INCOME TAX LIABILITY COULD ARISE WITHOUT REAL INCOME  

INCOME TAX LIABILITY COULD ARISE WITHOUT REAL INCOME  

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Query 1]

I had booked a flat in Nov. 1995 & paid Rs. 2.75 lakhs in F-Y 95-96 & Rs. 3.25 lakhs in F-Y 1996-97 i.e., total Rs. 6.00 Lacs. This amount is indicated cheque wise in the Sale Deed which was executed on 22.10.1999 with payment of Rs. 54,395/- on account of stamp duty/legal expenses. I want to sell the flat in F-Y 2015-16. For calculating the capital gain my queries are:

  1. What will be the indexed purchase price in F-Y 2015-16? What is the cost inflation index for the relevant years? Whether it will be calculated on the basis of actual payment year or on sale deed year only?
  2. The R.R value (minimum amount for the sale deed) is Rs. 38 Lakhs. Whether this amount, which is mentioned in the sale deed, can be taken as the purchase price for calculating capital gain? [Rajendrapaul Gupta-rpgupta04@yahoo.co.in]

Opinion:

  1. You have purchased a flat in the FY 1999-2000 for Rs. 6 Lacs whereas the ready reckoner value or value adopted for levy of stamp duty at the time of purchase was Rs. 38 Lacs. Before I come to specific queries raised by you in the query, let the readers know the recent change in the Income Tax law, ignorance of which could results in additional tax burden.
  2. In normal course, income-tax is payable on real income and not on notional income. Taxpayer who are not much aware of the ongoing changes in the tax laws may be shocked to learn that paying stamp duty on a higher valuation than the actual sale price has greater tax consequences for the purchaser also. By the Finance Act-2013, Section 56(2) has been amended with effect from 01.04.2013 so as to provide that if any individual or HUF purchases any immoveable property for an inadequate consideration (i.e., if the stamp duty valuation of the property is more than the actual purchase price) and the difference between stamp duty valuation and actual purchase price is more than 50,000/-, then such difference shall be taxable in the hands of the individual or HUF as “Income from Other Source”. After reading the provision, taxpayers may rightly conclude that purchasing the property below the stamp duty value is also taxing now. Income tax is not always on actual income. Even purchasing property below stamp duty valuation could result in additional tax liability.
  3. In your specific case, you have purchased the property in the FY 1999-2000. You were outside the purview of notional taxability at the time of purchase. As a precautionary measure, you should take indexation benefit from the year in which you have acquired the flat i.e., FY 1999-2000 & not from FY 1995-96 & 1996-97. The cost of acquisition would be Rs. 6.54 Lacs (& not Rs. 38 Lacs).
  4. Cost Inflation Index (CII) for the FY 1999-2000 (year of flat purchase) was “389” & for the FY 2015-16, it has not yet been notified.

 

Query 2]

Recently, in Maharashtra state budget, stamp duty has been waived on gifting of a property to the relative. I want to gift my house property to my wife as rental income of this house property is presently included in my income. My wife is House wife. As a result of this, income would not be mine. Please advice if anything wrong with this strategy? [hriday.tiwari60@gmail.com]

Opinion:

With a view to reduce the tax liability, most of the taxpayer resort to several devices of managing the tax impact. One such device is to gift the property in favor of other person so that subsequent income gets diverted to that other person. Undoubtedly, gift is one of the most powerful weapons for tax planning but it is subject to riders as under:

  1. Not all gifts received are tax free in the hands of recipients. Only gift received from the following person would be tax free:
    (i) spouse of the individual;
    (ii)       brother or sister of the individual;
    (iii)     brother or sister of the spouse of the individual;
    (iv)     brother or sister of either of the parents of the individual;
    (v)       any lineal ascendant or descendant of the individual;
    (vi)     any lineal ascendant or descendant of the spouse of the individual;
    (vii)    spouse of the person referred to in clauses (ii) to (vi).
    So, if you gift the property to your wife, direct incidence of tax will not arise in her hands.
  2. There is a clubbing provision in the Indian Income Tax Act-1961. As a result of clubbing provision, where an asset/property is transferred by an individual to his spouse or minor Child or Daughter-in-law, directly or indirectly, otherwise than for an adequate consideration, any income from such asset is deemed to be the income of the transferor by virtue of section 64(1A) / 64(1) (iv) / 64(1)(vi) of the Income Tax Act-1961.
    Effectively, even if the property is you gift the property to your wife, still rental income would be treated as your income & would be clubbed with your other income only. It may be noted that clubbing provision is not applicable if you gift the amount/property in favor of father/mother/major son-daughter, Brother, Sister etc.

 

Query 3]

My mother has given a cash Gift of Rs. 2 Lacs by cheque to her Grandson during the year 2014-15. But she expired before any ‘Deed of Gift’ is made which is a required document for income tax purpose. Father is also not alive. Please advice suitably further line of action for documentation for a cash gift already given by deceased Grand-mother. [Vijay Pankey- vdpankey@rediffmail.com]

Opinion:

  1. It appears that the gift money has moved through banking channels only and the grandmother was having that much money in her accounts at the time of gifting. She has an established source of money in her accounts & her creditworthiness is also unquestionable. Only issue is that, though she has gifted the amount, the gift deed or any documentary evidences are not available.
  2. From Income Tax perspective, even oral gifts are equally valid gift. Your son is advised to treat the amount as gift only. If required or called for, he may present the totality of the facts as elaborated above before his assessing officer.

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