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Volume I Part 1 October 25, 2012 1 Business Advisor
Business
Advisor (Fortnightly inputs for professionals and executives)
Volume I Part 1 October 25, 2012
o Governance and Board Diversity
by Ramesh Venkataraman, CEO,
CurAlea
o Queries & Replies: Service tax and
Income tax
o The long wait for clarifications
from the Service Tax Department –
Joseph Prabakar, Advocate,
Chennai
o Circular on freebies, Service Tax
Order on due date
o Case law updates by V. K.
Subramani, Chartered Accountant,
Erode
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Volume I Part 1 October 25, 2012 2 Business Advisor
Dear readers:
We are happy to announce the launch of ‘Business
Advisor’ as a fortnightly online magazine to update
finance, corporate governance, accounting, and
tax professionals and executives on the recent
developments in legislation and practice in these
domains.
Watch this space for the details about the experts
and senior professionals who will be associating
with ‘Business Advisor’ as editorial board
members.
For subscriptions, contact Shrinikethan, 34
Second Main Road, CIT Colony, Mylapore,
Chennai 600 004.
Feel free to send in your suggestions and feedback
to [email protected] .
Wishing you a productive reading!
D. Murali, Editor
Disclaimer: "Management and editors do not necessarily agree with the
views of the authors in their articles and of the readers in their letters,
and of the query editors in their replies. The editors, authors and / or
publishers shall not be responsible for any kind of result generated out
of any action taken on the basis of suggestions, etc., made in any of the
write ups, interviews contained in any part of the magazine or for any
error, omission, commission to any person, whether subscriber or
otherwise. The copyright of all the materials printed herein including
articles, queries and replies etc., rests with the publishers".
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Volume I Part 1 October 25, 2012 3 Business Advisor
Governance and Board Diversity
Ramesh Venkataraman
Inadequate gender diversity on Indian boards has
been a topic of heated discussion in recent times.
A recent news item said representation of women
in Indian Boards at 5% was amongst the lowest in
the world. Half of the companies that form the
Nifty Fifty have at least one woman director, so at
the macro level all looks well as far as diversity in
corporate India is concerned. However, a closer
look at gender diversity in Indian Boards reveals
an interesting picture.
Let us look at
presence of diversity
before assessing its representation. Three out of
four PSUs in the Nifty Fifty have women
directors, so the public sector is leading the
pack in bringing about greater gender diversity
at the top. This is not surprising given the focus
of the government on this aspect. New
generation industries i.e. IT, private banks and
pharma follow, where around half the
companies on the Nifty Fifty have women
directors on the Board. In the case of the
traditional private sector engineering-cum-
manufacturing companies and MNCs, only a third of the corporates on the
Nifty Fifty have gender diversity on their boards. Interestingly, male
domination of boards in traditional engineering companies is a global
phenomenon that is changing only in recent times.
In terms of representation, women directors constitute 6% of the total
director strength of the Nifty Fifty companies overall. Again the PSUs lead
the pack with a representation of 9%, followed by the new age businesses
with 7%. The private sector manufacturing and MNC companies have a
representation of 3%, not surprising given the fact that many of them do not
have women directors. Interestingly, only 6 of the 50 companies have more
than one woman representative on the board and Coal India with 4 women
directors tops the list.
In terms of
representation,
women directors
constitute 6% of
the total director
strength of the
Nifty Fifty
companies overall.
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Volume I Part 1 October 25, 2012 4 Business Advisor
The Nifty Fifty covers India’s corporate giants, some of which are well known
for their good governance practices. This then begs the question if there are
deep rooted issues limiting their ability to have more gender diversity on
their boards? We look at some potential questions in the context of
corporate governance.
Is gender diversity essential for good governance?
At a conceptual level, good governance requires good directors, and the
objective of the corporate should be to have the best possible board
irrespective of gender. However, one cannot help thinking that corporate
governance would be poorer if board rooms were to remain a male preserve
for reasons other than genuine non-availability of suitable women
candidates for board positions.
