“AMOUNT RECEIVED ON SURRENDER OF TENANCY RIGHT IS TAXABLE !”

TAX TALK-16.12.2013-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

“AMOUNT RECEIVED ON SURRENDER OF TENANCY RIGHT IS TAXABLE !”

Query 1]

A mother of my friend who is a widow seeks clarification/advice from you regarding income from ancestral property. As per the tax law, income received through disposal of ancestral property comes under Capital Gain Tax & to avoid Capital Gain Tax amount received through disposal of property should be utilized in purchasing of house or in construction of house. Her share after disposal is so small that no house can be purchased or can be constructed. Then,

1.      How  to  save  Capital  Gain  Tax  on  such  amount ?

2.      Can amount be invested in regular fixed deposits in Bank?

3.      Can  whole  amount  or  part  of  it  can be  gifted  to  her son or  daughter?

4.      Can  amount be utilized  by  her  for  day  to  day requirements  of  life?

5.      If it is done so, then what will be the tax implication? She is a housewife & not coming under the bracket of tax limit.  [Vinod Hande -vkh0811@gmail.com]

Opinion:

1.      Apart from investment in purchase/ construction of house property, tax on Long Term Capital Gain (LTCG) can be saved U/s 54EC by investing the amount of LTCG in the specified bonds issued by Rural Electrical Corporation (REC) or National Highway Authority of India (NHAI). The investment has to be done within a period of 6 months from the date of transfer. The application form for subscription is available at www.recindia.nic.in or at www.nhai.org. As her other income is below the basic exemption limit, the unused basic exemption limit can be reduced from the amount of LTCG and she would be required to invest the balance amount only u/s 54EC, for saving tax.

2.      The investment in fixed deposits with banks won’t help her in saving LTCG Tax. However, she can just invest the amount of taxable LTCG (as reduced by the unutilized basic exemption limit) only in the specified bonds u/s 54EC and the balance of the sale consideration can be used as per her convenience. The same can be invested in Bank FDR as it could provide her with better liquidity and returns.

3.      Gift by mother to her son or daughter is tax neutral and don’t have any tax repercussion.

4.      There is no bar in the using the funds for household or any other purposes.

5.      If she don’t wish to claim an exemption either by purchasing or constructing the house property or by investing in the specified bonds u/s 54EC, she would be liable for LTCG tax @ 20% on the amount of taxable income [i.e., on LTCG Less the amount of unutilized basic exemption limit].

Query 2]

I am a partner in a firm with my elder brother. A property was taken on rent by my forefathers some 60 years back. In family partition, the said property was given to me and my brother. The rent agreement is in name of firm. Now I want to surrender my portion. I will get approx Rs. 80 Lacs for surrendering my portion to the landlord. My brother will continue existing business in other half. I request you to please enlighten on the taxability of above Rs. 80 Lacs. Further, I have also learnt that if benefit of indexation is not availed long term capital gain is taxable @ 10%. Can I divide this income between myself, my wife and son as we got these rights through our forefathers? Also suggest tax saving tools for the same. Partnership deed is registered between me and my brother. [V***********]

Opinion:

1.      The tenancy right is a capital assets and surrender of tenancy right for Rs. 80 Lacs would yield Long Term Capital Gain (LTCG).

2.      The benefit of 10% tax rate without indexation is available only on transfer of listed securities or unit or zero coupon bonds. The benefit is not available to LTCG arising from transfer of tenancy right or any other capital assets.

3.      The important question that remains here is about the taxability of such amount.
Taxability, tax saving options & other implication would depend upon multiple factors and documents. Apparently, it appears that the amount would be taxable in the hands of the firm as the tenancy right belongs to firm.

Query 3]

I have made registered agreement for purchase of plot at Nagpur in December, 2009 by paying whole amount of plot i.e., Rs. 3 Lacs (Market value of said plot was Rs. 2.94 Lacs). Expenditure on registry was also borne by me. As the plot is not having town planning sanction, hence till date, sale dead of plot is not executed. I have requested land developer to return my money and cancelled the agreement; he is also ready to return my money Rs. 3 Lacs plus registry amount of Rs. 10,000/-. Let me know that are there any Income tax liabilities on me? Today market value of said plot is Rs. 8.80 Lacs. [Shailendra Kuralkar- svkuralkar@rediffmail.com]

Opinion:

Taxability on the cancellation transaction would depend upon the clauses incorporated in the agreement to sale. More particularly, it would be dependant on the clause incorporated in relation to “possession” of the plot. In normal course, the amount received back on cancellation of agreement to sale may not be taxable on the basis of prevailing Stamp Duty valuation.

Query 4]

My wife is unemployed. She has a PAN card. Last financial year, while starting an FD in Union Bank, Raipur, she could not mention her PAN number. Therefore, TDS has been deducted @ 20% by the Bank from the interest she earned. This fact has come to know only at the time of maturity of FD. As we have not mention the PAN number, the Bank is not issuing the TDS. Please let me know whether any way to get the TDS from the Bank and claim for a refund from IT Deptt. [mohandas1956@sify.com]

Opinion:

She can get the income tax refund after filing the income tax returns only. However, in the absence of TDS certificate being issued or TDS amount reflected in 26AS of the taxpayer, getting a refund would be a difficult task. You can write a letter to the bank intimating the PAN of the depositor and can ask them for issue of the TDS certificate. They can issue the TDS certificate by filing a corrected TDS return. After filing the corrected TDS return, the TDS amount would also be reflected in the 26AS statement of the taxpayer.

[The author is a practicing Chartered Accountant and is a partner of M/s. SSRPN & Co., Nagpur. Readers may send there queries at cassrpn@gmail.com.  If you wish to unsubscribe from the mailing list, please reply back “unsubscribe” on the same email id]