Post No. - 51
Interest Free/Concessional Loan
On March 23, 1995, the Central Board of Direct Taxes (for short the “C. B. D. T.”), informed the Chief Commissioner of Income-tax, Hyderabad, that where the employer directly bears a part of the interest burden of the employees by reimbursing a portion of the interest payable by the employee in respect of building loans, such reimbursement is taxable as income from ”salaries”. In other words the perquisite is chargeable only in case the employee has originally incurred an obligation in favour of a lending institution such as HDFC etc. Cases where the employer has directly advanced loans to its employees either as interest free or concessional should not result in any benefit for the following reasons:
a) The employee is under no obligation to pay interest or has obligation only to pay a certain interest;
b) The loan facility is extended as staff welfare to all the personnel.
The attempt in the new rule to tax such staff welfare measures must be countered on the basis of corresponding claims for deduction of such notional income under the head ” income from house property” as interest expenditure deduction. Further it would be wrong to consider such loans as providing any benefit in as much as the employee is required to serve the employer for a specified period and in case of early departure is made subject to charge of interest on retrospect basis. In true effect therefore the benefit that is being made subject to tax under the new sub rule is a contingent benefit, which can be taxed only on the happening of such contingency.
Employers are advised to redraw their housing loan schemes to so specifically include a clause for payment of interest at par with the market rate of interests. Further the scheme should also provide that no interest would be charged if the employee serves the company for a particular period. In case of early exit the interest shall be charged retrospect basis. This would have two advantages:
1) The loans would become interest bearing. Hence no perquisite. Employer may have to justify such interest as a mere contingent income under the scheme.
2) In the alternate if the assessing officer so chooses to tax it as benefit the employee could take a deduction u/s 24 for the equivalent sum for a specific mention of interest clause in the scheme perse.
Remember it is not possible to conclude that no perquisite will be charged as well as a deduction can be clamed as that would be inconsistence with the law.
Post No. - 50
Gifts to employees
In the new rules it is provided that gifts in kind to employees would not be taxed up to an aggregate sum of Rs. 5K in a year. These gifts can be made at any occasion such as Diwali, New Year, Christmas, marriage, birthday etc. In case of gifts exceeding in value by Rs. 5K only the excess need to be considered as taxable salary.
Care must be taken to avoid building this as compensation element in the engagement terms in which case it would become contractual and not voluntary thereby preventing employee from claiming exemption. Further this limit of Rs. 5K is set for all members of the household taken together and not individually.
The limit of Rs. 50 per meal has been set as exemption limit for this purpose as staff welfare measure. Only the excess cost (net of employee recoveries) needs to be considered as taxable salary. For this purpose it is desired for an employer to have direct arrangements with the caterer/restaurant. By a specific clarification expenses on tea, coffee, non-alcoholic beverages, snacks etc. are to be ignored.
Post No. - 49
Credit Card and Club payments
Realizing the fact that such payments are often made in the course of entertainment of costumers, clients or constituents the Board has desired appropriate record making in this regard. As part of such details it is desired to maintain the following information;
a) Date of entertainment;
b) Place of entertainment;
c) Amount paid;
d) No. of persons entertained;
e) Nature of entertainment;
f) Purpose of entertainment.
The new rule does not impose any restrictions on residential entertainment. As such the employees may entertain guests at their residence too provided sufficient record is kept in the manner above.
In the fourth column the numeric number of persons entertained would be sufficient.
In the fifth column the kind of entertainment may be specified. For instance meals, gifts (other than free samples), Liquor etc. Further in the Explanation (ii) of sub rule entertainment to include hospitality of any kind.
In the last column it is desired to mention the necessity of such expenditure in which case it may be kept in mind that such entertainment costs was incurred only for extending customary courtesy to persons who are connected with the assessee's business be they are vendors, customers, foreign guests, advisors/consultants, auditor's etc.
As regard the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of the persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assessee, either as an express or implied condition of service, that would not amount to acts of entertainment. Before the Delhi High Court in the case of Commissioner of Income-tax Vs. Modern Bakeries India Limited (249ITR465) the revenue has conceded that the expenditure in connection with the conference of the assessee's managers and