Sunday, January 18, 2015

Tax Planning: Sale of Agricultural Land vis a vis N.A. Land



TAX TALK-19.01.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

Tax Planning: Sale of Agricultural Land vis a vis N.A. Land

Query 1]
My grandfather received a farm about 40 years ago as a gift. After his death my mother's name was put up legally on 7/12 extract as his kin. Whether it was taxable? Now, we want to make the land as Non Agricultural and clear it from Town planning (NA/TP). Is it advisable or possible? If yes, then can we start our own business? Are we required to pay taxes for this gift if we start business and can we have the rights to Gift or Sale this property to other person who don't belong to our family? Please help & guide as to the aspects that we should look in to from income tax angel. We would be thankful if you can kindly suggest tax planning measures. [Neha Rathod- rathodn326@gmail.com]
Opinion:
First of all, agricultural land received by your mother as a result of inheritance is totally tax free & doesn’t have any tax attachment. After inheritance of the property, recipient (i.e., your mother in the present case) enters the shoes of original owners. She gets all the rights and duties bestowed to the original owner. As such, subject to other land related rules & regulations, she can get it converted in to Non agricultural & can also get TP sanction.

She can also start the business & can sale/gift the land to outsiders who may not be the part of your family. The transactions of sale have income tax implication attached to it. In normal course, merely starting of the business by her would not be give rise to a taxable event. It’s at the time of sale/transfer that the tax liability would emerge.
In your specific case, the land inherited is an ancestral property. Though actual cost of acquisition by her is zero, still she can adopt the fair market value of the land as on 01.04.1981 as its cost of acquisition, Courtesy- Income Tax Act. She would be able to further get the indexation benefit from 1981 itself even though she might have becomes the owner of the property only few years back after inheritance.
Many taxpayers owning agricultural land in the vicinity of the city have queries like this. Timely tax planning on such an occasion could be of great benefit for the taxpayer. A stitch in time save nine & tax planning is more effective if done at the initial stage itself. Tax cost can be reviewed & an alternate with lower tax burden can be taken by the taxpayer within the framework of law.
One of the important aspects that should be considered in such situation is whether the land should be sold before NA/TP or after NA/TP. The question is of enormous importance in view of the fact that entire profit on sale of agricultural land would be tax free if (a) it is a rural agricultural land & (b) it is used for agricultural purpose.
An agricultural land is considered as rural agricultural land if it is not situated in any area within the distance (measured aerially) of not more than:
a] 2 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
 b] 6 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
c] 8 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.
Rural agricultural land is outside the purview of capital assets and hence no tax is payable on sale of rural agricultural land. No similar tax benefit is available to profit arising on sale of urban agricultural land; still taxpayer can opt for an exemption u/s 54B by investing the amount of capital gain towards purchase of another agricultural land.
No such benefit is available if the land sold is not an agricultural land. To be more precise, above exemption would not be available if the land is sold after converting it to non agricultural.
Considering the amount involved, taxpayer needs to be tax cautious while doing the transactions as mentioned in the query. They should consider the tax implications of all the possibilities in such type of transactions & can legally plan the business affairs in such a way that the tax liability is kept at minimum. Tax planning aspects cannot be generalized in such case and it has to be case & individual specific. Few of the factors which should be considered by land owner in such scenario could be:
1.      Whether to sale an agricultural land itself or sale an agricultural land after doing it NA/TP?
2.      Whether to convert the land in to stock in trade & thereafter sale the land as business assets OR sale the land as capital assets only after doing NA/TP? [If taxpayer opts to convert capital assets in to stock in trade, proper documentation should suffice the transactions. It could be an excellent planning tool if owner of an agricultural land wish to sale rural agricultural land after doing NA/TP as it has the capacity to defer tax payment liability till the time of sale. However, a careful study should be done before opting for this decision in view of the fact that (a) LTCG is taxable @ 20% straightway whereas business profit is taxable @ 30% if income exceeds Rs. 10 Lacs; (b) Exemption up to Rs. 50 Lacs is available every year for investment in NHAI/REC Bonds which is not available for investment of business profit (c) Exemption u/s 54F for investment in the residential house property could be claimed against transfer of capital assets whereas no such exemption is possible against transfer of business assets].
3.      Convenient timing & liquidity to pay the tax arising in the transactions?
4.      Whether the business should be carried out in the name of the land owner itself or in the name of some other family person with POA from land owners etc?

