Tax Column

These days, the system immediately intimates you that your return is defective since you have not paid tax or it may process the return and raise tax demand on you. The system does not give any time to the assessee for payment of tax and, therefore, your return may be treated as defective if you do not pay tax. Jayesh Dadia Chartered Accountant 

I am carrying out business in a partnership firm. In the partnership firm, we have stock-in-trade in the form of flat and shares. To improve the Balance Sheet, we want to convert stock-in-trade into capital asset which will be shown at the market value. Is there any tax implication in doing so? If yes, can you explain? 

With effect from assessment year 2019-20, i.e. the current financial year 2018-19, a new clause (via) has been added in Section 28 which provides that "the fair market value of an inventory as on the date on which it is converted into, or treated as a capital asset determined in the prescribed manner" shall be chargeable to income tax under the head "profit and gains of business or profession". This will mean that on conversion of stock-in-trade into a capital asset, the difference between the cost and the market value on the date of such conversion will be taxable as business income. The difference is taxable even if stock-in-trade is not sold. It may be noted that by insertion of Clause (xiia) in Section 2(24), it is now provided that such notional difference between the fair market value and the cost of stock-in-trade shall be deemed to be income liable to tax. As such, a firm may have to pay tax on deemed business income.

For your further information, when you sell the capital asset which has been converted from stock-in-trade in future, then the market value of capital asset which was considered for calculating business income would become your cost of capital asset and, therefore, you will pay tax as capital gain only on excess of market value. Further, you can also claim depreciation on such capital asset which has been converted from stock-in-trade. 

I am an individual and have earned substantial capital gain, besides regular salary income. I have used the entire capital gain for certain personal family use. As per the computation of income, for assessment year 2018-19, the tax liability on the capital gains come to Rs.21 lakh, but I don't have funds today. Can I file my Income Tax Return without payment of tax and what are the consequences of non-payment of tax as per the return? I am expecting funds by November 2018 and will pay the tax immediately thereafter. 

Yes, you can file the ITR disclosing tax payable. The income tax system would accept your return, but will show the amount of tax payable. These days, the system immediately intimates you that your return is defective since you have not paid tax or it may process the return and raise tax demand on you. The system does not give any time to the assessee for payment of tax and, therefore, your return may be treated as defective if you do not pay tax. 

However, the bigger issue is penalty under section 221 read with section 140A(3) of the Income Tax Act, under which a penalty can be levied of the equivalent amount of non-payment of tax in the absence of any reasonable cause. If you fail to establish a reasonable cause or if the Officer is not convinced with the reasons given by you, then the penalty can be levied. Therefore, it is a serious offence and not worth taking risk. My advice to you is to borrow funds from any other source and make payment of tax to avoid penalty, interest and prosecution. 

I am a tenant of a residential premise in which I have been staying over a period of many years. There is the pressure on me from the landlord to vacate the premises for which the landlord has agreed to give me a compensation of Rs.2 crore. I don't have any residential premises and I want to invest the entire Rs.2 crore in the purchase of new residential premises on ownership basis. Is there any tax implication on the receipt of Rs.2 crore from the landlord and what are the remedies available ?

Tenancy right in residential premises is a capital asset and, therefore, on surrender or transfer of such right for a consideration, then such consideration is subject to capital gain tax. Since you have been enjoying the tenancy rights for more than three years, the entire Rs.2 crore is long term capital gain. 

Under section 54F of the Income Tax Act, if you invest the entire Rs.2 crore in a new residential house, then you need not to pay any capital gain tax since you are reinvesting the entire capital gain in a new residential house, particularly when you don't have any other house in your name. So your investment of Rs.2 crore in new house will not attract any capital gain tax. If your new house is for a lesser amount,say Rs1.5 crore, then the balance Rs50 lakh can be subject to capital gain tax @20%. However, under section 54EC, you can also invest in government capital gain bonds upto Rs50 lakh to get further exemption from the capital gain tax..