Tax Column

Tax Column

Tax Queries By Jayesh Dadia Chartered Accountant

I along with my wife and two sons and their families are staying in a residential house on a tenancy basis. The tenancy right is in my name. The landlord is now compensating us on surrender of tenancy rights for ₹ 20 crore. I would like to know the Income Tax (IT) implications. I am going to buy three flats, one for myself and one each for my two sons.

Tenancy right is a capital asset. Therefore, consideration received on surrender of tenancy right is subject to Capital Gain Tax. It seems that you have been staying there for more than three years. Therefore, the entire capital gain would be in the nature of long-term capital gain. Under section 54F of the Income Tax Act, if you do not have more than one residential house on the date of surrender of tenancy right, then you can make investment in buying one residential flat to avail the Capital Gain Tax exemption.

You propose to buy three flats which you can do but the exemption will be restricted to only one residential house. The balance amount will be considered as long-term capital gain even though you have invested in two more residential houses. However, if you induct your two sons as a part of the agreement as tenants and they have occupation right, you can divide the compensation of ₹ 20 crore in three parts amongst the three of you. In that case, the capital gain will arise in the hands of all three of you and then all the three can buy one residential house each and enjoy the entire capital gain exemption.

I am a promoter and director of one closely held company which had business activity up to the assessment year 2015-16. Thereafter, the company did not carry out any business activity and did not even comply with the requirements of ROC, Income Tax, etc. As a result, the ROC has struck off the name of the company. The company has no assets and no bank account. I received a notice from the IT Department regarding reopening of assessment year 2015- 16, proposing an addition of ₹ 2 crore. Could you explain the consequences?

If the company is officially struck off and the master data of ROC clearly shows that the company is struck off, then the IT Department cannot start any reassessment proceedings against a nonexisting company. Therefore, you have to first inform the IT Department about the struck-off of the company with evidence. However, the IT Department may write to ROC to revive the company to enable the department to pass an order and raise a demand. On a letter from the IT Department the ROC will revive the company.

On revival, the Income Tax Officer will pass an order demanding tax liability which you can contest on law point before the appellate authorities. If the demand is finalised subsequently, the IT Department can recover the demand from the director of the company under Section 179 of the Income Tax Act. This process is also disputable and you would have to fight the case on legal issues.

I do share trading where in some cases I take delivery while in some cases I purchase and sale shares on the same day. What would be the treatment in terms of profit or loss on these transactions in my Income Tax Return? I do trading in derivatives also. There also I make substantial profit. How will this derivative profit be taxed in my hands?

Trading in purchase and sale of shares would be taxed as short-term capital gain or long-term capital gain if you take delivery of the shares and then sell them. Short-term capital gain will be taxed at 15 per cent and long-term capital gain will be taxed at 10 per cent. Profit or loss arising on intraday share transactions are in the nature of speculative transactions and it will be taxed as speculative profit or loss. Speculation loss can be set off only against speculation profit. Derivative transactions are in the nature of business transactions. Therefore, any loss or profit arising out of these transactions will be treated as business loss or income which could be available for setting off against other business income or loss.

I am an individual and hold a power of attorney a person who has authorised me to sell immovable property belonging to him. During the financial year 2020-21 I have sold the property. In the sale agreement my PAN was mentioned as the agreement was entered between the purchaser and myself as a power of attorney holder. Since I am not the owner, I did not disclose capital gain in my IT Return for assessment year 2021-22. However, the assessing officer has completed my assessment for assessment year 2021-22 by taxing the entire sale consideration as my income since the registered documents show my PAN and name as a seller. Is this right and in accordance with the law?

Under the Income Tax Act, income on sale of asset accrues to the owner of the asset and accordingly it is taxable in his or her hands. Power of attorney holders are not the owners both legally and beneficially but they have been granted authority by the owner to convey the property to a third party. The courts have consistently held that the holders of power of attorney do not become owners of the property. Therefore, the assessing officer is wrong in taxing income in your hand as you are not the owner of the property.

You can file an appeal against the action of the assessing officer for relief. You can also refer to the decision of the Supreme Court reported in 340 ITR 1 and Karnataka High Court reported in 382 ITR 179 where it has been held that income cannot be taxed in the hands of power of attorney holders. Also you can also draw the attention of the department to the fact that the owner has disclosed capital gain in his IT Return and therefore taxing capital gain in your hand would amount to double taxation.

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