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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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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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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6 I.T.A. No.943/M/12
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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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.

“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”


TAX TALK-18.08.2014-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA
Chartered Accountant

“BILL DISCOUNTING: WHETHER BUSINESS INCOME OR OTHER SOURCE INCOME ”


Query 1]
I have following query. I am agent of some company and I am making advance payment on behalf of parties, who are purchasing material from company. Company is allowing me CD and these parties are making payment after 30 days. Kindly advice whether it is a business income or income from other sources? [Lalit Devpura-lalit.devpura@adityabirla.com]
Opinion:
Prima-facie, it appears that the company is selling the goods directly to the customers. The transaction of purchase & sale is between the parties and you are an intermediary through whom just payment is routed. You are making the payment to the seller on behalf of their purchaser/customers after deducting the cash discount whereas you will be receiving the billed amount from the customer. In such case, your bill discounting income ideally is taxable under the head “Income from Business/profession” as the transactions doesn’t appear to be an isolated single transaction & doesn’t appear to fall in the residual category of “Income from Other source”.

Query 2]
I have the following queries with regard to Real Estate Transactions. Kindly help.
1.      The client has entered into a JV Agreement with the Land owner for construction of 5 flats, out of which 3 flats to be given to the owner and 2 flats are to the Builder.
2.      The cost of each flat is Rs. 25 Lacs.
3.      Now, the percentage of completion is 60%.
4.      So Sales Turnover to be recognized is Rs. 25 Lacs * 2 * 60% = Rs. 30 Lacs (Please correct me if I am wrong).
5.      Cost of Construction incurred till 31st March is Rs. 25 Lacs.
6.      How to calculate the closing WIP assuming that
a. One flat is booked before 31st March?
b. Two flats are booked before 31st March? [Bhagyalakshmi Ramesh-
blassociates2003@gmail.com]
Opinion:
1.      The hardest thing to understand is income tax. It gets all the more complicated when it comes to taxation of real estate transactions. A real estate project is generally spreads over for more than one accounting period & so revenue recognition and accounting in such cases still remains a complex issue. There are lot many confusions as to revenue recognitions in such cases. In your specific case, apparently it appears that the risk & rewards in respect of the builders share in the project would be transferred in favor of the prospective or identified buyer only after completion of the scheme, at the time of executing sale deed or handing over the possession of the flat. If it is so, the revenue need not be recognized at the time of booking or during the construction phase of the project. Rather, the revenue would be recognised at the end of the project at the time of executing the sale deed in favor of buyer.  In plain words, even if 60% or more is the stage of construction, no revenue needs to be recognised. Irrespective of the number of booking (one or both), the revenue would be recognised at the time of transfer as stated above. Work in progress (WIP) would consist of all the expenses incurred till the end of the financial year. It will not have anything to do with the stage of completion & closing WIP, in such case, would be carried forward in the next year.


Query 3]
I have a query regarding second housing loan. Please provide solution to following queries. I have purchased one flat at Delhi in 2005 taking housing loan which is cleared in 2012 and the house is in my possession. I was posted at Delhi in 2005 and now shifted to Nagpur in 2007 and is residing in a rented house at Nagpur.  In January- 2014, I had purchased one plot taking a housing loan from SBI reality and now within 18 months, I have to construct a house on that plot as per the requirement of bank. I shall be applying for housing loan in march-2015 for constructing a house. At present, I am not getting any interest certificate from bank for claiming income tax exemption. Bank says after 
completion of construction of house, they will issue it. What will be my tax liability? I am a salaried employee and posted at Nagpur and residing at Nagpur. Whether tax exemption could be claimed for combine construction + plot or only for loan taken for construction?
[mskhatib@rediffmail.com]
Opinion:
1.      It may be noted that housing loan taken merely for purchase of plot is not eligible for deduction till the construction of the house property is completed. Only after the construction of the house property, deduction could be admissible. Interest in respect of pre-construction period is deductible in five equal annual installments commencing from the year in which the construction is completed. After the construction of house only, tax benefit of housing loan could be availed. [For this purpose “pre-construction period” means the period commencing on the date of borrowing and ending on 31st March immediately prior to the date of completion of construction /acquisition].
2.      In your case, Nagpur house property would be your second house property. Readers may cautiously note that the tax treatment of housing loan taken for purchase/construction of second house property is different (and not same as that of first house property loan). You & other readers may kindly refer the last month Tax Talk Dated 21.07.2014 wherein the tax benefit and tax treatment of second house property was discussed in length.

