Tax Query: Setting off capital losses in delisted shares

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Kindly guide whether there is any method by which capital loss under Income Tax provisions can be set off against the shares which get delisted and are not traded, or have become unmarketable? Please also guide about the tax treatment on equity shares where capital reduction has been effected.

E Madhavan NairAs per the provisions of Section 71 of the Income-tax Act, 1961 (‘the Act’), losses under the head of capital gains can be set-off against income under the head of capital gains only. Further, as per the provisions of Section 70 of Act, Short-Term Capital Loss can be set-off against Long-Term or Short-Term Capital Gain. However, Long-Term Capital Loss can be set-off only against Long-Term Capital Gains. Holding period of capital asset determines the nature of Capital Assets viz. a Long-Term Capital Asset or a Short-Term Capital Asset. As per the provisions of the Act, assets in the nature of unlisted equity share would qualify as Long-Term Capital Asset, if at the time of selling, the same has been held for a period of 24 months or more. Otherwise, the same would qualify as Short-Term Capital Asset. In order to answer the query, additional facts and clarity would be required. However, in the instant case, if the subject Capital Loss is Short-Term in nature (to be ascertained based on the period of holding and nature of the asset), such loss can be set off against Short-Term / Long- Term Capital Gain arising from any other capital asset. However, if such loss is Long-Term in nature, the same can be set off against Long-Term Capital Gain arising from any other capital asset. In case of a Capital Reduction, if the shareholders receive any payout the tax treatment as per the provisions of the Act would be twofold as mentioned below:

Taxability as Dividend: As per the provisions of section 2(22)(d), distribution by company on capital reduction (to the extent attributable to its accumulated profits), shall be considered as deemed dividend. It is also important to note that as per the amendments made by Finance Act 2020, companies are no longer required to pay dividend distribution tax. Dividend income is taxable in the hands of the shareholder at applicable slab rates. The payor company would be required to deduct Taxes at Source (TDS) on such dividend under section 194 of the Act at 10 per cent, for dividends paid in cash. For dividends paid via any mode other than cash, TDS shall be required, if aggregate payment exceeds ₹5,000. Taxability as Capital Gain / Loss: Taxation for distribution of profits (over and above accumulated profits) has been a matter of debate. There are judicial precedents which suggest that such distributions shall be regarded as transfer and would result in Capital Gain / Loss in the hands of the shareholder.

The writer is a practising chartered accountant

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Tax Query: Treatment of ‘bullock rent’ income

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I got retired from a PSU in May 2020. My earnings for FY2020-21 comprise regular salary for April 2020 and May 2020, retirement benefits (including leave encashment), regular pension from June 2020, interest income on fixed deposits, dividend income from shares and income from house property (two houses; availed housing loans and paying EMIs). Can you please advise which income tax form should I submit for AY 2021-22?

Bhaskaran S

Based on the details provided, your income includes salary, house property (2 houses with housing loan), and income from other sources. Hence, you need to file your return for FY 2020-21 using form ITR 2.

We rent our bullock for tilling the land. Although there is no service tax for the activity, could the income from be treated as business income / non agricultural income? What could be the form to be submitted before June?

Chandrasekaran

If the principal source of income is renting of bullock used for tilling the land, the same qualifies to be business income and accordingly, ‘ITR-3’ is the tax return form that needs to be used for filing the return of income.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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Tax Query: How much money can father send to son working abroad?

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I am working with The Ramco Cements Limited. I am also an employee of a firm and I pay/ file my annual tax returns. My son is working in the US. How much amount can I send to him every year out of my annual savings? How does it affect him in terms of tax returns there?

Ravi Shankar

As per the provisions of Foreign Exchange Management Act, 1999 (‘FEMA’), under the Liberalised Remittance Scheme (LRS), all resident individuals are allowed to freely remit up to USD 250,000 per financial year (April-March) for permissible transactions under LRS.

Remittances outside India in the nature of gifts or for maintenance of close relatives abroad are permitted transactions under the LRS.

Hence, you may remit up to USD 250,000 under LRS for such purpose to your son who is living outside India. As per provisions of section 56 (2)(x) of the Income-tax Act, 1961 (‘the Act’) income tax is payable on any sum of money (if aggregate value exceeds ₹50,000) received by an individual without consideration.

