“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.

2. 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.)
3.  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.
4.  The transferor does not own more than one house property, other than the new asset, on the date of transfer of the original asset.
5.  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.
6.  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.