PAYMENT EXCEEDING 20000 40(A)3 EXCEPTIONS RULE 6DD

1. Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a deduction.However if payment is being made for plying, hiring or leasing goods carriages then Limit for these section is Rs 35000/-,instead Of  20000/- 
2. Section 40A(3)(b) also provides for deeming a payment as profits and gains of business or profession if the expenditure is incurred in a particular year but the payment is made in any subsequent year in a sum exceeding Rs. 20,000/- otherwise than by an account payee cheque or by an account payee bank draft.
3. Section 40A(3) is an anti tax-evasion measure. By requiring payments to be made by an account payee instrument, it is possible to verify the genuineness of the transaction thereby mitigating the risk of evasion.Person are splitting a particular high value payment to a person into several cash payments, each below Rs.20,000/-. This splitting is also resorted to for payments made in the course of a single day.Courts have also held that the statutory limit in section 40A(3) applies to payment made to a party at one time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book.According to the judicial opinion, the words used are ‘in a sum’, i.e., single sum.Therefore, irrespective of any number of transactions, where the amount does not exceed the prescribed amount in each transaction,the rigours of section 40A(3) will not apply.
4. To overcome the splitting of payments (AS GIVEN IN POINT NO 3)to the same person made during a day as referred above and to increase the efficacy of the provision, an amendment was made through Finance act 2008 and after 01.04.2008, where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under the proposed sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under the proposed sub-section (3A) of section 40A,as the case may be.

EXAMPLE :To illustrate with an example, let us assume a taxpayer has incurred an expenditure of Rs 40,000/-. The taxpayer makes separate payments of Rs 15,000/-, Rs 16,000/- and Rs 9,000/- all by cash, to the person concerned in a single day. The aggregate amount of payment made to a person in a day, in this case, is Rs 40,000/-. Since, the aggregate payment by cash exceeds Rs 20,000/-,Rs. 40,000/- will not be allowed as a deduction in computing the total income of the taxpayer in accordance with the proposed amendment.

EXCEPTION TO ABOVE PROVISION:The provisions of this section are subject to exceptions as provided in Rule 6DD of the Income-tax Rules, 1962.

• Payment to Specified payee Rule 6DD(a)- Where the payment is made to 
• (i) Reserve Bank of India  or any  banking company as defined in section 5(c) of Banking Regulation Act, 1949; 
• (ii) State Bank of India or any subsidiary bank as defined in section 2 of SBI (Subsidiary Banks) Act, 1959; 
• (iii) any co-operative bank or land mortgage bank; 
• (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949; 
• (v) Life Insurance Corporation of India.
• Payment to Government  Rule 6DD(b)- Where payment is made to the Government and, under  the rules framed by it, such payment is required to be made in legal tender.
•  Payment by certain modesRule 6DD(c) - Where the payment is made by
•  (i) any letter of credit arrangements through a bank; 
• (ii) a mail or telegraphic transfer through a bank; 
• (iii) a book adjustment from any account in a bank to any other account in that or any other bank; 
• (iv) a bill of exchange made payable only to a bank; 
• (v) the use of electronic clearing system through a bank account; 
• (vi) a credit card; 
• (vii) a debit card. 
• Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.
• Adjustment in books Rule 6DD(d)-  Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee.
• Purchase of certain productsRule 6DD(e):Where the payment is made for the purchase of  -
•   (i) agricultural or forest produce; or 
• (ii) the produce of animal husbandry (including livestock, meat, hides and skins)***** or dairy or poultry farming; or 
• (iii) fish or fish products; or 
• (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products. 
• Cottage industry Rule 6DD(f)- Where the payment is made for the purchase of the  products manufactured or processed without the aid of power in a cottage industry, to the producer of such products.
• No bank service Rule 6DD(g)  - Where the payment is made in a village or town, which on the date of such payment is not served by any bank,to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town.
•  Note: “Bank” means any bank, banking company or society referred to in #(i) to (iv) of rule 6DD(a) and includes any bank [not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949], whether incorporated or not, which is established outside India.
• Terminal benefit to employee - Rule 6DD(h) Where any payment is made to an employee of the  assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs. 50,000.
• Temporary posting of employee - Rule 6DD(i) Where the payment is made by an assessee by way of  salary to his employee after deducting the income-tax from salary as per section 192, and when such employee
•  (i) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship; and 
• (ii) does not maintain any account in any bank at such place or ship. 
• Bank closed - Rule 6DD(j) Where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike.
• Payment to agent  Rule 6DD(k)- Where the payment is made by any person to his agent  who is required to make payment in cash for goods or services on behalf of such person. 
• Foreign currency Rule 6DD(l)- Where the payment is made by an authorised dealer or  a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. Note: “Authorised dealer” or “money changer” means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law for the time being in force

