Saturday, September 22, 2012

“INTEREST ON BORROWED CAPITAL IS RESTRICTED TO RS. 30,000/- IF HOUSE CONSTRUCTION IS NOT COMPLETED WITHIN A PERIOD OF 3 YEARS”


TAX TALK-24.09.2012-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA (Chartered Accountant)
“INTEREST ON BORROWED CAPITAL IS RESTRICTED TO RS. 30,000/- IF HOUSE CONSTRUCTION IS NOT COMPLETED WITHIN A PERIOD OF 3 YEARS”
Query 1]
I have booked a house in Bhilai, under the scheme of Chattisgarh state Housing Board in the year December 2008. The house was financed partly from my company in the year 2009 in March and subsequently part from the Bank started in May-2010. Now even after elapsing of 3 years, the Housing Board is unable to provide me the booked house. It is still under construction and installments are timely paid as per agreement/progress. The issue seems to be between contractor and the housing board. Now the CG Housing board has once again assured that they will deliver the completed houses to all allottees by 2013-July. Although there might be possibility of time overrun due to conditions beyond our control. Now my queries are
1.      Whether there is any restriction in the time period in the construction of house from the date of disbursement of loan to completion date of House for availing I-Tax exemption on the interest paid towards the borrowed capital?
2.      If yes, what is that period and how to become entitled for such exemption in case of time overrun due to Government Agency? [tappup@ymail.com &  hemneel.kankane@rediffmail.com]
Opinion:
  1. Interest in respect of pre-construction is deductible in five equal annual installments commencing from the previous year in which the house is constructed/acquired. For this purpose “pre-construction period” means the period commencing on the date of borrowing & ending on the March 31st immediately prior to the date of completion of construction /acquisition. If the house is completed in any particular year then one should note that the pre-construction interest doesn’t include the interest for the period from 1st April of that year to the date of completion in that year.
  2. The important question here is about the availability of the amount of deduction. Deduction towards Interest on borrowed capital for purchase/ construction of the house property is available u/s 24(b).
  3.  The maximum of deduction admissible u/s 24(b) is Rs. 1.50 Lacs if the following three conditions are satisfied:
    a] Loan is taken on or after 01.04.1999 for purchase or construction of the house property.
    b] The acquisition or construction should be completed within a period of 3 years from the end of the financial year in which the capital was borrowed.
    c] The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan for such acquisition or construction.
  4. If the three conditions mentioned above are not satisfied for any reason whatsoever, the amount of deduction would be restricted to a maximum of Rs. 30,000/-. In other words, the readers may note that deduction would be restricted to Rs. 30,000/- only in the following situations:
    a] Loan is taken before 01.04.1999 for purchase, construction, for renewal, reconstruction or repairs of the house property.
    b] Loan is taken on or after 01.04.1999 for renewal, reconstruction or repairs of the house property.
    c] In respect of the loan taken on or after 01.04.1999, the acquisition or construction is not completed within a period of 3 years from the end of the financial year in which the capital was borrowed.
  5. There is no exception or provision in the law to offer deduction up to Rs. 1.50 Lacs if delay in completion of the house property is on account of Government Agency or for any other whatsoever.

Query 2]
We have query about capital gain tax:
1.      We had purchased the agricultural land in year 1999 for Rs. 109,000/- in National Highway Road in 2009-10. We had received notice from National Highway authority & deputy collector for acquisition our land to extend highway width. We got in August-2012 compensation of Rs. 3,85,,000/-. How can we calculate the tax amount? From 4 years, we were doing farming on the land which was under acquisition. The compensation amount is deposited in our term loan account instead of our saving account (capital account).  Sale deed (Land name) & Term loan A/c are in personal name (same).
2.      How the money received in the form of compensation of agricultural land acquisition by the National Highway & deputy collector for building road, can be transferred to loan account instead of saving account (capital account)? Does that transfer attracts any tax?  Because of this small amount, we can't purchase any land/plot. If not, what should we do now to avoid any tax liability?
3.      How we show this entry in our books? (i.e., transfer amount in term loan a/c instead saving a/c)?  Please advice. [lokeshshiva1@gmail.com]
Opinion:
1.      Capital gain arising to an Individual/HUF out of the compulsory acquisition of the urban agricultural land under any law is exempt from income tax u/s 10 (37) of the Income Tax Act-1961 provided:
a] It is received after 31.03.2004 &
b] The said agricultural land was used by the assessee or his parents for agricultural purpose during the preceding 2 years prior to its transfer.
[As far as rural agricultural land is concerned, it may be noted that it is not a capital assets and the surplus its transfer is also tax free in the hands of assessee.]
2.      It appears that the lender (bank/financial institutions from whom the term loan is availed) has created a charge on the land at the time of lending the amount. As a result of this, the compensation is deposited by the concerned authorities in the loan a/c instead of issuing the payment directly to the land holders. The deposit of amount directly in the loan account doesn’t in any adversely affect the taxability of the transaction & is tax neutral. The book entry can be passed by crediting the sale proceeds in the land a/c and debiting the amount to the Term Loan A/c.

