 |
|||||||||||||
| Date: Dec 19, 2013 | |||||||||||||
| Inflation Indexed National Savings Securities- Cumulative, 2013 | |||||||||||||
|
|||||||||||||
National Savings Securities
Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Credit Card Accounts
RBI vide its notification no.DBOD.No.BP.BC.78/21.04.048/2013-14 dated December 20, 2013, has clarified the norm for bringing the credit card dues under NPA. It reads ou as below:
 |
|
| Date: Dec 20, 2013 | |
| Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Credit Card Accounts | |
|
Clubbing of Income
Income from other persons included in Assessee’s Total Income
Normally an assessee is taxed in respect of his own income only, but U/s 60 to 64 of the Act an assessee may be taxed in respect of income which legally belongs to someone else. Inclusion of an income of one person in the income of another person is known as “clubbing of Income”.
The following Incomes or assets are clubbed:-
0 Transfer of an income without transfer of assets (Sec. 60):-
1- Such income is to be clubbed in the income of transferor;
2- it is immaterial whether transfer is revocable or irrevocable and whether it is made before the commencement of this Act or after commencement of this Act.
3- Example:- Mr. A, owns 1,000, 12% debentures of Rs. 100/- each in x ltd. . Interest on such debenture of Rs. 12000/- is transferred by Mr. A to Mr. B, his friend, without transferring theownership of the debentures. Rs. 12000/- being debenture interest as received by B will be clubbed in the hands of Mr. A U/s 60.
0 Income arising from revocable transfer of assets (Sec. 61)
1- Is to be clubbed in the total income of transferor;
2- As per Sec.63 transfer is deemed to be revocable, Where the ownership can be taken back
3- The clubbing provision will operate even if only part of income of the transferred asset had been applied for the benefit of the transferor. Once the transfer is revocable, the entire income from the transferred asset is includible in the total income of the transferor.
4- Exception where clubbing provisions are not attracted even in case of revocable transfer (Sec. 62) by the transferor;
a- Transfer is not revocable during the life time of the beneficiary or the transferee provided that transferor derives no direct or indirect benefit from such income.
b- Transfer made before April 1st years.
0 Clubbing of Income arising to spouse :-
• Remuneration of spouse[Sec.64(1)(ii)]:-
a- The taxpayer is an individual;
b- He/she has a substantial interest in the concern;
c- Spouse of the taxpayer is employed in the above mentioned concern;
d- Spouse is employed in the concern without any technical and professional knowledge or
e- Where both husband and wife have substantial interest in the concern, such income will experience. Income to be clubbed in the hands of individual is limited to salary, commission, fees, or any other form of remuneration received by the spouse, directly or indirectly, whether in cash or kind, from a concern in which individual has a substantial interest. be clubbed in the hands of spouse whose total income, excluding such income is higher.
f- Where such income is clubbed in the total income of either spouse, income arising succeeding year shall not be clubbed in the total income of the other spouse unless Assessing Officer is satisfied, if it is necessary to do so.
Substantial Interest:-
a- If an individual beneficially holds (individually or along with his relatives) 20% or more of equity shares in a Company at any time during the previous year.
b- If individual entitled to 20% profit in a concern (individually or along with his relatives at any time during the previous year.
The term relative means husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
• Transfer of an income earning Assets, other than a House Property to spouse, without adequate consideration[Sec. 64(1)(iv):-
1- there is a transfer of an asset (other than House Property), directly or indirectly, from one spouse to other, any income arising to the transferee from the transferred assets either shall be included in the total income of transferor.
2- In case of transfer of House Property, without adequate consideration, the transferor shall be deemed to be the owner of house property and its annual value shall be taxed in his hands.
3- Income from accretion of transferred assets is not to be clubbed with the income of the transferor.
4- Where transferred Assets are invested by the transferee in the business, proportionate income arising from such investment is to be clubbed in the total income of the transferor. Where investment is in the nature of capital contribution, proportionate interest on capital will be clubbed with the income of the transferor. Such proportion is to be clubbed in the income of transferor.
5- Income earned by investing such income is not to be clubbed with the income of the transferor.
a- Natural love and affection do not constitute adequate consideration;
b- Assets are transferred before marriage;
c- Assets are transferred in connection with an agreement to live apart;
d- On the date of accrual of income, transferee is not the Spouse of the transferor;
e- If property is acquired by Spouse out of pin money.
• Transfer of an asset for the benefit of spouse [Sec.64(1)(vii):-
All income arising directly or indirectly to any persons or association of persons, from the asset transferred, directly or indirectly, without adequate consideration is includible in the income of the transferor to the extent such income is used by the transferee for the immediate or deferred benefit of the transferor’s spouse.
• Transfer of an income earning asset by the Assessee to any person for the benefit of son’s wife[Sec. 64(1)(viii):-
All income arising directly or indirectly to any persons or association of persons, from the asset transferred, directly or indirectly, without adequate consideration is includible in the income of the transferor to the extent such income is used by the transferee for the immediate or deferred benefit of son’s wife.
0 Clubbing of minor’s income [Sec. 64(1A) :-
The income of a minor child shall be clubbed in the income of that parent, whose income other than minor child’s income is higher. if the marriage of parents does not subsist (in case of divorce or separation of parents or in case of death of either of the parents), then income of minor child shall be clubbed with the income of that parent who maintains the child. However, an income of a minor child shall not be clubbed in the following two situations (exceptions):-
a- An income earned by that minor child by way of doing any manual work or by way of doing
b- Any income of minor child suffering from a disability of a nature specified in section 80U of If a minor child acquires an asset, out of such non clubbable income and earns any income out of that asset, then such income shall be clubbed in the hands of either of his/her parents in the way discussed above for example:- if minor child is TV serial artist earns Rs. 10 lacs, which is not clubbed in the hands of parents as it is earned by that minor child by way of applying skill, talent etc. of his/ her own but 12% debentures are acquired by that minor child out of those Rs. 10 Lacs, then interest on such debenture is liable to be clubbed, as debenture interest is not earned out of applying skill or talent, knowledge or experience of that minor child.
Exemption U/s 10(32) upto a maximum of Rs. 1500/- per annum per minor child, shall be available to that parent in whose hands the income of minor child is being clubbed. The minor child shall include adopted child as well as a step child, but not an illegal child or a child resulting out of illegal marriage.
