Sunday, May 29, 2011


(Chartered Accountant)
Query 1]
1) I want to know whether the deduction of interest on HBA for self occupied house is admissible when the house is in the sole name of the wife and the bank has given HBA loan to the husband, EMI is being paid by the husband from his salary bank account and the husband wants to claim the deduction u/s 24 for self occupied house. In other words if the self occupied house is not in the name of the assessee, whether deduction u/s 24 can be claimed for such property as self occupied?
2) With reference to your reply to Query No. 3 in the Hitavada Money Dt.18.04.11, you are requested to reconsider the reply with reference to the case O.P. Sharma Vs ITO [1986] 17 ITD 45 in which it is mentioned that the interest portion on non- refundable withdrawal is allowed on the portion of loan []
Opinion: -
1. Ownership is a condition precedent 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, deduction claim shall not be admissible.
2. The judgment rendered in the case of O.P. Sharma Vs ITO [1986] 17 ITD 45 was indeed an interesting judgment. The same is rendered by the Jaipur Bench & may not be upheld at all the jurisdiction of the Income Tax Department. However, the observation of the Tribunal was well elaborated in the Third Para which reads as under:“After carefully considering all the facts and circumstances of the case, I am of the opinion that so far as the legal position is concerned, the matter should be decided against the assessee. A man certainly loses interest if he withdraws his own provident fund which would be exempt from tax. But that does not mean that he can claim the loss of that interest as a deduction from his income. In fact the decisions of the Punjab and Haryana High Court referred to above are themselves not free from difficulty and the Legislature had to step in to supersede those decisions. The provision that in all doubtful cases the view which favours the assessee should be taken has recently been disapproved by the Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 2 Taxman 49. Therefore, on the legal question, I am inclined to decide the issue on the ground that the loss of interest suffered by him in respect of interest payable to himself and the same would not be covered by clause (vi) of section 24(1) of the Act.”

Query 2]
1. Is profit /loss from commodity derivatives transactions entered on multi commodity exchange (MCX) speculation profit/ loss or business profit /loss. Can the expenses incurred like transaction charges, brokerage allowed as deduction. How to show daily settlement amount? []
2. We are a broker dealing in shares & commodities. We have query regarding commodities transactions in MCX/NCDEX. Whether the profit form MCX/NCDEX is a speculative profit? We are getting conflicting views from various consultants & are unable to form an opinion. We shall be highly thankful if you can kindly elaborate the issue in details for mass benefit. [CEAI]
Section 43(5) of the Act defines the expression “speculative” transaction to means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts.
It is provided that for the purposes of this clause the following shall not be deemed as speculative transaction.
(i) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(ii) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(iii) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member;
(iv) An eligible transaction in respect of trading in derivatives in shares, etc.
Explanation to section 43(5) defines the term eligible transaction as meaning any transaction--(a) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and(b) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (a) and permanent account number allotted under the Act.As per Explanation to section 43(5) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose.
The Central Government has notified NSE, BSE, MCX stock exchanges & United Stock Exchange of India Ltd for this purpose but not the NCDEX.
As a result, the profit/loss in MCX is not considered as a speculative profit/loss. The expenses incurred like brokerage, transactions charges are deductible expenses while working out the profit/ loss from the transactions.

As far as NCDEX is concerned, there are two types of transactions carried out on NCDEX i.e, delivery based & non delivery based.
In the first set of transactions the contract is settled otherwise than by actual delivery of commodity, and the income derived from this set of transactions would be treated as speculative income except in situations mentioned above.
In another set of transaction, the contract is settled by actual delivery of commodities. Income derived from this set of transactions would be treated as business income.

Sunday, May 22, 2011


(Chartered Accountant)

Query 1]
Sir, I along with my brother purchased plot at Nagpur; But, due to some financial complications it is registered in brother’s name only. Now I wish to take its half portion back by way of Gift. What will be Tax implications to both of us? We both are in 30% slab of IT. []
Gift between the “Relatives” inter se is not at all taxable, neither in the hands of the donor nor in the hands of Donee. The definition of Relatives, for the purpose, includes Brother, Sister , Mother, Father etc.