****. Exemption from disallowance is not available

• on payment for purchase of livestock, meat,hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman, by whatever name called [Circular No. 4/ 2006, dated 29-3-2006 (14 CAPJ 201)] 
• Any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets is considered as producer of livestock and meat. 
• Exemption is available subject to furnishing of 
• (i) declaration from person receiving payment that he is a producer of meat; 
• (ii) confirmation that payment, otherwise than by account payee cheque/draft, was made on his insistence; and 
• (iii) a further confirmation from a veterinary doctor certifying that person specified in the certificate is a producer of meat and that slaughtering was done under his supervision [Circular No. 8/2006, dated 6-10-2006 (16 CAPJ 381)].

CLARIFICATION REGARDING THE MEANING OF THE EXPRESSION 'FISH OR FISH PRODUCTS' USED IN SUB-CLAUSE (iii) OF CLAUSE (f) OF RULE 6DD OF THE INCOME-TAX RULES, 1962

CIRCULAR NO. 10/2008, DATED 05-12-2008

Representations have been received from various quarters regarding problems being faced by the seafood exporters mainly on account of provisions of Section 40A (3) of the Income-tax Act, 1961.
2. Disallowance of expenditure under the provisions of sub-section (3) of Section 40A of the I.T. Act, 1961 is made in the computation of income in a case where a payment or aggregate of payments exceeding twenty thousand rupees is made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft. However, payment otherwise than by an account payee cheque drawn on a bank or by an account payee bank draft exceeding twenty thousand rupees does not attract the aforesaid disallowance in certain circumstances as prescribed under rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter-alia, refer to payment made to the producer for the purchase of ‘fish or fish products' under sub-clause (iii) of clause (e) of rule 6DD. [Clause (f) of rule 6DD prior to coming into effect of the I.T. (Eighth Amendment) Rules, 2007 w.e.f. A.Y. 2008-09].
3. The following clarifications are, therefore, being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:—
(i) The expression ‘fish or fish products' used in rule 6DD(e)(iii) would include 'other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.'.
(ii) The 'producers' of ‘fish or fish products' for the purpose of rule 6DD(e) of I.T. Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc.
4. It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other middleman, by whatever name called.

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Happy new year 2010

happy new year to all visitors of Simple Tax India
With your Best Wishes we have achieved the following

1. 1072000 (page Visits in last year)
2. 629000 (visitors)
3. 6000(additional Subscriber)

HAPPY NEW YEAR
Receive my simple gift of LOVE
Wrapped with SINCERITY
Tied with CARE &
Sealed with BLESSINGS
2 Keep u HAPPY & SAFE all the life long.
HAPPY NEW YEAR....



Tom Cruise
Angelina Jolie
Aishwarya Rai
Arnold
Jennifer Lopez
Amitabh Bachhan
& me..
All the Stars wish u a Very Happy New Year.

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VALUATION CONCESSIONAL/INTEREST FREE LOAN TO EMPLOYEE -CALCULATOR

Employee covered Under Interest Free/Concessional Loan Perks
If Interest free or concessional Loan is given to employee (or to any member of his household ) is chargeable to tax as a perquisite to the employee.All employees are Covered under this scheme whether Govt /semi Govt/private ,specified /Non specified .

