Whether Indexation benefit on sale of a property is available to NRI?

 

One may note that there is no distinction between an NRI and a non NRI as far as benefits of indexation on residential property is concerned.

 

As a result, all the taxpayers are entitled to avail the benefit of indexation of a residential house property if the same is sold after 24 months. It is only after a holding period of 24 months that the property is treated as a long term capital asset.

 

Any profits made on such long term capital assets are to be taxed as long term capital gains.

 

Two Tax saving Option:

 

1. One can buy or construct another residential house within a prescribed time period.
2. One can invest such capital gains in capital gains bonds of some specified financial institutions like Power Finance Corporation. Rural Electrification Corporation Limited, Railway Finance Corporation within six months from the date of sale of the residential house.

 

One can avail either or both the options for saving tax on long term capital gains on sale of a residential house.

Capital Gain on sale of Property by NRI & Section 195   1.    As per Section 195, tax is required to be deducted at source from “sums chargeable to tax” before making the payment to a non-resident. Deduction has to be only on “sum chargeable to tax”.   2.    Logically, if the payment does not include any income chargeable to tax, no deduction of tax at source is required.   3.    However, there are many issues related to deduction of tax at source and the divergent view of the judiciary on the issue.   The main issue is whether deduction of tax is required on the capital gain or gross consideration? One view is that tax is required to be deducted under Section 195 only on the capital gain, or on the whole amount of consideration paid to a non-resident?

The Karnataka High Court in CIT (International Taxation) vs. Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 has held that deduction of tax at source was required on each remittance on the gross sum payable. However, it appears that it has incorrectly applied the Supreme Court ruling in Transmission Corpn. of A.P. Ltd. vs. CIT [1999] 239 ITR 587that at the time of deduction of tax at source, the taxpayer needs to obtain an order under Section 195(2) to determine the amount of taxable income forming part of a composite payment. The Supreme Court in GE India Technology Cen. (P.) Ltd. vs. CIT [2010] 193 TAXMAN 234 (SC) has corrected this ruling and held that “The obligation to deduct tax at source is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non- resident.”   One may note that there are a couple of recent decisions of the Bengaluru Tribunal which have not applied the above Supreme Court ruling.     In Syed Aslam Hashmi vs. ITO [2013] 55 SOT 441, the ITAT taking support of the Karnataka High Court decision in Samsung Electronics, has held that tax needs to be deducted at source on the whole of the consideration. In R. Prakash vs. ITO [2013] 38 taxmann.com 123 (Bangalore – Trib.) the ITAT has upheld the computation of interest under Section 201(1A) on tax payable on the whole amount of consideration instead of on the amount of gain. Both the above decisions of the Bengaluru Tribunal, in our humble submission,  are not correct in law as they have not considered the decision of the Supreme Court in GE Technology Cen. P. Ltd., which has clearly stated that deduction of tax at source is required only on the portion of income embedded in the payment.