Query 2]
Sir, our factory construction work was in completed in the Financial year 2008-09 & the commercial production commenced from February-2009. Certain payment were done without TDS to the contractors engaged for Sheds works, Ducting works etc. The expenses were debited to the concerned capital assets & not to the profit & loss A/c. Depreciation was charged on those assets at the year end & depreciation was debited to the Profit & Loss A/c. Our queries is whether the non deduction of TDS would result in disallowance of proportionate amount of depreciation debited to the profit & loss account? Please elaborate & enlighten. [LPPL]
A very interesting query indeed. Though, prima-facie it appears that the proportionate amount of depreciation will be disallowable but in fact it will not be so.
Section 40 starts with
“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”:-
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carryout any work), on which tax is deductible at source under chapter XVII – B and such tax has not been deducted or, after deduction, has not been paid before the specified date mentioned in the said sub-section.
A non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause.
Further a perusal of the above provision show that it is only when a deduction is claimed in computing the income chargeable under the head “ Profits and gains of business or profession” that the above provision is attracted.
The deduction claimed should be of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services, Contractors / Subcontractors Payment. The claim for depreciation made by the assessee does not fall within any of the categories mentioned in the aforesaid provision. Therefore, we are of the strong opinion that it is not possible to make disallowance of depreciation by resorting to the provisions of section 40(ia) of the Act. One may further refer ITA No. 1497/Mum/2010 Dt. March 9, 2011.
Furthermore, in SMC demaag (P) Ltd. vs. DCIT [132 TTJ 498], the Delhi Tribunal has held that depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim of deduction under section 32.

Query 3]
I have worked with ordnance factory, Chanda in the year 2007-08. I was leaving in the quarter provided by the factory. Quarter allotment letter was on my name. To get PAN card, I used this address and got the PAN card. I have left the job and have been leaving in the Nagpur in a rented house, since 2008. My queries are:
1. Is there any need to change the address in the PAN card ?
2. If yes, can I use address of my landlord for change of address? What is the procedure? Kindly guide me. []
1. It is always advisable to change the PAN data wherever there is a change in the address.
2. By attaching the new address proof document, you can apply for the Change.
For this, you have to make an application in “Request for New PAN Card or/and Changes or Correction in PAN data”
. The form can be downloaded from the websites of UTI Technology Services Ltd (UTITSL), National Securities Depository Ltd (NSDL), or the I-T department [, or]. You can tick in the “Address for Communication” box on the left margin of the form. You have to attach color stamp-sized photograph on the form.
3. The form can be submitted at PAN application centers of UTITSL and NSDL, the addresses of which are available at the above mentioned website.

Sunday, May 15, 2011


(Chartered Accountant)

In the last issue of Tax Talk dated 09.05.2011, we have elaborated the provision of section 56(2) (vii). It was opined therein that “Issue of shares below the fair market value would be taxable as income from other source”.

In response to our opinion, we have received few feedbacks doubting the taxability of difference between the Issue Price and Fair Market Value as Income. We are very happy to see the feedback & divergent views given by the active readers of our column. We appreciate the comment provided by our vigorous Readers.

The three main divergent views expresses in the feedback were:
1. Section 17 (2) of Income tax governs taxation of shares allotted or transferred to the employee by the employer or former employer, free of cost or at a concessional rate. It is taxed by an express & clear provision as perquisite whereas nothing specific is there in section 56 (2)(vii) and 56(2)(viia).
2. Section 56(2)(vii) & section 56(2)(viia) governs taxation of movable property (including shares) received by an individual, HUF, Firm or company from any person or persons, in so far as it refers to property being shares, following conditions precedent must be fulfilled-a] Property being shares must be in existence.b] Property being shares must be received (allotment excluded)c] Property being shares must be received from any person or persons.Thus, this section purports to tax, transaction in the pre-existing shares held by the entity, other than the Company. If the legislature had intention to tax issue of shares by allotment by the Companies it must have used the word “receipt by allotment”. This point comes clear from the explanations to memorandum of Finance Bill, which reads as under: -“In order to prevent the practice of transferring unlisted shares at price much below their fair market value, it is proposed to amend section 56 to also include within its ambit transaction undertaken in shares of a company (not being a company in which the public are substantially interested) either for inadequate consideration or without consideration”
3. Shares as a Property Shares in the Company represent entitlement of a shareholder against the Company, Shares in the issuer Company is not a property held by that Company. In Khoday Distilleries Ltd. Vs CIT (2008) the Supreme. Court has expressed that “The Company does not own and cannot own its shares. It becomes property in the hands of allottee. Prior thereto does not constitute goods.”The legislature has used and employed the words ‘Property being ‘purposefully with the intention of covering the shares which have already in existence and not an issue of shares by the Company having regard to the provision of Companies Act well as the law laid down by the Supreme Court, which the legislature is aware of.In the view of what is stated above, allotment of shares by a company, does not give rise, to taxable event. It has never been the intention of legislature to tax allotment of shares to non-employees. The Finance Minister has made this point clear in the explanation to Memorandum. It is well settled canon of taxation that for taxing the citizen, the legislature has to make express provision. Using the word allotment in section 17 (2) and excluding this word in section 56(2) (vii) 56(2) (viia) should make the point clear beyond doubt.

