Saturday, June 25, 2011


(Chartered Accountant)
Query 3]
1. I have inherited 1/3 ownership in a residential house which was purchased by my fore- father in 1920. The valuation of the whole house on 1-4-1981 was 15 Lacs and hence Rs. 5 Lacs for my 1/3rd share. Now I am selling my 1/3rd share for Rs 70 Lacs. What will be my taxable amount after considering index?
2. There are 7 shareholders in my HUF property. My question is whether I am entitled to purchase a single house or entitled to purchase 7 houses, 1 each for every individual member. Is there any restriction in this regard?
3. I am told that Chennai High Court has pronounced that one can purchase as many houses as he chooses, while the Mumbai High court sticks in favor of one single house only. Since my property is in Maharashtra, what is my entitlement? Is there any Supreme-Court ruling also in this matter?
4. In case ,my way to acquire 7 houses against the sale of 1 single HUF house is obstructed, can our way be free if all HUF members first make a partition of HUF property and then execute seven separate sale-deeds of their ownership shares?. []
1. As per provisions of the section 54 of the IT Act-1961, the long-term capital gain arising to an individual / HUF assessee, from the sale of a residential house shall be exempt if the amount of Long Term Capital Gain (LTCG) is invested within a stipulated time for purchase of “a ” residential house. Whether exemption will be available on investment of capital gain for purchase of more than one house property is question with no full proof solution. The issue is a vexed one and divergent views have been expressed by the Judiciary on the issue depending upon the facts & circumstance of each & every individual case. Confusion prevails as to the interpretation of alphabet “a” used in section 54.
2. The word “a” has been interpreted either way in the judicial ronouncements:
a] The Mumbai bench of the IT Appellate Tribunal in the case of Mrs. Gulshan banoo R. Mukhi vs Joint CIT ((2003) 78 TTJ 768 (Mumbai) held in favor of the department interpreting the term `a residential house’ as meaning one property. Recently, Punjab & Haryana High Court in the case of Pawan Arya Vs. CIT (2011) 37 CTR (P & H) 210 has held that exemption u/s 54 is available in respect of one house property only.
b] The Bangalore High Court in CIT Vs. D. Anand Basappa [2009] 180 Taxmann 4 (Kar) has affirmed the view of the Tribunal & has upheld that the exemption can be claimed in respect of the investment made in more than one house. Similar view are expressed in
i] ITO Vs. P.C. Ramakrishna (2007) 108 ITD 251 (Chennai),
ii] Prem Prakash Bhutani Vs. CIT (2007) 110 TTJ (Delhi) 440, &
iii] CIT Vs. Rukminiamma (2011) 196 Taxman 187 (Kar).
3. As of now, there is no Supreme Court Ruling on the issue. To be on a safer side, better interpret the word “a” as one house property only.
4. In your case, you can first partitions the property in 7 parts & thereafter the 7 individual owners can join in executing the sale deed in favor of the prospective buyers. With this modus operandi, all the 7 owners will be able to claim exemption u/s 54 for purchase of a residential house property without any hassle & dispute.

Query 2]
My father wants to take home loan for the reconstruction of house, on which my mother is also a co-owner, if he will take loan can he get full deduction on it against the interest & the principal amount paid, because my mother is housewife & her income is nil so the deduction which she will get, will be of no use. []
1. Deduction u/s 80C is restricted to the repayment of Loan (Principal portion) used for the purpose of purchase or construction only & not against the loan taken for reconstruction/ renovation etc.
2. However, deduction u/s 24(b) for interest payment is admissible even in respect of fund borrowed for repairs, renovation and or reconstruction. The persons who avails the loan can get the deduction u/s 24(b). In your case, your father will be availing the loan & so he can get the deduction towards the entire amount of interest on loan taken for reconstruction of the house property.

