Tax Column

Jayesh Dadia 
Chartered Accountant 

I had, as an individual, invested Rs 1 crore as share capital in ABC (P) Ltd. in 2001. Three years ago, ABC went into liquidation and in the current financial year the company has been wound up by an order of NCLT. On winding up, I received Rs 1.5 crore, being the surplus left after payment of all the liabilities. What I want to know is whether the amount received is now taxable and if yes, under which head should it be calculated and how?

It is clearly mentioned under Section 46(2) of the Income Tax Act that if a shareholder receives money on the liquidation of a company, it shall be liable for Income Tax under the head of capital gain. Thus, the amount of Rs 1.5 crore is subject to Capital Gain Tax in the current financial year i.e. 2020-21, relevant to assessment year 2021-11. Since you were holding the shares for more than two years, the capital gain would be considered long-term capital gain. Further, while calculating the capital gain, you will also be entitled to deduction of cost with indexation. If your indexed cost is more than Rs 1.5 crore, there will be capital loss in your hand which could be available for set-off against any other capital gain you may have made in the current financial year. The unabsorbed long-term capital gain can be carried forward for subsequent eight years. 

I am employed with an MNC, drawing salary of Rs 2 lakhs per month. Due to the ongoing lockdown, my employer is contemplating either to reduce my salary since there is no business and insufficient cash flow or pay part salary now and defer the balance till the cash flow status of the company improves. Also, the MNC has decided to pay all employees, including myself, an ad hoc allowance so that we can meet our household expenses. The MNC may also decide to waive off the entire salary for the months of April, May and June. I want to know the tax implications in such a scenario.

Under Section 15 of the Income Tax Act which is related to income falling under the head salary, it is clearly stated that any salary due from an employer or former employer to an assessee in the previous year, whether paid or not, is chargeable to tax. Thus, under Section 15(1)(a), any salary due from an employer is chargeable to tax in the previous year, whether it is actually paid or not. Considering the aforesaid, any salary which is deferred till the improvement of cash flow is taxable in the hands of employees whether it is received or not received in the previous year. Hence, deferment of salary is taxable even if you have not received it during the previous year.

If the employer decides to reduce the salary by say 50% and if the employer gives a letter regarding reduction of the monthly salary, then what is due on account of salary is the reduced amount and the said reduced amount is taxable in the hands of the employees, whether received nor not. Waiver of salary by the employer is not taxable in the hands of the employees since the salary is not due to employees. Therefore, it is outside the purview of Section 15(1) of the Income Tax Act.

There could be a case where certain employees surrender 10 days or one month salary so that the said amount can be used by the employer to donate to any government organisation or NGO to help fight the virus pandemic. In such a case, the surrender of salary cannot be taxed in the hands of the employees. Section 10(14)(i) provides for exemption of certain allowances made to employees which are specifically granted to meet expenses wholly, necessarily and exclusively incurred for performance of duties of an office or employment of profit. During the lockdown period it may so happen that employee may not have incurred expenses against the receipt of the allowance and therefore in my opinion such an allowance received during the lockdown period to meet household or personal expenses would be taxable in the hands of the employees. 

XYZ Charitable Trust is registered under Section 12A of the Income Tax Act since 2009 onwards. I am a managing trustee of this organisation and was told that there are some amendments regarding registration under Section 12AB in respect of existing trusts as well as new charitable trusts. Can you highlight the new provisions in the Income Tax Act? Is our trust required to apply for fresh registration? 

Section 12AB of the Income Tax Act has been inserted with effect from October 1, 2020. All charitable institutions which are currently registered under Section 12A or Section 12AA are required to apply for fresh registration under Section 12AB. Similarly, all new charitable trusts seeking exemption under Section 11 and Section 12 are required to apply for registration under Section 12AB of the Income Tax Act. Since your charitable trust was registered in 2009, you are required to upload a fresh application on or before December 31, 2020. Within three months, from the end of the month in which the application is uploaded, the Principal CIT or CIT will provide registration for five years. The Principal CIT or CIT will not make any inquiries about the genuineness or activities of the trust or compliances of such requirements of other laws as are material for the purpose of achieving the objectives of XYZ Charitable Trust. If you fail to apply for fresh registration on or before December 31, 2020, the the existing registration will expire and accordingly the trust will lose exemption under Section 11 and Section 12 of the Income Tax Act. The process of registration for new and existing charitable trusts will be completely electronic under which a Unique Registration Number (URN) shall be issued to all the new and existing charitable institutions. Moreover, new institutions which are yet to start their charitable activities will get provisional registration for three years. With these amendments, every trust has to apply for registration on expiry of five years as against the earlier scenario of its validity being for an indefinite period. Various time limits have also been prescribed with respect to new and existing trusts which are to be followed for the purpose of registration.