Tax Column

My father died leaving house property to my mother, myself and my brother. The property was jointly owned by my mother and my father. Therefore, the society has transferred the flat in the name of my mother. Now we all have decided to sell the flat and distribute the sale consideration equally. Can we first sell the flat and distribute the sale consideration or is it that myself and my bother first become members, then sell the flat and take the sale consideration separately? Can you explain what are tax implications ?

I recommend that first you and your brother should become co-owners in the residential flat by making an application to the society. After becoming members, you sell the flat and instruct the purchaser to pay the sale consideration to all the three separately. If you do this, then all the three individuals would be liable to pay capital gains tax separately and everybody will be entitled to reinvest the net capital gain in a new residential flat. Thus, you will enjoy exemption of the entire capital gain. 

I am an individual. Due to financial crisis I have taken a cash loan of Rs2,00,000/- from my close friend. I deposited cash in my bank account and then made certain payments. My close friend from whom I have taken a cash loan, has given me a confirmation letter and he has given his PAN. My friend wants me to repay the loan again in cash. What are the tax implications and whether I have violated any law ? 

Yes you have violated the law. Under Section 269SS of the Income Tax Act, a person is prohibited from taking a cash loan in excess of Rs20,000/-. Since you have taken cash loan in excess of Rs20,000/-, ie Rs2,00,000/-, you have violated provisions of section 269SS. For this default, you may be liable to pay penalty of an equivalent amount under Section 271D of the Income Tax Act. Similarly under section 269T, a person is prohibited in making repayment of loan in cash in excess of Rs20,000/-. If you repay the loan again in cash, then you would violate another provision of the Act i.e. section 269T. For such default, there will be penalty of an equal amount under section 271E of the Income Tax Act. Overall, you may be liable to pay a penalty of Rs4,00,000/-, unless you prove that there was a reasonable cause, which in your case, I don’t see any. Therefore, it is advisable to repay the loan by Account Payee Cheque to avoid at least a default under section 269T and penalty under section 271E. 

I am an individual and borrowed Rs2 crore on interest at 15% in the financial year 2016-17. I invested the entire Rs2 crore in one listed equity. Now I am planning to sell the said equity for Rs3 crore. I have increased my cost by approximately Rs1 crore by adding interest paid during the financial years 2016-17, 2017-18 and 2018-19. Thus my cost has become Rs3 crore. Since my sale price is the same i.e. Rs3 crore, there will be no capital gain as per my books. Whether the same would be accepted under the Income Tax Act? 

Interest paid by you on the borrowed funds will not be allowed as cost of the equity. Under the Income Tax Act, cost does not include interest for the purpose of computing capital gain. Therefore, your net capital gain would be Rs1 crore which could be reduced by taking Index Cost, Since you are holding the shares for more than one year, capital gain would be Long Term Capital Gain and you will be liable to pay tax at 10%. 

I am staying in a tenanted premises for the last almost 40 years. The building is very old and now going for redevelopment. The builder has given two options; first to surrender the tenancy rights and take consideration of Rs3 crore and second, agree for redevelopment and get a bigger premises in the redeveloped building along with monthly rent of Rs50,000/- till the possession is given in the new building. Can you explain me what would be the tax implication in my hand if I exercise any of these options? 

You are a tenant and have been staying in the property for more than 40 years. Therefore your tenancy right is a Long Term Capital Asset. If you exercise the first option i.e. surrender of tenancy rights, then the entire Rs3 crore would become Long Term Capital Gain in your hand. However, you are eligible for tax relief under section 54F of the Income Tax Act if you reinvest the entire capital gain in a new residential premises. There would be no tax implications if you invest the entire capital gain provided you don’t have more than two residential houses. If you invest a part amount then only this part amount would be eligible for exemption and on the balance amount you have to pay a Long Term Capital Gain Tax at 20%. If you exercise the second option, then the allotment of the new house on ownership basis will not attract any capital gains tax. Further, if you spend the full amount of rent you receive every month for temporary accommodation, then the entire rent would be exempted from tax. But if you pay a lesser amount of rent than Rs50,000/-, then the difference will be taxed as Income from Other Sources. Thus, in both the options, there will be no tax implications. 

My father was a HUF in which my mother and three brothers are the members. My father died and therefore we have decided to dissolve the HUF and distribute the assets according to my mother’s wish. So my question is whether there will be any tax implication on dissolution of HUF under the Income Tax Act ? Also, if the assets are distributed unequally where some members may get more than others, then what are the tax implications in the hands of a particular member ? 

Yes, the HUF can be dissolved but it has to be dissolved fully and not partially in view of provisions of section 171 of the Income Tax Act. There would be no tax implication on dissolution of HUF in the hands of HUF as well as in the hands of members. The distribution of assets need not be in equal proportion to all the members. It is possible that some members may get more and others may get less or even nothing. The distribution of assets, on account of dissolution of HUF, are not taxable in the hands of individual members.