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at cassrpn@gmail.com]

Thursday, January 1, 2015

house rent: salaried preferred over self employed



house rent: salaried preferred over self employed

Query 1]
I am paying a house rent for Rs 14,000/- per month and additional Rs. 1,200/- towards maintenance for which receipt is being given to me every month. Will I get HRA exemption on Rs. 14,000/- or Rs 15,200/-. Please clarify. [N.K.Panda-niroj_p@yahoo.com]
Opinion:
With handful of options to save tax for the salaried taxpayers, one can definitely explore the possibility of reducing tax bill by revisiting the exemption & deduction provision. One such tool is claiming an exemption towards rent payment of residential accommodation.
Employees generally receive a house rent allowance (HRA) as a part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee for his stay. Exemption on HRA is available under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. Taxpayer would be surprised to see that there is no amount wise upper ceiling on HRA exemption.
An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from the employer. In order to claim the deduction, an employee must actually pay rent for the house occupied. [HRA exemption benefit can be claimed only by the salaried taxpayer. Self employed person may save little tax by claiming deduction u/s 80GG if they are staying in a rented premise. Interestingly, deduction U/s 80GG cannot exceed Rs. 24,000/- p.a. whereas there is no such ceiling while claiming exemption u/s 10(13A). May be it is where salaried taxpayer have better favoring tax law provision as compared to self employed.]
In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax. Exemption from HRA will be lowest of the following three factors:
1.      Actual HRA received from the employer
2.      Actual house rent paid by employee minus 10% of basic salary
3.      50% of the basic salary if employee live in a metro or 40% of basic salary if lives in a non-metro.
Minimum of above is allowed as income tax exemption on HRA. Salary here means basic salary which includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.
Whether HRA & Home loan benefit could be availed simultaneously?
Misconception prevails that HRA exemption is not available if taxpayer also have availed housing loan. It’s wrong. If the taxpayer is staying in a rented house, HRA benefit can be claimed despite the fact that he owns another house (whether rented out or vacant, whether in the same city or elsewhere) & is claiming the tax benefit available on home loan also. The tax benefits against home loan and HRA are two separate independent deductions and have no direct bearing on each other. As long as employee is paying rent for rented accommodation occupied by him, HRA exemption could be claimed while also availing tax benefits of other self owned house property.
Whether PAN of the Landlord is mandatory for HRA claim:
Employees have to furnish the PAN of the landlord if the rent payment exceeds Rs. 1 Lacs p.a. [Circular No. 8/2013 Dated 10.10.2013 issued by CBDT]. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed with the employer by the employee.
[Though  incurring actual expenditure on payment of rent is a pre-requisite for granting exemption under  section  10(13A) by the employer,  as  an  administrative  measure, salaried employees drawing house rent allowance  up to Rs. 3,000/-  per  month are exempted from production  of rent  receipt to the employer/ disbursing authorities . It  may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that  the employee  has  incurred  actual expenditure on payment  of  rent.] 
Present Query:
Coming to your query, HRA exemption is available towards rent payment. The question here is what type of payment could be considered as rent. Whether payment towards maintenance, electricity, additional amenities & facilities could be considered for HRA exemption?
Given the clear cut wordings of the section 10(13A) & without any precedent as of now stretching the meaning of “Rent”, I am of the view that exemption would be admissible only towards Rent payment and not payment done towards electricity, maintenance charges etc. If however, you make the lump-sum payment to the landlord towards rent who in turn makes the payment of maintenance charges or others, the exemption u/s 10(13A) could not be denied.

