Sebi plans to set out stringent regulations for fund managers
Q: I have recently set up a 3-star hotel in Jaipur alongwith my brothers who are resident in India. Deduction was claimed in respect of the capital expenditure incurred in setting up the hotel. The deduction was claimed from the year in which the hotel started its business, but the tax department has not allowed it on the ground that the classification of the hotel was not certified by the Central Government. Is the tax department justified in this stand?
A:
Under section 35-AD of the Income-tax Act, 1961, 100 per cent of the expenditure of capital nature incurred for the purpose of the business carried on by a tax payer is allowed as a deduction in the year in which the expenditure is incurred. In the case of a hotel, it has to be of 2-star or higher category as classified by the Central Government. There is no requirement of law that the certificate of classification should be issued by any particular date. The Madras High Court has held that so long as the tax payer fulfills the condition of setting up a hotel of 2-star or higher category, the capital expenditure incurred would be deductible under section 35-AD in the year in which such expenditure is incurred. The fact that the certificate categorising the hotel as 3-star was received by your company after the financial year in which the capital expenditure was incurred, is not relevant. Hence, the tax department is erroneous is not allowing the benefit of the deduction. The company should, therefore, go in appeal against the assessment order within thirty days of the date of receipt of such order.
Q: My wife is going back to India as she has got an attractive offer for teaching in an international school in Mumbai. She will also be giving private tuitions and earn money. I want to know the best form of saving for her which will give a regular income after retirement.
A:
Since your wife will be working in a school, provident fund will be deducted from her salary to the extent of 12 per cent. In addition, she may save part of her income by investing in the National Pension System. Under this mode of investment, her contribution to NPS will also qualify for deduction under section 80-C of the Income-tax Act, 1961. The full amount of the NPS contribution as well as the provident fund contribution made by her to the school will be eligible for deduction from her taxable salary and the income earned from tuitions. However, the aggregate of the deduction is restricted to Rs150,000 per annum. On reaching the age of 60, 40 per cent of the corpus which is the accumulated amount in her NPS account will have to be annuitised. This should be done by taking out an annuity policy with an insurance company. The balance 60 per cent can be withdrawn by her and invested in any mode she chooses. The entire amount so invested in now free from income-tax. However, the annuity received every year will be treated as normal income and taxed at the applicable rates for each financial year. This is subject to the initial exemption which is currently Rs300,000 per annum for a person who is 60 years or more.
Q: My friends and I have been investing in mutual funds. Some of us have lost money and the fund managers have not responded to our queries. I am told that there are certain schemes called ‘Side Pocketing’. Is any action being taken by the authorities to protect genuine investors?
A:
The Securities & Exchange Board of India (SEBI) is proposing to set out stringent norms for fund managers who use schemes of ‘side pocketing’. This is done by segregating bad assets into a separate folio. SEBI has made it clear that it does not want mutual fund managers to use this scheme to cover up poor investment decisions. Fund managers will now be required to take prior permission from the board of trustees of mutual funds or their holding company before transferring bad assets into a separate folio. The fund manager will have to give his reasons for such decision. In fact, the fund manager’s bonus may be withheld if he indulges in side pocketing without the written permission of the board of trustees. This move has been triggered due to the recent IL&FS problem which has brought nonbanking finance companies a bad name.