Tax Column

Jayesh Dadia
Chartered Accountant

I am an individual and in the current financial year I have sold shares of a closely held company and made Long Term Capital Gain (LTCG) of Rs 2 crore. I don’t own any residential house and I stay in my father’s house. Can I invest the entire LTCG in acquiring house from my father by a proper sale deed? Is it possible to avail the LTCGby acquiring house from my father and not from a third party? My father bought his house four years back for a total consideration of Rs.1.8 crore. What would be the tax implication in my father’s hands?

You have made LTCG by selling equity shares and you don’t own any house. Therefore, you are entitled for investment in a new house and enjoy the exemption under section 54F of the Income Tax Act. Yes, you can buy the house from your father as thereis no restrictions in the Act. However, you must ensure that the sale consideration should not be less than the ready reckoner rate and you actually pay the consideration to your father through proper banking channels. As you will invest the entire LTCGin purchase of a new house, no capital gain tax is chargeable in your case. In case your father also makes a gain, such gain would be LTCG. Apparently, taking into consideration the indexed cost, it seems there will be no capital gain as both the indexed cost and the sale consideration would be almost the same. If at all there is minor capital gain, then your father can invest in some specified bonds (maximum Rs 50 lakh) for a period of five years.

I have made Short Term Capital Gain (STCG) of Rs 30 lakh on sale of listed equities on which STT has been paid in the current financial year. I have also incurred Short Term Capital Loss (STCL) of Rs20 lakh in the current financial year on which STT was not paid. 

Yes, you can set-off STCL against STCG in the same financial year. Under Section 74 of the Income Tax Act, STCL can be set-off against any capital gain, either short term or long term.

I am a working woman. My father died during this financial year and on his death, my family gave me jewellery which belongs to my parents as a part of my share of inheritance. I am in need of funds and desire to sell the jewellery which would fetch me Rs 1.5 core. Let me know whether the entire Rs 1.5 crore is tax-free as I received it on the death of my father? If no, then whether it would be taxed as capital gain in my hands and whether I am entitled to deduction of any indexedcost, etc.? What papers and documents required to justify that I have received jewellery as part of inheritance which my father owned for more than 40 years?

The jewellery which you received as inheritance from your father is not taxable in your hand. However, you have to establish with documents that your father was capable of owing such jewellery.The copy of the Will of your father must also disclose the above facts that on his death, certain jewellery will go to you as one of the legal heirs. The other legal heirs, such as your brothers and sisters, who are the beneficiaries of your father’s Will must also confirm the above facts. In other words, you have to satisfy the Income Tax Department that the transaction is genuine and you received the jewellery as inheritance from the estate of your father.If you sell the jewellery, the sale consideration would be taxed as capital gain. As you have mentioned that jewellery was held by your father for more than 40 years and which could be proved by evidence, then it is along term capital gain and you are entitled for deduction of indexed cost which is the fair market value as on April 1, 2001. The difference between the sale consideration and indexed cost would be the long term capital gain, which is subject to tax at 20%. However, in case if you are not able to satisfy the Income Tax Department about the jewellery owned by your father and you inherited on his death, then in that case the entire sale consideration of jewellery may be taxed as short term capital gain, which is subject to tax at 30%. The Income Tax Officer may invoke provision of Section 68 by treating the sale consideration as income from undisclosed sources, which is subject to tax at 60%. Therefore, you have to do some paperwork and collect proper documents to justify that you have actually inherited the jewellery from your father on his death and he was holding this jewellery for a long period of time.

Our family has one HUF where I am Karta and my wife and three sons are the members. The HUF has immovable properties as well as other movable assets such as fixed depositd, jewellery and shares etc. I have decided to dissolve the HUF and distribute the assets among the family members. Is there any tax implication on dissolution of HUF, both in the hands of HUF as well as in the hands of members? Is it necessary to distribute the wealth equally amongst the members? Is there any disclosure or form to be filled with the IT department?

You can dissolve the HUF by making a dissolution agreement which is to be signed by all the members of the HUF. There is no legal provision to distribute the assets of the HUF equally amongst the members. Therefore, you can distribute the wealth unequally.All the assets can be given to one individual member or one can give a higher portion of the assets to one individual and lower portion can be distributed amongst 3 to 4 members. The distribution can be mutually agreed between the members and there is no specific law on that. There is no tax implication in the hands of HUF as well as in the hands of the members who receive the assets on partition of HUF. Section 10(2) and Section 56(2)(x) of the Income Tax Act exempt such income in the hands recipients of asset/income on distribution of the assets. The HUF has to be fully partitioned and not partially partitioned. You have to inform about the total partition of the HUF to the concerned Tax Officer, who will then pass an order accepting the partition of HUF under section 171 of the Income Tax Act.