Thursday, October 23, 2014

R. B. N. J. Naidu vs Commissioner Of Income-Tax, ... on 9 February, 1955 : 1956 29 ITR 194 Nag

Income Tax Appellate Tribunal - Nagpur
R. B. N. J. Naidu vs Commissioner Of Income-Tax, ... on 9 February, 1955
Equivalent citations: 1956 29 ITR 194 Nag
JUDGMENT In pursuance of the direction of this Court under Section 66(2), Indian Income-tax Act, 1922, in Miscellaneous Civil Case No. 143 of 1950, the Income-tax Appellate Tribunal, Bombay, has submitted the statement of case on the following question of law : "Whether on the material on record the Appellate Tribunal could reasonably come to a finding that the sum of Rs. 8,500 was an income undisclosed sources ?"
In the opinion of the Tribunal the question which arises is :
"Whether there was material on which the Appellate Tribunal could have rejected the assesses explanation ?"
The question as framed by the Tribunal dies not, however, cover the entire controversy.
2. The subject mater of the controversy is the finding of the Tribunal that the sum of Rs. 8,500 represents the assesses income from undisclosed sources. The question that arises for our judgment, therefore, is the following :
"Whether there was material on which the Appellate Tribunal could come to a finding that the sum of Rs. 8,500 was the assesses income from disclosed sources ?"
This question arises from the same facts which the Tribunal has stated. It is not, therefore, necessary to refer the case back to the Tribunal under Section 66(4) of the Indian Income-tax Act.
3. The assessee runs the business of exhibiting pictures at various cinema houses in Nagpur. During the assessment year 1946-47 there were two credits, one of Rs. 10,000 on April 30, 1945, and the other of Rs. 8,500 on May 1, 1945, in his wifes account with the Bank of India Ltd., Nagpur. We are not concerned with the amount of Rs. 10,000 in respect of which the explanation of the assessee was accepted by the Income-tax authorities. As regards the amount of Rs. 8,500 he submitted the following explanation :
"As regards the sum of Rs. 8,500, I may point out for the last so many years I drew from the company various sums of money from time to time and paid the same to my wife to enable her to defray the household and other expenses of the family. My withdrawals for years ending March 31, 1943, March 31, 1944, March 31, 1945, and March 31, 1946, were Rs. 26,147-15-9, Rs. 20,100-2-9, Rs. 31,036-12-9, and Rs. 47,106-4-6 (this ought to be Rs. 37,106-4-6) respectively. My wife made some savings out of the said amounts and when savings amounted to the above, she asked me to credit the said amount to her account in the Bank of India Ltd., Nagpur, on May 1, 1945."
4. The above explanation was not accepted by the Income-tax Officer who observed :
"It is difficult to believe that the assessee was withdrawing funds for construction of this bungalow and household expenses indiscriminately without ascertaining from his wife as to whether the money previously drawn and handed over to her was fully spent or not. Besides the savings of Rs. 8,500 could not have been effected on one day. The assessee has not proved as to where the amount was lying all these days when Mrs. Naidu had a regular bank account. In short the explanation offered is not at all convincing and cannot be accepted."
The explanation was, however, accepted by the Appellate Commissioner on these grounds :
"It is clear that the petitioner derives substantial income from business and he was withdrawn about Rs. 26,000 every year for personal expenses. The petitioner is not carrying on any other business and the receipts from the picture houses have been properly shown. It is also clear that the petitioner has withdrawn substantial amounts every year. It may be a fact that the petitioners wife was able to save the amount and that she was in possession of funds for crediting the same in her account from funds given to her by her husband. Apparently there is no reason to disbelieve the explanation offered and there are no materials on file to hold that he petitioner carried on some other business or that the income from the cinema business was not properly returned. Records do not go to show that the petitioner did not credit the receipts properly or that he had any other business activity not disclosed by him. The addition of Rs. 8,500 was not warranted and it shall be deleted."
5. The Department went up in appeal to the Tribunal mainly for reason that in its opinion the Appellate Assistant Commissioner had wrongly thrown on it the burden of finding out the source of income. The appeal was allowed by the Tribunal which observed :
"It is not for the Income-tax Department to find out what other business the assessee was doing. It may be that he was carrying on some business unknown to the Income-tax Department. It is for the assessee to explain satisfactorily the source of a credit to his own account."
The explanation of the assessee was rejected by the Tribunal on the following short ground :
"If such a large amount was lying at home it is obvious that the assessee would not be borrowing capital interest for the purpose of his business."