Saturday, September 15, 2012

“WHETHER RETURN FILING MANDATORY FOR CHARITABLE TRUST/ SCHOOL & COLLEGES?”


TAX TALK-17.09.2012-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA (Chartered Accountant)
“WHETHER RETURN FILING MANDATORY FOR CHARITABLE TRUST/ SCHOOL & COLLEGES?”
Query 1]
I have a few queries regarding the society and schools. Kindly spare some time to answer them:
1.      Whether the charitable societies registered u/s 12A of the I.T.Act-1961 are required to file tax return even if their income is below the exemption limit?
2.      Which I.T. Return Form is to be used for such societies? Form No. 5 or Form No.7?
3.      When is audit required to be done in case of societies for I.T. Purposes?
4.      Whether schools and colleges are required to file income tax return even if their income is below the exemption limit? Which return form is required in their case? Form No. 5 or Form No.7?
5.      Are schools and colleges required to get themselves registered u/s 12A of I.T. Act? [jyoti_ag@sify.com]
Opinion:
1.      If the total income of the charitable trust (without claiming deduction u/s 11, 12 & 13A) exceeds the maximum amount not chargeable to tax (i.e., Rs. 1.80 Lacs for the FY 2011-12 & Rs. 2.00 Lacs for the FY 2012-13) then filing of the return by the trust is mandatory. The filing will be mandatory even if the trust income is exempt [Lala Gopi Mal Kuthiala Trust Vs. ITO (1962) 46 ITR 436 (Punj)]. The return is to be filed as per the provisions of section 139(4A) of the I.T. Act-1961.
2.      For the trust/ organization/ AOP/ Institutions claiming deduction u/s 11, return of income has to be filed in ITR-7. The return cannot be filed electronically. It has to be filed manually & have to enclose all relevant papers and details with the I.T. Return including copies of Audited Accounts, TDS Certificates etc.
3.      Under the Income Tax Act, the charitable trust/institutions with total income exceeding the maximum amount which is not chargeable to income tax are required to get the books of accounts audited. The ‘income’ for the purposes of filing the return should be computed without giving effect to the provisions of sections 11 and 12 of the Act. Such returns are to be filed with the Income-Tax Officer or the Assessing Officer under whose local jurisdiction they fall.
4.      All the educational institutions shall be required to file the income tax return mandatorily if its total income exceeds the maximum amount not chargeable to tax. [Section 139(4C)]
5.      Even though on many occasions, income of schools/colleges are exempt u/s 10(23C), even then they may get themselves registered u/s 12A of the Income Tax Act-1961.

