1. Mr. B is an agriculturist and converted his ancestral agricultural land to NA in 2003 and sold it in 2018. Whether this single transaction can be considered as an adventure in the nature of trade and be taxed as business income?

What should be the cost of acquisition for Capital Gains tax or business income?

Ans. It is no doubt true that a single transaction can be an adventure in the nature of trade, and may amount to business. However, one of the major tests for existence of business is the existence of a profit motive. In this case, there has been no purchase of land, but mere conversion of inherited agricultural land into non-agricultural land. Moreover, the sale of the land has been in 2018, though the conversion was in 2003. The long time lag from conversion to sale clearly indicates that the transaction of conversion of land is merely to enhance the value of the land, and not to make a profit on such conversion. The sale transaction would therefore be regarded as sale of a capital asset, subject to capital gains tax, and not a business transaction.

Since the land was inherited, the cost of the land would be the cost to the last previous owner who purchased it for a consideration, by virtue of s.49(1)(iii)(a). However, since it was acquired prior to 1st April 2001 by the previous owner, from whom the land was inherited by Mr. B, under section 55(2)(b)(i), the fair market value of the land as at 1st April 2001 can be substituted for the cost of conversion. In valuing such land, it would be valued as agricultural land as on 1st April 2001, since it was not converted into non-agricultural land on that date. However, the cost of conversion to non-agricultural land can be taken as the cost of improvement of the land in the year in which the conversion has taken place.

2. Mr. Rahul has sold his only residential flat in August 2018 and has not deposited in Capital Gains savings scheme. He intends to purchase flat after one year but within two years from the date of sale. What is the time limit within which he has to deposit the amount in capital gain savings bank account? Whether he has to deposit entire sale proceeds or only amount of Capital Gains? Is he required to file income tax return when he 
   does not have any taxable income except this?

Ans. The claim for exemption on purchase of a new residential house on sale of a long term capital asset, which is a residential house, would be under section 54. This requires purchase of a new residential house to the extent of Capital Gains. It is this amount of Capital Gains which would therefore have to be deposited in the Capital Gains Account Scheme.

The amount has to be deposited before the due date of filing of the return of income under section 139(1). Since Mr. Rahul does not have any other income, his return of income has to be filed before 31st July 2019. The deposit under the Capital Gains Account Scheme would therefore have to made before this date, i.e. 31st July, 2019.

The obligation to file the income tax return arises under section 139(1). Primarily, this requires filing of a return of income by an individual if his total income exceeds the maximum amount not chargeable to tax, i.e. the basic exemption limit, which would be ₹ 2,50,000, assuming that Mr Rahul is not a senior citizen. The sixth proviso to section 139(1) also states that if the total income, without giving effect to certain exemptions, viz. section 10(38), section 10A, section 10B, section 10BA or deductions under Chapter VI-A, exceeds the maximum amount not chargeable to tax, then also the return of income is required to be furnished. In this proviso, there is no reference to section 54, and therefore, it appears that there is no obligation to file a return of income in this case.

However, courts have been taking a view [e.g. DIT(E) v. Malad Jain Yuvak Mandal Medical Relief Centre 250 ITR 488] that where an exemption is being claimed, if the return of income is not filed, the assessing officer has no opportunity to examine the eligibility of the claim for exemption, and therefore, even in a case where the entire income is claimed as exempt, the return of income needs to be filed. Further, the information about sale of property would be available with the Tax Department through the Annual Information Returns. It is therefore highly likely that a notice for reassessment may be received in a case where the return of income is not filed for this year.

It is therefore advisable to file the return of income by 31st July 2019, after depositing the amount of capital gains in Capital Gains Account Scheme, and claim exemption under section 54F.

3. Mr. A is a Chartered Accountant following cash system of accounting and claimed credit of TDS based on 26AS statement without including it in cash income. Recently ITAT Delhi Tribunal in case of Dhruv Sachdev v. ACIT (2019) 174 ITD 504 has held that the amount of credit of TDS need not be included in income. But the issue is can credit of TDS be claimed in return as per 26AS statement without including it in income?

Ans. Section 199(3) of the Income-tax Act, 1961, as amended with effect from Assessment Year 2008-09, provides that the CBDT may make rules for the purpose of giving credit in respect of TDS deducted, including for the assessment year for which such credit may be given. The relevant rule is Rule 37BA, inserted with effect from 1st April 2009. Rule 37BA(3)(i) provides that credit for TDS deducted and paid to the credit of the Central Government shall be given for the assessment year for which such income is assessable.

Section 198 provides that all sums deducted in accordance with Chapter XVII shall be deemed to be income received for the purposes of computing income of an assessee. Therefore, credit for TDS cannot be claimed in return as per Form 26AS without including it in income.

In the case of an assessee following cash system of accounting, in the year of receipt of net fees, the relevant TDS in respect of such fees will be added to the net fees to arrive at the gross fees received, which would constitute the income of the deductee, and credit for the relevant TDS would be claimed against the tax payable in that year. Thus, both the requirements of section 198 and 199 would be fulfilled.

4. A charitable trust has given an interest-free loan to another charitable trust, having similar objects, to facilitate completion of a project by the borrower charitable trust. There are a few trustees who are common between the two trusts.

Can exemption to the lender trust be denied under either section 13(1)(c), on account of benefit given to a trustee, or under section 13(1)(d), on account of investment in other than permitted investments? If not, can the lender trust claim the loan as an application of income towards its objects?

Ans. For the provisions of section 13(1)(c) to apply, a benefit has to be provided to a specified person. The list of “specified persons” under section 13(2) does not include another public charitable or religious trust, where one or more of the trustees are common with the trustees of the assessee trust. Therefore, the provisions of section 13(1)(c) do not apply to the transaction of giving of the interest-free loan to the other trust.

Section 13(1)(d) applies where any funds of the trust are invested or deposited otherwise than in any one or more of the modes specified in section 11(5). Investment of funds would imply an investment or deposit with a view to earn income thereon. In the case of the loan to another charitable trust, the intention is not to earn income thereon, but to facilitate the carrying on of charitable purposes by the borrower trust. This is therefore not an investment of the lender trust. This has been confirmed by the Tribunal in the case of Puran Chand Dharmarth Trust v. ITO 93 taxmann.com 367 (Del.), JCIT v. Bhaktavatsalam Memorial Trust 152 ITTD 48 (Chen).

Such a loan is also furtherance of the objects of the lender trust, since it facilitates the carrying on of charitable activities of the borrower trust. Such an amount can therefore be regarded as an application of income for charitable purposes, on the basis of the principles laid down in CBDT Circular No. 100 dated 24-1-1973 in respect of loan scholarships.

 

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