6. There is no doubt, that the Department is not bound to prove by direct evidence the source of income before an assesses explanation is rejected. Nevertheless if the explanation is prima facie reasonable, it cannot be rejected on capricious or arbitrary grounds. In Ganga Ram Balmokand v. Commissioner of Income-tax, Punjab, it was held that the Income-tax Authorities are not bound to prove by "positive evidence" that the accounts are unreliable and their finding cannot be disturbed unless it is altogether capricious and injudicial. What applies to accounts also applies to all other evidence tendered by an assessee including his explanation on the source of income. Therefore, while it is true that the rejection of the assesses explanation cannot be disturbed if it is based on reasonable grounds, it can be challenged if it is capricious, arbitrary or injudicial.
7. The facts of the instant of the instant case are that he assessee has maintained his accounts properly and made a correct return of the income of his cinema business. That he withdrew from time to time from his business the amounts stated by him and gave them to his wife for household expenses is also not in dispute. Presumably, therefore, the amount in dispute credited to her account with the bank has its source in the funds which she used to receive from her husband, as no other source is indicated.
8. The Tribunal rejected the assesses explanation on the ground that he would not be borrowing capital on interest for the purpose of business if the amount in dispute was lying at home. This reasoning is based on the assumption that the total amount was always available at home to the knowledge of the assessee. This assumption ignores that the amount was likely to be made up gradually out of the small savings made from time to time, of which the assessee was not aware until it was deposited in the bank. It is common knowledge that the ladies of the house do manage to make small savings, which are not deposited in a bank until they accumulate emergency. We are, therefore, of the opinion that the rejection of the assesses explanation by the Tribunal, which was prima facie reasonable, was arbitrary and cannot be accepted as final.
9. In this connection we may also notice the reason adduced by the Income-tax Officer for rejecting the assesses explanation. He seems to have discarded the existence of the savings on the ground that the assessee was not likely to have advanced any sums to his wife until he was satisfied that the money previously given to her was fully expended. In our opinion there was no basis for him to assume such a rigid business-like dealing between persons who do not stand in the relationship of a master and servant or principal and agent.
10. It cannot be postulated as an axiom that no burden ever less on the Department in cases arising under the Indian Income-tax Act. For Instance, where an assessee should deny that he is in receipt of income from a particular source, it is for the Income-tax Officer to prove that he made the income, for the assessee cannot prove the negative : In re Bishnu Priya Choudhurani. So also where an assessee prima facie establishes a partnership, the burden is on the taxing authorities to prove that it is fictitious : Seth Chhogalal v. Commissioner of Income-tax, C.P. and Berar. In Sovaram Jokhiram v. Commissioner of Income-tax, Bihar and Orissa, it was held that where property stands in the name of the assessees wife, it is for the Income-tax Officer to prove that she is only the benamidar and not the real owner. Where, therefore, an assessee makes out a prima facie case, the burden rests on the Department to do prove or avoid it. It is obviously for this reason that Section 23(3) of the Income-tax Act requires the Income-tax Officer to hold an enquiry before making an assessment and under proviso to Section 13 he has to determine the basis and the manner of computing the assessment.
11. In case where the explanation of the assessee regarding the source of a disputed amount is not accepted, the question still remains whether it is a revenue income. It is not in all cases that by mere rejection of the explanation the character of the disputed item as revenue income can be deemed to be established. Each case has to be judged on its own merits for this purpose. In Mahabir Prasad Munna Lal v. Commissioner of Income-tax there was a credit entry in the assessees account books in the name of Hari Kishan who was found to be a fictitious person. The question arose whether there was anything in law to prevent the Income-tax Officer or the appellate authority from presuming or infering that the receipt evidenced by the credit entry was a revenue receipt. This question was answered by their Lordships as below :