Query 2]
I want to enquire about interest exemption in case of second property. I had purchased a property in the year 2007 in my name, financed from the bank, in which I am presently staying since the day of purchase. I am already availing the exemption of interest component on this property. Now, I have added another property a month back jointly with my wife, her name being the first in the ownership. My wife is employed in a college and is income tax assessee. She falls in the 10% bracket of Income tax calculation whereas I fall in 30% Income Tax calculation. The second property is also financed from bank. My questions are
a)     Can I avail 100% tax exemption as far as interest component of second home is considered from my salary including the previous home’s tax component declaring the second property as deemed rented since I fall in 30% category?
b)     Do I have to make an agreement in this regard?
c)     Can the ratio of interest be any thing else to suit the assessee's requirement?
The EMI is being deposited from my salary account. [tiwarianimesh@yahoo.com.au, Bhilai]
Opinion:
1.      It is not very explicit from your query as to who is the actual owner in the jointly owned/purchased new house property. Tax planning is a valid tool to plan one’s affair in such a manner that it reduces the tax bill. But, at the same time, one needs to be cautious that it doesn’t result in tax evasion. In your case, you have already purchased the flat and now you are planning for the tax implications on this flat.
2.      The fact of ownership is not very clear on the basis of information/data provided in the query. There are three probabilities as under:
a] The flat is owned by you and the name of wife is incorporated for the name sake.
b] The flat is owned by your wife and your name is incorporated for the name sake.
c] The flat is jointly owned by both of you.
In day to day life, many tax payers may be facing the situation like this. For the overall benefit of tax readers, I am covering the tax implications in all the three probabilities.
3.      The flat is owned by you and the name of wife is incorporated for the name sake.
In this case, you would be treated as the sole owner of the house property only. Generally, the tax treatment of the second house property is as under:
a] The income from house property is taxable on the basis of its “Annual Value”. The term “Annual value” is elaborated at point No. (e) hereunder. The tax implication / housing loan benefit for the second house property is not similar/ same as applicable to the first house
property. The second house property has a different tax treatment under the Income Tax Act-1961.
b] One house used by the tax payer for his/her own residence is exempt from tax as its annual value is treated as Nil.
c] Where the assessee owns only one house property and it cannot actually be occupied by him because it is situated at a place other than a place where he is employed or carries on business or profession, in such a case also the annual value of the property is taken as Nil provided the property is not actually let out.
d] If taxpayers have two or more houses which are used for own residence, then assessee have the option to choose one of the house (according to his own choice) as self-occupied house, for which an assessee would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to have been let out [whether not actually let out].
e] What is Annual Value of house property and how it is determined?
The annual value means the amount for which the property might reasonably be expected to be let out from year to year. However, if the actual rent received or receivable in respect of any let out property is higher, it shall be treated as its Annual Value. The annual value is always taken to be NIL in case of one self-occupied property.
f] How to calculate annual value/taxable value of property:
Annual value of property is considered as higher of the following:
(i) Actual rent received or receivable in a year;
(ii) Reasonable expected rent of the property.
[ The reasonable expected rent is deemed to be the sum for which the property might reasonable be expected to be let out from year to year and is normally higher of  (a) municipal value; (b) fair rent. However, if the property is covered by a Rent Control Act, then the amount so computed cannot exceed the Standard Rent determinable under the Rent Control Act.]
As mentioned earlier, the assessee has the option to choose only one house as self-occupied property. Rest of property is assessable to income tax on the basis of its annual value.
g] Deductions:
From the annual value, the following deductions are available under the Income Tax Act: -
i] Municipal Tax paid.
ii] 30% of the net annual value of the house property towards Repair & Maintenance charges (Deduction is fixed @ 30% whether assessee incurs more or less amount on repair and maintenance of the house).
iii] Actual Interest paid on housing loan whether house is actually let out or is deemed to be let-out.
iv] For self-occupied property, maximum interest on housing loan is restricted to Rs. 1,50,000 p.a., subject to certain other stipulations.

h] Effectively, if Assessee owns more than one house property & is kept for own use,
i] one house property, as per the choice of the Assessee, shall be treated as self occupied house property and the annual value shall be treated as Nil.
ii] Other house property shall be deemed to have been let out and the tax is payable on notional rent as the property is deemed to have been let out and is taxable on the basis elaborated above. In respect of such deemed let out house property, one can claim interest as deduction u/s 24(b) without any monetary limit. However, for the second house property, no deduction is available for repayment towards the principal portion of housing loan under section 80C as clause ( xviii) to section 80C of the I T Act reads as under: -
"(xviii) for the purposes of purchase or construction of ‘ a’ residential house property the income from .....".
4.      The flat is owned by your wife and your name is incorporated for the name sake:
In such case, wife alone would be treated as the owner. If this is the only house property, then she can claim the deduction u/s 24(b) towards Interest on housing loan & u/s 80C towards repayment of the principal portion of the housing loan, subject to the repayment of the same by her. Neither you would be entitled for any deduction u/s 24(b) or u/s 80C in such case nor would the income be added in your income on the basis of deeming fiction in such case.
5.      The flat is jointly owned by both of you:
a] In such case, the tax treatment in their Individual hands would be as per Point No. 3 & 4 elaborated above in the ratio of their share in the ownership & Loans.
b] Unless & until anything contrary is there to prove otherwise, the joint owners are presumed to be equal owners in the property & Loan (i.e., 50:50 may be in your case).



