Sowmya P K (Chartered Accountant) (251 Points)
09 September 2010Hi
A CA renders services to his client(in business) . The client settles his bill by transferring a house to the CA.
Now, can the client claim deduction u/s 37(1)?? Or, the transfer comes u/s 2(47) and he has to pay Capital Gains??
(P.S.: U/s 37(1) deduction is allowed as long as the expenditure is not of capital nature)
Thanks in advance
Vicky
(CA, LCS,MCOM,)
(136 Points)
Replied 10 September 2010
hi sowmya(nice name)
as per sec 37(1) exp shd not be a cap exp.......in ur case exp is not a cap exp,only payment being made is through capital asset....accordingly,the above exp will be allowed u/s 37(1)........also as per sec 2(47) transfer includes sale,exchange or relinquishment of an asset....ur client has exchanged his house against auditors services.....therefore it will also be treated as transfer and accordingly liable for capital gains.......for calculating sales consideration,the amt which has been claimed as exp as auditors fees u/s 37(1) would be considered.......also if the fees charged is less than stamp duty value of the property,stamp duty value will be considered as sales consideration as per sec 50(C)
Member
(Management)
(325 Points)
Replied 11 September 2010
How do you account for it in your books ? Please note that only expenditure that is debited in your books can be an allowable expenidture . Are you debiting the value of the house in your books ?
As pointed out earlier, CG is also liable for such a transaction. I wonder why anybody would go through the hassle of settling bills in such a way.
Sowmya P K
(Chartered Accountant)
(251 Points)
Replied 11 September 2010
Hi ronit
Thanks for the compliment!!
As per your view the client is liable to capital gains. But look at this, the house so trfd will be biz income for the CA u/s 28 (perquisite in the course of b/p)
This way dont you think the same amount is getting taxed twice???
Sowmya P K
(Chartered Accountant)
(251 Points)
Replied 11 September 2010
Hi Member
Accounting in client's books:
Audit Fees Dr XXX
To House Property XXX
(audit fees settled in kind)
Manoj BG
(Tax Professional and in Service)
(1795 Points)
Replied 11 September 2010
HI DEAR,
THE TRANSACTION MENTIONED BY U IS CHARGEABLE TO CAPITAL GAIN TAX IN HANDS OF CLIENT AS THE SAME IS COVERED UNDER SEC 2(47) AS AMOUNTING TO TRANSFER.
AUDIT FEES TO CA SHALL BE CLAIMED BY CLIENT AS DEDUCTION U/S 37 AS A GENERAL DEDUCTION SINCE IT IS THE FORM OF REVENUE EXPENDITURE. THE FACT THAT A REVENUE EXPENDITURE IS DISCHARGED BY GIVING A FIXED ASSET DOESN'T MAKE A REVENUE EXPENDITURE AS A CAPITAL EXPENDITURE. IT IS ONE OF THE MODE OF DISCHARGING CLIENTS LIABILITY.
FURTHER, TRANSFER OF HOUSE FOR EXTINGUISHMENT OF LIABILITY WOULD AMOUNTED TO TRANSFER AND SHALL BE CHARGEABLE TO CAPITAL GAIN TAX. CA FEES (FOR WHICH THE HOUSE IS TRANSFERRED TO CA) IS DEEMED TO BE THE FULL VALUE OF CONSIDERATION FOR CLIENT.
REGARDS,
MANOJ
Sanjay Singh Rana
(CA)
(208 Points)
Replied 11 September 2010
Hi somya i think u can claim deduction since facts shows that it is merger of two transactions instead of paying cash to CA, client purchased the house in CA name and later given to him against his bills.
treatment could be different if client have purchased & registered the house for his business
thanksssss
Vicky
(CA, LCS,MCOM,)
(136 Points)
Replied 11 September 2010
| Originally posted by : Sowmya P K | ||
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Hi ronit Thanks for the compliment!!------u r most welcome As per your view the client is liable to capital gains. But look at this, the house so trfd will be biz income for the CA u/s 28 (perquisite in the course of b/p) This way dont you think the same amount is getting taxed twice??? |
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hi sowmya(nice name)......house received by CA in consideration of audit fees will also be liable for tax under PGBP........i do agree with u that same amt is getting taxed twice in ur case. which is not logical........but this is LAW and LAW has nothing to do with logic......LAW and logic are strangers to each other.......
but if u look it from another angel.....if the fees wld have been paid in cash/bank......the consequences wld have been that the client wld have claimed audit exp u/s 37(1),audit fees received by CA wld have been treated his biz income,,,,,and further suppose the client wld have transferred the property to the CA in an independent transaction......then in this case also,client wld have been liable for capital gains......
Hardik Patel
(B.Com, CA Final)
(158 Points)
Replied 12 September 2010
Hats off to Rohot.
What a great answer. Thanxs.
Sowmya P K
(Chartered Accountant)
(251 Points)
Replied 12 September 2010
| Originally posted by : ronit | ||
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Originally posted by : Sowmya P K Hi ronit Thanks for the compliment!!------u r most welcome As per your view the client is liable to capital gains. But look at this, the house so trfd will be biz income for the CA u/s 28 (perquisite in the course of b/p) This way dont you think the same amount is getting taxed twice??? hi sowmya(nice name)......house received by CA in consideration of audit fees will also be liable for tax under PGBP........i do agree with u that same amt is getting taxed twice in ur case. which is not logical........but this is LAW and LAW has nothing to do with logic......LAW and logic are strangers to each other....... but if u look it from another angel.....if the fees wld have been paid in cash/bank......the consequences wld have been that the client wld have claimed audit exp u/s 37(1),audit fees received by CA wld have been treated his biz income,,,,,and further suppose the client wld have transferred the property to the CA in an independent transaction......then in this case also,client wld have been liable for capital gains...... |
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Hi ronit
In ur example, there is only 1 income for CA and 1 expense for the client in respect of the audit fees. And the transfer is an entirely different transaction.
But in my case , you have 2 incomes(1 for CA and 1 for client) and 1 expense for the client in respect of the SAME audit fees.
Consider this: If the transaction was entirely settled in cash, then as you say biz income for CA and 37(1) expense for client. Further, if the client is extra happy(!) with the CA's work and he gifts him a house, then it is again an income for the CA u/s 28 BUT it is not taxed as capital gain for the client cos of Section 47 which says Gift is not a transfer.
????
Vicky
(CA, LCS,MCOM,)
(136 Points)
Replied 12 September 2010
dear sowmya........all the above propositions put forward by u are entirely correct.......but if u remember i told u that LAW and LOGIC are strangers to each other...........u cld also find situations where u can easily take double benefit for a single investment,,etc...........so it also works that way
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