Sunday, February 7, 2016

Readable format accessible at http://ssrpn.com/article-details.php?id=1383

TAX TALK-08.02.2016-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


Beware, there is a penalty for property transactions in cash

Query 1]
1.      I am to get some amount in March 2016 on redemption of ELSS MF done in March-2013 for tax savings. Whether I shall have to pay IT on LTCG or otherwise? Kindly enlighten me in this matter. [kumarmeher52@gmail.com]
2.      Is it better to invest in Equity linked saving scheme to save tax? Isn’t PPF a better option as compares to ELSS? My agent has advised me to go for ELSS and not PPF. Please advise.  [ amitr******@gmail.com]
Opinion:
There are lot many taxpayers who are not well aware of the Equity-linked saving schemes (ELSS) as a tax cum financial planning tool. ELSS is one of the types of mutual funds with tax benefits. It is one of the most preferred tax saving option for the young taxpayers as it has the potential to yield robust tax free returns in addition to offering tax benefit. The return from ELSS are tax free and have a smaller lock in period of merely 3 years as compared to other tax saving options which offers nominal fixed returns or have longer lock in period. Since the amount is indirectly invested in the equity shares of listed companies in the stock exchanges, the risk of negative return in ELSS cannot be ruled out. There are three options available in the ELSS, as under:
1.      Growth option – In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the Net Annual Value (NAV) of the fund and vice versa. Whenever the investor sells its holdings he will realize long term capital gain/loss. 
2.      Dividend option – In this option the fund distributes income earned by the fund to the investors as dividends. The date of distribution is declared by the fund, however if the fund has negative income it will not distribute any dividend. Any dividend received by the investor is not liable for tax in the hands of investors.
3.      Dividend reinvestments option – If the investors choose this option the dividends declared by the fund are reinvested. For example an investor is holding 1000 units of a fund and the fund declares dividend @ 2 per unit, the total dividend of 2000 (1000*2) will be reinvested on behalf of the investor as a fresh purchase.

ELSS Vs. PPF:
Since both the investment operates on EEE (Exempt-Exempt-Exempt) model, one needs to know difference between the two so as to arrive at a better decision. ELSS is an equity product while PPF is a debt product.  With PPF, returns are guaranteed while with ELSS, the returns are market-linked and there is no such guarantee. ELSS investments have lock-in of 3 years while PPF matures in 15 years.

Tax Implication on redemption of ELSS:
Planning for taxes is an integral part of your financial planning. Amount invested in ELSS cannot be redeemed before the end of three years from the date of investment. The fact remains even if the taxpayer has not claimed any tax benefits under Section 80C of the Income-tax Act.  Amount withdrawn from ELSS would be totally tax free. There are lot many taxpayers who makes investment in ELSS through the route of Systematic Investment Plan (SIP). At the time of redemption of such ELSS, each SIP installment is treated as a separate investment and the installment must complete three years of holding for it to be redeemed. Redemption is on a first-in first-out basis since the units allotted first will be redeemed first. Whatever may be the amount of redemption, it would be totally tax free.

Query 2]
I have two queries:
1. A, B and C are joint owners of a land in the ratio 40:40:20. B and C are father and son while A is a relative of B. Now B wants to construct on the land to which A and C have no objection and A will be pay annual rents for allowing the use of land while the ownership of building will belong to B only. What are the tax law requirements to put in practice the above arrangement? Whether I would get the tax benefit if I avail the bank loan for above construction purpose? And will Income Tax authorities accept such an arrangement?
2. I have entered into an agreement for sale of rural agricultural land at a price of Rs. 21 Lacs. I am going to receive Rs. 5 Lacs as advance. However the value adopted for stamp duty purpose will be quite less i.e., apporx. Rs. 7 to 9 Lacs. Please guide me how to account for this transaction and for the advance I am going to receive. Also, the whole transaction will be in cash as the buyer is a local farmer. Please guide on above as soon as possible. [sasim.ca.nagpur@gmail.com]
Opinion:
1.      The first part of the question is a very unique & often asked by the taxpayers on various occasion. Taxpayer need to understand that ownership in a house property is one of the first & foremost vital pre-condition  for claiming deduction towards Interest on housing loan u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Without ownership in the house property, no right would emanate for deduction. The second pre-condition is the availment of loan towards the house property.
Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets. In your case, land is owned by A, B & C whereas construction is proposed to be done by B alone. It appears that you would be entering in to some sort of documentary arrangement through Memorandum of Understanding (MOU) or Lease agreement whereby (a) you would be paying some annual value/ rent to A & C for using their share of land (b) the fact of construction or proposed construction by you would be mentioned therein. If it so & if you are properly documenting the transactions and routing the payment of construction through your account, you can claim deduction u/s 24(b) & u/s 80C towards housing loan repayment without any limitations. Ensure the proper documentation to prove that construction is done by you, loan is primarily your individual liability, and entire loan repayment is done by you.
2.      In your case, the actual sale price (Rs. 21 Lacs) is higher than the prevailing stamp duty valuation (i.e. ready reckoner value or guidance value) of Rs. 7 to 9 Lacs. In your case, there would not be any tax liability on notional basis. Even, since the agricultural land is a rural agricultural land (i.e., land beyond certain specified area of Municipal Corporation), entire receipt would be tax free. However, there is one important default that you would be committing under the Income Tax Act-1961. The default is acceptance of cash against sale of immoveable property. Beware, there is a penalty for property transactions in cash. In order to curb generation of black money in the property transactions, Section 269SS was amended by the Finance Act-2015 so as to provide that no person shall accept from any person any amount as advance or otherwise against sale/transfer of an immovable property otherwise than by an account payee cheque or bank draft or by ECS, if the amount is Rs. 20,000/- or more. It may be noted that penalty is there on the seller against accepting the amount in cash. Similarly section 269T prohibits the repayment of such money otherwise than by an A/c payee cheque/draft or ECS, if the amount is Rs. 20,000/- or more. Here again, the penalty is on seller against the repayment of the amount in cash. V
iolation of the provision of section 269SS & 269T attracts penalty u/s 271D & U/s 271E respectively which shall be a sum equal to the amount of the amount accepted /repaid in such violation.