0 Transfer of as asset by a member of an HUF to HUF [Sec.64(2)]:-
When an income earning asset belonging to any member of Hindu undivided Family, is transferred by that member to HUF, whether directly or indirectly, without adequate consideration, then income generated out of that asset will be clubbed in the hands of that member of the family.
0 Income includes loss also.
0 All deductions under Chpater VIA (U/s 80C to 80U) shall be available on Gross Total Income computed after clubbing all the clubbable incomes.
0 Liability of person in respect of income included in the income of another person [Sec. 65]:-
Sec. 61 to 64 provide for clubbing of income of one person in the hands of other person in circumstances specified therein. However, service of notice of demand (in respect of tax on such income) may be made upon the person to whom such asset is transferred (i.e. the transferee). In such case transferee is liable to pay that portion of tax levied on the transferor of which is attributable to the income so clubbed.
0 In case of cross transfer:-
In case of cross transfer also, the income from the assets transferred would be assessed in the hands of the deemed transferor if the transfers are so intimately connected as to form part of single transaction, and each transaction constitutes consideration for the other by being mutual or otherwise.
For example:- A making gift of Rs. 50000/- to the wife of his brother Mr B for purchase of a house by her and simultaneously gift by B to A’s minor son of shares in a foreign Company worth Rs. 50000/- owned by him), in the instant case transfer have been made by A and B to persons who are not their spouse or minor child so as to circumvent the provisions of this section, showing that such transfer constituted consideration for each other. an activity involving application of skill, talent, specialized knowledge or experience or the Income Tax Act.
Service Tax On Construction Services
Circular No. 151 /2 /2012-ST
F.No.332/13 /2011-TRU
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs
(Tax Research Unit)
New Delhi, 10th February, 2012
To
Chief Commissioner of Customs and Central Excise (All)
Chief Commissioner of Central Excise & Service Tax (All)
Director General of Service Tax
Director General of Central Excise Intelligence
Director General of Audit
Commissioner of Customs and Central Excise (All)
Commissioner of Central Excise and Service Tax (All)
Commissioner of Service Tax (All)
Madam/Sir,
Subject: Service tax on construction services — regarding.
Many issues have been referred by the field formations, in the recent past, seeking clarification regarding the levy and collection of service tax on construction services [clauses (zzq),(zzzh) of section 65(105) of the Finance Act, 1994], in the light of varying business models. Across the country, divergent business models and practices are being followed in the construction sector. Some of these business models and practices could be region specific.
2. From the issues referred by the field formations, important ones have been identified model wise, examined and clarified as follows:
2.1. Tripartite Business Model (Parties in the model: (i) landowner; (ii) builder or developer; and (iii) contractor who undertakes construction): Issue involved is regarding the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers.
Clarification: Here two important transactions are identifiable: (a) sale of land by the landowner which is not a taxable service; and (b) construction service provided by the builder/developer. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash.
(A) Taxability of the construction service:
(i) For the period prior to 01/07/2010: construction service provided by the builder/developer will not be taxable, in terms of Board’s Circular No.108/02/2009-ST dated 29.01.2009.
(ii) For the period after 01/07/2010, construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/developers even for the flats given to the land owner.
(B) Valuation:
(i) Value, in the case of flats given to first category of service receiver, is determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument(eg. allotment letter).
(ii) Value, in the case of flats given to the second category of service receivers, shall be determined in terms of section 67 of the Finance Act, 1994.
2.2 Redevelopment including slum rehabilitation projects: Generally in this model, land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. When it becomes necessary after the lapse of a certain period, society or its flat owners may engage a builder/developer for undertaking re-construction. Society /individual flat owners give ‘No Objection Certificate’ (NOC) or permission to the builder/developer, for re-construction. The builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following:
(i) construct some additional flats for sale to others;
(ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction;
(iii) pay an additional amount to the original owners of flats in the society.
Clarification: Under this model, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers. First category is the society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer. The second category of service receivers consist of buyers of flats other than the society/members. Generally, they pay by cash.
(A) Taxability:
(i) Re-construction undertaken by a building society by directly engaging a builder/developer will not be chargeable to service tax as it is meant for the personal use of the society/its members. Construction of additional flats undertaken as part of the reconstruction, for sale to the second category of service receivers, will also not be a taxable service, during the period prior to 01/07/2010;
(ii) For the period after 01/07/2010, construction service provided by the builder/developer to second category of service receivers is taxable in case any payment is made to the builder/ developer before the issuance of completion certificate.
(B) Valuation:
Value, in the case of flats given to second category of service receivers, shall be determined in terms of section 67(1)(i) of the Finance Act, 1994.
2.3 Investment model: In this model, before the commencement of the project, the same is on offer to investors. Either a specified area of construction is earmarked or a flat of a specified area is allotted to the investors and as it happens in some places, additionally the investor may also be promised a fixed rate of interest. After a certain specified period an investor has the option either to exit from the project on receipt of the amount invested alongwith interest or he can re-sell the said allotment to another buyer or retain the flat for his own use.
Clarification: In this model, after 01/07/2010, investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to the investor and the said amount would be subject to service tax. If the investor decides to exit from the project at a later date, either before or after the issuance of completion certificate, the builder/developer would be entitled to take credit under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded the original amount). If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.
2.4 Conversion Model: Conversion of any hitherto untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time.
Clarification: Mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service.
2.5 Non requirement of completion certificate / where completion certificate is waived or not prescribed: In certain states, completion certificates have been waived or are considered as not required for certain specified types of buildings. Doubts have been raised, regarding levy of service tax on the construction service provided, in such situations.
Clarification: Where completion certificate is waived or is not prescribed for a specified type of building, the equivalent of completion certificate by whatever name called should be used as the dividing line between service and sale. In terms of the Service Tax (Removal of Difficulty) Order, 2010, dated 22/06/2010, authority competent to issue completion certificate includes an architect or chartered engineer or licensed surveyor.
2.6 Build- Operate – Transfer (BOT) Projects: Many variants of this model are being followed in different regions of the country, depending on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant. Generally under BOT model, Government or its agency, concessionaire (who may be a developer/builder himself or may be independent) and the users are the parties. Risk taking and sharing ability of the parties concerned is the essence of a BOT project. Government or its agency by an agreement transfers the ‘right to use’ and/or ‘right to develop’ for a period specified, usually thirty years or near about, to the concessionaire.