In the last decade one has seen a
concerted effort on the part of many
corporates to ensure gender diversity
amongst the employees, for reasons of
good governance and business
sustainability. It would be reasonable to
assume that the factors influencing this
trend would apply to the board of a
company as well.
Is there a paucity of women with the
right qualifications?
A typical board member of a large
corporate is a 50 plus person who has
experience as a CEO or Director of
another large company. It is quite likely that not many women are available
who fit this requirement, given the fact that not many corporate CEOs in
India are women. However, a good number of board positions are also held
by professionals like Chartered Accountants, lawyers and management
consultants. These are domains where women have made a mark in the last
two decades.
A large number of women have graduated through our IIMs have in the last
20 years. Add to this the number of women who have held high positions in
our government and our central bank. Would this then mean that the
availability of women who can match wits with men on corporate boards
ought to be better today than say ten years back? This is a question that
needs some introspection.
In the last decade one
has seen a concerted
effort on the part of
many corporates to
ensure gender diversity
amongst employees, for
reasons of good
governance and
business sustainability.
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Volume I Part 1 October 25, 2012 5 Business Advisor
Can women handle board responsibility?
The news item quoted at the start of this article had some interesting
observations. It said women shied away from taking more important
assignments and also find it difficult to balance roles such as that of a
board member with the demands of their homes. These seem to raise
questions about the ability of women to handle a board role effectively. We
are one of the few countries in the world to have had a woman Prime
Minister, and a bolder one has probably not led the country. Women
bureaucrats have distinguished themselves in challenging assignments. It is
quite hard to imagine that women would not have the mental toughness to
handle a director’s role. And the role as an independent member of a board
is not a full time job. A woman should not find it difficult to manage this
with other responsibilities she may have. On the contrary, she may probably
be able to devote more time to the board
role than a man with a full time job.
Is there a need for regulatory action?
Regulatory action for increasing diversity on
corporate boards can be a double-edged
sword. Appointing persons to the board
merely to fill a quota would be unfair to the
shareholders of the company. All the more,
it would be unfair to the person so
appointed.
Therefore regulatory action in the form of
quotas has been avoided by many countries
and rightfully so. However, what may be
desirable is affirmative action to institute
mechanisms that ensure a rigorous search is made for qualifying women
candidates whenever there is a vacancy on the board, and the shareholders
given a fair opportunity to promote diversity.
This could be a part of the charter of the Nominations Committee. Also, a
conglomerate with multiple listed companies has an opportunity to make a
start by appointing women directors initially in smaller group companies.
These steps could enable corporates to work towards a more sustainable
and organic solution than what one would achieve through a mandate.
(Ramesh Venkataraman is CEO, CurAlea Management Consultants,
Consultant in Risk Management and Corporate Governance)
Appointing persons
to the board merely
to fill a quota would
be unfair to the
shareholders of the
company. All the
more, it would be
unfair to the person
so appointed.
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Volume I Part 1 October 25, 2012 6 Business Advisor
Queries & Replies
Service tax
Payment for technical services
Query: I am a paramedic attached to a hospital. I am eligible for 3% of the
fee collected from the patients for the radiation treatment given in the
hospital and supervised by me. I do not have any retirement benefits or
provident fund contribution by the hospital as employer. Previously, I paid
service tax since it was not an exempted service and I was registered in the
category of ‘Business Auxiliary Service”. I understand that the mega
exemption Notification No.25/2012 – ST, dated 20.06.2012 grants
exemption with effect from 01.07.2012.
Please clarify. Guide me on surrender of registration certificate with the
service tax authorities.
Reply: From the query its seems that the querist does not work under any
employment contract. Since the relationship of employer-employee does not
exist between the hospital and the querist, the payments have to be treated
as payment for technical services.
It is obvious that the employee is not eligible for superannuation benefits
and PF contribution of the employer and hence the receipts do not have the
character of salary. As there was no specific exemption previously, the
querist had registered under the service tax in the category of ‘business
auxiliary service’.
