Tax Column

Jayesh Dadia 
Chartered Accountant 

I am an individual and have inherited a residential flat from my father who acquired it in 1966. Within nine months from the date of inheritance of the flat I have decided to sell this flat for Rs10 crore. Can you tell me whether this will be a long-term capital gain and if yes, how does one compute it and what are the options available for reducing capital gain?

As stated by you, the residential flat inherited by you from your father was acquired by him in 1966. Therefore, under the provisions of Income Tax Act, the said flat is deemed to be held by you since 1966. As you are selling the flat in 2020, the flat is definitely a long-term capital asset in your hands and accordingly any gain that arises on the sale of such an asset is considered long-term capital gain. This will be computed by considering the fair market value (FMV) of the flat as on April 1, 2001 since the flat was acquired prior to that date. The FMV could be the ready recknor value as on April 1, 2001 or as determined by the registered valuer. So the FMV, as determined as on this date, would become the deemed cost in your hands. 

Since you are selling the flat in 2020, you are entitled for indexation which is 3.1 times the FMV as on April 1, 2001. The difference between the selling price of Rs10 crore and the indexed cost would be the long-term capital gain. You are liable to pay 20 per cent tax plus surcharge on long-term capital gain. However, if you invest the net capital gain in another residential flat, then the entire capital gain will be exempted from tax. You can also avail benefit under Section 54EC by Tax Column investing Rs50 lakhs for a fixed period of five years in capital gain bonds. If you don’t invest the full capital gain in a residential flat as well as a capital gain bond, then you will have to pay proportionate Capital Gain Tax. 

I am an individual and engaged in the business of manufacturing and trading of various goods. My annual turnover for the financial year 2019-20 was around Rs1.8 crore. Due to the pandemic and lockdown, my accountant did not come to work and has also not maintained proper records of expenses, etc. All my sales were received through banking channels and duly recorded in the bank statements. Can you advise me how to file my tax return in the absence of books of accounts? 

You need not panic as there is a provision in the Income Tax Act which will help you in filing the return for assessment year 2020-21. Under Section 44 AD, any individual who is in the business of trading and manufacturing of goods and whose turnover is less than Rs2 crore can pay the tax by estimating 8 per cent of the total turnover as business profit. There is no need to show any proof of expenses. Further, if an individual’s entire turnover has been received through account payee cheques or through any electronic clearing system, the income would be estimated at 6 per cent of the turnover. Since your turnover is Rs1.8 crore during the financial year and you have received the entire turnover through proper banking channels, you are eligible for provisions of Section 44 AD and can offer your income at 6 per cent of Rs1.8 crore, which comes to Rs10.80 lakhs. The tax will be calculated on the income of Rs10.80 lakhs.

I am an individual and residing in a flat in a cooperative society. I had another residential flat in another part of the city which I have sold and earned long-term capital gain of Rs2 crore. I want to invest the entire gain in a residential flat located in my building itself. However, as per the bye-laws of the society an individual can have a maximum of one flat in the society. Can I reinvest the capital gain in another residential flat in the name of my wife? Will I be entitled for exemption under Section 54 of the Income Tax Act? 

There is some debate about whether any capital asset acquired in the name of the spouse would be entitled for exemption while computing capital gain. However, in my opinion, you will be entitled for deduction under Section 54 of the Income Tax Act even if you have reinvested your capital gain in the name of your wife. What is important is the utilisation of capital gain in a residential house which is going to be utilised by you and your family. The amount is invested in the name of your wife only because of the bye-laws of the society. The Delhi High Court in 351 ITR 1 has held that acquisition of new asset in the name of spouse is eligible for exemption under Section 54 F of the Income Tax Act. Therefore, you have a fair chance of succeeding before the Income Tax authorities in availing deduction under Section 54 of the Income Tax Act. 

I request you to explain how when an immovable property jointly acquired (contribution of each person in a certain ratio) is sold, the sale consideration is to be received by the joint sellers from buyers in the same ratio and also whether the TDS from the sale consideration is also to be shared in the same ratio. 

Technically, yes, the sale consideration is to be offered for taxation in the same ratio as contributed by the joint owners. However, in the sale deed, sale consideration need not be bifurcated between the two joint owners. The joint owners, in their returns, will offer proportionately the capital gains’ TDS. If deducted in the hands of only one owner, then only that particular owner can claim the TDS. If the buyer has deducted TDS in the name of both the joint owners, then only joint owners will claim their share of TDS in the return of income. However, for sake of convenience, TDS is to be deducted separately in the name of the joint owners. 

You need not panic as there is a provision in the Income Tax Act which will help you in filing the return for assessment year 2020-21. Under Section 44 AD, any individual who is in the business of trading and manufacturing of goods and whose turnover is less than Rs2 crore can pay the tax by estimating 8 per cent of the total turnover as business profit. There is no need to show any proof of expenses. Further, if an individual’s entire turnover has been received through account payee cheques or through any electronic clearing system, the income would be estimated at 6 per cent of the turnover. Since your turnover is Rs1.8 crore during the financial year and you have received the entire turnover through proper banking channels, you are eligible for provisions of Section 44 AD and can offer your income at 6 per cent of Rs1.8 crore, which comes to Rs10.80 lakhs. The tax will be calculated on the income of Rs10.80 lakhs.

I am an individual and residing in a flat in a cooperative society. I had another residential flat in another part of the city which I have sold and earned long-term capital gain of Rs2 crore. I want to invest the entire gain in a residential flat located in my building itself. However, as per the bye-laws of the society an individual can have a maximum of one flat in the society. Can I reinvest the capital gain in another residential flat in the name of my wife? Will I be entitled for exemption under Section 54 of the Income Tax Act? 

Technically, yes, the sale consideration is to be offered for taxation in the same ratio as contributed by the joint owners. However, in the sale deed, sale consideration need not be bifurcated between the two joint owners. The joint owners, in their returns, will offer proportionately the capital gains’ TDS. If deducted in the hands of only one owner, then only that particular owner can claim the TDS. If the buyer has deducted TDS in the name of both the joint owners, then only joint owners will claim their share of TDS in the return of income. However, for sake of convenience, TDS is to be deducted separately in the name of the joint owners.