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Paying income tax on the value of car won

My wife who is residing in India has been the lucky winner of a car at one of the shopping malls in Bangalore. She has been asked to pay income tax on the value of the car and show proof of payment before the car is handed over to her. Is this a correct legal procedure to be followed?

— K R Arvind, Doha

Winnings from lotteries, whether in cash or kind, are liable to tax. Such tax is applicable at the highest rate of 30 per cent. Where the winnings are not in cash but in kind, that is, in the form of an article, the market value of such asset is liable to tax. Under section 194-B of the Income-tax Act, 1961, tax is required to be deducted at source in case the cash winnings or the value of the asset exceeds Rs.10,000.

However, tax can only be deducted at source if the winnings are in the form of cash.

Therefore, the law provides that if the winnings are in the form of an article, the person responsible for giving the article to the winner should ensure that the tax has been paid by the winner on the value of the article. The asset would be released to the winner only after proof of payment of tax is furnished.

I have been investing in units of mutual funds in India. When dividend is declared on these units, the mutual fund is required to pay dividend distribution tax. I want to know whether the mutual fund would also be required to pay this tax when the units are redeemed or repurchased. Further, would such tax be payable on allotment of bonus units?

— P F Shah, Dubai

Under section 115-R of the Income-tax Act, 1961, tax has to be paid on income distributed to unit holders. A controversy has arisen recently on the question whether tax would also be payable at the time of redemption or repurchase of units. Some Assessing Officers have been levying this tax at the time of repurchase. The Central Board of Direct Taxes has issued a circular to clarify this point. This circular issued in February has stipulated that section 115-R would not apply in case of redemption of units or repurchase of units by mutual funds. The reason is that at the time of redemption or repurchase, no income is distributed to the unit holders. Hence, section 115-R does not apply. It has also been clarified in this circular that when bonus units are issued by mutual funds to existing investors, no tax would be payable by the mutual funds.

I have a family business in India which is involved in the manufacture of sophisticated electronic products. The company has to constantly upgrade the technology. Substantial expenditure is incurred for this purpose. The auditors feel that this is capital expenditure which should be shown in the balance sheet. Is this view correct?

— D K Jain, Sharjah

Any expenditure on product improvement or technological upgradation would be in the nature of revenue business expenditure.

This can be debited to the profit and loss account and claimed as a deductible expense under section 37(1) of the Income-tax Act. Therefore, your auditor is not correct in insisting that such expenditure should be capitalised. There are many decided cases on this point, and recently the Delhi High Court has held that product improvement expenses as well as technology upgradation expenses do not result in an enduring advantage because technology changes very fast and needs to be upgraded frequently.

Therefore, Courts have allowed this expenditure as a deduction under section 37(1) of the Act.

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