"If an assessee gives an explanation which is false or unbelievable, there is nothing in law to prevent the Income-tax Officer or the appellate authority from inferring that the receipt evidenced by a credit entry is a revenue receipt. In each case it would be a question of fact and the answer must, in every case, depend on the finding whether the inference is a reasonable inference from the assessees failure to prove his case. There is nothing in law to prevent an inference that a particular receipt is a revenue receipt, provided that that is as reasonable inference and the assessee fails to satisfy the Income-tax Officer or the appellate authority the source from which the money came."
It would thus appear that in order legally to draw an inference that a receipt is a revenue receipt, the circumstances of the rejection should be of the kind from which such an inference can reasonably be drawn. There is no doubt that in G. M. Madappa v. Commissioner of Income-tax, Madras, the law appears to be much widely stated, but the answer was obviously given by their Lordships in relation to the facts of that case, which pointed reasonably to the inference that the receipts wre income receipts.
12. The other cases that have come to our notice do not appear to lay down a law different from what has been stated in Mahabir Prasad Munna Lal v. Commissioner of Income-tax, In Lal Mohan Krishan Lal Paul v. Commissioner of Income-tax, Bengal, the question was whether the Income-tax Officer or the appellate authority was legally bound to prove by "positive evidence" that a sum credited in the assessees books as capital, in respect of which his explanation was found to be false and unreliable, represented income assessable to tax. Answering this question in the negative, their Lordships added that the Income-tax Officer was not prevented from basing his conclusions on circumstantial evidence. So far as the facts of the case were concerned, their Lordships found that there was considerable material on which the Income-tax Authorities could come to the conclusion that the sum in question was income. The facts also admitted the applicator of illustration (g) of section 114 of the Evidence Act, in that on account of the failure of the assessee to adduce evidence which could be produced the Income-tax Officer was competent to presume that the reason for his failure to offer the available evidence was that it would not assist his contention. This decision does not differ from Mahabir Prasad Munna Lal. v. Commissioner of Income-tax.
13. In J. A. Shellim v. Commissioner of Income-tax, Bengal, the assessees bank accounts showed considerable credits for a period of one year for which he did not give any information as to their source, and it was for reason that it was held that he question whether the assessment, which was made under the provisions of Section 13 of the Indian Income-tax Act, was proper or not was one of fact. That was, however, a decision which was peculiar to the facts of the case and did not answer the question whether when the explanation of the assessee is rejected, it inevitably follows that the receipt is income assessable to tax. In Udayram Jagannath, In re, their Lordships did not decide this question and only referred to the decision in Mahabir Prasad Munna Lal v. Commissioner Income-tax on the one hand and G. M. Madappa v. Commissioner of Income-tax, Madras, on the other. In Anraj Narain Dass v. Commissioner of Income-tax, Delhi, it was held that he initial onus of explaining cash credits in the accounts lies on the assessee. While this is true it does not answer the question whether, if the explanation is rejected, the credit should necessarily be liable to be treated as income. That will, in our opinion depend upon he facts of each case. We are, therefore, in respectful agreement with the decision in Mahabir Prasad Munna Lal v. Commissioner of Income-tax.
14. In the instant case, the rejection of the assessees explanation has been the sole basis for the inference that the amount was a revenue receipt from undisclosed sources. There are no circumstances in the case from which the receipt in question can reasonably be held to be in the nature of income. The amount was not credited in the assessees account books and was presumably advanced by his wife to be deposited in her own account with the bank. In these circumstances, even if the contention may be negatived that the amount came out of the savings as alleged it cannot ipso facto be traced to the assessee as him income. The broad fact, however, is that the assessee has prima facie made out a case which the taxing authorities have no material or information to rebut. In these circumstances, the source of the should be deemed to be established, and consequently the money was not liable to be treated as the assessees income merely because he could not explain satisfactorily how his wife made the saving and why she did not deposit it in the bank at any earlier date. In Narayandas Kedarnath v. Commissioner of Income-tax, Central, the assessee firm was held to have discharged its burden when it proved the source of the moneys even though it was unable to explain how the partners got them in their native place. The same reasoning is applicable to the instant case. Our answer to the question is, therefore, in the negative.
15. The reference is answered accordingly with costs on the Department. Hearing fee Rs. 100.
Reference answered accordingly.