Clarification: Transactions involving taxable service take place usually at three different levels: firstly, between Government or its agency and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users, all in terms of specific agreements.
At the first level, Government or its agency transfers the right to use and/or develop the land, to the concessionaire, for a specific period, for construction of a building for furtherance of business or commerce (partly or wholly). Consideration for this taxable service may be in the nature of upfront lease amount or annual charges paid by the concessionaire to the Government or its agency. Here the Government or its agency is providing ‘renting of immovable property service’ (renting of vacant land to be used for furtherance of business or commerce) and in such cases the concessionaire becomes the service receiver.
In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, on the land provided by the government or its agency for temporary use, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period.
At the second level, transaction can take place between a concessionaire and the contractor. Where the concessionaire himself does not have exposure to construction sector, he may engage a contractor for undertaking construction of a building on the land, in respect of which right to use has been obtained in his favour, from the Government or its agency. If the concessionaire is himself a builder/developer, this level of transaction may not arise. Where an independent contractor is engaged by a concessionaire for undertaking construction for him, then service tax is payable on the construction service provided by the contractor to the concessionaire.
At the third level, the concessionaire enters into agreement with several users for commercially exploiting the building developed/constructed by him, during the lease period. For example, the user may be paying a rent or premium on the sub-lease for temporary use of immovable property or part thereof, to the concessionaire. At this third level, concessionaire is the service provider and user of the building is the service receiver. The concessionaire may provide to the users, taxable services such as ‘renting of immovable property service’, ‘business support service’, ‘management, maintenance or repair service’, ‘sale of space for advertisement’, etc. Service tax is leviable on the taxable services provided by the concessionaire to the users.
There could be many variants of the BOT model explained above and implications of tax may differ. For example, at times it is possible that the concessionaire may outsource the management or commercial exploitation of the building developed/constructed by him, to another person and may receive a pre-determined amount as commission. Taxable service here will be business auxiliary service and service tax is leviable on the commission.
(A) Taxability:
(i) the service provided by the Government or its agency to the concessionaire is liable to service tax;
(ii) the construction services provided by the contractor to the concessionaire would be examined from the point of taxability as to whether the activity is not otherwise excluded;
(iii) the services provided by the concessionaire to the user of the facility are liable to service tax;
(B) Persons liable to pay tax:
Government or its agency and concessionaire are liable to pay tax on the services being provided by them. There could be several other persons liable to pay service tax, depending on the variant of the BOT model followed.
2.7 Joint Development Agreement Model: Under this model, land owner and builder/developer join hands and may either create a new entity or otherwise operate as an unincorporated association, on partnership /joint / collaboration basis, with mutuality of interest and to share common risk/profit together. The new entity undertakes construction on behalf of landowner and builder/developer.
Clarification: Circular 148/17/2011-ST dated 13/12/2011, particularly paragraphs 7, 8, 9 apply mutandis mutandis in this regard.
3. This Circular may be communicated to the field formations and service tax assessees, through Trade Notice/ Public Notice. Hindi version to follow.
(Samar Nanda)
Under Secretary, TRU
Tel/Fax: 011-23092037
Income from Other Sources
Income from Other Sources
(Section 56 to 59)
Introduction: – Any income not taxable under the head salary, House Property, Income from Business /Profession, capital Gain, is chargeable to tax as Income from Other Sources.
Section 56 (1) General Provisions:- Income from other Sources is last and residual head of Income. It can be said that the residuary head of income can be invoked if the following conditions are satisfied.
a- Income :-There is an Income
b- Income should not be exempt u/s 10 to 13A
c- Not covered by other heads
The following are some of the examples of income generally taxable u/s 56 (1).
I. Income from sub-letting;
II. Interest on bank deposits and loans
III. Income from royalty (if it is not income from Business/ Profession);
IV. Director’s fee;
V. Ground rent;
VI. Agricultural income received from outside India;
VII. Director’s commission for standing as guarantor to bankers;
VIII. Director’s commission for underwriting shares of new Company;
IX. Remuneration received from a person other than his employer, e.g., examination remuneration received by a teacher;
X. Rent of plot of land;
XI. Insurance commission
XII. Mining rent and royalties;
XIII. Interest on foreign Government securities;
XIV. Casual income;
XV. Annuity payable under a will, contract, trust, deed(except annuity payable by employer which is chargeable under the head “salaries”;
XVI. Salaries payable to member of Parliament;
XVII. Family pension received by a family member of a deceased employee.
Deduction allowed u/s 57(iia) to the extent of Rs. 15000/- or 1/3rd of such income whichever is less.
XVIII. In case of retirement, interest on employee’s contribution if provident fund is unrecognized;
XIX. Income from undisclosed Sources;
XX. Gratuity paid to director who is not employee of the Company;
XXI. Income from racing establishment;
XXII. Compensation received for use of business assets;
Section 56 (2):- the following nine incomes are always taxable under the Head “Income from Other Sources”
1- Dividend u/s 2(22)(a) to sec. 2(22)(e)
2- Casual income in the nature of winning from lotteries, cross word puzzle, cards games, horse races and other games of any sort, gambling, betting etc. (Section 56(2)(ib). such winnings are chargeable to tax at 30%(+SC+EC+SHEC) under section 115BB.
Tax is deducted at source under section 194B and 194BB on payments in respect of winning from lotteries or cross word puzzle or card game and other game of any sort exceeding Rs. 10000/- (Rs. 5000/- in case of winning from horse races)@30%.
Case study Decision
CIT v. Manjoo & Co. (2011) 335 ITR 527 (Kerala) Even if the argument of the assessee that the winning from lottery is taken to to be received by him in the course of his business , the High Court held that the rate of 30% prescribed U/s 115BB is applicable in respect of winnings from lottery received by the distributor.
3- Gift- Any sum of money or value of property received without consideration or value of property, other than immoveable property for an inadequate consideration to be subject to tax in the hands of recipient being Individual or HUF exceeds Rs. 50000, whole of such amount is taxable in the hands of recipient as income from Other Sources.
4- Employee’s contribution towards staff welfare scheme (sec. 56(2)(id):-any sum received as contribution by assessee from his employee towards any staff welfare scheme, it becomes an income in the hand of employer under the head of ‘Income from other Sources.