With this feedback, to have a better understanding, we need to revisit the original provision.

Section 56 (2)(vii) specifies the following receipt taxable as income from other source as under:
(vii) Where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009,-
a) Any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
b) Any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property ;)
c) Any property, other than immovable property,-
i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
ii) for a consideration which is less than the aggregate fair Market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

The word “Property” is a much wider terms. The explanation to section 56 has duly elaborated the meaning of the word “Property” so as to include the shares & securities as well within its ambit. It would be improper to conclude that shares are not included in section 56(2) vis a vis section 17(2).

Issue/Allotment of shares by a company pre-supposes the existence of rights of the company to issue such shares embedded in the Authorised share capital of the company. What is being transferred is a RIGHT which gets crystallized in to Shares after Allotment. The views that the shares should be in existence so as to be taxable u/s 56(2)(vii) & (viia) may not impress the Assessing Officer.

Further it may be noted that Shares in a company are certainly a form of property. The wide definition of “property” in section 6 of the Transfer of Property Act includes not merely shares as transferable, moveable property, but would cover, as a separate form of property, a right to obtain shares which may be antecedent to the accrual of rights of a shareholder upon the grant of a share certificate in accordance with the Articles of a Company. It was so held by the Apex court in Vasudev Ramchandra Shelat Vs. Pranlal Jayanand Thakar (1975) 45 Comp cas 43 (SC).

It may further be noted that the stipulations like “(a) Existence of shares (b) Shares must be received (allotment excluded) (c) shares must be received from any person/ persons” cannot be supposed to be originating directly from the provision of section 56(2)(vii) / 56(2)(viia).

At the cost of repetition, the clause (d) to section 56(2)(vii) is reproduced hereinbelow:
d) Any property, other than immovable property,-
iii) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
iv) for a consideration which is less than the aggregate fair Market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:

Undisputably there will be a unanimous consensus that there is a difference between the intention with which this provision was introduced and the actual result the section is yielding. It is correctly pointed out by the Readers that the explanatory memorandum to the Finance Act-2010 (AND NOT EXPLNATORY MEMORANDUM TO THE FINANCE ACT-2009 which has introduced section 56(2)(vii)]conveys the intention of the legislature to cover the TRANSFER of shares only and not fresh issue of shares by the company itself. The words “In order to prevent the practice of transferring unlisted shares at price much below their fair market value……………..” will always carry the required weightage in such cases.

Perhaps, reader will recall the careful opinion drawn by us vide Tax Talk dated 09.05.2011 as under:
“Whereas the intention of the Government while enacting the above provision would have been to essentially tax transfer of shares of private companies for inadequate consideration, the way the proposed amendment is worded will make RIGHT ISSUE, preferential issues & most of the acquisitions also taxable in the hands of the Investor.

We, at Tax Talk, always believe that precaution & safeguards are always better. We also try to remain the tax neutral from either side, be it the Assessee or the Income Tax Department. The views expresses above are our personal views & still the divergent views are possible on the issue. The Income Tax Department, by & large, may take the view favorable to the revenue, at least, when the strict & plain interpretation of the statue is in favor of the Revenue. May be in time to come, the provision will be settled by the Judiciary. In the overall interest, we request CBDT to kindly clear the air by coming out with the suitable clarifications on the issue.

