Income from Other Sources
Query No. 1: [Taxability of Single Premium Money Back Policy]
Mr. X has purchased single premium money back plan of LIC called New Bima Bachat Policy. Sum assured is
Rs. 7,00,000/-. He has paid a single premium of Rs. 5,59,843/-. He will be getting
Rs. 1,05,000/- as survival bonus after every three years from LIC during the span of 15 years and thereafter the sum assured with Bonus on maturity.
The survival bonus and sum assured with bonus, receivable during the lifetime of Mr. X, is taxable in his hands as there is no exemption available as per the provisions of section 10(10D) of the Income-tax Act. There will be TDS also on this amount. Mr. X has not claimed deduction under section 80C on this premium paid, which in any case would have been
Rs. 70,000/- only.
In this connection, the following questions arise:
1. Is there any specific provision under the Income-tax Act by which this amount is taxed under the head “Income from other sources”?
2. Is it possible to show the income under head Capital Gain?
3. Is there any provision to claim the investment made in the policy as cost against the survival benefits?
4. If yes then how the same is to be claimed i.e. can one claim the cost by dividing it against the survival benefit receivable after every three years and then pay tax on entire amount received on maturity.
5. If the investment made is not allowed to be deducted from the survival amount receivable, will it not be unconstitutional as this will amount to taxing gross receipt and not income.
From the facts, it is clear that Mr. X has taken money back insurance policy called as New Bima Bachat Policy. As per the terms of the said policy, it is a single premium payment policy, where sum assured will be paid back to the policy holder in the form of survival benefit periodically. First survival benefit will be given to the policy holder on completion of three years of the policy and thereafter completing every three years. At the end of the term, policyholder on maturity will receive a sum assured minus survival benefits paid plus bonus. If he dies within the term of policy, death benefit will be paid to his nominee i.e. sum assured plus bonus.
As stated correctly, Mr. X is only entitled to claim deduction at
Rs. 70,000/- as per section 80C(3A) read with section 80C(2), though he has paid premium of
Rs. 5,59,843/-. However, as stated he has not claimed any deduction under section 80C.
The amount receivable on maturity of the said policy would not be entitled to the benefit of section 10(10D) of the Act, amounting to
Rs. 1,75,000/- plus bonus (i.e. sum assured Rs. 7,00,000/- less survival benefits paid in five installments of
Rs. 1,05,000/-. i.e. Rs. 5,25,000/-).
So, the survival benefits received would be nothing but return of capital as it is money back policy, hence, the same is not liable to tax when it is received. But on maturity bonus amount would be taxable in the hands of Mr. X under section 56 of the Act as it cannot be taxed under any other head.
In view of the above, the queries raised in serial nos. 2 to 4 do not require any elaboration.
Further, there is nothing unconstitutional, as survival benefit is nothing but return of investment and on maturity bonus would be taxable as the same is not exempt under section 10(10D) of the Act.
As regards TDS deducted on each payment of survival benefit can be claimed as a refund.
Query No. 2: S. 45(4): [Taxability of Distribution of assets during continuation of firm and on dissolution]
A firm having three partners and doing construction work.
In the said firm, there are tippers and JCB machines standing in balance sheet for business purpose.
Out of three partners, one partner wants tipper and another partner wants JCB machinery for his individual business purpose.
Can it be transferred by debiting their capital account and crediting machinery account during the continuation of partnership business without attracting capital gains tax.
What will be position, if the said transaction is effected on dissolution of firm?
Further, if the firm is decided to be dissolved on April 1, 2016 and the said transaction is made then as to whether the entry is to be passed on March 31, 2016 or April 1, 2016 and in that circumstances as to which date will be treated for taxation purpose i.e. March 31, 2016 or April 01, 2016 and in which year liability to pay income tax, if any, will arise?
If plant and machinery are withdrawn by the partners at book value during the continuance of partnership firm, then, the same can be debited to partners account and credited to plant and machinery account in such case there is no question of any liability of capital gains. [see Malabar Fisheries Co. (120 ITR 49) (SC)]
However, if partners withdraw at the time of dissolution of firm then as per section 45(4) of the Act, the liability in the hands of firm would arise on the basis of fair market value of the assets withdrawn on the ground that it amounts to distribution.
The dictionary meaning of the expression “distribution” is “to give each a share, to give several persons”. The expression ‘distribution’ connotes something actual and not notional. It can be physical, it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts due to him.
[see Punjab Distilling Industries Ltd. v. CIT (57 ITR) (SC)].
The Madras High Court in CIT vs. Vijayalakshmi Metal Industries [256 ITR 540] has held that the relevant date for ascertaining the year in which the tax is to be levied is the year in which the transfer takes place. That year may or may not be the year in which the dissolution of the firm takes place. Until such time such capital asset is transferred by way of distribution of the assets on the dissolution of the firm no occasion arises for brining to tax any capital gain on a transfer which has not taken place. The section itself gives no room for doubt as the year in which the capital gains to be brought to tax is “the previous year in which the said transfer takes place.”
Thus the year in which transfer takes place would create liability for taxation.
Income from Other Sources
Query No. 3: [S. 56(2) Gifts from Nana / Nani]
Gift given by Nana or Nani (i.e. mother side of assessee) is taxable or not? Whether Nana / Nani is covered under the definition of ‘Relative’? Whether lineal ascendant / descendant is also covered by mother side of assessee?
As per Explanation to section 56(2)(vii) “relative“ means in case of an individual:
(A) Spouse of the individual
(B) Brother or sister of the individual
(C) Brother or sister of the spouse of the individual
(D) Brother or sister of either of the parents of the individuals.
(E) Any lineal ascendant or descendant of the individual
(F) Any lineal ascendant or descendant of the spouse of the individual
(G) Spouse of the person referred to in items (B) to (F)
The term “lineal descendants” include all descendants and is not restricted to male descendants. [see Jagnnath vs. Kunja Behari (AIR 1929 PC 162)]. So lineal ascendant would include an ascent or in direct line of ascent of a child which includes Nana / Nani (i.e. parents of mother).
Query No. 4: [Right in the flat, converted into flat]
An individual booked a flat in a building in April 2012, allotted flat no. A-1. Building is completed in March 2015 and possession given. The flat is resold in May 2016 whether it will be long term capital gain or short term capital gains
It is a long term capital gain as per Punjab and Haryana High Court in Mrs. Madhu Kaul vs. CIT [363 ITR 54]. In that case, the assessee was allotted a flat on June 7, 1986 conveyed on June 30, 1986. The assessee paid the first installment on July 4, 1986. The flat was later identified and delivery of possession was given on November 30, 1988. The assessee sold the flat on July 5, 1989. The assessee’s claim for treating
Rs. 2,38,609/- received from sale of a flat as long term capital gain was rejected treating it as short term capital gains. This was confirmed by the Commissioner (Appeals). The Tribunal held that as a specific flat was allotted to the assessee, on November 30, 1988,the allotment letter or payment of the first installment did not entitle the assessee to claim that the gains were long term capital gains.
However on appeal, the High Court held that the flat was allotted to the assessee on June 7, 1986, by a letter conveyed to the assessee on June 30, 1986. The assessee paid the first installment on July 4, 1986 thereby conferring a right upon the assessee to hold a flat, which was later identified and possession was delivered on a later date. The mere fact that possession was delivered later did not detract from the fact that the allottee was conferred a right to hold the property on issuance of an allotment letter. The payment of the balance installments, identification of a particular flat and delivery of possession were consequential acts, that related back to and arose from the right conferred by the allotment letter,
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