Tax Column

Tax Column

Tax Queries by Jayesh Dadia, Chartered Accountant 

My father died during the financial year 2020-21. As per my father’s legal will, an executor was appointed and the assets are to be distributed amongst myself, my brother and my mother. Pending distribution, I have filed the return of my late father’s estate as an individual. Is this action correct? 

Under Section 168 of the Income Tax Act, if a person dies after making a will the income of the estate of the deceased person shall be chargeable to tax in the hands of the executor. If the executor is only one, the income of the estate will be taxed at the rate applicable to individuals but if there are more executors the estate’s income will taxed as association of persons (AOP). Since in your case there is only one executor, you have calculated the tax liability of the estate rightly by treating the same as an individual. However, the IT Department, while processing the return under Section 143(1) of the Income Tax Act may treat the estate as an AOP in the absence of copy of the will or other documents. In that case, you may have to file an application under Section 154 of the Income Tax Act for rectification or approach the appellate authorities for necessary directions.

I have purchased shares of a closely held company from an individual who is a non-resident Indian. The total consideration paid was ₹ 8 crore. Am I liable to deduct withholding tax and if yes, at what rate? 

Under Section 195 of the Income Tax Act, every assessee is responsible for deducting withholding tax if the payment is made to any non-resident as income in his hand. The tax is to be deducted at the rate prescribed and applicable under the Income Tax Act. Therefore you are liable to deduct withholding tax on the gross sale consideration. Since the shares involved are of a closely held company and assumed to be a long-term asset, under Section 112(1)(c) of the Income Tax Act the applicable tax rate is 10 per cent plus applicable surcharge and education cess. However, while calculating the capital gain, no indexation is permissible. Further, you can also avail the benefit of a double taxation avoidance agreement if the non-resident is a resident of a foreign country with which India has a double taxation avoidance treaty.

I am an individual and have received a gift of ₹ 5 lakhs from my sister. However, the amount was received by cheque from my nephew i.e. my sister’s son. I was told that I may face a problem in assessment as this gift from my nephew is not exempt under provisions of the Income Tax Act. Can you advise on this matter? 

If your case is picked up for scrutiny, the IT officer may hold that the gift of ₹ 5 lakhs was received from your nephew and not from your sister and therefore it is taxable under Section 56(2)(x) of the Income Tax Act. You have to obtain a confirmation letter from your sister where besides expressing love and affection for you, she should also mention that she has instructed her son to issue cheque of ₹ 5 lakhs on her behalf. Further, also take confirmation from your nephew that the cheque issued to you was under the instruction of his mother. On the basis of these two letters, the concerned officer may treat the gift received from your sister as exempt under Section 56(2)(x) of the Income Tax Act. In a recent case, the Chennai Tribunal held that the amount received by the assesse on behalf of a paternal uncle’s son with clear indication that the amount was paid on behalf of his father who is the assessee’s uncle can be treated as a gift which is exempt under Section 56(2)(x) of the Income Tax Act. 

I am an individual and staying in a rented premise for the past many years. I was asked to surrender the tenancy rights for which I was paid ₹ 5 crore. I don’t have any other residential house in my name. Can I buy any house on a tenancy basis by investing the entire amount and can I avail exemption under the Income Tax Act? 

Tenancy right is a capital asset under the Income Tax Act. Therefore, surrender of tenancy right amounts to transfer of capital asset and accordingly subject to Capital Gain Tax. Under section 54F of the Income Tax Act, a person who receives capital gain on transfer of long-term capital asset other than land and building can invest in the purchase or construction of a new residential house and the amount invested is exempted under Section 54F. However, you are not acquiring ownership right in the new property but merely acquiring tenancy right which cannot be equated with the former. The condition of Section 54F is that the assesse must purchase or construct new residential property within the specified time. In my opinion, the acquisition of tenancy right does not tantamount to purchase or construction of new property in any manner. Therefore, if you invest the entire capital gain in the acquisition of tenancy right in residential property, you may not be eligible to claim capital gain exemption. Therefore, I recommend acquiring new residential property on ownership basis.

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