However, any receipts from specified relatives (includes lineal ascendant or descendant of the individual) or on specified occasions such as marriage and inheritance would not be considered as taxable. Hence, a gift of money to your son will not be subject to tax in the hands of your son in India.

In relation to your US tax query, I am not a subject matter expert of US tax laws and therefore would not comment on the same.

Axis Direct has a reporting system for dividends paid. In that, dividend amounts are shown in March 2021 based on declaration date whereas the actual credit is made to savings bank account in April 2021. Please clarify for income tax purpose what should be considered. Is the dividend amount to be shown in the financial year of month in which declared or in the financial year based on the credit in bank account? Also, which is the document considered by the Income Tax department?

S R Subramani

As per the provisions of section 8 of the of the Income-tax Act, 1961 (‘the Act’) along with related clarifications provided by Income-tax Department (via tutorial uploaded in Income-tax website), final dividend, which is chargeable under the head Income from Other Sources, should be considered as taxable in the year in which it is declared, distributed or paid, whichever is earlier.

In the instant case, I understand that the subject dividend was declared in March 2021 (i.e. FY 2020-21) and was subsequently paid in April 2021 (i.e. FY 2021-22). As such, the dividend would be required to be offered to tax in the year in which it is declared i.e. FY 2020-21.

Further, it may be noted that at the time of filing of your income tax return, you are not required to submit any proofs / documents. However, the same should be kept on records for the purpose of assessment / revenue audit, if any. In that case, the dividend report can be submitted with the authorities.

The writer is a practising chartered accountant

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Tax Query: Does a mother pay tax on money received from NRI son?

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My son is working in the Netherlands and sends me €300 every month. My son pays income tax on his salary there. I used to send him €2,400 from India every month during his higher education in the Netherlands for almost two years. Is the money I receive from my son every month taxable in India? My existing income falls under 20 per cent tax bracket.

Manjula

As per provisions of section 56 (2)(x) of the Income-tax Act, 1961 (‘the Act’), income tax is payable on any sum of money (if aggregate value exceeds ₹50,000) received by an individual without consideration. However, any receipts from specified relatives (includes lineal ascendant or descendant of the individual), would not be considered as taxable. Hence, a gift of money from your son (who is your lineal descendant) will not be subject to tax in your hands in India.

I got only one folio with Sundaram MF i.e. Diversified Equity Fund. The fund had declared a dividend of ₹725 and deducted tax at the rate of 20.8 per cent. On taking up the matter with them they stated that timings and frequency and amount of dividend declared is not known in advance. They also said that the investment horizon of the investor is unknown and actual dividend income accrued for such TDS cannot be assessed. The fund-house also said the threshold limit of ₹5,000 has been aggregated at PAN level across all AMCs and Sundaram MF does not have investor level data of dividends being declared for each PAN during a year. So, they will deduct TDS from each dividend declared even without reaching the ₹5,000 threshold. In case of total TDS exceeding the actual tax liability of any investor, he/she can claim refund while filing income tax returns. I feel the explanation given by Sundaram is patently absurd. If all MFs take this stand, and deduct tax irrespective of the amount of dividend, what is the sanctity of the threshold limit of ₹5,000. In my view, they should aggregate the dividend under their schemes alone and deduct tax if it exceeds ₹5,000 and not otherwise. Please give your considered opinion on this subject.

Cyril Dsouza

As per provisions of section 194K of the Income-tax Act, 1961 (‘the Act’), payers (MF house in this case) are required to deduct tax at source (TDS) at 10 per cent for payments made to resident individuals. However, if the amount of such income paid during financial year (FY) to the payee does not exceed ₹5000, tax is not required to be deducted at source. Literal reading of the section suggests that no TDS is to be deducted by the payer if amount paid by them during a FY does not exceed ₹5,000. However, practically some payers take a view that the threshold limit of ₹5,000 is to be considered qua the individual (i.e. at PAN level) and necessary TDS to be done. In such a scenario, individual would have to claim credit of such TDS in the return of income. Also it is important to note that, as per provisions of section 206AA of the Act, in case you do not provide your PAN to the payor, then tax is required to be deducted at a rate of 20.8 per cent (including applicable cess). If this holds true for your case, this may be reason for the MF house to deduct tax at the rate of 20.8 per cent.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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Tax Query: Is flat registration must for claiming long term capital gains?