Saturday, June 18, 2011


(Chartered Accountant)
Query 1]
My friend had purchased a plot in 1975. He has recently sold this plot in good locality by giving it to a developer and in exchange the builder is going to give 5 flats, considering he has 3 sons & 1 daughter and 1 flat for himself. Besides this the builder is paying some amount by cheque. What would be the position of capital gain tax levy whether all 5 flats will be considered as his single flat for purpose of capital gains tax rebate deeming having reinvested the sales proceeds in residential house property or only one of these would be qualifying for rebate and others taxed.
For illustration, suppose he has sold 5000 sq. ft. @ 4000. Thus, total notional sales proceed Rs. 2 Crore. Here he is getting 5 flats of say 800 sq. ft. each and Rs.20 Lacs by cheque. Whether the capital gain tax liability arises in such case even though small amount is received in cheque by him? How the value of 5 flats will be determined? What is the capital gain tax element? Since consideration not received in cash/cheque, but in form of flats and no savings in NHAI bonds contemplated. []
a. Transfer of capital asset results in capital gain tax liability even though major portion of the sale consideration is received in kind pursuant to Development agreement.
b. In the given case, your friend is (or will be, depending upon the terms in the development agreement) transferring the share of land in favor of the Builder. Against the transfer of certain share of land, he will be receiving the constructed portion (5 Flats) & small amount in cheque. The sale consideration for computing the capital gain would be higher of the following:i] The construction cost of the five flats plus the amount received by cheque ii] Stamp Duty valuation of the share of land transferred pursuant to Development Agreement. Effectively, the difference between Indexed cost of acquisition of the share of land your friend is transferring AND higher of (i) or (ii) is the amount of long term capital gain.
c. The most important mute question in such a situation is the year of taxability of such transactions.
d. It may be noted that Development agreement is not an agreement for sale simpliciter. It is an executory agreement whereby the developer undertakes to put up a superstructure on that part or portion of land retained by the owner in consideration of transfer of remaining part. Development agreement is not a sale simpliciter, because there is an element of builder’s contract with the only difference that the consideration is not cash but in kind also i.e. constructed portion on the retained land. There are no set guidelines as to the date /Year of taxable event on which the income accrues to the owner or the manner of ascertainment of the capital gains in the hands of the owner, whether on completion of contract or on transfer of undivided interest to the Builder/ prospective flat owners before the completion of construction.There are no accounting standards or guidelines or any treatise in text books on accountancy on the subject. It is not a well settled law as well.The capital gain tax liability arises in the year in which “TRANSFER” took place.Various clauses of sub-section 47 to section 2 define what is “Transfer”. Clause (v) to section 2(47) includes “any transaction involving the allowing of the POSSESSION of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882” in the purview of Transfer.Effectively, any transaction ALLOWING POSSESSION to be taken over or retained in part-performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v) of the I-T Act. So, even if you may have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer, even then it MAY BE treated as Transfer u/s 2(47)(v).With above points in mind, two permissible option as to the year of taxability of such transaction could be a) the year in which the Development agreement is signedOR b) the year in which the construction is completed and Flats are handed over to you. All depends upon the terms /conditions/ stipulations in the Development Agreement which plays a very vital role in determining the year of taxability of capital gain.I] If the Development agreement stipulates the transfer (or possession) of land to the builder at the time of handover the five constructed flats to your friend, capital gain shall be chargeable to tax in the year of completion of construction and handover of the flats to your friend. II] If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession to the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself. Depending upon the year of taxability as per the wording used in the Development agreement regarding possession of the land, one need to examine the possibility of claiming an exemption u/s 54F of the I.T. Act- 1961. To take the better decision, we are elaborating the major stipulations for exemption u/s 54F as under: -
1. Benefit of exemption u/s 54F is available only to an Individual or HUF.
2. To claim an exemption, assessee has to purchase either one year before or within two year after the date of transfer, another residential house property. Alternatively, an assessee can construct the residential house property within a period of 3 years from the date of transfer.
3. Exemption is available only if the long term capital gain arises from the transfer of any capital asset other than a residential house property. If the asset transferred is a residential house property then an assessee can claim an exemption u/s 54 (and not u/s 54F).
4. The assessee has not within a period of 2 years purchase or 3 years construct any residential house other than the new house.
5. Sale consideration has to be invested in residential house property before the DUE DATE of filing the return or else it need to be deposited in the capital gain Deposit Scheme with the Nationalized bank till acquisition of house property within the prescribed period as mentioned above.
6. The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.
7. Exemption u/s 54F is available only in respect of investment in one residential house property. In the given case, your friend is getting 5 flats against the agreement. As per the prevailing ruling of few courts, if all the five flats your friend is getting are capable of being used as single unit, then probably he can claim the proportionate amount long term capital gain as exempt u/s 54F.
8. The quantum of exemption amount will be worked out on the following basis:a] If the amount invested is more than or equal to the net consideration then the entire capital gain. b] If the amount invested is less than the net consideration, then the amount invested x capital gain/net consideration.
9. Situations when exemption granted under section 54F may be withdrawn:
a. If the assessee transfers the new house within 3 years of its purchase/construction Consequences:Capital gain which arises on the transfer of the new house will be taken as short-term capital gain. Besides, the capital gain which was exempt under section 54F shall be treated as long-term capital gain of the year in which the new house is transferred.
b. If the assessee purchases, within a period of two years of the transfer of original asset, or constructs within a period of three years of the transfer of such asset, a residential house other the new houseConsequences: Capital gain which was exempt under section 54F shall be deemed to be income by way of long-term capital gain of the year in which another residential house is purchased or constructed.