Meaning of Member of House Hold
“member of household” shall include—
(a) spouse(s),
(b) children and their spouses,
(c) parents, and
(d) servants and dependents;
so not only the loans directly given to employee is covered under  perquisite but loan given to family member and servant is also covered .
Type of Loan covered
All type of loans are covered under this scheme except given under the heading Loans not covered .To clear the issue the following type of loans are covered under this rule (list is not exhaustive)

• House Loan
• Car Laon for New Car
• Two wheeler Loan 
•  Education laon
• Loan to subscribe Esop
• personal loan 
• Computer Loan
• Marriage Loan /personal loan

Loans Not covered under perquisites 

1. where the original Loan(s) amount does not exceed in aggregate Rs 20000/-.This rule exempted only original amount up to 20000 but if loan if original loan is more than 20000 but present  loan outstanding is less than 20000 then there is no exemption available and perquisite remains taxable.
2.  if the  loans made available for medical treatment (for disease specified ) then there will no perks value ,However  the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

How To Value This Perquisite
The valuation will be done the basis of interest charged by State Bank of India on first day of relevant previous year .So for the Financial year  2009-10 the rate of SBI as on 01/04/2009 will be applicable .So if Loan to employee or his household is provided at a rate less than SBI rate on first day of the previous year then the difference of interest will be charged as perquisite in hands of employee.So if the Interest rate on which loan is provided is more than Rate charged by SBi on relevant date ,then valuation of the perquisite will be nil.Process to calculate the perks value is Given below.

1. Find Out the Maximum outstanding monthly balance For each loan on the last day of each month.
2. Find Out the rate of interest Charged by the SBI on that type of loan on the first day of relevant previous year (for FY 2009-10 check rate as applicable on Loan from SBI on 01.04.2009)
3. Calculate interest on amounts given in (1)for the full financial year  above @ rate of SBI as per (2) above and deducte interest recovered from the employee.
4. The balance will be taxable as perquisites in hand of employee.

Rates Of the SBIN is Given in the Table Given below

Rates charged by SBI as on 01.04.2009
Type of Loan		Amount
House Loan	period	up to 30 Lakh	30-75 lakhs	above 75 lakhs
	up to 5 years	9.75	10.25	10.25
	5-to10 years	10.00	10.50	10.50
	>10- upto 15 years	10.00	10.50	10.50
	>15- up to 20 years	10.25	10.75	11.00
	>20-upto 25 years	11.00	11.00	11.00
Car Loan		up to 7.5 lakh	>=7.5 lakh
	up to 3 years	11.75	11.50
	>3-up to 5 years	11.75	11.75
	>5 upto 7 years	12.00	12.00
Two wheeler		any amount
		16.25
Education loan		upto 4 lakh	4 lakh to 7.5	above 7.5 lakh
	Girl student	11.25	12.75	12.00
	Boy student	11.75	13.25	12.50
Personal Loan		any amount
		16.50
Loan Esop		14.50

Now calculate yours Interest Free loan perks from calculator given below

Relevant provision as per rule 3A as amended on 18/12/2009
(i) The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955 (23 of 1955), as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by him or any such member of his household:
Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:
Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

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DEPRECIATION RATE INCOME TAX SET OFF BLOCK OF ASSESTS LEASE HIRE PURCHASE

Who can claim ?Depreciation is allowed as a deduction while computing income under the head ‘profits and gains of business or profession’ and ‘income from other sources’. It is allowed on all fixed assets, save and except land. However, it is not allowed to a person earning salary income, even if he uses his car for commuting between his office and residence. Likewise, a person who owns house property and lets it out cannot claim depreciation on the building while working out income from house property.

Why provide for depreciation?
There are two reasons. Firstly, the use of any asset erodes its value due to wear and tear or due to the passage of time, or due to obsolescence resulting from a change in technology. The cost of an asset should be written down to reflect its correct value. Since assets like plant and machinery, buildings, and furniture and fixtures are used to generate revenue, the reduction in their values represents a charge, which is debited to the profit and loss account to arrive at the correct profits of the year.

Secondly, depreciation is a non-cash expenditure–it does not involve an outflow of cash from the business, and therefore results in the accumulation of funds. But since it is debited to the profit and loss account like any other expense, it reduces the taxable profits and, therefore, the burden of tax. It acts as a source of internal financing for replacement of an asset at the end of its useful life.

Computation under the Companies Act. Depreciation is computed using either the straight-line method (where the amount of depreciation is uniform for all the years) or the written-down value method (where the amount of deprecation is highest in the first year and goes on reducing year after year).