Saturday, September 8, 2012

Commissioner of Income-tax v. B.C.Srinivasa Setty [1981] 128 ITR 294 (SC)

[1981] 128 ITR 294 (SC)

SUPREME COURT OF INDIA

Commissioner of Income-tax

v.

B. C. Srinivasa Setty

P.N. BHAGWATI, V.D. TULZAPURKAR AND R.S. PATHAK, JJ.

CIVIL APPEAL NOS. 1146 OF 1975, 1378 OF 1976 AND 926 OF 1973

FEBRUARY 19, 1981



JUDGMENT



Pathak J. —The question in these appeals is whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under section 45, IT Act, 1961.

The assessee, a registered firm, manufactured and sold agarbattis. Clause (13) of the instrument of partnership executed on the 28th July, 1954, showed that the goodwill of the firm had not been valued, and the valuation would be made on dissolution of the partnership. The period of the partnership was extended by an instrument dated 31st March, 1964, and it contained a similar clause (13). Subsequently, the assessee-firm was dissolved by deed dated 31st December, 1965. At the time of dissolution, it seems, the goodwill of the firm was valued at Rs. 1,50,000. A new partnership by the same name was constituted under an instrument dated 2nd December, 1965, and it took over all the assets, including the goodwill and liabilities of the dissolved firm.

The ITO made an assessment on the dissolved firm for the assessment year 1966-67 but did not include any amount on account of the gain arising on transfer of the goodwill. The Commissioner, being of the view that the assessment order was prejudicial to the revenue, decided to invoke his revisional jurisdiction and, setting aside the assessment order directed the ITO to make a fresh assessment after taking into account the capital gain arising on the sale of the goodwill.

In appeal before the ITAT, the assessee maintained that the sale did not attract tax on capital gains under section 45 of the IT Act, 1961. Accepting the contention, the Tribunal allowed the appeal. At the instance of the Commissioner, it referred a question of law to the High Court of Karnataka which, as reframed by the High Court, reads as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains can arise under section 45 of the Income-tax Act, 1961, on the transfer by the assessee-firm of its goodwill to the newly constituted firm?"

By its judgment dated 4th July, 1974, the High Court answered the question in the affirmative, holding that the value of the consideration received by the assessee for the transfer of its goodwill was not liable to capital gains tax under section 41 of the Act. Civil Appeal No. 1146 of 1975 is directed against that judgment.

Civil Appeal No. 1378 of 1976 arises out of a judgment by the same High Court in which it has followed its earlier view.

Civil Appeal No. 926 of 1973 has been preferred against the judgment of the Kerala High Court where a similar opinion has been expressed, but in respect of the provisions of section 12B, Indian IT Act, 1922.

At the relevant time section 45, IT Act, 1961, provided:

"45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place."

The section operates if there is a transfer of a capital asset giving rise to a profit or gain. The expression "capital asset" is defined in section 2(14) to mean "property of any kind held by an assessee". It is of the widest amplitude, and apparently covers all kinds of property except the property expressly excluded by clauses. (i) to (iv) of the sub-section which, it will be seen, does not include goodwill. But the definitions in section 2 are subject to an overall restrictive clause. That is expressed in the opening words of the section: "unless the context otherwise requires". We must, there fore, enquire whether contextually section 45, in which the expression "capital asset" is used, excludes goodwill.

Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v Lye [1810] 17 Ves 335 that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage "that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business". In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his Introduction to the Law of the Property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566 the Calcutta High Court reviewed the different approaches to the concept (pp. 577, 578) :

"It has been horticulturally and botanically viewed as 'a seed sprouting' or an 'acorn growing into the mighty oak of goodwill'. It has been geographically described by locality. It has been historically explained as growing and crystallising traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a 'habit' and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 (HL) as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern."

A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character. Those features prompted Lord Macnaghten to remark in IRC v. Muller & Co.'s Margarine Ltd. [1901] AC 217 (HL), that although goodwill was easy to describe, it was none the less difficult to define. In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by section 45?

Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head "Capital gains". Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the IT Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.

The point to consider then is whether if the expression "asset" in section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer.

The mode of computation and deductions set forth in section 48 provide the principal basis for quantifying the income chargeable under the head "Capital gains". The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset :

"(ii) the cost of acquisition of the capital asset . . ."