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I have a flat in one of projects of Amrapali Group in Noida. The builder did not complete the projects on time and the money collected from home buyers was fraudulently utilised for personal purposes. The projects are now under the court receiver and the builder is behind the bars. I booked the flat under construction linked payment schedule and the first payment was made on April 5, 2010 and the last payment on February 1, 2014. The total payment, including service tax, made to the builder comes to ₹40.36 lakh. The flat was handed over to me on September 11, 2014. Though I have already received possession of the flat, registration is not done as the builder was not cooperating. The process for registration has already started and my documents have been verified successfully by the court receiver.

If I sell my flat now before registration, can I claim the benefit of long term capital gain tax if I use the sale proceeds to buy a new flat/new house in my native place at Kerala? Is registration of the flat a necessary condition for claiming long term capital gains tax?

James Thekkan

As per Income Tax Act,1961 (the Act), gain arising from the sale of a capital asset is taxable under the head “capital gains”. Further, the gains will have to be sub-classified into long term or short term depending on the period of holding of the asset. This, in turn, would also determine the rate of taxation of the gain, deductions that can be claimed and associated conditions.

A land/building is considered as a long- term capital asset (LTCA) if it is held for a period of more than 24 months. Further, the period of holding of such LTCA is to be reckoned from the date it was first held by the the assessee. Also, CBDT vide circular no. 672 (16.12.1993) read with 471 (15.10.1986) has held that “the allottee gets title to the property/flat on the issue of the allotment letter and the payment of installment is only a follow up action and taking the delivery of possession is only a formality.”

Based on the above, your flat qualifies to be LTCA as it is held for a period of more than 24 months. The resultant gains on sale of LTCA will qualify as Long-Term Capital Gains (LTCG) and taxable at the rate of 20 per cent as per section 112 of the Act, with applicable surcharge and cess.

Please note that given the background of your case,documentation will play a crucial role in asserting your ownership to the property. Given that the flat qualifies to be a LTCA and you wish to invest the sale proceeds received from the sale of flat in another house property at Kerala, you shall be eligible to claim exemption u/s 54 of the Act, provided the other conditions mentioned therein are duly satisfied. Registration of the existing flat is not a pre- condition to claim exemption u/s 54 of the Act.

The above position has been upheld by ITAT Bangalore in case of Shri Basheer Noorullah Khan Vs CIT(A) ( ITA No. 575/Bang/2019) and Delhi High Court ruling in case of Balraj Vs. CIT as reported in 254 ITR 22. However, it is not free from litigation and needs to be contested appropriately at the higher level.

It is pertinent to note that the definition of ‘transfer’ in relation the capital asset has specific reference to ‘Transfer of Property Act, 1882’ (TOPA) under the Act and as per Section 53A of the TOPA, registration of documents/agreement is mandatory. Thus, if an agreement is not registered, then it shall have no effect in law for the purposes of section 53A.

Besides this, there are other laws in India viz. the Registration Act, Indian stamp Act, etc. which mandates the registration requirement of immovable property which needs to be analysed separately. In view of the above, if the case is selected for audit/scrutiny, the tax officer may ask for the registered purchase/sale deed to analyse the exemption claimed.

The writer is Partner, Deloitte India

Send your queries to taxtalk@thehindu.co.in

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Tax Query: How to close HUF account with the I-T Department

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My friend is having an HUF account. Till 2016 he had business income in HUF. He has two sons and a spouse. Both sons are not interested in continuing the business, hence he wants to close his HUF account with the bank as well as the income tax department. Request your advice on how to close HUF account with the income tax department.

Pravin Shah

Hindu Undivided Family (‘HUF’) is dissolved only on the partition of property between the members. It is important to note that as per the provisions of section 171(9) of the Income-tax Act, 1961 (‘the Act’), partial partition of HUF is not recognised. Under the provisions of Act, partition means ‘full partition’.

For the purpose of dissolution of the HUF, your friend will need to draw up a deed of full partition and get the same registered. Once the partition of HUF is complete, it will cease to exist.

Till the date of such dissolution, the HUF shall be assessed in its capacity as a HUF and the return of income for such period should be filed by your friend. Also, your friend may make an application for surrender of PAN of HUF with the jurisdictional assessing officer by submitting a request in this regard after the partition of the HUF and related compliances (like filing of return) are complete.