Under the Income Tax Act. Depreciation is charged on the ‘block of assets’, and not on individual assets. The block represents the group of assets for which the same rate of depreciation applies. Under the Income Tax Act, depreciation is computed using the written-down value method, except in case of an undertaking engaged in generating and distributing power.

While the actual cost of new asset is added to the block, the amount received on the sale of an asset (including scrap value) is reduced from it. Depreciation at the prescribed rates is computed on the written-down value of the block as on the last day of the financial year–typically 31 March. This value is the aggregate cost of acquisition of the assets in a block as reduced by the depreciation charged in previous years.

New Rates. The rates of depreciation under the Income Tax Act are not linked to the useful life of the asset. Mobile phones are treated as plant and machinery, and are entitled to depreciation at the rate of 15 per cent.

Condition for allowability

The following fundamental conditions need to be fulfilled to claim depreciation:

(1) The person claiming depreciation must be the owner or the co-owner of the asset;

(2) The asset must be(put to use) used in the business. If it is only partly used for business, depreciation would be allowable on pro-rata basis;

(3) The asset must be used during the relevant financial year. If an asset is purchased and put to use for less than 180 days, that is, on or after the first day of October, only 50 per cent of the normal depreciation will be allowed in that year. In the subsequent years however, the asset will be subject to depreciation at the normal rates. So if an assessee buys a machine on 1 September 2009 but does not put it to use before 1 December 2009, he will be allowed depreciation at 7.5 per cent (instead of the normal 15 per cent) for the financial year ended 31 March 2006. The crucial date is the date of putting the asset to use.

Suppose a Person purchased a Car on 31st March and put to use on same date even then he can claim 50% of the  depreciation of the full year i,e 7.5%(50% of 15%)
Download Depreciation rate for Income Tax Act and Companies ACT
Hire-purchase or lease?

In case an asset is purchased under a hire-purchase scheme, the depreciation is available to the hirer (the user of the asset). But if it is taken on lease, depreciation is allowed to the lessor (the financer). Hence, acquiring an asset on hire purchase is a better option than acquiring the same under lease, if the intention is to avail deduction for depreciation.

However, in a lease, although a lessee (the user) loses the benefit of depreciation, he can treat the lease rentals as an expense and reduce his taxable income accordingly. The decision to go in for lease or hire purchase should depend on when the asset will be put to use, the rate of depreciation available on the asset and the cash flow position of the user, among others.

Claim of depreciation :optional /mandatory ?

Until 31 March 2001, a taxpayer could choose whether or not to claim depreciation. From 1 April 2001 onwards, however, the claim of depreciation is no longer optional and the amount of depreciation will be compulsorily treated as deduction, irrespective of whether or not the claim has been made.

Unabsorbed depreciation(set off and carry forward) 
set off
If, in a particular year there are losses or inadequate profits, depreciation amount may not be fully deductible. In such cases, the amount that cannot be deducted wholly or partially can be set off against any other income.
carry forward
If such ‘unabsorbed depreciation’ cannot be adjusted against the income of the same year, it can be carried forward to next year and can be adjusted against any income of the next year and so on. Unabsorbed depreciation can be carried forward for any number of years without any limitation.

Download Depreciation rate for Income Tax Act and Companies ACT

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VALUATION OF PERQUISITES-AMENDED ON 18/12/2009

Central Board of Direct taxes has Amended the Income Tax rules in respect of valuation of the perquisites vide notification No. 94/2009/F.NO. 142/25/2009-SO (TPL), dated 18-12-2009.These rules has been amended mainly due to abolition of the FBT from 01.04.2009 i.e Fy 2009-10.The New rules shall applicable form the 01.04.2009 means applicable from Fy 2009-10.The main changes I have noticed is that valuation of car perks in respect of party used for personal purpose has been increased by 50% along with Driver salary .I will report other changes in due course in simplified manner .For the Time being I am publishing the full text of the amendment.You may also download the same from the Link given below

Download Thirteenth amendment in Income Tax rules dated 18/12/2009 regarding valuation of perquisites for employees
Check List of tax Free and Taxable allowances
Download List of Tax free allowance U/s 10(14)


Download Thirteenth amendment in Income Tax rules dated 18/12/2009 regarding valuation of perquisites for employees
Tags:valuation of rent free accommodation,valuation of medical facility,valuation of loan at concessional rate ,valuation of free education facility to employee,free electricity and water facility valuation,valuation of sweet equity, valuation of ESOP,valuation of Gift by the employer ,sale of movable asset to employee and perquisite valuation,free facility to travel to rail and airline and other employees, free medical treatment, facility of gardener,sweeper and other type of servant to employee

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TAX BENEFIT ON HRA AND HOME LOAN -AVAILABLE OR NOT?