What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indicate that section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-section (2) of section 55. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the "cost of acquisition" mentioned in section 48 implies a date of acquisition, and that inference is strengthened by the provisions ofclause 49 and 50 as well as sub-section (2) of section 55.

It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-section (1) of section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can sub-section (3) of section 55 be invoked, because the date of acquisition by the previous owner will remain unknown.

We are of opinion that the goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of section 45 and, therefore, its transfer is not subject to income-tax under the head "Capital gains".

The question which has been raised before us has been considered by some High Courts, and it appears that there is a conflict of opinion. The Madras High Court in CIT v. K. Rathnam Nadar [1969] 71 ITR 433, the Calcutta High Court in CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566, the Delhi High Court in Jagdev Singh Mumick v. CIT [1971] 81 ITR 500, the Kerala High Court in CIT v. E.C. Jacob [1973] 89 ITR 88 [FB], the Bombay High Court in CIT v. Home Industries and Co. [1977] 107 ITR 609 and CIT v. Michel Postel [1978] 112 ITR 315 and the Madhya Pradesh High Court in CIT v. Jaswantlal Dayabhai [1978] 114 ITR 798, have taken the view that the receipt on the transfer of goodwill generated in a business is not subject to income-tax as a capital gain. On the other side lies the view taken by the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the Calcutta High Court in K.N. Daftary v. CIT [1977] 106 ITR 998, that even if no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire amount of sale proceeds relating to the goodwill must be brought to tax under the head "Capital gains". It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax.

Upon the aforesaid consideration, Civil Appeal No. 1146(T) of 1975 and Civil Appeal No. 1378 of 1976 must be dismissed.

Civil Appeal No. 926 of 1973 raises the same question with reference to section 12B, Indian IT Act, 1922. As the relevant statutory provisions of the Indian IT Act, 1922, are substantially similar to the corresponding provisions of the IT Act, 1961, that appeal is also liable to be dismissed.

Accordingly, the appeals are dismissed with costs.

“PROPERTY GIFTED TO WIFE & INCOME FROM PAYING GUEST SERVICES”


TAX TALK-10.09.2012-THE HITAVADA  -

TAX TALK
BY CA. NARESH JAKHOTIA (Chartered Accountant)
“PROPERTY GIFTED TO WIFE & INCOME FROM PAYING GUEST SERVICES”
Query 1]
Mr. A proposes to sell his independent house and buy two flats- one in his own name and the other in joint name with Mr. B. There is no problem if the sale and purchase considerations are equal. But if in such transactions, the sales proceeds (X) are more than the investment in the flats (Y), please let me have your advices on the following:
1.                  What expenses would be eligible to be classified as investments to constitute the value of Y and what expenses are deductible from X?
2.                  What would be the options with Mr. A as regards payment of Capital gains tax?
3.                  In case, Mr. A decides to pay Tax on Capital Gains in the Financial Year in which the income accrues, which I am told would be @ 10% on (X minus Y), what treatment will be given to the amount (Z = X minus Y) in subsequent Financial Years if the Investments are made in Bank Deposits? Whether the same would attract Capital Gains Tax or the Investments would be treated as normal Bank Deposits and would attract Tax at the normal rate?
4.                  If Mr. A distributes the amount (Z) as “Gift” to his children, what shall be the Tax Liability in the hands of Mr. A and the Beneficiaries, i.e. his children?
Mr. A is a pensioner aged 85 years and falls in the ‘Super Senior Citizen’s category’ and does not file Income Tax Returns. Please guide me. [Dilip Athlay-dilipsbi@rediffmail.com]
Opinion:
First of all it may be noted that Mr. A want to sell one property and wish to invest the sale proceeds for purchase of two properties. (Out of which one is proposed in individual name & the other one in joint name).
I would like to elaborate upon one more important issue, which though not asked, is emerging from your query about exemption u/s 54.
As per provisions of the section 54 of the IT Act-1961, the Long-Term Capital Gain (LTCG) arising to an individual / HUF assessee, from the sale of a residential house shall be exempt if the amount of 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 final verdict. The issue is still 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.
The word “a” has been interpreted either way in the judicial pronouncements:
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).
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. Alternatively, still if Mr. A has a compulsion of purchasing more than one flat as mentioned in the query, the same should be purchased advisably in a single or adjacent building in such a way that the properties are capable of being used as a single unit.

