Tax Column

I sold a residential flat during the current financial year 2019-20. The entire sale consideration was deposited in my Bank of Baroda account. I have another bank account with HDFC where there is substantial fixed deposits and bank balance. I purchased a new residential house by utilising the balance lying in HDFC Bank and shall avail benefit under section 54 of the Income Tax Act. One of my friends told me that since I have not utilised the actual sale proceeds which I have deposited in Bank of Baroda for the purchase of new house, the tax officer may deny exemption to me under section 54 of the Income Tax Act. What is your view on this?

Jayesh Dadia Chartered Accountant

Provisions of Section 54 of the Income Tax Act does not require an assessee to hold on to the same money and to demonstrate that very same money. It means sale consideration can be utilised in the acquisition of assets. The requirement of law is that, the money so available to the assessee to the extent on which exemption under section 54 is claimed, need to be invested in acquisition of specific asset, within stipulated time. Since you have invested a substantial amount in the purchase of new asset, within a specified period, you are entitled to claim exemption under section 54 of the Income Tax Act and the tax officer cannot deny that to you.

I am an individual, who filed Income Tax Return (ITR) for the assessment year 2017-18, declaring income at Rs 42 lakh, comprising of salary, interest and capital gain. I have received an order under section 143 (3) of the Income Tax Act for the above mentioned assessment year where the Assessing Officer (AO) has assessed my total income at Rs 1.25 crore. He has made an addition under capital gain as well as certain credit entries appearing in my bank account as unexplained income. The AO has also demanded Rs 32 lakh. Can you please advise what steps should I take now and how to handle the matter henceforth?

The first step you should take is to approach any tax consultant or Chartered Accountant (CA) and ask him to file an appeal against the assessment order before the CIT (A). The appeal need to be filed within 30 days from receipt of the order. The appeal is to be filed online and its filing charge is Rs 1,000. Please ensure that you file the appeal within 30 days. As far as the demand is concerned, you may write to the Assessing Officer that an appeal has been filed against the assessment order and you do not have liquidity to make payment of disputed demand and accordingly, request him to keep the demand in abeyance till the disposal of the appeal. However, the AO may not accept your request and ask you to pay 20 per cent of the demand. You may approach the AO again with a request to allow you to pay 20 per cent in suitable monthly installments. You may also approach CIT (A) for posting the appeal for hearing out of turn. A proper representation should be made at the time of appellate proceedings and all the relevant details, documents, explanations along with a paper book should be filed to convince the CIT (A) that the addition made by the AO is primafacie incorrect and wrong. Therefore, it is necessary to have a competent CA/Tax consultant to represent your appeal.

I am a senior citizen, staying in a tenanted premise along with my wife and son for more than 30 years. Our building has gone for redevelopment and the builder has offered me two proposals; first one is that-I surrender tenancy rights and take consideration of Rs 2 crore and the second option is-to handover the possession to the builder for redevelopment and receive the new premises on ownership basis after the construction is over. I am confused. Can you explain the tax implication in both the situations?

If you choose the first option of surrendering tenancy rights and receiving consideration of Rs 2 crore, then that would be a long-term capital gain in your hand as you will surrender capital asset i.e. tenancy right. However, if you invest the entire Rs 2 crore in the purchase of a new residential house, then the entire Rs 2 crore will be allowed as deduction under section 54F of the Income Tax Act and there will be no tax implications at all. However, you have to follow certain time limit for the purchase and investment of the new asset. If you go for the second option, then there will be no tax implications, if you receive the property on ownership basis after the construction is over. Therefore, you have to decide which option suits more commercially and logically

I am an individual, holding a power of attorney for Mr A, which authorises me to sale his immovable property. During the financial year 2016-17, I sold the property belonging to him. In the sale agreement, my PAN was mentioned, as the agreement was entered between the purchaser and me as power of attorney holder. Since I am not the owner, I did not disclose the capital gain in my Income Tax Return (ITR) for the assessment year 2017-18. However, the AO has completed my assessment for 2017-18 by taxing the entire sale consideration as my income since in the registered documents, my PAN was given and my name was mentioned as the seller. Whether the action of the AO is correct or not, in accordance with the law?

Under the Income Tax Act, the income on sale of asset accrues to the owner of the asset and accordingly, it is taxable in their hands. Power of attorney holders are not the owners both legally and beneficially but they have been granted the authority by the owner to convey the property to a third party. The Courts have held consistently that the holders of power of attorney do not become the owner of the property by virtue of an irrevocable power of attorney. Therefore, the Assessing Officer is apparently wrong in taxing income in your hand as you are not the owner of the property. However, you have to file an appeal against the action of the AO for further relief. You can also refer to the decision of the Supreme Court (SC) reported in 340 ITR 1, and Karnataka High Court reported in 382 ITR 179, where it has been held that income cannot be taxed at the hands of power of attorney holders.