Common sense can help you reduce your taxes

Most people think of tax planners as wise old men in white hair who study the arcane tax laws and come up with brilliant interpretations of little known sections of the income tax law. Many times, it is indeed so. But a number of times, the tax planning consists of simple common-sense approach to understand the final objective and aim to achieve it in a slightly different fashion to obtain a tax effective solution.

My friend Rakesh Mehra’s case illustrates this point perfectly. Rakesh’s father Roshan Mehra is an 84-year old retired IAS officer. He has pension income of Rs 60,000 per month. He lives with Rakesh in Mumbai. Rakesh has a brother Rishi who lives in Delhi. Both Rakesh and Rishi are financially well off. The father Roshan Mehra has a flat in Panvel that he had bought in 2001. Its indexed cost is around Rs 18 lakh. Its current value is around Rs 1.1 crore. He wishes to sell the flat and distribute the sale proceeds equally among both Rishi and Rakesh even while he is living. He does not wish to purchase another flat but still wants to save on capital gains tax to the extent legitimately possible.

In the normal course if Roshan Mehra were to sell the flat he would have taxable long-term capital gains of Rs 92 lakh. If he does not do any tax planning he would have to pay capital gains tax of Rs 21 lakh approximately (calculated at 22.66% of Rs 92 lakh). The balance amount left from the sale consideration of Rs 1.10 crore after paying long-term capital gain tax of Rs 21 lakh would be Rs 89 lakh which he can gift equally to both Rakesh and Rishi who would end up getting Rs 44.50 lakh each.

A straight forward tax planning suggestion was for Mehra to invest in capital gain bonds of National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) for Rs 50 lakh. This would bring down the taxable capital gains to Rs 42 lakh and the capital gains tax would come down to Rs 9 lakh approximately (20.60% of Rs 42 lakh).

The balance amount left from the sale consideration after the investment of Rs 50 lakh and the tax of Rs 9 lakh would be Rs 51 lakh. Mehra could gift Rs 25.50 lakh each to Rishi and Rakesh. Additionally, he could gift another Rs 25 lakh each after three years when the capital gain bonds mature. In this way Rakesh and Rishi would get Rs 50.50 lakh each in two tranches (instead of Rs 44.50 lakh in scenario one) and Mr Mehra could also enjoy the interest on the bonds during the three-year holding period.

Instead, I suggested that Mr Roshan Mehra gift the flat itself to his two sons. Gifts to close relatives enjoys concessional stamp duty rates in Maharashtra (total cost around Rs 40,000 all inclusive) and there are no income tax implications on any of the parties. The sons could now sell the flat and the taxable capital gains in the hands of each of them would be Rs 46 lakh as the capital gains would be divided up between the two of them in the proportion of their ownership. Each of them would now receive Rs 55 lakh on which they need not pay any capital gain tax if they invest in capital gain bonds of Rs 46 lakh each. Also, Rishi had just bought a residential property in Delhi and hence would not even need to invest in capital gain bonds to claim exemption.

This is a common-sense application of the tax planning maxim called gift the asset rather than gifting the money obtained from selling the asset. Nothing complicated about this tax planning technique.

Source : DNA/13.10.2017

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NRIs do not need to visit India to get a Permanent Account Number

From income-tax perspective, there is a specific exemption for foreign citizens on the requirement to obtain Aadhaar for income-tax return filing and PAN application

Question : I have recently become a citizen of Canada. Till now I was holding NRE and NRO accounts in India, as well as several other investments. My wife, who is a Canadian citizen, is now a part of my financial life as well and I want to transfer two rental properties in India in her name. Please let me know how the taxes for that will be filed? Will she have to get an Aadhaar and PAN? Can I get a PAN in Canada? If so, what is the process?

Answer :
Taxability on transfer of house property to spouse:
Under the Indian income-tax laws, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration, except if the same is received from a ‘relative’. Under this provision, the term ‘relative’ includes spouse.

Accordingly, a transfer of house property in India to your wife will not be subject to tax in India. A gift deed registering the transfer of property in India is recommended.

Taxability of rental income from house property received by spouse:
Under the India income-tax laws, in case an individual transfers any house property in India to his or her spouse without adequate consideration, the transferor will be considered as the deemed owner of the house property so transferred. Hence, any rental income received from the said house property in India will still be taxable in your hands. You will be required to pay applicable taxes and file the income-tax return in India disclosing rental income from the said house property.

However, any further income derived by your wife from investing the said rental income like interest from bank etcetera, may be taxable in her hands. Your wife will be required to file an income-tax return in India in case her total income (i.e., gross income excluding the exempt income) exceeds the threshold limit for the relevant financial year (Rs2.5 lakh for the financial year 2017-18).

Please note that as you and your wife are residents of Canada, there may be tax implications in Canada for the said transfer and income from the house property in India. In case of any double taxation, applicable benefits under the Double Taxation Avoidance Agreement between India and Canada may be explored.

Eligibility to obtain Aadhaar:
Under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, every ‘Resident’ is entitled to obtain Aadhaar number by providing his demographic and biometric information. The term ‘Resident’ has been defined under the said Aadhaar Act as an individual who has resided in India for a period 182 days or more in the 12 months immediately preceding the date of application for enrolment for Aadhaar.

Accordingly, there may be no requirement for your wife to obtain Aadhaar unless she stays in India for 182 days or more in the immediately preceding 12 months period.

From income-tax perspective, there is a specific exemption for foreign citizens on the requirement to obtain Aadhaar for income-tax return filing and PAN application.

Eligibility to obtain PAN:
Under the India income-tax laws, in case an individual has total income (i.e., gross income excluding the exempt income) exceeding the threshold limit for the relevant financial year (Rs2.5 lakh for the financial year 2017-18), then the said individual is required to obtain a PAN.