HRA – allowance is one of the components of salary package, which is normally offered to employees by their employers to meet the higher cost of renting a home. Tax exemption under Income Tax Act for HRA is allowed to salaried persons who are occupying a rented accommodation. It is being regulated by 2A of Income Tax Rules, 1962 and Section 10(13A) of the Income Tax Act, 1961. Accordingly, least of the following three options will be exempt from tax

• [a.) 50% of the basic salary and DA, where the residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of above salary where residential house is situated in any other place. 
• [b.] HRA actually received by the employee in respect of the period during which rented accommodation is occupied by the employee during the financial year
•  [c.] the excess of rent paid over 10% of the salary. 

Some times, salaried persons who avail home loan for acquisition or construction of residential house properties but could not stay in such properties owing to employment or other reasons and they stay in rented houses. In such circumstance, when they are receiving a HRA - allowance from their employer, a question often arises

whether they can get exemption of HRA under section 10(13A) of the Act?, based on the rent actually paid by them as well as the interest payable on the housing loan taken by them towards acquisition or construction of a property. 

To avail HRA benefit,

• salaried employee who is in receipt of HRA from his employer
•  should be actually paying house rent for the rented premises which he has occupied and
•  such rented premises must not owned by him. 

It is evident from the above section the exemption of HRA is available to an assessee so long as he occupies the rented premises which is not owned by him. At the same time, the assessee is not barred from claiming exemption under section 10(13A) read with rule 2A, because he be the owner of any other house property, which was acquired through housing loan. It is to be noted that provisions of deduction of interest on borrowed capital for the acquisition or construction of house property and exemption of house rent allowance are two different issues under the Act, as one would not influence other. The benefits accrue on account of availing home loan are interest payments which is exempted under section 24(b) and the principal repayment is exempted under section 80C of the Income Tax Act. Conversely, HRA benefit can also be availed by the assessee on fulfillment of certain circumstances depicted above.

PR. Raamaanathan, CS

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composite arrangement under franchises agreement not liable for TDS as rent :Delhi High court

A recent ruling of the Delhi High Court (HC) in the case of CIT v NIIT Ltd. (Taxpayer) [2009-TIOL-533-HC-DEL-IT], on the issue of whether the amount paid by the Taxpayer to the franchisees, pursuant to a franchises agreement (Agreement), can be considered in the nature of rent, for the purpose of tax deduction at source (TDS) under the Indian Tax Law (ITL). The HC held that the Agreement, when read as a whole, indicated that the main intention of the parties to the Agreement, was to carry on the business and share the revenues therefrom and not to let out the premises and infrastructure therein, in isolation. Hence, the payments made cannot be considered in the nature of rent and are not liable for TDS.


Facts of the case

• The Taxpayer is engaged in the business of providing computer education and training, through its own centers and through franchisees.
• The Taxpayer granted limited license to the franchisees for use of its trademark and trade name for the education center. The license was granted for a specified territory with a right to operate the education center, in relation to marketing courses offered by the Taxpayer.
• As per the Agreement with the Taxpayer, the franchisees were providing these courses under the Taxpayer’s license. The franchisees were in charge of bringing together resources such as classroom facilities, equipment, furniture, fixtures, administrative set-up etc., for the purpose of providing computer education and training. The franchisees were responsible for the day-to-day operation and management of the education center, including marketing the course, admitting the students, conducting the classes and performing all other administrative functions relating to the education center. 
• The Taxpayer, as owner of technical information, was to provide the franchisees the relevant courseware and expertise in providing computer education.
• The education center was to run under the Taxpayer’s brand name.
• The Taxpayer and the franchisees agreed to share revenues, based on the number of students enrolled. The Taxpayer collected fees from the students enrolled by the franchisees and shared the same with them.
• The payment of the franchisees’ share was linked to performance-based milestones. For the sake of convenience, the payments were broken into marketing and infrastructure claim.
• For the relevant assessment year, the Taxpayer made payments to the franchisees, without withholding tax. The Tax Authority treated the payments made for infrastructure claims, in the nature of rent for use of assets and infrastructure, which is liable for TDS under the ITL.
• The second appellate authority held that the broad objective of the Agreement was to share the revenue and was not in the nature of hiring of premises and infrastructure thereof and, hence, not liable for TDS. Aggrieved by this, the Tax Authority preferred an appeal before the HC.