5- Interest on Securities (sec.56(2)(id) interest on debentures, bonds / Government Securities provided securities are held as investment and not as stock in trade is taxable under the head “Income from other Source” (if same is not taxable under the head Income from Business/ Profession u/s 28).
6- Rent from letting out Plant & Machinery, furniture.
7- Composite Rent – combined rent from letting out Building alongwith Plant & Machinery, Furniture or other assets.
8- Sum received under Key Man Insurance Policy including Bonus thereon.
9- Interest on Compensation and enhanced Compensation is taxable in the year in which it is received applicable from the assessment year 2010-11 onwards. 50% of income by way of compensation/ enhanced compensation received is chargeable to tax in the year of receipt.
• Dividend [Sec. 56 (2)(i)]
Dividend from Indian Company is exempt u/s 10(34) in the hands of shareholders (Company declaring dividend will have to pay dividend tax u/s 115-O). However deemed dividend u/s 2(22)(e) from an Indian Company or any dividend from a foreign Company is taxable in the hands of shareholder under the head “Income from other Sources”.
Provision of sec. 115-O:- Indian Company should pay dividend tax within 14 days from the date of its declaration, distribution or payment whichever is earliest.
Penalty: – if Dividend Tax is not paid within above specified time the Company would be in default and penalty U/s 271C a sum equal to the amount of tax which the principal officer of the Company failed to pay. The penalty is however, not applicable, if the assessee proves that there was a reasonable cause for failure.
Dividend Tax rate U/s 115-O
Dividend Distribution Tax -u/s 115-O 15%
Surcharge 10%
Education Cess & SHEC 3%
Note: – Dividend tax is an additional tax i.e. other than Income Tax.
Under section 2(22) the following payments or distributions by the Company to its shareholders are deemed as dividend to the extent of accumulated profits of the Company (these payments may not be “dividend” under the Companies Act):
a- Any distribution entailing the release of Companies assets:-
When bonus shares are issued to equity shareholders out of accumulated profit whether capitalized or not, it will be deemed dividend when bonus shares are redeemed (paid) there should be release of assets.
b- Any distribution by a Company to its shareholders (whether equity shareholders or preference shareholders) of debenture, debenture stock, deposit certificates and bonus to preference shareholders out of its accumulated profit.
c- Distribution by a Company on liquidation of a Company:- to its shareholders is treated as dividend to the extent to which such distribution is attributable to the accumulated profits (whether capitalized or not) of the Company immediately before its liquidation.
However the following are not treated as dividend
1- Any distribution in respect of preference share issued for full cash consideration; and
2- Any distribution insofar as such distribution is attributable to the capitalized profits of the Company representing bonus shares allotted to its equity shareholders during 1964-65.
d- Distribution of accumulated profits on reduction of a Company’s capital is treated as dividend to the extent the Company possesses accumulated profits (whether capitalized or not).
However the following are not treated as dividend
1- Any distribution in respect of preference share issued for full cash consideration; and
2- Any distribution insofar as such distribution is attributable to the capitalized profits of the Company representing bonus shares allotted to its equity shareholders during 1964-65.
3- Any distribution out of accumulated profits which arose upto the previous year ending during 1932-33.
e- Any payment by way of loans and advances by a closely-held Company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money lending should not be a substantial part of the company’s business.
This section is applicable to a closely held Company i.e. Private Company in which public is not substantial interested.
For applicability of section 2(22)(e):- Conditions:-
1- It should be a closely held company
2- It should not be banking or money landing Company.
3- The person to whom loans and advances has been granted should have substantial interest in that Company at that time.
Meaning of Substantial interest: – the shareholder substantially holds 10% or more of equity shares at the time of getting the loan.
Proportionate holding does not matter for deemed dividend. Deemed dividend will be accumulated profit or amount of loan whichever is lower.
Repayment of loan: – Sect. 2(22)(e) is applicable even if loan is repaid before the end of the previous year.
Case name Result
CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom.) if the income earned by way of interest is excluded, the other business had resulted in net loss. These factors were considered in concluding that lending of money was a substantial part of the business of the Company. The money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it had to be excluded from the definition of “dividend” by virtue of specific exclusion in sec. 2(22)
Pradip Kumar Malhotra v. CIT 2011 338 ITR 538(cal.) It was decided by the Calcutta High Court that the advance given to the assessee by the Company was not in the nature of a gratuitous advance; instead it was given to protect the interest of the Company. Therefore, the said advance cannot be treated as deemed dividend in the hands of shareholders u/s 2(22)(e).
• Receipt without consideration to be treated as income [Sec. 56 (2)(Vii)/(Viia)/(Viib)]:- if satisfies the following four condition:-
1- It is received by individual or HUF.
2- It is received on or after October 1st, 2009.
3- It does not fall in the exempted category.
4- The sum of money or property falls in the following categories:-
Different catagories Tax treatment For ceiling of Rs. 50000/- whether a single transaction is to be examined or all transactions of the previous year will be considered
Category 1- Any sum of money (gift in cash, cheque or draft) Exceeding Rs. 50000/- received from individual or HUF without any consideration from one or more persons on or after 1st October 2009 All transactions
Category 2- Immoveable property without consideration
Or for inadequate consideration Being land or building or both, the stamp duty value of such property exceeds Rs. 50000/-. W.e.f. Assessment year 2014-15 where any immovable property is received for a consideration which is less than the stamp duty value of the property by Rs. 50000/- , the difference between stamp duty value and consideration is taxable under the head “Income from other Sources” in the hands of individual and HUF
Note:- 1- stamp duty value shall be taken as on the date of
agreement not on the date of registration.
2-if the stamp duty value is disputed by the assessee
the assessing officer may refer the valuation of such
property to the valuation officer. Single transaction
Category 3- moveable property without consideration
Or for inadequate consideration Moveable property means share and securities, jewellery, archaeological collections, drawing, paintings, sculptures, any work of art.
The aggregate fair market value of such property on the date of receipt would be taxed as income of the recipient, if it is exceeds Rs. 50000/-
If the Moveable property is received for inadequate consideration and the difference between fair market value and such consideration exceeds Rs. 50000/- , such difference would be taxed as income of the recipient. All transactions
Note:- the provision of section 56(2)(vii) would apply only to a property which is the nature of capital assets of the recipient not as stock in trade, raw material, or consumable stores of any business of the recipient.