However, the mega exemption notification referred in the query in item (2)
covers ‘health care services by a clinical establishment, an authorized
medical practitioner or para-medics’. The word clinical establishment
defined in the ‘Clinical Establishments (Registration & Regulation) Act, 2010
defines clinical establishment means –
(i) “a hospital, maternity home, nursing home, dispensary, clinic,
sanatorium or an institution by whatever name called that offers services,
facilities requiring diagnosis, treatment or care of illness, injury, deformity,
abnormality or pregnancy in any recognized system of medicine established
and administered or maintained by any person or body of persons whether
incorporated or not; or
(ii) a place established by an independent entity or part of an
establishment referred to in sub-clause (i), in connection with the diagnosis
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Volume I Part 1 October 25, 2012 7 Business Advisor
or treatment of diseases where pathological, bacteriological, genetic,
radiological, chemical, biological investigations or other diagnostic or
investigative services with the aid of laboratory or other medical equipment,
are usually carried on, established and administered or maintained by any
person or body of persons, whether incorporated or not, and shall include a
clinical establishment owned, controlled or managed by –
(a) the Government or a department of the Government;
(b) a trust, whether public or private;
(c) a corporation (including a society) registered under a Central,
Provincial or State Act, whether or not owned by the Government;
(d) a local authority; and
(e) a single doctor,
but does not include the clinical establishments owned, controlled or
managed by the Armed Forces constituted under Army Act, 1950, the Air
Force Act, 1950 and the Navy Act, 1957”.
In view of the above, radiological treatment includes radiology and nuclear
radiation. The amount received from the hospital by the querist for the
radiation treatment administered to the patients is exempt from service tax
w.e.f. 01.07.2012.
The querist is advised to intimate the fact of exemption given in the
notification to the Superintendent of Central Excise with whom he is
registered and after filing the return for the period upto 30th June, 2012 he
can surrender the registration by communicating appropriately.
Income-tax
Discontinued business
Query: A partnership firm having unabsorbed depreciation of Rs.30 lakhs
relating to the assessment year 2011-12 has discontinued the business
during the financial year 2012-13. The partners of the firm decided to
dispose off all the fixed assets (all depreciable) which would result in short-
term capital gain of Rs.35 lakhs. The partners propose to set off the brought
forward unabsorbed depreciation against the said short-term capital gain. Is
it possible? Is there any other tax efficient mode by which the disposal is
possible?
Reply: The partners have discontinued the business and they are eligible to
revive the business or any other business (if the deed of partnership permits
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Volume I Part 1 October 25, 2012 8 Business Advisor
the same) at a later date. Regardless of such discontinuation or dissolution
of partnership or firm, the query is answered.
The unabsorbed depreciation of the firm would become the current year
depreciation by virtue of section 32(2) of the Act. To quote “where, in the
assessment of the assessee, full effect cannot be given to any allowance
under sub-section (1) in any previous year, owing to there being no profits
or gains chargeable for that previous year, or owing to the profits or gains
chargeable being less than the allowance, then subject to the provisions of
sub-section (2) of section 72 and sub-section (3) of section 73, the allowance
or the part of the allowance to which effect has not been given, as the case
may be, shall be added to the amount of the allowance for depreciation for the
following previous year and deemed to be part of that allowance, or if there is
no such allowance for that previous year, be deemed to be the allowance for
that previous year, and so on for the succeeding previous years”. (emphasis
supplied).
Therefore, the unabsorbed depreciation becoming current depreciation is
eligible for set off against any other head of income. The short-term capital
gain of Rs.35 lakhs would be scaled down by set off of brought forward
depreciation of the earlier year and only the resultant Rs.5 lakhs would be
chargeable to tax in the hands of the firm on the assumption that the firm
does not have any other income for the financial year 2012-13.
With regard to a superior tax efficient strategy, it is possible that the
partnership firm go in for slump sale envisaged in section 50B of the Act.
The condition is “transfer of one or more undertaking for a lump sum
consideration without values being assigned to the individual assets and
liabilities in such sales”.
If the depreciable assets sold could fit in to the term “undertaking” and has
been in operation for more than three years before the date of transfer, the
capital gain would obtain the character of ‘long-term capital gain’ which is
eligible for concessional rate of tax at 20% plus cess.
Charitable trust
Query: Sir, I want to start a charitable trust with the objects such as
advising the business entities on various strategies for sustaining growth.