Thursday, October 16, 2014

The Assistant Commissioner of Income TaxVs. Shri C. Ramabrahmam : Chennai ITAT

IN THE INCOME-TAX APPELLATE TRIBUNAL
‘C’ BENCH, CHENNAI.
Before Dr. O.K. Narayanan, Vice-President &
Shri S.S. Godara, Judicial Member
I.T.A. No.943/Mds/2012
Assessment Year : 2007-08
The Assistant Commissioner of
Income Tax, Business Circle IV,
Room No. 507, Annexe Building, 5th
Floor, 121, Nungambakkam High
Road, Chennai 34.
Vs.
Shri C. Ramabrahmam,
16, 2nd Canal Cross Road, Gandhi
Nagar, Adyar, Chennai 600 020.
[PAN:AACPR0103K]
(Appellant)
(Respondent)
Appellant by : Shri Guru Bashyam, IRS, JCIT
Respondent by : Shri Ananda Kumar, C.A.
Date of Hearing : 29.10.2012
Date of pronouncement : 31.10.2012
ORDER
PER S.S. Godara, Judicial Member
This Revenue’s appeal is directed against the order of the
Commissioner of Income Tax (Appeals) VIII Chennai dated 24.01.2012 in
ITA No. 53/09-10(A)-VIII for the assessment year 2007-08 in proceedings
under section 143(3) of the Income Tax Act 1961 [in short the “Act”].
2. Brief facts of the case are that the assessee (individual), filed his
‘return’ declaring income of `.6,40,440/-. In scrutiny proceedings, the
Assessing Officer noticed that the assessee had purchased a house
property at T. Nagar, Chennai on 20.01.2003 for `.32.64 lakhs. In addition to
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2 I.T.A. No.943/M/12
the said consideration, he paid `.4.00 lakhs towards registration cost and
also had added further amount of `. 39,926/- as cost of improvement. In this
manner, the assessee paid net cost of `.37,03,926/-. In the enclosures with
the return, the assessee had added an amount of `.4,82,042/- as interest on
housing loan taken in 2003 for purchasing the property. Finally, the
assessee sold the said property on 20.04.2006 for `.26.00 lakhs.
After taking cognizance of the above facts, the Assessing Officer was
of the opinion that since interest in question on housing loan, had already
been claimed as deduction under section 24(b) in assessment years 2004-
05 to 2006-07, the same could not be taken into consideration for
computation under section 48 of the “Act” as the legislative provision did not
provide such method of including amount of deduction under section 24(b) of
the “Act”. Therefore, the Assessing Officer added back the above said
interest amount to the income of the assessee from short term capital gains
vide assessment order dated 24.11.2009.
4. Further, the assessee had declared income under “other sources” of
`.26,127/- alleged to have been derived from tax free dividend of `.4,720/-
with interest of `.26,127/-. With regard to the above income, he debited an
amount of `.9,94,542/- as interest on loan and brokerage amount and the
consequential loss was set off against income from other heads.
5. The Assessing Officer did not accept the assessee’s contention by
holding that since there was no consistency and regular activity of granting
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3 I.T.A. No.943/M/12
loans by the assessee, the same could not be called as a business activity
even if some interest had accrued to the assessee. The Assessing Officer
also noticed that the assessee had not advanced loan to any other party
except the above said. In this manner, on legal principle as well as on facts,
the Assessing Officer, added an amount of `.9,94,542/- in assessee’s total
income. In this manner, the assessee’s total income was assessed as
`.21,17,020/-.
6. The assessee preferred appeal against the assessment order,
wherein, both the additions made by the Assessing Officer (supra) have
been deleted by the CIT(A). Regarding addition of interest amount of
`.4,82,042/-, the CIT(A) has held that the assessee was entitled to include
the interest amount for computation under section 48 despite the fact that
the same had been claimed under section 24(b) while computing income
from house property.
Regarding other addition of `.9,94,542/- (supra), the CIT(A) has held
that the payments made by the concerned creditor to the assessee stood
duly proved from the record, which had not been considered by the
assessing authority.
It is, in this background, the Revenue has challenged the CIT(A)’s
order.
7. The DR, representing the Revenue, reiterated the finding of the
assessing authority as well as grounds of appeal and prayed for restoring
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4 I.T.A. No.943/M/12
the additions made by the Assessing Officer. It is the submission of the
Revenue that once the assessee had availed section 24(b) of the “Act”, he
cannot include the same very amount for the purpose of computing capital
gains under section 48. In the same manner, regarding other addition under
the head “income from other sources” (supra), the contention of the
Revenue is that the Assessing Officer had rightly made the addition since
the assessee’s activity of granting loan to a single person could not be called
as business. By referring to the findings of the CIT(A), the DR had submitted
