TAX TALK-04.06.2012-THE HITAVADA

TAX TALK-04.06.2012-THE HITAVADA

TAX TALK

BY CA. NARESH JAKHOTIA (Chartered Accountant)

“PURCHASED RESIDENTIAL PROPERTY & USED FOR COMMERCIAL PURPOSE”

Query 1]

I am a CA Student & I would like to obtain your opinion on the following issue.

My parents are practicing doctors. They have purchased a residential flat in Joint Name & are planning to conduct their practice from the said flat.

1.      Can my Father and Mother, individually, claim benefit of stamp duty paid for the purchase of the flat and Amount of Repayment of Principal as deduction u/s 80C? The flat will be used purely for commercial purpose.

2.      My mother is a pathologist. She conducts her practice in a Partnership firm, XYZ, whose operations are carried on in the above mentioned flat. Can XYZ (the partnership firm) show payment of rent to my father (who happens to be a part owner) for taking his part on rent and claim it as an expense? And can my father show payment of rent to my mother (who is also a part owner) for taking her part on rent and claim it as an expense?

3.      My Father and mother have availed Housing Loan. Can the two of them, in their individual returns claim benefit of interest, showing their share as let-out?

4.      As the property is being shown in the books as let-out, no depreciation will be claimed. I wish to confirm as to whether the Department will insist on calling it a Business Asset as it is being used for business purpose, We do not want to treat it as a business asset and wish to claim the entire indexed purchase cost as deduction while calculating Capital Gain as and when we happen to sell it. Is that option possible? [Satyamedh Nandedkar- satyamedh@gmail.com]

Opinion:

Indeed it’s an interesting query with a lot of practical sense. Opinion on the various parts of the queries raised by you is as under:

1.      As far as the claim for stamp duty u/s 80C for purchase of house property is concerned, it may be noted that there is no bar on use of the property. Section 80C speaks about the admissibility of deduction if a residential house property is purchased. We are of the opinion that the deduction will be available even if the property is subsequently used for commercial purpose.

2.      The mode proposed sounds a bit confusing & questionable. The best way could be the letting out of the property (or part of the property) by the joint owners to the firm. The rent could be apportioned amongst the joint owners in the ratio of their ownership in the flat. Even if the mother is a partner in the firm, the deduction would be admissible in the hands of the firm for rent payment. Both the joint owner can show their share of rent received from the firm as income in their Individual return.

3.      The income from flat, even though let out for commercial purpose, is assessable under the head “Income from House property”. As far Interest deduction u/s 24(b) is concerned, there is absolutely no bar in claiming such deduction even if the residential house property is used for commercial purpose. As far deduction u/s 80C towards the principal part of the repayment is concerned, we are of the opinion that the deduction can be claimed as there is nothing to prohibit the assessee’s claim u/s 80C. Subject to reasonableness, the firm is eligible for deduction towards rent payment, even in case the rent is paid to the partner of the firm.

4.      The assets could be treated as a capital asset if no depreciation is claimed by the assessee. Also, the income from the assets let out is proposed to be offered as “Income from House property” (& not Income from Business/Profession) which further strengthens the treatment of assets as capital assets.)

Query 2]

Sir, I am working in public sector bank.  My wife is a housewife.  She had received Rs.1,00,000/- from her father 10 years back as he had sold his house & gave some money to his daughter. She deposited the money in bank and then in RBI bonds. After maturity, she again deposited the money in bank in her name and her sons' name (Her name is first).  Over the period, amount increased to Rs. 1,80,000/-.  She has submitted form 15G to the bank for non deduction of TDS as the amount of interest exceeds the prescribed limit. She does not have any other source of income. Kindly let me know whether she has to file income tax return for this income every year or only submission of form 15G is sufficient? [sanjay.deshpande@sbi.co.in]

Opinion:

She can submit Form No. 15G & filing of the income tax return is not at all mandatory in her case. It may be noted that while submitting Form No. 15G, quoting the PAN is mandatory.

Query 3]

We wish to get your advice on following points:

1.      Is NSC-VIII interest is tax free or not?

2.      If not and it is assumed that interest is reinvested in the NSC then whether tax will be paid on total interest calculated in last year after maturity?

3.      If someone, without actually receiving the total interest earned on old NSC maturity, directly repurchases new NSC from the interest earned, then, is total interest earned on old NSC maturity considered as reinvested? Will such interest be treated as tax-free or whether such interest will enjoy reinvestment benefits for next 5 years? kindly advise. [S.K.Ghai, Jabalpur- sanjayghaiye@rocketmail.com]

Opinion:

1.      Interest from National Saving Certificate is not exempt & is taxable.

2.      According to Rule 15 the NSC (VII Issue) Rules, 1989 the interest on N.S.C shall accrue to the holder(s) of the certificate at the end of each year and the interest so accruing at the end of each year shall be deemed to have been re-invested on behalf of the holder and aggregated with the amount of face value of the certificate. So, Interest on N.S.C. should be offered for taxation on accrual basis every year. It may further be noted that the interest accrued every year is deemed as reinvested therein and is also eligible for deduction u/s 80C.

3.      At the time of maturity, the reinvestment for purchase of another NSC’s, won’t make the interest income exempt from income tax.