With the above basic background about investment & exemption u/s 54, opinion about other parts of your queries are as under:
1.      The amount of investment in a residential house property eligible for exemption from LTCG would normally consists of Purchase Price, Stamp Duty, Registration Expenses, Brokerage paid on purchase, Legal expenses etc. Further the amount of deduction admissible from sale consideration is given in point No. 3(a) hereunder.
2.      If Mr. A doesn’t wish to avail an exemption u/s 54 from LTCG by investing it for purchase of a residential house property, then he has to pay tax @ 20% u/s 112 of the Income Tax Act-1961. The tax would be payable on the amount of LTCG less unused basic exemption limit. As Mr. A is a very senior citizen (80 years & above), he is entitled for a bit higher basic exemption limit as compared to other assessee (i.e., Rs. 5 Lacs).
3.      The tax rate of LTCG on sale of any property (other than share) is 20% & not 10% as mentioned in the query. The tax is payable not on the difference between the sale price & investment/ exemption availed, as mentioned in the query. The computation is quite different than what you are presuming and the same is elaborated hereunder for the mass benefit:
a] Computing LTCG:
LTCG is required to be calculated by deducting from the sale consideration:
i] Indexed Cost of Acquisition
ii] Indexed Cost of Improvement
iii] Expenses in connection with transfer (like legal expenses, brokerage paid etc).
For above, Sale consideration is required to be taken as higher of:
i
] the sale price as mentioned in the sale deed or
ii] Value adopted by the Registrar for the purpose of levy of stamp duty

b] Computing Tax on LTCG:
LTCG computed above could further be reduced by
i) the amount of exemption u/s 54 admissible as a result of investment for purchase/ construction of a residential house property
ii) the amount of unused basic exemption limit. (Unused basic exemption limit is basic exemption limit less other taxable income of the assessee).
4.      The amount invested in bank FDR after payment of tax or availment of exemption u/s 54 is treated as normal FDR only. The interest therefrom would be taxable at regular rate.
5.      The assessee is free to use the amount left after exemption & payment of tax as per his own will. The gift given to his children / specified relative is tax neutral i.e., neither taxable in the hands of donor nor in the hands of donee.
Query 2]
One of my friends has gifted to his wife ground floor of his residential building (constructed at a cost of Rs. 20,000/- in 1970) about 5 years back and the same was transferred in municipal records also. She now wants to give on rent to some girls as paying guests after adding many facilities such as 8 each-tables, steel almirahs,  palangs with complete beds, Gas, TV with DTH, Fans, Exhaust, Coolers, Water purifiers, Beautiful curtains & Lights  etc etc at a cost of about Rs. 2 Lacs from her own capital. She files her tax return every year. Tell me whether rent received by her will be taxable in the hands of the wife or husband or partly both? If both, then in what proportion it will be taxable?  [Shankerlal Fatnani- srf.fatnani@yahoo.co.in]
Opinion:
1.      Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for an adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor by virtue of section 64(1) (iv) of the Income Tax Act-1961.
2.      In normal course, the rental income from the property transferred to wife without consideration is to be clubbed with the income of the husband u/s 64(1)(iv). However, in the given case, the income is not merely from letting out of the property but also from providing other amenities like bed/gas/TV etc, the investment for which is done by the wife only. If the rent received could be separated in two parts i.e., towards property & towards amenities, then the clubbing provision in the hands of husband would be only in respect of rent of property and the charges/rent for providing amenities would be taxable in the hands of wife as “Income from Other Source”. Wife could claim depreciation on the assets so purchased for providing the amenities. If the segregation of rent in two parts is not done at the time of providing the premises to the user, the same can be done subsequently by the assessee on some logical basis like investment in amenities vis a vis property cost/valuation of let out portion of the property or could be in some other logical basis.
3.      In respect of “Paying guest services” which is being similar to hostel business, she can also have an option of offering the income in her hands only as “Income from Business / Profession” with due professional advice & consultations.