Contentions of the Tax Authority

• The Agreement provides for payments made for infrastructure claims, which is in the nature of rent to be liable for TDS under the ITL
•  As per the ITL, the definition of rent is wide enough to cover within its ambit any charges paid towards the use of any land, building, furniture etc., either separately or together.
• The relationship between the Taxpayer and the franchisees was in the nature of lessor–lessee.

Contentions of the Taxpayer

• The transaction was in the nature of a partnership, where the parties to an agreement bring in their own contributions and the revenue is shared between them.
• The intention of the parties was to be drawn from the agreement and be inferred accordingly, unless the agreement was a colorable device.

Ruling of the HC

• The HC, affirming the second appellate authority’s ruling, held that the payments made to the franchisees, in the nature of infrastructure claims, cannot be construed as rent under the ITL and, hence, were not liable to TDS.
• The Agreement was a franchises agreement and not a rent arrangement. The relationship between the Taxpayer and the franchisees was not that of a lessor and lessee.
• The agreement is to be read as a whole and cannot be broken up into different components, when the parties to the agreement intend it to be composite.
• The dominant intention and the broad objective of the Taxpayer and the franchisees were to conduct the business and share the revenue therefrom and not to merely hire the premises and infrastructure thereof.
• The revenue shared between the Taxpayer and the franchisees was not a fixed amount but was variable, as it was based on the fees received from the students. No minimum guarantee amount was fixed to be paid to the franchisees by the Taxpayer.

Comments
This ruling provides a guidance that an agreement is to be read as a whole and cannot be broken up in order to bring the payments, made under the agreement, within the ambit of the
ITL. This ruling is very fact-specific.

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Unit Linked Insurance Polices (ULIPS)-FAQ

We hope the following FAQs will enable a better insight to all

buyers about the character and features of Unit linked Products.

1.         What is a ULIP?

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life

insurance policy which provides a combination of risk cover and investment. 

The dynamics of the capital market have a direct bearing on the performance of

the ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY, THE

INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.

2.     What is a Unit Fund? 

The   allocated (invested) portions of the premiums after deducting for all the

charges and premium for risk cover under all policies in a particular fund as

chosen by the policy holders are pooled together to form a Unit fund.

3. What is a Unit?

 It is a component of the Fund in a Unit Linked Policy.

4. What Types of Funds do ULIP Offer? 

Most insurers offer a wide range of funds to suit one’s investment objectives, risk

profile and time horizons. Different funds have different risk profiles. The

potential for returns also varies from fund to fund.

 The following are some of the common types of funds available along with an

indication of their risk characteristics. 

5. Are Investment Returns Guaranteed in a ULIP? 

Investment returns from ULIP may not be guaranteed.”  In unit linked

products/policies, the investment risk in investment portfolio is borne by the

policy holder”.  Depending upon the performance of the unit linked fund(s)

chosen; the policy holder may achieve gains or losses on his/her investments. It

should also be noted that the past returns of a fund are not necessarily indicative

of the future performance of the fund.

6.  What are the Charges, fees and deductions in a ULIP? 

ULIPs offered by different insurers have varying charge structures.  Broadly, the

different types of fees and charges are given below. However it may be noted

that insurers have the right to revise fees and charges over a period of time.

6.1       Premium Allocation Charge

This is a percentage of the premium appropriated towards charges before

allocating the units under the policy. This charge normally includes initial and

renewal expenses apart from commission expenses.

6.2       Mortality Charges

These are charges to provide for the cost of insurance coverage under the plan.

Mortality charges depend on number of factors such as age, amount of coverage,

state of health etc

6.3Fund Management Fees 

These are fees levied for management of the fund(s) and are deducted before

arriving at the Net Asset Value (NAV) . 