In one of answers to a query earlier, you had stated that in view of the amendment to Sec. 55 of the Income tax Act, where the property is purchased before April 1, 2001, the fair market valuation as per the valuation by a registered valuer as at April 1, 2001 would be considered the cost of acquisition, which has been capped from April 1, 2021 at the stamp duty value, wherever available. A search on the site of the Inspector General of Valuation of Registration, Tamil Nadu reveals that fair valuation as revised from 9.6.2017 is available only from April 1, 2002. The site states that the information provided online is updated and no physical visit is required for services provided online. Do we then assume that since the stamp duty value is not available as on April 1, 2021, the fair market valuation by the valuer could be considered as the cost of acquisition for property sale in Chennai ?

Murli Krishnamurthy

As per the provisions of section 55(2)(b)(i) of the Income-tax Act, 1961 (‘the Act’), in case of a property purchased before April 1, 2001, the cost of acquisition shall be considered as any of the following at the option of the assessee:

– the fair market value (‘FMV’) of the property as on April 1, 2001; or

– the actual cost of acquisition of the property.

As per amendment made vide Finance Act, 2020, in case of a capital asset being land or building or both, the FMV of such asset (as on April 1, 2001) for the purpose of section 55, shall not exceed the stamp duty value (‘SDV’), wherever available, as on April 1, 2001.

In the instant case, I understand that SDV as on April 1, 2001 is not available for the subject property. In such scenario, you may consider FMV as on April 1, 2001 as the cost of acquisition of the property for the purpose of section 55 of the Act.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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Tax query: What’s the tax liability for buying resale property using proceeds of equity investment?

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I am planning to buy a resale property using the proceeds from sale of my shares held in ICICI direct. What will be my tax liability, considering the fact the shares held in the account are one year old to seven-year old? Also, advise me on the precautions needed while buying a resale house.

Nilesh

Assuming that the shares held in ICICI direct are listed on Indian stock exchanges and are held for a period of more than 12 months, the gain/loss arising on sale of these shares shall be treated as long-term capital gain /long-term capital loss (LTCG/LTCL). As per Section 112A of the Act, LTCG in excess of ₹1,00,000 earned from sale of listed equity shares on which securities transaction tax has been paid shall be subject to income tax at the rate of 10 per cent (excluding surcharge and education cess).

Where the shares are purchased before January 31, 2018, the cost of acquisition shall be the higher of the following:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on January 31, 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

You can explore deduction under Section 54F of the Act in case the net sale consideration arising from the sale of shares is invested in purchase of a residential house property within one year before the transfer date or within two years after the transfer date subject to specified conditions.

In regards to the purchase of immovable property, as per Section 194-IA of the Act, you will be required to deduct taxes at source (TDS) at the time of making payment of the sale consideration to the seller @ 1 per cent (assuming seller is a resident of India), where the sale consideration of the said property is equal to or exceeds ₹50 lakh. In such case, you will also be required to file a TDS return in Form 26QB and issue a Form 16B to the seller of the property.

A senior citizen engaged in businessis expected to make payment of advance tax based on his earnings. I would like to know the following: (i) if a senior citizen makes investment on equity, does he need to pay advance tax based on the quarterly earnings? (ii) if a senior citizen does trading on equity (buying and selling shares) will the same (payment of advance tax) be applicable? Please clarify while keeping in mind long- and short-term gains.

RM Ramanathan

As per Section 208 of the Income Tax Act, 1961 advance tax is applicable if the tax liability (net of taxes deducted or collected at source) on taxable income is ₹10,000 or more. As per Section 207 of the Act, liability to pay advance tax doesn’t apply to a resident senior citizen (who is aged 60 years or more), not having the income from business or profession.

Scenario I

The senior citizen doesn’t have income from business/profession:

Earnings on investment in equity could be in the form of dividend & capital gains (long term or short term, depending upon the period of holding) which are chargeable to tax under the head ‘Income from other sources & Income from Capital gains, respectively.

In view of the provision discussed above, payment of advance tax provision doesn’t apply in this scenario.

Scenario II

Senior citizen derives income from business/profession (trading of shares):

Since the senior citizen is trading in equity (which may include shares held as stock-in trade, intraday transactions etc.), it would tantamount to carrying on a business.

Accordingly, the advance tax provision of section 208 shall apply and he is required to pay advance tax if the net tax liability exceeds ₹10,000 in a FY.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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