NRI PROBLEMS

My family business in India is of running goods transport vehicles. The company sold the vehicles to a financier and took them back on lease. The financier claimed depreciation on the actual cost of acquiring the vehicles. The tax department took the view that depreciation could only be claimed on the written down value to the previous owner prevailing on the date of sale and levied penalty on the financier for claiming higher depreciation. Is this legally sustainable?

— K R Raghavan, Doha

Penalty can only be levied where there is concealment of income or inflated expenditure is claimed in determining taxable business profits. According to Court decisions, penalty can only be levied if there is a finding to support the conclusion that there is a deliberate attempt on the part of the assessee to inflate the cost of acquisition. Therefore, if the financier has furnished all details and relevant information to the tax department, penalty cannot be justified on the ground that inaccurate particulars were furnished. Though Explanation 3 to section 43(1) of the Income-tax Act, 1961 requires that the written down value to the previous owner should be treated as the basis for claiming depreciation in a sale and lease back transaction, levy of penalty cannot be upheld on the ground that there has been concealment of income. The mere making of a claim which is not sustainable in law, would not amount to furnishing of inaccurate particulars. Hence, an appeal should be filed against the penalty order.

A charitable trust has been set up in India in 2011 in which it has been stated that the beneficiaries would be persons belonging to minorities. Would such trust be eligible for exemption in respect of its income?

— A S Ahmed, Dubai

A trust which is set up for a particular religious community or caste on or after 1st April, 1962 is not eligible to claim tax exemption in respect of its income. Such a trust would be adversely affected by the provisions of section 13(1)(b) of the Income-tax Act, 1961. The tax authorities would, therefore, deny the benefit of exemption. Hence, if the trust in India wishes to avoid litigation, it would be advisable to amend the trust deed to provide that the beneficiaries would be members of any minority community who do not belong to any particular religion. In the absence of such clarification, the denial of exemption has been upheld by Courts and the income of the trust has been made liable to tax.

On returning to India, I want to set up a company manufacturing consumer goods which will also be involved in exporting. Initially, substantial expenditure will have to be incurred in giving free samples of the product manufactured. My worry is that I may not be permitted to deduct the cost of these free samples against my taxable income. Is my apprehension justified?

— T R Mishra, Bahrain

Every new company is required to spend substantial amounts on advertising, sales promotion and distribution of free samples of the product which is manufactured. Such expenditure would definitely be treated as business expenditure. There is no provision in the law which allows deduction of expenditure only if corresponding income is generated.

The writer is a practicing lawyer, specialising in tax and exchange management laws of India.