Exempted Categories:- Any sum of money or property received from
1- Relative; or
2- On the occasion of the marriage of individual; or
3- By way of will/inheritance; or
4- In contemplation or death of payer/donor; or
5- From any local authority; or
6- From any trust or institute registered u/s 12AA; or
7- From any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in sec. 10(23C);
Would be outside the ambit of section 56(2)(vii)
The term relative for the purpose of sec. 56(2)(vii)
a) In case of individual-
i- Spouse of the individual;
ii- Brother or sister of the individual;
iii- Brother or sister of the spouse of the individual;
iv- Brother or sister of either of the parents of individual;
v- Any lineal ascendant or descendent of the individual;
vi- Any lineal ascendant or descendent of the spouse of individual;
vii- Spouse of any of the persons referred above.
b) In case of the Hindu Undivided family, any member thereof.
Rules for determining the fair market value of moveable properties
a- Valuation of jewellery, archaeological collections, drawing, paintings, sculptures, any work of art.
i- Estimated price would be fetch if sold in the open market on the valuation date.
ii- In case if received by way of purchase on the valuation date from the registered dealer, the invoice value shall be the fair market value.
iii- If received in any other mode and the value exceeds Rs. 50000/- the assessee may obtain the report from registered valuer in respect of price it would fetch if sold in the open market.
b- Valuation of shares and Securities
A- The fair market value of quoted shares and securities shall be determined in the following manner:-
i- The fair market value of such shares and securities shall be the transaction value as recorded in the stock exchange.
ii- If shares and securities are received by way of transaction carried out other than recognized stock exchange, the fair market value shall be-
1- lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and
2- if shares are not traded on the valuation date, the lowest price of such shares and securities on a date immediately preceding the valuation date (when such shares and securities are traded) shall be the fair market value.
B- The Fair market value of unquoted equity shares shall be:-
Adjusted book value of assets-adjusted book value of liabilities
= ————————————————————————————- x paid up value of such equity share
amount of paid up equity shares as per balance sheet
1- Adjusted book value of assets = book value of assets as per balancesheet as reduced by TDS/TCS, advance payment of tax after adjustment of refund, deferred expenditure.
2- Adjusted book value of liabilities = book value of liabilities as shown in the balance sheet but not including the following amounts-
a- Paid up capital in respect of equity shares;
b- The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
c- Reserves, by whatever name called, other than those set apart towards depreciation;
d- Credit balance of the profit and loss account;
e- Provision for taxation , other than amount paid as advance income tax, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
f- Provision for meeting unascertained liabilities;
g- Contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
C- The fair market value of unquoted shares and securities other than equity shares in a Company shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain report from a merchant banker or an accountant in respect of such valuation.
Receipt of shares by a firm or a closely held Company [Sec. 56(2)(viia)]-
w.e.f june 1, 2010. This clause is applicable if the following conditions are satisfied-
1. Recipient is a firm or closely held Company (i.e. Company in which public is not substantially interested).
2. The asset (which is received) is in the form of shares in a closely held Company.
3. These shares are received from any person on or after june1, 2010.
4. without consideration or inadequate consideration.
5. such shares are not received by way of transaction in a scheme of amalgamation, demerger.
If the above conditions are satisfied, then the value of such shares will be taxable in the hands of recipient as follows:-
1- If such shares are received without consideration , the aggregate fair market value on the date of transfer would be taxed as income of the recipient firm, Company, if it is exceeds Rs. 50000/-
2- If shares are received for inadequate consideration, the difference between the aggregate fair market value and consideration would be taxed as income of the recipient firm or the Company, if such difference exceeds Rs. 50000/-.
Share premium in excess of fair market value [sec.56(2)(viib)], applicable from the aseessment year 2013-14
It is applicable as follows:-
1- Recipient is a private limited Company.
2- It receives consideration for issue of shares (preference shares or equity shares) from a resident.
3- Shares are issued at a premium.
If the above conditions are satisfied, the aggregate consideration received for such shares exceeds the fair market value of shares, shall be chargeable to tax as income from other sources in the hands of recipient Company.
The above provisions are not applicable:-
a- where consideration for issue of shares are received by venture capital undertaking from a venture capital Company or venture capital fund; or
b- where consideration for issue of shares are received from a class or classes of person as notified by the Central Government.
The Fair market value shall be higher of the value:-
a- As may be determined in accordance with the method as may be prescribed.
b- As may be substantiated by the Company to the satisfaction of the Assessing Officer based on the value of assets, including intangible assets (being goodwil, patent, copy right, know-how, trade mark, licenses, franchise or any other business or commercial right of similar nature.
PERMISSIBLE DEDUCTION U/S 57 FROM INCOME FROM OTHER SOURCES
1- Commission or remuneration for realizing dividend or interest on securities [sec.57(i)
2- Deduction in respect of employees’ contribution towards staff welfare schemes [sec. 57 (ia)]
3- Repair, depreciation, insurance premium in the case of letting out of plant, machinery, furniture, building.
4- Standard deduction allowed u/s 57(iia) in case of income in the nature of family pension to the extent of Rs. 15000/- or 1/3rd of such income whichever is less.
5- any other expenses for earning the income [se. 57(iii)] provided that such expenditure is not in the nature of Capital expenditure, personal expenses of the assessee. It must laid out or expended wholly or exclusively for the purpose of making or earning the income. It must be related to the previous year not prior to previous year.
Bond washing transactions and dividend stripping [Se. 94]
a- Sec. 94(1) provides that where a security owner transfers the securities before the due date of interest and re-acquires the same after the due date is over. Such interest income will be deemed to be the income of the transferor and would be taxable in his hands.
b- In order to prevent the practice of sale of securities cum interest sec. 94(2) provides that if an assessee who has a beneficial interest in the securities sells such securities in such a manner that either no income is received or income received is less than the sum he would have received if such interest had accrued from day to day, then the income from such securities for the whole year would be deemed to be the income of the assessee.