In view of the complexity of law & heavy stake involved, we advise all our readers to obtain competent professional advice before entering into such agreements.

Sunday, June 12, 2011


(Chartered Accountant)
Query 1]
I own an ancestral property at Bajaria, Nagpur. In the year 2001, I started construction of flats of about 600 sq. ft over the aforesaid property. I entered into an agreement of sale of flats at the rate of Rs. 600/- per sq. ft on installment basis with different purchasers. Now, the purchasers want to register the property in their names after paying the installments. My queries are:
1. Now the value adopted by the Registrar for the purpose of levy of stamp duty is Rs. 2,500/- per sq. ft. In that case, whether the income tax department will treat the sale at the price adopted by registrar for the purpose of levy of stamp duty, though I had entered into agreement to sell the said property at the rate of Rs. 600/- per sq. ft?
2. What will be long term capital gain?
3. How to handle this problem? []
1. If any capital assets is sold by an assessee, then capital gain is required to be computed by taking the sale consideration as higher of a] Actual sale deed valueORb] The value adopted by the Registrar for levy of Stamp duty.The provision is applicable if the capital assets is sold & not on sale of business assets (like flats/shops sold by the Builder).
2. In your case, prima facie, it is appearing that on your ancestral plot you have started a Flats scheme (Business of Builder-ship) and have sold the goods (i.e., flats) in installments. It is further appearing that you have not so far offered the income on sale of flats as income in the year in which you have probably handed over the possession to the flats owners as the entire sale consideration was not received by you.
3. If the presumptions & assumptions elaborated above are correct, then the taxability of the income on sale of flats would be as under:a] It can be considered that you have converted your capital assets (i.e., Ancestral Plot) in to your Business Assets i.e., stock in trade. Accordingly, the difference between the fair market value of the plot and (the indexed cost of acquisition & improvement) would be treated as Long Term Capital Gain (LTCG) and would be taxable in the year in which you transfer those assets (i.e., Flats). In respect of acquisition / improvement done prior to 01.04.1981, you can replace it with the fair market value of the property as on 01.04.1981 for computing long term capital gain.b] The difference between the sale consideration (@ Rs. 600/- per sq.ft) AND [Cost of Construction of those flats + Fair market value of the property as on the date of conversion of capital assets in to stock in trade + Expenses incurred for earning the income] would be taxable as your business Income.
4. To conclude:a] The Stamp duty valuation of Rs. 2,500/- would not be at all relevant & Sale price of Rs. 600/- per sq. ft will be taken as sale consideration.b] You would be having Business Income as well LTCG on the above transaction.
5. The above opinion is based on certain set of assumption/ presumption drawn on the basis of query. In view of the multiple implications involved in the income tax issues, you are advised to have detailed consultation with your counsel before arriving at any final conclusion.

Query 2]
I am a Government Servant & received salary arrears from the year 2005 to 2010 in the financial year 2010-2011. Now can I get the advantage of section 89(1) regarding splitting the income year wise and get the relief in refund of tax (as the tax already deducted from arrears) while filing the return for F.Y.2010-2011?
Yes, you can get relief Under Section 89(1) by splitting the income year wise & can also get the refund of tax. The required particular for relief u/s 89 is required to be worked out in Form No. 10E.

Query 3]
I was an officer in Government of Maharashtra & draws pension from Nagpur treasury. I am filing my I.T. returns in Nagpur for many years. I have shifted to Banglore since last one year. On enquiry in I.T. office in Bangalore, I was told that as my PAN address is of Nagpur, it is better that I file my returns there only. To overcome this, I have applied for change of address of my PAN card to Banglore but I don’t want to change in treasury from where I am drawing my pension. Please let me know where should I file my I.T. returns physically, after getting PAN Card at Banglore address? []
You have changed the PAN Data from Nagpur to Banglore. You can now very comfortably file the return of income in Banglore I.T. office even though the payment is received elsewhere.