[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


Monday, January 11, 2016

Income tax department acting tough against the Non filers

TAX TALK-11.01.2016-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant


Income tax department acting tough against the Non filers

Query 1]
I have following queries:
1.      My friend is not paying any tax though his income exceeds the basic exemption limit. He hasn't done any investment in PF or LIC& doesn't file return. So, how would the income tax departments would come to know about the tax escape? Even if the Income tax dept. comes to know about this, then whether he would be liable to pay the tax along with penalty for the full year in which he escaped? Please Advice.
2.      One of my friend is running an advocate legal consulting firm. I want to ask whether he is required to file 2 returns i.e., one for his own name & for other in name of the firm? Also I want to ask that which ITR should he filed?
3.      I know that we can get deduction with regard to tuition fees paid under section 80C. I want to know for which kind of tuition fees, we can claim deduction? please advice.[adityapatel025@gmail.com]
Opinion:
You don't pay Taxes - They take Taxes - Chris Rock
1. 
Gone are the days when the non filers with tax liability could go unnoticed. With income tax department is getting fully hi-tech and utilizing the technology effectively, there is always a third eye of income tax department on the taxpayer. Income Tax Department is acting tough with the tax evaders & non-filers. The chances of non filers going scot free are rare now. The Income Tax department has identified over 44 lakh high-value spenders in the country who have not filed their returns till now. The department is now extracting the information from multiple sources about multiple transactions. Non filing of the return for the person with income above basic exemption limit would attract heavy penalty,fine and prosecution also. The department is keeping a hawk’s eye on income, expense, fund flow and investment details of the taxpayers. Below are some of the transactions/ information collected by the department through AIR, CIB and TDS returns.
Through Annual Information Return(AIR):  Cash deposits aggregating to Rs. 10,00,000/- or more in a year in any savings account, Payment of Rs. 2,00,000/- or more against credit card bills, Investment of Rs. 2,00,000 or more in Mutual Fund or Rs. 5,00,000/- or more in Bonds or Debenture or Rs. 1,00,000/- or more for acquiring shares or RBI Bond of Rs. 5,00,000/- or more, Purchase of Immovable Property valued at Rs. 30,00,000/- or more.
Through Central Information Branch (CIB): Sale of Motor Vehicle, Transfer of immovable property or capital assets where value declared for the purpose of stamp duty is more than actual sale value, Purchase of Immovable property valued at Rs. 5 lakhs or more, FDR of Rs 1,00,000/ or more, Purchase of Bank Draft of more than Rs. 50,000/- in cash, Share Transactions more than Rs. 20,000/-, CIB-410: Cash deposit aggregating of Rs 2,00,000/- on a day, Interest paid by co operative credit Society.Through TDS return: Where TDS is done by the payer but the payee has not filed the return or not shown it in the return. It’s time for the non filers to be very cautious. If the income of any individual is above the basic exemption limit, file the return within time. Else, be prepared for a warm hug through notices, fine, penalties and prosecution.
2.  Proprietary firm don’t have any independent & separate status under the Income Tax Act-1961. Only one return is required to be filed by your friend wherein all the income (Income from his proprietary firm as well as income earned in individual capacity) is required to be incorporated.
3. Deduction u/s 80C is also available towards the payment of the tuition fees, subject to the overall cap of Rs. 1.50 Lacs. However, it is admissible only against the payment of tuition fees to university, college or school or other educational institutions situated within India for the purpose of full time education of any two children of the individual. It may be noted that only tuition fees is eligible for deduction and no deduction is available towards the payment of development fee, donation or payment of similar nature.

