TAX TALK-04.07.2011-THE HITAVADA

TAX TALK-04.07.2011-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“WHETHER EXEMPTION IS AVAILABLE U/S 54 OR U/S 54F?”
Query 1]
I have few doubts & request you to please clear it through Tax Talk column in the Hitavada:
1. Since I haven’t shown Interest (on accrual basis) from FD & Company Bonds earlier, Can I show the interests from FD, Company Bonds on receipt basis in my IT return i.e. on completion of tenure on maturity? Whether this is correct or not?
2. Will there be any fine if I show interest on receipt basis instead of accrual basis?
3. Also I would like to know since few company bonds are in my minor child's name (having separate PAN no.). At the time of maturity, the exemption on interest received will be only Rs. 1,500/- or Rs.7,500/- (for 5 years on receipt basis). [suryajeet.614@rediffmail.com]
Opinion:
The interest to be offered for taxation depends upon the method of accounting regularly followed by the assessee in recognizing the income.If Assessee is following cash (Receipt) system of accounting then the interest income has to be offered at the end of FD Tenure. If Assessee is following mercantile (Accrual) system of accounting then interest income is required to be offered for taxation every year as income of that year only.
In view of the Circular No. 371 dated 21.11.1983 issued by the Central Board of Direct Taxes (CBDT), we advise the readers to offer the interest on Bank FDR on accrual (due) basis only.
In your case, it appears that you haven’t offered the interest income for taxation every year on mercantile basis. You are advised to offer the income for taxation on cash (i.e., Receipt) basis at the time of Maturity or on completion of tenure.
As far as the Minor’s income is concerned, the exemption shall be restricted to Rs. 1,500/- only & not Rs. 7,500/- depending upon the number of years to which the said income pertains.

Query 2]
Kindly refer to the Tax Talk dated 20th June 2011, which is very informative. Thanks for the same. Please throw more light on the following.
1. Whether exemption is available u/s 54 or54F of the Income Tax Act 1961 for capital gain arising from a typical development agreement by a plot owner in which the plot owner hands over the plot to a developer and in return obtains consideration in the form of cash/cheque and/or flat or flats.
2. Our clients insist that exemption u/s 54 is available and put forth the argument that majority of CAs and IT Practioners are allowing exemption U/s 54 as it is beneficial to the assessee.
3. Since the plot owner in effect is transferring the undivided share in the land to the buyers of flats built by the developer, What is transferred by the land owner is right in land and he is not transferring a residential house property. In my view Section 54 is not applicable, only Section 54F is applicable.Please examine and throw more light. [CAPM]
Opinion:
On transfer of plot, exemption could be admissible u/s 54F only & not u/s 54. You may further refer to the query No. 3 hereunder wherein the SHARE OF LAND may have been transferred & not the residential house property.

Query 3]
I own two houses, one at Delhi and the other one at Nagpur. We have a residential house built by my father in 1970 at Manali.
Our father died in 2001. We are three legal heirs of our father (Myself, My sister & Our Mother). We have entered into an agreement with a builder to demolish the old house and build an apartment scheme of seven independent flats. The consideration is fixed at Rs. 54 Lacs to be paid as Rs. 18 Lac in cash (that is, Rs. 6 Lacs to each of the co-owner) and the remaining Rs. 36 Lacs in the form of a flat in the said scheme to be held in the name of all the three legal heirs (that is, Rs.12 Lacs each).
Now my queries are as follows:
1. Are we eligible for exemption U/s 54 or 54F? What are we selling a Residential house Property or a share in land? Our tax consultant says you are selling a share in the land and not residential house property. Hence, exemption U/s 54F only shall be applicable.
2. If the exemption is U/s 54F, are we required to invest entire Rs. 54 Lacs in house property as required in section 54F?
3. If section 54F is applicable, am I eligible for the investment in house property of Rs. 12 Lacs as mentioned above, since I already own two houses? [Roshan L)
Opinion:
It’s a very interesting & practical query, various readers may be facing while entering in to a Development agreement with the builders. Whether exemption would be admissible u/s 54 or under section u/s 54F could best be inferred from the words, sentences & drafting used in the Development Agreement. If the development agreement suitably & appropriately reflects the transfer of house property to the builder & not merely share of land ONLY, exemption u/s 54 could be available to the Assessee.
With above basic proposition, the point wise replies to your queries are as under:
1. Exemption u/s 54 or U/s 54F would depend upon the drafting used in the Development Agreement. If the transfer agreement clearly stipulates the transfer of house property to the builder, exemption u/s 54 could be available. If transfer of share of land is only stipulated, exemption u/s 54F could be available & not u/s 54.
2. If exemption is admissible u/s 54F, entire sale consideration (i.e., Rs. 54 Lacs) is required to be invested for claiming the full amount of LTCG as exempt.
3. Since you already own two house properties, exemption u/s 54F would not be available to you. For exemption u/s 54F, Assessee should not be owner of more than one house property on the date of transfer of the original asset.

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