The surplus of the activity however will be redeployed in the same activity
and no amount would be withdrawn for personal use by the trustees. Can
you please elucidate on the precautions to be taken and the conditions to be
satisfied for availing tax concessions?
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Volume I Part 1 October 25, 2012 9 Business Advisor
Reply: A charitable trust can either be wholly religious or wholly charitable.
It cannot be partly religious and partly charitable. You have stated that the
object of the trust primarily is to advise the business entities for growth.
The term ‘charitable purpose’ defined in section 2(15) is worth a reference.
“Charitable purpose includes relief of the poor, education, medial relief,
preservation of environment (including watersheds, forests and wildlife) and
preservation of monuments or places or objects of artistic or historic interest
and the advancement of any other object of general public utility”. (Emphasis
supplied).
The proposed activity of the trust viz. helping business entities for
sustaining growth would fall in the category of ‘advancement of general
public utility’.
The proviso to section 2(15) says ‘the advancement of any other object of
general public utility shall not be a charitable purpose, if it involves the
carrying on of any activity in the nature of trade, commerce or business, or
any activity of rendering any service in relation to any trade, commerce or
business, for a cess or fee or any other consideration, irrespective of the
nature of use or application, or retention, of the income from such activity”.
The further proviso says that the first proviso (mentioned above) will not
apply if the aggregate value of receipts from the activities referred to therein
is Rs.25 lakhs or less in the previous year.
Therefore, in spite of your activity falling in the category of “any other object
of general public utility” you are eligible for availing the status of a
charitable trust so long as your aggregate receipt does not exceed Rs.25
lakhs.
With regard to availing tax concession in respect of the surplus generated
from the activity, you may note that you can form either a charitable trust
by a declaration in writing and register the same or you may prefer to
register as a society under the appropriate state Act dealing with
establishment and management of societies.
The following conditions may be kept in mind by the trust in order to be
eligible for registration under section 12A which is the gateway for availing
tax exemption at present:
1. The registration will be granted from the first day of financial year in
which the application is filed or the date of creation of the trust whichever is
later.
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Volume I Part 1 October 25, 2012 10 Business Advisor
2. Certified true copy of the Trust Deed / Memorandum of Association /
Bye-laws / Accounts for the last three years are to be filed. In the case of
new trust, documents and accounts from the date of inception is to be filed
in duplicate.
3. There must be a clear provision as to investment of funds of Trust /
Society/ Institution to be in accordance with the provisions of Section
13(1)(d) read with section 11(5) of the Income-tax Act.
4. There must be a clause to the effect that the Trust/Society/Institution
formed shall be irrevocable.
5. The Trust Deed / Memorandum of Association / Bye-laws must state
that the accounts of the Trust / Society /Institution will be maintained
regularly and the accounts will be audited by a qualified Auditor every year.
6. There should be a specific clause in the Trust Deed / Bye-laws that
the income and funds of the Trust /society/Institution will be solely utilized
towards the objects and no portion of it will be utilized for payment to
Trustees/ Members by way of profit, interest, dividends etc,.
7. The Trust Deed / Memorandum of Association / Bye-laws must
specify the mode of disbursement of assets in the event of dissolution or
winding up of Trust/ Society/Institution. There should be a specific clause
that “in the event of dissolution of the Trust/Society, the assets of the
Society/Trust shall be transferred to another Charitable Trust /Society
having similar objects of this Trust /Society.
8. There should be a specific clause that any amendment to Trust
Deed/Memorandum of Association /Byelaws will be carried out only with
the approval of the Commissioner of Income-tax / DIT (Exemptions) in
whose jurisdiction the trust is located.
9. There should be a specific clause that the benefits of the
Trust/Society/Institution are open to all, irrespective of caste, religion sex,
etc.
10. There should be a specific clause that no activities of the Trust will be
carried out outside India.
11. There should be a specific clause that the Trust /Society /Institution
will not carry on any activity with the intention of earning profit.