Query 2]
I'm in Govt. service (Army). I had three properties till Sept-2015 at Nasik, Pune and Bhopal. Though small, flats were purchased to reduce tax burden over the years. The detail of the transactions is as under:
1. Nasik House is a self occupied, purchased in 2007. No loan outstanding at present.
2. Pune House is at in Fatima Nagar. It was purchased in May-2012 for Rs. 20 Lacs. It was a 28 yrs old property. Now, consideration value is about Rs. 28 to 29 lacs. Loan cleared in the last year.  It was sold in Sept-2015 for Rs. 29.50 lacs.  How much is my capital gain? I think- Nil. Please let me know capital gain after indexation table of this year.
3. Bhopal House was purchased in March-2014. Rented out and the annual let out value is about Rs. 60,000/-. Total interest component was about Rs. 2.85 Lacs. EMI Rs. 40,000/- plus. I’ve paid Rs. 20 Lacs out of the sale proceeds of pune flat to reduce the principle amount in Sept-2015.
4. Actual plan was to sell off pune property and buy third/second at Bhopal  but due to lower prevailing price as well as the holding period being less than 3 years, could not sell off in 2014 as it might have been treated as STCG. So decision was delayed to this year. My query:
Since 3 years completed in May-2015 for pune property, I sold the property of pune in Sept-2015.  In a classical sense, as per rules to avoid the LTCG tax, one needs to sell the property first and then invest in other.  However, in this case I purchased the third property almost one year prior  but  used the sale proceeds to reduce the EMI after the sale this year.  What will be my tax liabilty for FY 2015 -2016 as a result of sale of Pune property? Please confirm. [S.B.Deshpande-  svdeshu@hotmail.com] 
 Opinion:
1.      Computing Long Term Capital Gain (LTCG) on sale of Pune Flat:Cost Inflation Index (CII) for FY 2012-13 (year of flat purchase) was “852” & your purchase price was Rs. 20 Lacs. You can further add the stamp duty, registration fees & other expenses incurred while purchasing the flat to arrive at the cost of acquisition. Ignoring stamp duty etc, your indexed cost of acquisition would be Rs. 25.37 Lacs (Rs. 20 Lacs*1081/852). Your sale price is Rs. 29.50 Lacsand if it is higher than the stamp duty valuation of the property, then Long Term Capital Gain (LTCG) would be Rs. 4.12 Lacs (Rs. 29.50 Lacs Cr less Rs. 25.37 Lacs). However, if stamp duty valuation is more than Rs. 29.50 Lacs, the LTCG would be required to be computed by taking such higher value as sale consideration. LTCG is taxable at a special rate of 20% plus education cess. In short, your additional tax liability as a result of LTCG on the basis of above calculation would be Rs. 84,963/-.
2.      Tax saving Options:Individuals can save LTCG tax by exercising any of the following tax saving options:
i) Exemption Under Section 54:
For exemption u/s 54, individual have to invests the amount of LTCG for purchase or construction of another residential house property within a prescribed time period. The prescribed time periods are as under:
a] For purchase:
One year before or two years from the date of sale.
b] For Constructions: Three years from the date of sale.
ii) Exemption Under Section 54EC:

To save tax u/s 54EC, taxpayers have to invest the amount of LTCG in the Specified bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India ( NHAI) within a period of 6 months from the date of sale.
3.      In your specific case, you have purchased the Bhopal Flat in March-2014 whereas you have sold the Pune Flat in Septeber-2015. Since the Bhopal Flat was purchased by you prior to one year, you would not be eligible for LTCG exemption u/s 54 even though the end use of the sale proceeds is towards Bhopal Flat (i.e., repayment of the loan taken for purchase of Bhopal Flat).
4.      You have an option to claim an exemption U/s 54EC by investing the amount of LTCG (i.e., Rs. 4.12 Lacs) in the specified bonds issued by NHAI/REC.
-- 
Regards,
   CA Naresh Jakhotia
   Partner - M/s. SSRPN & Co.
   10, Laxmi Vyankatesh Apartment
   Telephone Exchange Square 
   Central Avenue Road
   Nagpur-440008.

www.ssrpn.com


   Phone Nos: (0712)2735479, 6549611
   Cell No. :  094228-60300