for verification of creditors facts only the record has been dealt with by the
CIT(A) and not qua the legal aspect of the assessee’s claim, which was
negatived by the Assessing Officer by holding that the assessee’s activity
could not be called as a ‘business’.
On the other hand, the AR representing assessee has sought to place
reliance on CIT(A)’s order as well as findings contained therein. In the light
thereof, he prayed for upholding the same and dismissal of the Revenue’s
appeal.
8. We have considered submissions of both parties at length and also
perused the relevant findings of the Assessing Officer as well as CIT(A).
Regarding the issue of capital gains, it transpires that there is hardly any
dispute that the assessee had availed the loan for purchasing the property in
question. Since the assessee had shown the income under the head ‘house
property’, he preferred to raise the claim of deduction under section 24(b) of
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the “Act”, which reads as under:
“(b) where the property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the amount of any
interest payable on such capital:”
There is no quarrel that since the assessee’s claim of deduction was under
the statutory provisions; therefore, he succeeded in getting the same.
However, after the property was sold, he also chose to include the interest
amount while computing capital gains under section 48 of the “Act”, which
reads as under:
“48. The income chargeable under the head “Capital gains” shall be
computed, by deducting from the full value of the consideration43
received or accruing as a result of the transfer of the capital asset the
following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with
such transfer;
(ii) the cost of acquisition of the asset and the cost of any
improvement thereto:”
After perusing the above said provisions, we are of the opinion that
deduction under section 24(b) and computation of capital gains under
section 48 of the “Act” are altogether covered by different heads of income
i.e., income from ‘house property’ and ‘capital gains’. Further, a perusal of
both the provisions makes it unambiguous that none of them excludes
operative of the other. In other words, a deduction under section 24(b) is
claimed when concerned assessee declares income from ‘house property’,
whereas, the cost of the same asset is taken into consideration when it is
sold and capital gains are computed under section 48. We do not have even
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a slightest doubt that the interest in question is indeed an expenditure in
acquiring the asset. Since both provisions are altogether different, the
assessee in the instant case is certainly entitled to include the interest
amount at the time of computing capital gains under section 48 of the “Act”.
Therefore, the CIT(A) has rightly accepted the assessee’s contention and
deleted the addition made by the Assessing officer. Hence, qua this ground,
we uphold the order of the CIT(A).
9. Coming to the other issue involved i.e. addition regarding income from
the head “other sources”. We find that the Assessing Officer had turned
down assessee’s plea by holding that the assessee’s alleged loan
transaction to the concerned debtor namely Shri S.A. Krishnakanth could not
be called a ‘business activity’ even if it had culminated in some interest
which accrued to the assessee. Not only this, the assessing authority also
rejected assessee’s explanation tendered on facts as well. However, the
CIT(A) has found merits in assessee’s argument and held that the material
on record duly proved the transactions since the details of loan creditors,
who had lent money to the assessee stood proved as well as there was
evidence that the assessee had also paid interest to them in return. Further,
it is also evident that the CIT(A) has nowhere dealt with the legal aspect of
the issue i.e., whether the assessee who, called himself to be a salaried
employee could raise a plea his loan transaction could be called as a
‘business activity’ or not even after the same had led to accrual of interest as
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7 I.T.A. No.943/M/12
held by the assessing authority. This vital aspect, in our opinion has escaped
the consideration of the CIT(A). Faced with this situation, we deem it
appropriate that the CIT(A) shall redecide this legal aspect in accordance
with law after affording adequate opportunity of hearing to the assessee.
Accordingly, we uphold the CIT(A)’s order in deleting the addition of
`.4,82,042/- (supra). Regarding other issue involved i.e. addition of
`.9,94,542/-, we restore it back to the file of the CIT(A).
10. In the light of the above discussion, the Revenue’s appeal is partly
accepted for statistical purpose.
Order pronounced on Wednesday, the 31st of October, 2012 at
Chennai.
Sd/- Sd/-
(Dr. O.K. NARAYANAN)
VICE-PRESIDENT
(S.S. GODARA)
JUDICIAL MEMBER
Chennai, Dated, the 31.10.2012
Vm/-
To: The assessee//A.O./CIT(A)/CIT/D.R.
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Monday, September 15, 2014