Sunday, June 5, 2011


(Chartered Accountant)
Query 1]
Sir, Would you clear a few queries arising in our mind regarding filing Income Tax returns this financial year 2010 – 11 i.e., Assessment year 2011 -12:
1. We are senior citizens. Therefore our exemption limit is Rs. 2, 40,000/-
2. We can avail exemption u/s 80C for Rs. 1,20,000 /-
3. Therefore, our total exemption is Rs. 3, 60,000/-
4. We have already paid taxes (TDS& Advance tax) on our income which exceeded the above amount.
Now the queries are:
a. As senior citizens, do we need to file tax returns if we don’t ask for Refund? Is it mandatory?
b. How do we show the proof of depositing Rs. 1,20,000/-to avail the exemption u/s 80C if we don’t submit Returns?
Your advice:
a. Should we file Tax Returns as those may be needed for a foreign trip, to facilitate in obtaining Visa?
b. Is there any change in I/T Rule regarding senior citizens for financial year 2011-12; assessment year 2012-13?
We shall indeed be obliged if you clear these doubts.[]
1. Filing of income tax return is mandatory for an individual assesee if the total income (i.e., income before deduction of Rs. 1 Lacs u/s 80C & Rs. 20,000/- U/s 80CCF) exceeds the basic exemption limit. Even if the tax on the income is fully paid by way of Advance Tax/ T.D.S, will not give immunity from filing income tax return. Even though the filing is not mandatory if the income is below the basic exemption limit, one can file the return of income voluntarily for records or other purposes.
2. For Senior Citizen, the basic exemption limit has been increased from Rs. 2.40 Lacs to Rs. 2.50 Lacs.
Query 2]
I have invested some of my savings in the 8% Savings (Taxable) Bonds, 2003 of RBI under cumulative option. The interest accrued out of above deposit every year is duly accounted for in the annual tax returns filed by me regularly and appropriate tax is paid. The deposit is due to mature on 12.08.2011. I am informed that TDS at the applicable rate will be deducted from the proceeds at maturity. I have a salary income. Please let me know if I am entitled to submit form No. 15G to claim exemption from TDS on the above deposit at the time of maturity since the tax liability arising was already paid. []

Declaration in Form 15G (Form No.15H for senior citizen) can be filed by an individual assessee if:
1. the tax on his estimated total Income of the previous year in which such income is to be included in computing the total income will be nil; and
2. Income in respect of such bonds does not exceed the maximum amount which is not chargeable to tax.
So, if both the conditions as mentioned above are satisfied, you can submit the relevant declaration Form for non deduction of T.D.S.
Query 3]
Sir, I sold my house in Nagpur in September 2010 for Rs. 34 Lacs which was purchased by me in October 2003 for Rs. 8.50 Lacs. I have purchased new house at Delhi which is under construction and have paid Rs. 14 Lacs & may be ready within 3 years. All figures are as per agreement signed with concerned parties. My queries are as follows:
1. What will be long term capital gain?
2. How much and up to which time I must invest in LCG account to avoid the Income tax?
3. If the house will not be ready within 3 years, what shall be IT implications? Can I pay the whole amount to builder within 3 years anyway to avoid Income Tax?
The Long Term Capital Gain (LTCG) is required to be calculated by deducting Indexed Cost of Acquisition from the amount of sale consideration. Sale consideration is required to be taken asa] Higher of the sale price as mentioned in the sale deed or
b] Value adopted by the Registrar for the purpose of levy of stamp duty. We have considered the sale consideration at Rs. 34 Lacs assuming it than the stamp duty value of the house is not more than Rs. 34 Lacs.
With above basic principles, the point-wise reply to your queries is as under:
1. The Long Term Capital Gain (LTCG) shall be as under: a) Cost of Acquisition = Rs. 8.50 Lacs (You can further include stamp duty, Registration charges paid for registry etc in the cost of purchase)b) Year of Acquisition = 2003-04c) Cost Inflation Index (CII) for the F.Y. 2003-04 = 463d) Sale consideration = Rs. 34,00,000/-e) Year of Sale/Transfer = 2010-2011f) Cost Inflation index for the F.Y. 2010-11 = 711g) Indexed cost of Acquisition is Rs. 13,05,292/- (Rs. 8.50 Lacs * 711/463)h) Long term capital gain = Rs. 34 Lacs (-) 13.05 Lacs = 20,94,708/-.
2. LTCG tax can be saved by investing the amount of Long term Capital Gain (i.e.,Rs. 20,94,708 in your case) for a] purchase of another house property within a period of 2 years (for construction- 3 years period is permissible) from the date of transfer of the house. In case the amount is not utilized as aforesaid for purchase/ construction before the due date of filing the return of income of the financial year in which transfer took place, the amount is required to be kept in a “Capital Gain Deposit Account Scheme” with a scheduled bank. Since you have already paid Rs. 14 Lacs for purchase of hours property, you may keep Rs. 6,94,708/- in CGDA scheme for capital gain exemption.
3. It appears that you are purchasing (& not constructing) the house property. If it is so then you have to complete the transactions of purchase within 2 years (& not 3 years as mentioned in the query).