6.4       Policy/ Administration Charges 

These are the fees for administration of the plan and levied by cancellation of

units. This could be flat throughout the policy term or vary at a pre-determined

rate.

6.5       Surrender Charges 

A surrender charge may be deducted for premature partial or full encashment of

units wherever applicable, as mentioned in the policy conditions.

6.6Fund Switching Charge 

Generally a limited number of fund switches may be allowed each year without

charge, with subsequent switches, subject to a charge.

6.7     Service Tax Deductions

Before allotment of the units the applicable service tax is deducted from the risk

portion of the premium.

Investors may note, that the portion of the premium after deducting for all

charges and premium for risk cover is utilized for purchasing units

7.   What should one verify before signing the proposal?

One has to verify the approved sales brochure for 

•     all the charges deductible under the policy

•     payment on premature surrender

•     features and benefits 

•     limitations and exclusions

•     lapsation and its consequences

•     other disclosures

•     Illustration projecting benefits payable in two scenarios of 6% and 10%

returns as prescribed by the life insurance council.

8.  How much of the premium is used to purchase units? 

The full amount of premium paid is not allocated to purchase units. Insurers

allot units on the portion of the premium remaining after providing for various

charges, fees and deductions. However the quantum of premium used to purchase

units varies from product to product.

The total monetary value of the units allocated is invariably less than the amount

of premium paid because the charges are first deducted from the premium

collected and the remaining amount is used for allocating units.

9.   Can one seek refund of premiums if not satisfied with the policy, after

purchasing it?

The policyholder can seek refund of premiums if he disagrees with the terms

and conditions of the policy, within 15 days of receipt of the policy document

(Free Look period). The policyholder shall be refunded the fund value

including charges levied through cancellation of units subject to deduction of

expenses towards medical examination, stamp duty and proportionate risk

premium for the period of cover.

10. What is Net Asset Value (NAV)?

NAV is the value of each unit of the fund on a given day. The NAV of each

fund is displayed on the website of the respective insurers.

11.  What is the benefit payable in the event of risk occurring during the term of

the policy?

The Sum Assured        and/or value of the fund units is normally payable to the

beneficiaries in the event of risk to the life assured during the term as per the

policy conditions.

12. What is the benefit payable on the maturity of the policy?

The value of the fund units with bonuses, if any is payable on maturity of the

policy.

13.  Is it possible to invest additional contribution above the regular premium?

Yes, one can invest additional contribution over and above the regular

premiums as per their choice subject to the feature being available in the

product. This facility is known as “TOP UP” facility.

14.  Whether one can switch the investment fund after taking a ULIP policy?

Yes.  “SWITCH”     option provides for shifting the investments in a policy

from one fund to another provided the feature is available in the product.

While a specified number of switches are generally effected free of cost, a fee

is charged for switches made beyond the specified number.

15.  Can a partial encashment/withdrawal be made?

       Yes, Products may have the  “Partial Withdrawal” option which facilitates

withdrawal of a portion of the investment in the policy. This is done through

cancellation of a part of units.

16.  What happens if payment of premiums is discontinued?

a)   Discontinuance within three years of commencement – If all the

premiums have not been paid for at least three consecutive years from

inception, the insurance cover shall cease immediately. Insurers may give

an opportunity for revival within the period allowed; if the policy is not

revived within that period, surrender value shall be paid at the end of

third policy anniversary or at the end of the period allowed for revival,

whichever is later.

b)   Discontinuance after three years of commencement -- At the end of the

period allowed for revival, the contract shall be terminated by paying the

surrender value. The insurer may offer to continue the insurance cover, if

so opted for by the policy holder, levying appropriate charges until the

fund value is not less than one full year’s premium. When the fund value
reaches an amount equivalent to one full year’s premium, the contract
shall be terminated by paying the fund value reaches an amount equivalent 
to one full year’s premium, the contract  shall be terminated by paying 
the fund value.

17. What information related to investments is provided by the Insurer to

the policyholder? 

The Insurers are obliged to send an annual report, covering the fund

performance during previous financial year in relation to the economic

scenario, market developments etc. which should include fund performance

analysis, investment portfolio of the fund, investment strategies and risk

control measures adopted.

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