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Volume I Part 1 October 25, 2012 11 Business Advisor
The long wait
Joseph Prabakar
o Clarifications are not prompt from the Service Tax
Department.
o The officials do not commit themselves by issuing
clarifications since advocates tend to use the same
for arguing in favour of clients.
o We have, therefore, approached the High Court
under Article 226 of the Constitution, to direct the
Commissioner to issue clarification.
o Case of an assessee who had to wait for five years.
(Joseph Prabakar is Advocate, Chennai)
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Volume I Part 1 October 25, 2012 12 Business Advisor
Inadmissibility of expenses incurred in providing
freebees to medical practitioner by pharmaceutical
and allied health sector industry
Circular No. 5/2012 [F. NO. 225/142/2012-ITA.II], dated 1-8-2012
It has been brought to the notice of the Board that some pharmaceutical
and allied health sector Industries are providing freebees (freebies) to
medical practitioners and their professional associations in violation of the
regulations issued by Medical Council of India (the 'Council') which is a
regulatory body constituted under the Medical Council Act, 1956.
2. The council in exercise of its statutory powers amended the Indian
Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,
2002 (the regulations) on 10-12-2009
imposing a prohibition on the medical
practitioner and their professional
associations from taking any Gift, Travel
facility, Hospitality, Cash or monetary
grant from the pharmaceutical and allied
health sector Industries.
3. Section 37(1) of Income Tax Act provides
for deduction of any revenue expenditure
(other than those failing under sections 30
to 36) from the business Income if such
expense is laid out/expended wholly or
exclusively for the purpose of business or
profession. However, the explanation appended to this sub-section denies
claim of any such expense, if the same has been incurred for a purpose
which is either an offence or prohibited by law.
Thus, the claim of any expense incurred in providing above mentioned or
similar freebees in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be
inadmissible under section 37(1) of the Income Tax Act being an expense
prohibited by the law. This disallowance shall be made in the hands of such
pharmaceutical or allied health sector Industries or other assessee which
has provided aforesaid freebees and claimed it as a deductable expense in
its accounts against income.
4. It is also clarified that the sum equivalent to value of freebees enjoyed by
the aforesaid medical practitioner or professional associations is also
Prohibition on the
medical practitioners
and their professional
associations from
taking any gift, travel
facility, hospitality,
cash or monetary
grant…
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Volume I Part 1 October 25, 2012 13 Business Advisor
taxable as business income or income from other sources as the case may
be depending on the facts of each case. The Assessing Officers of such
medical practitioner or professional associations should examine the same
and take an appropriate action.
This may be brought to the notice of all the officers of the charge for
necessary action.
Service Tax Order on due date
Order No: 3/2012, dated 15-10-2012 F.No.137/99/2011-Service Tax
In exercise of the powers conferred by sub-rule(4) of rule 7 of the Service
Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the
date of submission of the return for the period 1st April 2012 to 30th June
2012, from 25th October, 2012 to 25th
November,2012.
The circumstances of a special nature which
have given rise to this extension of time are
as follows:
a) ACES will start releasing the return in
Form ST3 in a quarterly format, shortly
before the due date of 25th October, 2012.
b) This will result in all the assesses
attempting to file their returns in a short
time period, which may result in problems in
the computer network and delay and
inconvenience to the assesses.
Watch these videos
T. N. Pandey, Chairman
(1989 - 1990), Central Board
of Direct Taxes (CBDT)
ACES will start
releasing the return
in Form ST3 in a
quarterly format,
shortly before the
due date of 25th
October, 2012.