Thursday, September 6, 2012

“CONSTRUCTION OF FIRST FLOOR ON MY EXISTING RESIDENTIAL HOUSE PROPERTY & LTCG EXEMPTION”



TAX TALK-03.09.2012-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA (Chartered Accountant)
“CONSTRUCTION OF FIRST FLOOR ON MY EXISTING RESIDENTIAL HOUSE PROPERTY & LTCG EXEMPTION”

Query 1]
What is the basic difference between Dividends received from Companies & Co-operative Bank with respect to taxability in the hands of recipient under Income Tax Act? Dividend from companies is exempt in the hands of recipient. Whether Dividend received from Co-operative Banks is also exempt in the hands of recipient under Income Tax Act? [rakeshngp76@gmail.com]
Opinion
1.      The Domestic Company declaring or paying the dividend (whether interim or final) is liable to pay the Dividend Distribution Tax (DDT) u/s 115-O of the Income Tax Act-1961. All the Dividend on which DDT has been paid by the company is tax free in the hands of recipient u/s 10(34).
2.      Co-operative bank/ society are not required to pay any DDT & the income there from is also not tax free in the hands of receiver.

Query 2]
I had sold my land, Long term capital assets and the net consideration amount has been invested in construction of house property in first floor of my old residential house with in the prescribed time-limit. Please answer whether above investment in construction of house in first floor of my old residence is eligible for claiming exemption u/s 54 or 54F?
[Amit Rajak, G.D.Complex, Marhatal, Jabalpur-482002-ankurkhare1979@yahoo.co.in]
Opinion:
1.      The long term capital gain has arisen in your hands from the transfer of land & not from transfer of a residential house property. You have an option of claiming an exemption u/s 54F (and not u/s 54) of the Income Tax Act-1961.
2.      For the benefit of the masses, we are elaborating the provision of section 54F as under:
a.       The exemption is available only to an individual or a Hindu Undivided Family.
  1. The capital gain should arise from the transfer of any long-term capital asset other than residential house property. (If capital gain arises from transfer of a residential house property, an exemption can be claimed u/s 54.)
  2.  The transferor must, within a period of one year before or two years after the date on which the transfer took place purchase, or within a period of three years after that date construct, a residential house.
  3.  The transferor does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
  4.  The Assessee shall not purchase any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset or construct any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
  5.  If all above conditions are satisfied, transferor can claim entire LTCG as exempt provided full net sale consideration is invested for a residential house property. If full net sale consideration is not invested then Exempt LTCG shall be Cost of New House * Capital Gain/ Net Sale consideration.
3.      The important question here raised by you is whether the exemption would be admissible in respect of construction on or extension or expansion of the existing house property?
4.      It may be noted that in the case of CIT Vs. Pradeep Kumar (2006) 153 Taxman 138 (Mad) & Asst CIT Vs. T.N. Gopal (IT Appeal No. 231 of 2008, Decided on 25.05.2009) it has been held that a mere extension of the house building would not give the benefit to the assessee u/s 54F. However, in Addl. CIT Vs. Vidya Prakash Talwar (1981) 25 CTR 220 (Del) it has been held that, to claim an exemption u/s 54, an investment in a house property need not be in a complete house and it is sufficient even if the investment is made in an independent residential unit even though it is a part of the existing house property.
5.      In your case, with above judicial pronouncements, it may be noted that:
a] If the investment in the first floor in the existing house property is not merely an extension of the existing house property and
b] the first floor is capable of being used as an independent residential unit,
then an exemption u/s 54F could be claimed.

Query 3]
How the Money received in the form of compensation of farm land acquisition by the Government, can be transferred / gifted / or given by the father to his children? Does that transfer or gift attract any Tax like - income tax, Gift tax, capital gain Tax etc. to father or his sons? Is there any way out to lower this tax impact? Please advise.
[Shashank Ladole- sol712@indiatimes.com]
Opinion:
1.      Capital gain arising to an Individual/HUF out of the compulsory acquisition of the urban agricultural land is exempt from income tax u/s 10(37) of the Income Tax Act-1961 provided:
a] It is received after 31.03.2004 &
b] The said agricultural land was used by the assessee or his parents for agricultural purpose during the preceding 2 years prior to its transfer.
[As far as rural agricultural land is concerned, it may be noted that it is not a capital assets and the surplus its transfer is also tax free in the hands of assessee.]
2.      Under the Income Tax Act-1961, the amount of gift to the Children or Grand Children is tax neutral and no liability, (neither in the hands of Donor nor in the hands of Donee) towards Income Tax/ Gift Tax/ Capital Gain tax arises on the amount of Gift transactions so done between the specified Relatives.