• Dividend stripping [sec. 94(7)]
1- If any person buys or acquires any security or units at any time within a period of Three months prior to the record date; and
2- Sells or transfers such:-
a- Securities within three months from such Record date; or
b- Units within nine months from such Record date; and
3- Dividend or income from such securities or units are exempt from tax; and
4- There are no bonus units (only bonus units not bonus securities) are allotted to such person
5- Loss arising from transfer of such securities or units shall be ignored to the extent of income there from claimed to be exempt.• Bonus stripping [sec. 94(8)]
1- If any person buys or acquires any units at any time within a period of Three months prior to the record date; and
2- He is being allotted Bonus units (whether dividend is declared on record date or not)
3- Sells or transfers all or any of such Units within nine months from such Record date, while continuing to hold all or any of the bonus units; then
4- Loss arising on transfer of original units shall be completely ignored;
5- The loss ignored shall be deemed to be the Cost of acquisition of those Bonus units, which are left out as on the date of transfer of original units.
—————————————————*****—————————————
Prepared by Nandani Mishra
PwC gets SC notice on Fema, FDI rules violation charges
PwC gets SC notice on Fema, FDI rules violation charges
The Supreme Court on Friday issued a notice to auditing major PriceWaterhouse Coopers Pvt Ltd (PwC), five of its network firms, the Union government, the Reserve Bank of India ( RBI), the Registrar of Companies and the Central Board of Direct Taxes on a public interest litigation ( PIL) filed by Centre for Public Interest Litigation ( CPIL), an NGO run by senior advocate Prashant Bhushan.
The key theme of the various allegations made in the petition is that the network is infusing foreign funds into local audit firms in violation of Institute of Chartered Accountants of India ( ICAI) rules and the foreign direct investment ( FDI) policy, which do not permit foreigners to practise the auditing profession in India or invest in Indian audit firms without RBI approval.
CPIL has alleged that to achieve this end, PwC and its network firms have allegedly engaged in falsification of books of accounts, evasion of income tax and violation of FDI rules, RBI guidelines and the Foreign Exchange Management Act, among others.
The move comes at a time when the network is in the process of rebuilding its brand, which suffered asetback following the alleged involvement of one of its associates, Price Waterhouse, in the ₹ 8,000- crore Satyam Computer scandal. While cases are on in Indian courts, US regulators have slapped a penalty of $ 7.5 million on PwC and associates.
Price Waterhouse ( Bangalore), Price Waterhouse ( Gurgaon), Price Waterhouse & Co ( Kolkata), Lovelock & Lewes and Mumbaibased Dalal & Shah were the other firms named in the petition.
The bench of Chief Justice P Sathasivam and Justice Ranjan Gogoi issued a notice to the respondents, saying the issues raised needed to be examined. CPIL has also sought systemic changes, including aseparate regulator for auditors to look into such irregularities.
It has pleaded that falsification of books of accounts be made a non- bailable offence.
The petition has cited official filings such as balance sheets and annual reports and media reports to allege that some of the entities received close to ₹ 240 crore from “ undisclosed” sources. “ The importance of receipt of these funds in FY11 alone can be appreciated from the table below as without these funds, these entities would have incurred huge losses,” the petition said, adding that receiving such money from foreign entities would amount to ceding of control, which was in violation of the FDI policy. Quoting media reports, the petition said the matter had already been referred by the ICAI to the RBI.
Other allegations include the creative structuring of an acquisition of Mumbai- based Dalal & Shah through unexplained credits into accounts of its partners and irregularities in accounting insurance policies.
According to the petition, all PwC India entities had a common professional indemnity insurance ( PII) cover. However till FY11, only three entities used to pay for the premium in the following ratio: PricewaterhouseCoopers Pvt Ltd ( 20 per cent), Lovelock & Lewes ( 28 per cent) and Price Waterhouse ( 52 per cent). “ However, Price Waterhouse, Bangalore, Satyam’s auditor, used almost the full PII cover of $ 60 million (approximately ₹ 280 crore) by FY11 without even paying a single rupee of premium towards it,” the petition said.The petition quoted a PwC spokesperson’s statement to The Times of India in May 2012 that said, “ PwC India entities have not received any query from RBI on this matter. The grants from PwC Network to PwC India entities are not an investment. These are received in order to assist in maintaining the standards required of all member entities of PwC Network in India and were received at our request as outright nonrefundable grants facilitating enhancement of the resources and skills. The grants have come through regular banking channels. These are current account transactions which are under the automatic route.” PwC officials were not available for comment. An email seeking comments sent to the official spokesperson, citing specific allegations in the petition, did not elicit any response. In a text message, a spokesperson said, “ If we do (have a statement) will share.”
Railways Not Covered u/s 40A(3)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax
v.
Devendrappa M. Kalal
K.L. MANJUNATH AND A.N. VENUGOPALA GOWDA, JJ.
IT APPEAL NO. 5018 OF 2012
SEPTEMBER 18, 2013
Section 40A(3) of the Income-tax Act, 1961 – Business disallowance – Cash payment exceeding prescribed limits [Payment to Government concern] – Assessment year 2008-09 – Assessee a scrap dealer, purchased scrap from Railway by making payment in cash in excess of Rs. 20,000 – Whether since Railway is concern of Union of India, such payment in cash had to be considered as a legal tender, and, therefore, same could not be disallowed – Held, yes [Para 4] [In favour of assessee]
CASE REVIEW
Devendrappa M. Kalal v. ITO [2012] 53 SOT 23 (URO)/23 taxmann.com 404 (Bang.) affirmed.
Y.V. Raviraj for the Appellant.
JUDGMENT
-
The Revenue has come up in this appeal challenging the legality and correctness of the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in ITA Nos.220/Bang/2012 for the assessment year 2008-09.
-
Heard Sri Y.V Raviraj for the appellant. The respondent-assessee filed return of income for the assessment year 2008-09 by order of assessment passed u/s 143(3) of the Act. The Assessing Officer disallowed certain expenditure and added Rs. 73,91,380/- on the ground that the assessee has made payment in cash in excess of Rs. 20,000/- in respect of a single transaction which is in gross violation of Section 40A(3). Aggrieved by the same the assessee filed an appeal before the Commissioner of Income Tax Appellate Tribunal, which appeal came to be dismissed on 29-12-2011. Challenging the concurrent findings of the Courts below the respondent-assessee filed an appeal before the Income Tax Appellate Tribunal. It was contended by the assessee that all the payments were made by him to purchase the scrap from the Railways, which is run by the Union of India. According to the assessee, in respect of the purchase of scrap made from the Railway, the payments were made and any payment made to the Government is required to be considered as a legal tender and the question of adding the same by deleting from the business expenses is an error committed by the Assessing Officer. Accordingly, the appeal came to be allowed. Challenging the findings of the Income Tax Appellate Tribunal, the present appeal is filed.