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Volume I Part 1 October 25, 2012 14 Business Advisor
Case law updates
V. K. Subramani
No TDS on reimbursement of expenses
The assessee made payment towards
reimbursement of relocation expenses paid by the
payee to its employees. The payment was made as
per the terms of the agreement between the payer
and payee. No profit or mark-up was made and
only the actual expenditure incurred by the payee
was reimbursed. It was held that the payment
though made to non-resident since there was no
income embedded in the said amount it is not
liable for deduction of tax at source. It was held
that the assessee (payer) cannot be treated as an
assessee in default under section 201(1). (Global
E-Business Operations (P) Ltd v. Dy.CIT (2012) 76 DTR (Bang)(Trib) 106)
Rejection of books not a pre-condition for reference u/s 142A
For the purpose of assessment or reassessment an estimate of value of
investment is required and the AO may require the Valuation Officer to
estimate the value and furnish a report under section 142A. There is no
condition that the books of account produced by the assessee have to be
rejected first before making such reference under section 142A. In the
valuation reference mention of section 50C instead of section 142A is not
fatal in view of section 292B. (Bharathi Cement Corpn. (P) Ltd v. CIT (2012)
76 DTR (AP) 155)
Repair and renovation of lease accommodation not perquisite
When the employer incurred expenses towards repairs or renovation of
leasehold residential accommodation provided to the employee no amount
could be added in respect of such expenditure as perquisite. The lease deed
did not provide any obligation on the employee to carry out repair and
renovation to the premises. Hence, there was no obligation on the employee
which was discharged by the employer as much as to attract section
17(2)(iv) of the Act. If at all the AO wanted to enhanced the perquisite value
he must go by rule 3(a)(iii) of the Income-tax Rules. (Scott R.Bayman v. CIT
(2012) 76 DTR (Del) 113)
Property inherited by partners as legal heirs not property of the firm
Where the legal heirs succeeding the estate of the diseased and constitute a
partnership with other family members (not being legal heirs), the assets of
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Volume I Part 1 October 25, 2012 15 Business Advisor
the diseased related to the business will not become assets of the firm on
automatic basis. The legal heirs would inherit the assets in the status of co-
owners and the property in spite of being used by the firm cannot be treated
as property of the firm for charging capital gains upon its transfer. The legal
heirs whom so ever divested his share by way of transfer could be subjected
to tax consequence in personal capacity. (Dy.CIT v. South India Pulverising
Mills (2012) 76 DTR (Chennai) (TM) (Trib) 57)
Payment to trust by a company will not attract section 40A(2)
Payment of rent by a company in the capacity of a lessee to a trust (lessor)
will not attract section 40A(2)(b) since a trust is neither a company, nor
firm, nor HUF nor an AOP. Even though the directors of company were the
trustees of the trust, payment of such rent will not attract section 40A(2)
because in the trust the beneficiaries enjoy the benefit of the trust and the
function of the trustees is to merely administer the trust as per the recitals
of the trust deed. (Shanker Trading (P) Ltd v. CIT (2012) 76 DTR (Del) 40)
Non-compete fee capital expenditure eligible for depreciation
The assessee paid Rs.594 lakhs by way of non-compete fee on acquisition of
business on slump sale basis. The assessee claimed the payment as
business expenditure which the AO disallowed in toto as capital in nature.
The Commissioner (Appeals) allowed write off in five instalments. The
tribunal held that non-compete fee is a capital expenditure but eligible for
depreciation. It remanded the case to AO for allowing depreciation.
The court held that acquisition of business as a going concern and payment
of non-compete fee thereon is a capital expenditure, not deductible.
However, the assessee had disclosed the same in the balance sheet as
‘intangible asset’. It upheld the remand order of the tribunal for
reconsidering whether the same was eligible for depreciation at 25% under
section 32(1)(ii) of the Act. (Pitney Bowes India (P) Ltd v. CIT (2012) 76 DTR
(Del) 34)
Acquisition of asset jointly with spouse and benefit of exemption
When the assessee has long-term capital gain and redeployed the amounts
in investments eligible for exemption under sections 54 and 54EC it cannot
be denied merely for the reason that the name of the spouse of the assessee
was included as joint owner. When the money for such acquisition has not
flown from the spouse and was fully funded by the assessee the eligibility
for exemption could not be curtailed by attributing inclusion of spouse
name. (DIT (International Taxation) v. Mrs. Jennifer Bhide (2012) 75 DTR
(Kar) 402)
(V. K. Subramani is Chartered Accountant, Erode)
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Volume I Part 1 October 25, 2012 16 Business Advisor
Published by: Shrinikethan, Chennai http://bit.ly/ShriMap
Edited by: D. Murali http://bit.ly/dMurali http://bit.ly/TopTalk
October 25, 2012
Business Advisor
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