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Stagflation is not good for people
June, 09th 2008

Well, inflation sans growth is stagflation. Pretty much the same is being witnessed now in India. There is a steep increase in prices and, at the same time, the manufacturing sector is experiencing stagnating volumes. The name stagflation is in fact a picturesque description of the dual effect which does not augur well for any country. Inflation accompanied by growth goes down well with people though ideally they would want growth without inflation.

Audit of accounts

We have a partnership firm which is into agriculture plantation (that is, plantation in tea). We sell the tea leaves to a tea manufacturer. Since the activities are agriculture in nature income of the firm is exempt from income-tax as per Section (10) of the I-T Act. During 2006-07, the total sale of tea leaves exceeded Rs 40 lakh. Please clarify (i) whether the firm is liable for tax audit under Section 44AB of the I-T Act? (ii) whether the firm is liable to file the income-tax return during the period?

Manjen Jayaprakash, email

Even though the firms income is exempt from tax, it has to get its accounts audited in terms of Section 44AB inasmuch as this section does not talk about an assessee but about a person.

Failure to file tax audit report is punishable with a fine of one half per cent of the turnover subject to a ceiling of Rs 1 lakh.

If you read the fourth proviso to Section 139(1), it is clear that one is not required to file a return unless ones total income before granting deductions under Section 10A or 10B or 10BA or Chapter VIA exceeds the tax-free limit.

In this case, since the exemption for agricultural income is conferred by Section 10(1), obviously you need not file any return strictly speaking. But then the requirement to get your accounts audited would be rendered meaningless if you do not file return. It is one of the fundamental principles of interpretation that law should be interpreted in a wholesome manner so as not to render any provision meaningless or redundant. Thus in my view the firm has to file its return as well.

Sweat equity vs warrants

Which is the better option to give sweat equity to the promoters or issue them warrants that may be exercised in the future so as to get shares?

Deepti Gupta, email

Section 79A of the Companies Act permits a company to issue sweat equity shares to its employees and directors. It can be issued for consideration other than cash which may be for providing know-how or making available some intellectual property right. Though the company law does not in terms talk about warrants, they have become the in thing to enable the promoters to entrench themselves. I think the second alternative is more popular because the promoters helping themselves to warrants do not cough up any money upfront and can also be blas about the option should the market fall, they pick up the requisite shares from the market without exercising the option.

Sweat equity as part of remuneration only brings in shares in trickles whereas those interested in guarding their turf require them in scoops or dollops which are possible only if warrants are issued or preferential allotments are made.

Making available knowhow or some other intellectual property to the company in lieu of shares may not be an option that is available to everyone. At any rate the real worth of the knowhow or intellectual property may be questioned should there be an exaggeration.

Cause of inflation

Is inflation caused only by too much money in circulation?

K. Sethuraman, Chennai

Too much money chasing too few goods culminating in inflation is the monetarists explanation to the scourge of inflation. Often this is true. But sometimes other factors are also responsible. For example, the current boom in the prices of food articles is more due to shortfall in production and diversion of foodgrains by the US for generating biofuel. This is called the supply side problem engendering inflation. The RBI seems to feel that in the current context, both the factors are responsible for high rate of inflation.

What exactly is the sterilisation operation carried out by the RBI all about?

Brinda Sengupta, Kolkata

The RBI has been keen on protecting the dollar at a certain level with a view to encouraging the exporters who have a vested interest in a weak rupee that gives them more rupees per dollar earned on exports. But both the exporters and RBIs applecart was often upset with the rupee surging on the back of heightened capital account inflows such as FII and ECB. To arrest this natural appreciation in Indian rupee, the RBI entered the market and mopped up the excess dollars sloshing around with a view to shoring up their value.

But you would appreciate that this would have an adverse side effect -- now there is an excess of rupee. This too needs to be mopped up which is done by issuing bonds that sucks out the excessive liquidity. This in brief is sterilisation. Sometimes the RBI is unable to issue Market Stabilisation bonds because one has to pay an attractive interest to capture investors interest. When this happens, the bottom line is inflation with too much money chasing too few goods.

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