-
Having heard Sri Y.V. Raviraj, learned counsel for the revenue we do not see any substantial question of law arises in this appeal for the following reasons.
-
The revenue is not disputing that the assessee is a scrap dealer purchasing scrap from the Railways. Admittedly Railways is a concern of the Union of India. If any cash is paid towards purchase of the scrap the same cannot be disputed by the revenue since such payment has to be considered as a legal tender. If the revenue is of the opinion that no such payment has been made to the Railways, we could have considered their grievance. In the circumstances, the appeal is dismissed.
Article 370 of the Indian Constitution
Article 370 of the Indian Constitution
(1) Temporary provisions with respect to the State of Jammu and Kashmir.
Notwithstanding anything in this Constitution,-
(a) the provisions of article 238 shall not apply in relation to the State of Jammu and Kashmir;
(b) the power of Parliament to make laws for the said State shall be limited to–
(i) those matters in the Union List and the Concurrent List which, in consultation with the Government of the State, are declared by the President to correspond to matters specified in the Instrument of Accession governing the accession of the State to the Dominion of India as the matters with respect to which the Dominion Legislature may make laws for that State; and
(ii)such other matters in the said Lists as, with the concurrence of the Government of the State, the President may by order specify.
Explanation.- For the purposes of this article, the Government of the State means the person for the time being recognised by the President as the Maharaja of Jammu and Kashmir acting on the advice of the Council of Ministers for the time being in office under the Maharaja’s Proclamation dated the fifth day of March, 1948;
(c) the provisions of article 1 and of this article shall apply in relation to that State;
(d) such of the other provisions of this Constitution shall apply in relation to that State subject to such exceptions and modifications as the President may by order specify :
Provided that no such order which relates to the matters specified in the Instrument of Accession of the State referred to in paragraph (i) of sub-clause
(b) shall be issued except in consultation with the Government of the State :
Provided further that no such order which relates to matters other than those referred to in the last preceding proviso shall be issued except with the concurrence of that Government.
(2) If the concurrence of the Government of the State referred to in paragraph (ii) of sub-clause (b) of clause (1) or in the second proviso to sub-clause (d) of that clause be given before the Constituent Assembly for the purpose of framing the Constitution of the State is convened, it shall be placed before such Assembly for such decision as it may take thereon.
(3) Not withstanding anything in the foregoing provisions of this article, the President may, by public notification, declare that this article shall cease to be operative or shall be operative only with such exceptions and modifications and from such date as he may specify :
Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification.
AAp
Arvind Kejriwal: Won’t quit even if AAP losesIANS | 2013-11-27 17:33:00 +0000″I won’t quit even if AAP loses the Delhi elections. I’m here for good. I want to make India corruption free,” Kejriwal said.
NEW DELHI: Aam Aadmi Party (AAP) leader Arvind Kejriwal said on Wednesday he would not quit even if his party loses the December 4 assembly elections in Delhi.
“I won’t quit even if AAP loses the Delhi elections. I’m here for good. I want to make India corruption free,” Kejriwal said in interview to CNN-IBN news channel.
The party created ripples on the political landscape of Delhi which has been the fiefdom of the Bharatiya Janata Party and the Congress.
Asked why people should vote for AAP, Kejriwal said, “First, we are very happy we don’t have that kind of experience … experience to loot the country … we are bringing fresh ideas on the table. You are asking for three reasons … in our manifesto, we have hundreds of those.”
“To run the government is not rocket science. If you have clear intentions, you will have solutions to solve the problems. Only if you are not one of the beneficiaries, you solve problems.”
On the sting row, Kejriwal said, “The Election Commission has given a clean chit to AAP over sting operations. The EC even said political parties and media channels should not engage in such conspiracies.”
Dissolution of Partnership Firms
Dissolution of a partnership firm is the process by which the existence of a partnership firm comes to an end. This involves the sale or disposal of assets, settlement of liabilities and closing of books of accounts. Once the outside liabilities of the firm are settled, the partners take away their capital investment. If there is any surplus or deficit in this process it will be shared by the partners in their profit sharing ratio.
Reasons of Dissolution of a partnership firm:
Dissolution of a partnership firm can take place on account of any of the following reasons:
1. Dissolution by Agreement:
When the partners themselves reach an agreement to discontinue their business for whatever reason, it is known as dissolution by agreement.
2. Compulsory Dissolution:
Compulsory dissolution takes place when the business of the firm is declared illegal, or the partners become insolvent or the citizen of an enemy country happens to be partner of the firm.
3. Dissolution by notice:
A partner can demand dissolution of a partnership at will, by serving a notice to the firm.
4. Dissolution by Court:
Court may initiate dissolution of a firm under the following circumstances:
i) When one of the partners has become of unsound mind
ii) When a partner is guilty of misconduct which may affect the business
iii) When a partner commits wilful breach of contract
iv) Any other reason which the court may find adequate
5. Dissolution by the expiry of a pre determined period or completion of event:
This dissolution takes place in case of particular partnerships which are formed for a specific period or the completion of a specific project. Such partnerships will be dissolved at the completion of the specific period of or the project as the case may be.
Dissolution of Partnership and Dissolution of Partnership Firm
The term dissolution, referred in relation to a partnership business generally denotes the winding up of the business. However, there is a difference between ‘dissolution of partnership’ and ‘dissolution of the partnership firm’. The former indicates ending of agreement only to replace it with a new one, but the latter indicates the ending of partnership business altogether. The following points may be noted in comparison between the two:
Dissolution of Partnership
- Only the agreement is dissolved, no physical disposal takes place.
- The partners will continue to run the business with a new agreement.
- Limited effect on employees or debtors and creditors of the business
- Many dissolutions of agreement can take place during the life of a partnership business.
- Admission, retirement and or death of a partner can result in compulsory dissolution of existing agreement.
Dissolution of Partnership Firm
- The Firm is dissolved, by selling off assets and settling liabilities.
- The partners will discontinue the business
- Since the business is closed down it affects the workers, debtors and creditors of the firm
- Dissolution of firm can take place only once in the lifetime of a partnership business.
- None of these events can lead to a compulsory dissolution of the firm.