Sunday, May 8, 2011


(Chartered Accountant)
Query 1]
If a private limited company mobilizes the equity from private investor by issuing shares at par, Is there any provision to tax the difference between the book value & at par price as tax in the hands of investor? If this is so, how the private limited company would be able to mobilize the amount? In such case, why the investor would be required to pay tax without any actual income in his hands? Is it applicable for right issue also? [KDPL]

Query 2]
Kindly advise us on the following:
ABC Pvt. Ltd. plans to issue:
1. Bonus shares in the ratio 1:1
2. Issue of new shares at Rs. 20/- per share
a] Employees
b] Non-employees or former employees.
The fair value of each share is Rs. 40/- per shares.
The question is - Whether the receiving shareholders are liable to tax as they are getting shares free/ below the fair price?

Opinion as to Query No. 1:
When it comes to tax Statues, it is subjected to so much of the Changes, Amendment & Revision that non awareness could drastically impose the additional heavy tax burden on the Tax Payer. The position get further aggravated by virtue of deeming fiction incorporated in the Tax Statute every now & then which makes tax payer liable to pay income tax even though no income actually & in fact accrues in the hands of the Assessee. One such deeming provision is section 56(2) (vii)(c).
Originally cash gift, with few exceptions, in excess of Rs. 25,000/- from non relatives was brought to tax net by the Finance Act-2004. Thereafter F.A-2006 has expanded the scope of taxing gift so as to include the
a. Immoveable property if it is received without consideration
b. Moveable property if
(i) it is received without consideration OR
(ii) It is received at a consideration which is lower than the fair market value of the property.
In the later case, the difference between the fair market value & the sale price would be taxable as income from other source.

As a result of above amendment by the F.A. -2009, the difference between fair market value & the issue price would be taxable as income of the Purchaser/ Investor.

We agree with you that the said amendment would drastically hamper the flow of funds in to private or close held companies intending to mobilize the additional equity fund. In fact, all equity infusions into private companies including private placements, in any manner whatsoever, would get affected, in one way or the other.

Whereas the intention of the Government while enacting the above provision would have been to essentially tax transfer of shares of private companies for inadequate consideration, the way the proposed amendment is worded will make RIGHT ISSUE, preferential issues & most of the acquisitions also taxable in the hands of the Investor.
From our side, we will also be taking up the matter with the relevant Authorities about the injustice that the provision may cause in the growth of the companies.
Till any further favorable amendment/ change is carried out in the Statue, Taxpayer don’t have any other options but to plan the business affairs keeping in mind the present provision of Law.

Opinion as to Query No. 2:
1. Issue of Bonus shares is not at all taxable in the hands of recipient. The same is neither taxable as “Capital Gain Income” nor as “Income from Other Source”.
2. The 2nd part of your query is aptly elaborated in opinion to query No. 1 above. The ABC Pvt Ltd will be issuing shares @ 20/- per Shares whereas the Fair Value of the share comes to Rs. 40/- per shares. This could be by issue of Right Shares or by way of fresh issue of capital to the new investor.
3. The tax treatment in such case would be as under:
a] Issue of New Shares to Employees:
The difference of Rs. 20/- per shares would be taxable as perquisite in the hands of employee.
b] Issue of New Shares to Non-Employees:
The difference of Rs. 20/- per shares (i.e., the issue price & the Fair value would be taxable in the hands of the recipient as “Income from Other source” u/s 56(2)(vii). The way in which the provision is worded, even rights issues of shares, at prices less than the fair market values, would be covered.

Query 3]
I want to ask one query regarding tax deduction. Can I mention my sister child name under 80DD (she is mentally handicapped- 40%) for exemption of tax because my sister is widow and she and her child totally depend on me. Kindly help me.

1. Deduction under this section is available to an individual/HUF who incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependant.
2. For the purpose of section 80DD, the term 'dependent' as mentioned above, refers to the spouse, children, parents, brothers & sisters of the individual.
3. Expenses towards the treatment of your Sister Children will not enable you to claim the deduction u/s 80DD.