“HRA EXEMPTION & PAN SUBMISSION OF THE LANDLORD ”


TAX TALK-11.08.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“HRA EXEMPTION & PAN SUBMISSION OF THE LANDLORD ”

Query 1]
I am an employee in a PSU residing at Bilaspur (CG ). I receive HRA from my Company and I live in a rented premises. But I could not submit the rent receipts to my Company for the Financial Year 2013 - 14, so the Company deducted and deposited the tax without considering the provisions of HRA exemptions.
My query is - 
1.      Whether can I claim the HRA exemptions while filing the return online? If yes, will I still require the rent receipts from the landlord?
2.      My actual rent does not exceed Rs. 1,00,000/- p.a. Will I still require the PAN of the landlord in this case?
3.      My Basic Salary & DA keep on changing every month, so will I have to take the Basic Salary & DA for every month as per the pay slip and do the calculations for HRA?
I had purchased a house in 2008 under the Self Financing Scheme from the Housing Board for which I had availed the facility of HB loan from my Company and against which the Principal and the Interest amount is being deducted from my Salary. But since I have not received any Completion Certificate from the Housing Board till date (as the house is still not completed and I have not received the possession till date), I could not submit the same to my Company. My queries are: 
i.                    As I could not submit the required papers to the Company, won't I be able to claim the Pre - Construction period Interest as the 3 year period has also been lapsed?
ii.                 Can I claim the deduction U/s 24 for Housing Interest of Rs. 34,897/- for the F.Y. 2013-14 while filing my e-return? If not, then from when can I claim the deduction U/s 24? I have not claimed any deduction regarding this till now in any year. I am eagerly waiting for your solution to my problem.  [Meena Mohan-minaraju26@gmail.com]

Opinion:
Employees in receipt of House Rent Allowance (HRA) from the employer are eligible for exemption if they are staying in a rented accommodation & paying the rent. While working out deduction of tax at source (TDS) of employee, the disbursing authorities (or employer) should satisfy themselves about the rent payment by insisting the production of evidence of actual payment of rent before granting exemption towards HRA or any portion thereof from the total income. Income Tax Department has further tightened its focus on bogus HRA exemption claimed by salaried employees in income tax returns & so now employees have to furnish the PAN of the landlord if the rent payment exceeds Rs. 1 Lacs p.a. [Circular No. 8/2013 Dated 10.10.2013 issued by CBDT]. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

[Though  incurring actual expenditure on payment of rent is a pre-requisite for granting exemption under  section  10(13A) by the employer,  as  an  administrative  measure, salaried employees drawing house rent allowance  up to Rs. 3,000/-  per  month are exempted from production  of rent  receipt to the employer/ disbursing authorities . It  may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that  the employee  has  incurred  actual expenditure on payment  of  rent.] 

With above minor background, it may be noted that
1.      Even if the employer has not considered deduction towards rent payment u/s 10(13A), employee can claim the same while filing income tax return. The receipt is not required for uploading the return. However, it CAN be demanded subsequently by the Assessing Officer.
2.      PAN of the landlord, if rent payment exceeds Rs. 1 Lacs, is required by the employer to grant deduction towards HRA while working out Tax to be deducted (TDS) from the salary income of the employee. If the rent payment is not exceeding Rs. 1 Lacs, furnishing of PAN is not mandatory and employer could grant deduction merely on the basis of rent receipt / rent agreement of the landlord. It may be noted that even if the deduction towards HRA is not considered by employer due to any reason whatsoever, employee could claim the same while filing return of income if all other eligible condition of deduction are satisfied.
3.      Monthly Basic salary & DA would be aggregated to arrive at yearly figure and then deduction towards HRA would be worked out.

As far as interest towards pre-construction period is concerned, it may be noted that interest paid during the period of construction of house property is not deductible in the year of interest payment. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the construction is completed. For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on March 31st immediately prior to the date of completion of construction /acquisition.
There is one more penal consequence in case the house property is not completed within a period of 3 years. In such case, deduction towards interest on borrowed capital is also restricted to Rs. 30,000/- only & not Rs. 1.50 Lacs (now enhanced to Rs. 2 Lacs from the FY 2014-15 onwards) otherwise available in case of self occupied house property.

In your specific case also, deduction towards pre-construction period would be eligible for deduction only after the construction of the house property. Without completion of the construction of house property, deduction would not be admissible.