Settlement of Accounts on Dissolution
The first step in dissolution is the realisation of assets followed by the settlement of outside liabilities. All individual accounts for assets and liabilities, except cash, are closed by transferring their balances to a Realisation Account. Realisation account is the temporary account for accumulating all assets and liabilities for convenient accounting treatment. All ledger accounts except partner’s capital accounts and cash account are closed prior to realisation procedure. Accumulated profits or losses are directly transferred into the capital accounts in the profit sharing ratio. The following is the order of priority in settlement of liabilities and capital upon dissolution:
i) Expense incurred on realisation of assets such as commission, cartage, brokerage etc.
ii) All outside creditors
iii) Partner’s Loan accounts
iv) Balances in Capital Accounts of partners
Special Items in Accounting for Dissolution
1. Realisation Account:
This is the most important account prepared to facilitate dissolution of firms. This is equal in importance to Revaluation Account in Reconstitution. There is no scope of revaluation of assets and liabilities of a firm under liquidation. Realisation account is used to accumulate all assets and liabilities in one place for convenient accounting steps for disposal and settlement of liabilities.
2. Treatment of Goodwill:
Goodwill is the most prominent item in Reconstitution of partnership. But goodwill does not have any special treatment in dissolution. If it appears in the books it has to be transferred into Realisation Account. This will automatically gets transferred into the Capital Accounts of Partners, by way of realisation profit or loss. If goodwill does not appear in the books it is just ignored. There is no meaning in raising it or treating it in any way when the firm is being dissolved.
3. Realisation Expenses:
Expenses of realisation such as commission paid to brokers for the disposal of assets, expenses on transportation of items, registration documentation charges for the assets sold etc. are debited to Realisation Account and credited to Cash Account. However if any partner agrees to bear the expense for a certain fees, the fees charged by the partner becomes the common expense which is debited in Realisation Account; whereas the actual realisation expense, if mentioned, should be treated as personal drawing of the partner concerned.
4. Wife’s Loan:
Loans from a partners’ wife is to be treated as normal creditor. The basic aim of providing a loan in the name of partner’s wife is to by-pass the legal restrictions on the Loan from a Partner to the firm.
5. Provident Fund:
Provident fund should be understood as a liability payable to the employees. It should be paid off even when the question is silent about its treatment. Same rule applies to all other outside liabilities, such as creditors, bills payable etc.
6. Specific Funds:
Specific funds such as Investment Fluctuation Funds are preferably credited to Realisation account along with the transfer of related asset, which will get transferred to capital accounts by way of profit of loss on Realisation. Provision for doubtful debts, accumulated depreciation etc. must be credited to Realisation Account along with the transfer of assets.
7. Profits Kept Aside:
General Reserve; credit balance in P& L Account etc should be directly transferred into the Capital Accounts of Partners, in the profit sharing ratio.
8. Unrecorded Assets:
Unrecorded assets or assets which are completely written off may fetch some cash at the time of dissolution. There is no need of bringing them into books and selling them afterwards. It can be directly treated by crediting realisation account and debiting cash account.
9. Creditors Purchasing Some Assets in Part Settlement of Claim:
When creditors purchase some of the assets in part settlement, this is not specifically recorded by way of a journal entry, since the asset and liability are appearing in the same Realisation Account. The balance amount due to the creditors is aid in full satisfaction of the claim. If the value of asset taken over is more than the amount due, the creditors will pay the excess amount to the firm.
Please note: The treatment of creditors taking over part of the assets mentioned above is a questionable accounting treatment. What I mentioned above is only on ‘examination point of view’. The correct account treatment is to debit the Creditors account in the Ledger by passing a journal entry and transferring the balance of creditors into Realisation Account
Profit or loss on realization will be transferred to the Capital Accounts of partners in the profit sharing ratio. At the final stage of the realization process, only Cash Account and Capital Accounts will be left. The final balances of each other will match exactly, and the cash will be paid off to capital accounts to close both the accounts. This is the last transaction in the books of the firm.
The entire accounting steps in realization can be summarized as follows:
Step 1: Reduce the Number of Accounts into THREE: As you are aware each item in a detailed Balance Sheet represents an account in the Ledger. You have to reduce them into just three accounts, namely
i) Realisation Account
ii) Capital Accounts of Partners (considered one account)
iii) Cash Account
Step 2: Reduce the Number of Accounts into TWO: Major activities of realisation process take place at this stage. Sell assets one by one and add it to (debit) Cash and reduce it from (credit) Realisation Account. Take out cash and pay to liabilities placed in the Realisation Account. Now the Realisation Account is reduced to a residue, without any active accounts inside. This balance is transferred into capital accounts as realisation profit or loss. Now you have only two accounts, the Cash Account and the Capital Account.
Step 3: Reduce the Number of Accounts to NIL: This is the most interesting step. Here the cash balance has to be exactly equal to the credit balance in capital account. Take out cash (cr); Pay off Capital (Dr.), and there ends the Partnership Business.
Journal Entries in Dissolution
Accounting for dissolution begins with the closing of assets and liabilities accounts by transferring them to Realisation Account.
i) For transfer of assets
Realisation Account Dr. To Asset Account
ii) For Transfer of liabilities
Liability Account Dr. To Realisation Account
Accumulated profits such as General Reserves, Profit and Loss Account Credit Balance etc. are transferred to capital Accounts in the profit sharing ratio.
iii) For transfer of accumulated profits
General Reserve; P&L etc. Dr.
To Realisation Account
Note: Provision for doubtful debts; Investment fluctuation fund etc. are credited to realization account and ignored thereafter. These are internal provisions having no claim against the firm and therefore these amounts will merge into realization profit or loss and finally get transferred to Capital Accounts of partners.
iv) For assets realized
Cash/Bank account Dr. To Realisation Account
v) For Liabilities paid off
Realisation Account Dr.
To Cash Account
vi) For asset taken over by a partner
Partner’s Capital Account Dr.
To Realisation Account
vii) For Liability taken up by the partner
Realisation Account Dr.
To Partner’s Capital Account
viii) For unrecorded asset taken over by a partner
Partner’s Capital Account Dr.
To Realisation Account
ix) Unrecorded Liability settled by the firm
Realisation Account Dr.
To Cash account
x) Realisation expense
Realisation Account Dr. To Cash
xi) Asset taken over by creditors
No entry; Only settlement of balance amount is shown in the books.