“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


“DEDUCTION AND EXEMPTION ARE TWO DIFFERENT TERMS”


Query 1]
I am BSNL employee having income from salary only. I have would like to know that which return form should I fill? One more thing I wanted to ask you that in ITR-1, what Rs. 5,000 /-exemption limit is? What exemption refers to? What is the difference between exemption & deduction? [rakeshingley123@gmail.com]
Opinion:
1.      Income tax return can be filed by an individual taxpayer in form ITR-1 where the total income consists of the following income:
i) “Salaries” or income in the nature of family pension or
ii) “Income form house property”, where assessee does not own more than 1 house property and does not have any brought forward loss under the head; or
iii) “Income from other sources”, except winnings from lottery or income from race horses and does not have any loss under the head.
It is Provided that the ITR-1  form cannot be used by the person who:
(a)  is a resident, other than not ordinarily resident in India within the meaning of sub-section (6) of section 6 and has
i) assets (including financial interest in any entity) located outside India; or
ii) signing authority in any account located outside India;
(b) has claimed any relief of tax u/s 90 or 90A or deduction of tax under section 91; or
(c) has income not chargeable to tax, exceeding Rs. 5,000/-.
2.      In your specific case, if you satisfy the above criteria, you can file the return of income in form ITR-1.
3.      Exemption and deduction are two commonly used terms many get confused with, and most of the taxpayer can’t differentiate between the two. One needs to understand the difference between the two terms that many people commonly consider as one and the same.
a]
DEDUCTION:
The word “deduct” means “to subtract or take away from the total”. Tax deduction allows you to put some of your income to use in certain specified investments or expenses and deduct the amount from your income, thereby lowering your ultimate taxable income. In short, deduction reduces the amount of income which is taxable. Deduction is always on income forming part of your total income.
[
Few deduction forming part majority of tax payers are chapter VIA deductions like Deduction u/s 80C towards investments in LIC/PPF/NSC etc, U/s 80D towards health insurance premium, U/s 80E towards education loan interest payment, U/s 80G towards donations, U/s 80DD towards medical treatment of handicapped dependant etc.]
b] EXEMPTION:
Exemption means “Tax Free”. Exempted income does not form part of your total income on which income tax has to be paid. Another major difference between deduction & exemption is that exempt income doesn’t not form the part of gross total income (GTI).
[Few exemption available to majority of tax payers are life insurance money back, PPF Maturity proceeds, Agricultural income, share of profit from the partnership firm etc]

Query 2]
Please advise me whether the LTCG out of Shares, can be appropriated towards acquiring a New House. I have purchased a Flat @ Bangalore and the same is likely to be delivered before March-2015. In the meanwhile, I am planning to sell few shares and utilize the proceeds for meeting part of the acquisition cost. The rest of the amount for acquiring the Flat has been financed by our Bank. Please enlighten me regarding the LTCG. [sivaram.ganeshan@sbm.co.in]
Opinion:
1.      Any Long Term Capital Gain (LTCG) arising on sale of shares through recognised stock exchange is totally exempt i.e., tax free. In such case, tax payer is free to utilize the amount for any purpose without any barrier or restrictions as to its utilization or investment.
2.      Any other LTCG arising on sale of shares (other than mentioned in (1) above, would not be tax free and would be taxable. In such case, taxpayers have an option to save LTCG arising on sale of shares by investing the sale proceeds for purchase of another house property. The exemption in such case would be available u/s 54F.
3.      Exemption u/s 54F shall be admissible if following conditions are satisfied: -
a) Taxpayer is an individual or a Hindu Undivided Family.
b) Capital gain arises from the transfer of any long-term capital asset other than residential house property.
c)  Taxpayer has, within a period of one year before or two years after the date on which the transfer took place purchases, or within a period of three years after that date constructs, a residential house.
d)  Taxpayer does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
e)  Taxpayer do not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or constructs any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If all above conditions are satisfied, taxpayer can claim LTCG as exempt provided entire amount of net sale consideration is invested for new residential house property as mentioned above. If entire amount of net sale consideration is not invested, then exempt LTCG would be available proportionately. [U/s 54F, it’s the investment of actual net sale consideration that determines the claim of exemption.]
4.      Apart from exemption u/s 54F, taxpayers also have an option of claiming an exemption U/s 54EC as well. To save tax u/s 54EC, taxpayers have to invest the amount of LTCG, within a period of 6 months from the date of transfer, in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). For exemption U/s 54EC, Investment of LTCG is relevant and not the amount of net sale consideration as required in section 54F. [There is a maximum investment ceiling of Rs. 50 Lacs for investment in 54EC Bonds.]
With above generalized information, in your specific case, you can utilize the sale proceeds, present as well as future, for purchase of flat at Bangalore.