Accordingly, your wife may be required to obtain PAN in India in case her total income (i.e., gross income excluding the exempt income) exceeds the threshold limit.

Process to obtain PAN:
To apply for a PAN, your wife may make an online application and send the signed physical PAN application along with the necessary supporting documents such as identity and residence proof to the PAN centre in India. The PAN card can be delivered to your address in Canada.

Source : Live mint/16.10.2017

Posted in NRI

Rectification on cash transactions – section 269ST ?

If an invoice of ₹ 5,00,000/- of jewellery is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- is paid off in cash is hit by section 269ST?

Section 269 ST is inserted by the Finance Act, 2017 w.e.f. April 1, 2017 i.e. effective from Assessment Year 2017-18.

The object for introducing this provision has been explained in the Memorandum Explaining the Provisions relating to Direct Taxes. The Memorandum states that in India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.

In order to achieve the mission of the Government to move towards a less cash economy, to reduce generation and circulation of black money inserted section 269ST in the Act to provide that no person shall receive an amount of two lakh rupees or more –

a) In aggregate from a person in a day; or
b) In respect of single transaction; or
c) In respect of transactions relating to one event or occasion from a person
Otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing through a bank account.

Thus, from reading the fact it is clear that jewellery worth of ₹ 5,00,000/- is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- has been paid by cash. Thus the provisions of section 269ST are clearly applicable.

Chargeability of share application money in whose hands ?

Share application money which is taxed as Undisclosed in the hands of a private company can also be taxed as undisclosed income in the hands of applicants by issuing notice u/s. 148?.

The broad scheme of the Act is to charge all income to tax but only in the hands of the same person.

So share application money received by Private Limited Company has to be taxed in whose hands? The Supreme Court in CIT v. Steller Investment Ltd. [251 ITR 263] has given answer by stating that even if it be assumed that the subscribers to the increased capital are not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income in the hands of the company.

Thereafter, the Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 CTR 195] has held that, if share application money is received by assessee – company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessment in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company.

However, from the facts, it is clear that it has been wrongly taxed in the hands of the company instead of in the hands of applicant shareholders. Therefore, Assessing Officer can tax undisclosed income in the hands of applicant shareholders by reopening the assessment as per law.

At this juncture, it is necessary to refer the judgement of the Supreme Court in ITO v. Ch. Atchaiah [218 ITR 239], wherein the Hon’ble Court has observed that “where a person is taxed wrongfully, he is no doubt entitled to be relieved in accordance with law but that is different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law”.

Violation of principles of Natural Justice – Section 68 ?

When a closely held company receives share application money with premium in A.Ys. 2009-10, 2010-11 & 2011-12, he files Form 2, confirmation, address, PAN, bank account details etc during the course of assessment. AO doubts the capacity of share applicants and adds back u/s. 68 based on statement recorded of accommodation entry provider to share applicants. Assessee company asked for a copy of statement recorded and cross examination of entry provider, which was not provided by the AO. Please also refer proviso to section 68. Is the assessment valid ?

Assessment is not valid, as it violates the principles of natural justice. The Supreme Court in R. B. Shreeram Durga Prasad v. Settlement Commission [176 ITR 169] has held that the order made in violation of principles of natural justice is void and nullify.

The Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 ITR 195] has held that if share application money is received by the assessee company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee–company.

Provisos to section 68 was inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e. from assessment year 2013-14 and therefore the provisos are not applicable to earlier assessment years.

Amount deposited in bank – how to reflect in Income tax returns

In the new ITR forms provision has been made to mention aggregate amounts deposited in the banks during November 9, 2016 to December 30, 2016:

1. Whether only deposits of specified bank notes (SBN) or all types of notes has to be mentioned?

2. Whether aggregate of deposits in all bank accounts or in a single bank account i.e. ₹ 2/- lakh and above ?

In ITR, details of all bank accounts held in India at any time during the previous year (excluding dormant accounts) are to be given, wherein details in respect of cash deposited during November 9, 2016 to December 31, 2016 of aggregate cash deposits during the period ₹ 2/- lakh or more is required to be given.

Thus the details are not restricted to specified bank notes (SBN), but it covers all types of notes. Further aggregate cash deposited during that period is to be given in all bank accounts.

Fair Market Value of flat on surrender of tenancy right

An old lady was residing at Malad in tenanted chawl having about 1000 sq. ft. area. After her death her daughter-in-law became successor and continued to live there. Subsequently the building was re-developed and she was allotted two flats of 650 sq. ft. each in her name in exchange of surrender of tenancy right. Out of which one was sold by her at an handsome price. Now the ITO wants to tax the whole sum as long term capital gain without allowing any deduction as purchase value or cost price plus index cost. Is the AO correct ?

The Finance Act, 1994 has amended the provisions relating to capital gains for the purpose of taxing the capital gains arising from transfer of tenancy right. For this purpose, the amendment provides that the cost of acquisition of the tenancy right be taken at NIL.

From the facts, it is clear by surrendering the tenancy right, the lady got in exchange two flats. So on surrender of tenancy right the cost of tenancy right was Nil. But, here the consideration for surrender of tenancy right was in – kind i.e. by way of exchange of two flats. Therefore, the fair market value of the property exchanged to be ascertained in order to arrive at the figure of consideration as per the Bombay High Court in Baijunath Chaturbhuj v. CIT [31 ITR 643].

Out of the two flats received, the lady sold one flat at handsome price. So for purpose of calculation the capital gains the index cost of this sold flat has to be ascertained and deducted. The flat being long-term, the index cost has to be worked out on the basis of fair market value of the flat in exchange of tenancy right at the date of surrender. Therefore, the view of the AO is not correct.