Will the recipients have to pay any gift-tax or income-tax on the capital receipt? Will the income on the gift received by my wife be clubbed with my income?

-Pravin Deshpande, VIKHROLI

The Finance Act 1998 has rescinded the Gift Tax Act. Consequently, all gifts made after October 1, 1998, are free from gift tax. Neither the donor nor the donee would have to pay gift tax.

However, Section 64, which deals with the clubbing of income, has been left untouched. As per its provisions, income or wealth from assets transferred directly or indirectly without adequate consideration (gifts) to spouse and daughter-in-law will be deemed tobe the income and wealth of the transferor. Hence, the gift given by you to your wife and daughter-in-law would be clubbed in your hands, irrespective of individual tax brackets.

Note that gifts given to son-in-law are not clubbed. The authors of legislation still continued to be male chauvinist pigs.

We are a partnership firm dealing in retail trading. We have been maintaining our accounts meticulously through a chartered accountant. Our turnover is less than 40 lakh. All our partners have been getting a salary mainly to decrease the tax incidence from 35 per cent to 30 per cent. Now, u/s 44AF, the firm need not file the statement of accounts and merely show pay tax @5 per cent of the turnover. Now:
1) Does that mean, that the firm need not send the P&L account and balance sheet along with the return of income?

2) Can the assessment officer call for the books at the time of assessment of the partner of that firm?

3) How can a partner file his personal tax returns,if the actual net profit of the firm is not ascertainable?

4) If the books are maintained and the firm arrives at a profit in excess of 5 per cent, can the firm still file the return u/s 44AF and pay tax @5 per cent of the turnover?

5) Would a PCO/STD operator be considered as a retail business? If so, the commission actually received by them from MTNL is @18%, 15% and 12% respectively, depending on various slabs. Now will they be allowed to show a net profit of 5 per cent and pay tax on the same?

- Shivang Vyas, shivy@giasbmc.vsnl.net.in

In order to simplify the procedure of computation of income of retail traders, from AY 98-99, Section 44AF has been introduced. Under this section, the profits and gains of the retail business shall be presumptively computed at 5 per cent of the gross receipts, or a percentage higher than 5 per cent as may be declared by the assessee.

The assessee is not required to maintain books of accounts u/s 44AA nor the accounts need beaudited u/s 44AB in respect of such income unless the turnover is less than Rs 40 lakh. I personally feel that even if you are maintaining the accounts, and find that the tax on profits and gains are higher than 5 per cent of the turnover, you can get away by paying the stipulated 5 per cent. Of course, you are free to declare a higher percentage.

If the tax computed on the profits as per the books, is lower than 5 per cent, you need not take any recourse to Section 44AF. Now comes the main difficulty. Though deductions under Sections 30 to 38 are deemed to have been allowed, in the case of a firm, deduction in respect of salary and interest to partners u/s 40(b) shall be deducted from the income computed.

In other words, if the partnership deed provides for any salary, it will be taxed in the hands of the individual partners as their personal income. If there is no provision of salary, there is no tax. In both the cases, the tax on the firm is 5 per cent of the turnover and the turnover has nothingto do with the salary paid.

If the turnover is less than the stipulated Rs 40 lakh, the firm can pay 5 per cent tax on turnover claiming that it is not maintaining any books. If the partnership deed provides for salaries, bad luck. The tax incidence of the firm does not decrease but the individuals will have to pay tax on it at the rates applicable to them.

Suppose none of the partners get any salary from the firm, the excess amount after paying tax is credited to their capital account and they are free to withdraw therefrom any amount they desire, subject to the approval of the other partners. Finally, the ITO has a right to ascertain whether the turnover is really less than Rs 40 lakh.

Section 44AF is applicable in the case of an assessee engaged in retail trade in any goods or merchandise. Therefore, a PCO/STD operator may not be entitled to avail of the scheme u/s 44AF.