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Retention money paid is not taxable.

Retention deposit by substituting it with a bank guarantee, does not mean that the amount has accrued to your firm which would make it taxable.

My family business in India is that of civil construction. In all contracts, there is a retention clause whereby 10 per cent is retained by the customer for a period of three years. In one case the company allowed my firm to withdraw the retention amount within the three year period subject to a bank guarantee being given. There were no changes made in the terms of the original contract. Will the withdrawal of the retention amount be treated as income of that year? R P Damani, Sharjah

If the original contract has not been amended, it would mean that the amount has to be retained with the customer for three years from the date of completion of the contract. During this period, your firm is not eligible to receive the amount.

The fact that the customer has, contrary to the agreement, permitted your firm to draw on this retention deposit by substituting it with a bank guarantee, does not mean that the amount has accrued to your firm which would make it taxable.

The Gujarat High Court has in a similar case held that withdrawal of amount during the retention period would not result in accrual of income if the original contract remains unamended. Income would accrue only when the tax payer is entitled to receive it. If the retention amount becomes due to the contractor only upon the expiry of the retention period of three years under the agreement, it would not be taxable as income before the end of such period.

Special Economic Zones in India have not been very successful in attracting companies which are in the business of providing software services or information technology enabled services. Has anything been announced by the Government which was keen on promoting SEZs? C P Jain, Dubai

Companies which set up units involved in software development or in IT enabled services are eligible to claim exemption of profits under section 10-AA of the Income-tax Act.

Hundred percent of the profits are tax free during the initial five years beginning with the year in which the unit starts providing services. For the next five years, fifty percent of the profits are tax free. For another five years, profits upto a maximum of fifty percent which are transferred to a Special Economic Zone Re-investment Reserve Account are exempt from tax.

Recently, the Central Board of Direct Taxes has stipulated that where a unit transfers its existing business to a unit set up in a Special Economic Zone, the aforesaid tax exemption would be available even if the existing technical staff members are transferred to the new unit, provided the number of employees so transferred does not exceed 50 per cent of the total manpower engaged in developing software in the SEZ unit.

Before this relaxation, the limit was 20 per cent. The software industry has welcomed this step and it is expected that more and more software development units will be transferred to a special economic zone in order to avail of the exemption under section 10-AA.

A charitable trust has been set up in Madhya Pradesh. A few months ago, the trust was informed that a deceased person had bequeathed shares to the trust. When this was informed to the tax officer of the trust, the officer held that the trust was not entitled to claim exemption under section 11. The trustees have now been informed that the Will has now been challenged by the heirs of the deceased who are claiming the shares which were bequeathed to the trust. Will the trust lose the tax exemption in these circumstances?R D Khanna, Abu Dhabi

If a charitable trust holds shares, it would lose exemption under section 11(5) of the Income-tax Act. This provision makes it mandatory for charitable trusts to invest in certain specified assets, including immovable properties. If a charitable trust invests in other assets, exemption would be withdrawn.

However, in the case of the charitable trust which you have mentioned, there is a dispute regarding ownership of the shares which are bequeathed by the deceased. The heirs of the deceased have challenged the Will and claimed the shares. Unless the Court gives its decision in probate proceedings, the ownership of the shares will not vest with the charitable trust. Therefore, the trust has not violated the provisions of section 11(5) and it would continue to enjoy the tax exemption in respect of its income.

The writer is a practising lawyer, specialising in tax and exchange management laws of India.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:9INDI
Date:Nov 24, 2014
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