Tax Column

I am an individual. The Indian Railways had acquired my land situated in my native village for a total consideration of ₹10 crore as compulsory acquisition. Although the compensation was determined in 2016 I received the same in the current financial year along with interest of ₹2 crore. Please let me know the tax liability of the entire amount.

If the land is agricultural and is situated beyond the limits specified under Section 2(14) of the Income Tax Act, then apparently the compensation of ₹10 crore is not taxable. In my opinion, even if the land is non-agricultural, then also you can claim the consideration of ₹10 crore as exempt in view of the CBDT Circular No. 36 of 2016 read with Section 194 LA where it has stated that the compensation received on compulsorily acquisition of land by the Government of India is exempted. You, therefore, need to consult your tax consultant and avail of the tax benefit if it is applicable. As regards the interest of ₹2 crore, in my opinion the same is taxable under Section 56(2) (VIII). However, you will be entitled to notional deduction of up to 50 per cent of the interest earned under Section 57 (IV) of the Income Tax Act. In your case, you have to pay tax only on ₹1 crore.

I am an individual and a woman. I provide consultancy to various professionals who are engaged in the business of jewellerymaking, art-making and interior designing. During the financial year 2021-22 there was a search action on me in consequence of such action carried out in respect of other business houses where I provide consultancy. During the course of the search, the Income Tax Department seized loose papers with noting on it. No valuable assets such as jewellery, cash, properties, etc. were found and seized. However, the figures mentioned on the loose papers were in crores and may be considered as income in my hand. Can you explain how loose papers unsigned and undated can put me in trouble?

It is very common that during the course of search and seizure action voluminous documents are seized which may also include numerous loose papers and diaries which may contain rough calculations, vague noting, scribbling, jotting, etc. Most of these loose papers are non-speaking documents without any corroborative material, evidence, etc. The legal position is that non-speaking documents without any corroborative material, evidence, etc. have to be disregarded for the purpose of the assessment which is to be framed pursuant to any search and seizure action. The courts have held that all such types of documents not backed by any corroborative material are dumped documents. However, the Income Tax Department may consider all the noting on the loose papers as your deemed income under various deeming sections such as 68, 69, 69A, 69B and 69C of the Income Tax Act. Therefore, I suggest that you should be prepared to give proper explanation for each and every noting, scribbling or jotting on the loose papers and must state that noting on loose papers have not resulted into any financial transactions. However, there may be additions that would be made in the assessment order but you will have a fair chance of succeeding before the appellate authorities in view of numerous decisions of the Supreme Court, high courts and tribunals holding that loose papers or documents have no evidentiary value unless backed by corroborative evidence. In your case, nothing was found during the course search except loose papers.

I am an individual holding shares in a closely held private limited company which is controlled by me. I have decided to exchange these shares for shares of another closely held company and would like to know if there will be any tax implications as I have not received any consideration and only exchanged the shares of one company for the other.

The definition of transfer under Section 2(47) of the Income Tax Act includes ‘exchange’. Therefore, exchange of shares of one company’s shares for another amounts to transfer or sale of shares of the first company by you although you have not received any sale consideration. The deemed sale consideration would be the fair market value for shares of the second company. From this fair market value, the cost of shares of the first company will be deducted and the difference will be taxed as long-term capital gain. A similar tax position will be in the hands of the person who has transferred the shares of the second company for the shares of the first company. Receipt of actual consideration is not relevant as far as taxability of capital gain is concerned.

Can you let me know the taxability of receipt of any amount under a life insurance policy on maturity during the lifetime of an individual and also on death?

Any sum or receipt from a life insurance policy on maturity is exempt subject to certain conditions provided in Section 10 (10D) of the Income Tax Act. For example, any sum received under the key man insurance policy is subject to tax and is taxed separately under the provision of the act. Further, any bonus received along with the principal amount on maturity is also not taxable. However, exemption is available only in respect of amount received from a life insurance policy issued by any company or regulatory authority. The amount received on death of a person will always be exempt without any condition in the hands of the legal heir.