Sunday, May 1, 2011


(Chartered Accountant)
Query 1]
I am a Retired defense officer (64 years) & would request your valuable advice. I bought a flat for about Rs. 4 Lacs and took the possession in the year 1994. I put my son's name as joint owner when the sale deed was registered. He was a minor then & was aged about 18 years or so.
I sold the same on 11th November 2010 and the full payment was made to me in my name. After indexing, the net long term capital gain comes to about Rs. 15 Lacs.
My queries are:
1. Can I show 25% of the sale price in my son's name & Balance 75% will remain in my name? (My son is 34 years old now).
2. Is it better to pay the capital gains off and freely invest the remaining amount or better to put the Capital Gains amount into the Capital gain bonds of NHAI/REC etc? Which option is better? I am an IT payee in the highest tax bracket.
3. I don't want to invest into another property - it is only postponing the CG tax liability and I do not want to manage properties any more.
I would be grateful for your views. I would appreciate two lines from you earliest as the 6 months for putting into CG bonds finishes on 10th May 2011.

1. In the absence of anything contrary to prove otherwise (like specific mention in the sale deed about the ownership ratio, payment/recording in the books of accounts/ Balance-sheet etc), the ownership in case of jointly owned property is presumed in equal ratio. It appears from your query that the entire investment for purchase of the flat is done by you & your son name is included in the sale deed for the name sake only. If it is so, the entire LTCG on sale of flat will be taxable in your hands only.
2. If you have a better opportunity to invest the funds elsewhere & able to earn the higher income, you may think of paying the tax rather than investing the amount in the tax saving bonds of REC/NHAI u/s 54EC. The biggest gain an assessee have while investing in the 54EC Bonds is the upfront tax saving @ 20% of the LTCG. In ideal situations, if an assessee in the higher tax slab is able to earn the income above 18.05% p.a., he may think of paying the tax as against saving the tax by investing in the bonds U/s 54EC. You may refer to one of the Tax Column written by CA. Payal Rathi in the Hitavada- Money dated 01.03.2011 titled “LTCG: PAYING TAX MAY BE BETTER THAN SAVING TAX” which may be relevant & helpful in deciding whether to pay tax or save tax. The same can be viewed at or at

Query 2]
My doubts are towards taxable amount against property gain. I am house wife. Due to sad demise of my father & mother, during 2010 the ancestor property was transferred to my name. The property is near about 100 years old and now the mutation contains 3 names i.e. my self along with my cousins. My name was included in mutation in the Month of March 2011.
We have sold 1/3rd portion of the property in the month of April 2011. As per Nagar Parshad Office, the current valuation of the 1/3rd portion of property is Rs. 34,00,000/- and the Sale deed was prepared for the same amount. Instead of receiving 1/3rd share I have received Rs 10, 00,000/- only from the broker.
The ancestral property, as referred above, consists of total area of 1800 sq meter. On this area, there are 15 houses and 25 shops leased to tenants & one Bungalow. Out of this area, about 600 sq meter consisting of 10 houses with tenants were disposed off for Rs. 34,00,000/-. You are therefore requested to kindly confirm the amount which should be treated as property gain and how much tax I have to pay? Sir, if I invest up to Rs. 3,50,000/- for procurement of agriculture land, can the Tax liability will be reduced? []

Opinion: -
1. From the sale consideration received, the expenses incurred in connection with transfer need to be reduced to arrive at the figure of Net Sale Consideration. Your share in the sale consideration of Rs. 34 Lacs appears to be of Rs. 11,33,333/- whereas you have received Rs. 10 Lacs only out of the sale proceeds. If Rs.1.33 Lacs is the brokerage or deal charges, then the same would be deductible as expenses in connection with the transfer and Rs.10 Lacs would be taken as the Net Sale Consideration.
2. The difference between thea) Net sale consideration & b) the fair market value of the property as on 01.04.1981 & indexed cost of improvement
Would be treated as “Long term capital gain” & would be taxable @ 20%.
3. In the absence of all the relevant information like fair market value as on 01.04.1981, cost/year of improvement etc the amount of long term capital gain could not be worked out.
4. Investment in the agricultural land will not help you in saving any LTCG Tax arising on sale of the ancestral property.
5. You can save the Long Term Capital Gain tax as under:
a) U/s 54EC:To save LTCG tax u/s 54EC, you are required to invest the amount of Long Term Capital Gain (LTCG) within a period of 6 months from the date of sale/transfer of assets in the specified bonds issued by REC/NHAI.b) U/s 54F: For exemption u/s 54F, subject to various other terms / stipulations, you have to invest the amount of net sale consideration for purchase of a residential house property within a prescribed period.