Nut Crackers

Questions & Answers
Direct Taxes

Q.1 Confirmation for Trade Credits

Whether the AO can insist on the filing of confirmation in respect of all outstanding trade payments ?

Ans. Yes. The Assessing Officer can require furnishing of confirmation in respect of all outstanding trade payments. Though there is no specific provision like sec. 68 but it has been noticed that no trade creditors have been paid but are shown as payable and trade debtors have be received but are shown as outstanding. In such circumstances it would be considered that the unrecorded amount has been paid or received by the assessee.

Q.2 Details of Family Members

The details of investment made by other family members who are separately assessed can be demanded for current as well as past 3 years also ?

Ans. When family members are assessed to income-tax, it would not be obligatory for an assessee to furnish details of investment made by such family members. He should furnish name with complete address along with PAN number and the Ward in which family member is assessed to tax. Same is the position for the year of assessment as well as past three years.

Q.3 Benefits of Indexation

Whether the benefits of indexation are available to the transferor from the date of holding of property by previous owner in case of acquisitions modes specified u/s. 49.

Ans. Yes. When an asset is acquired by an assessee by a mode specified in sec. 49 of the Act, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. Hence, cost as in the hands of the assessee shall be the cost in the hands of the previous owner.
Sec. 48 provides the mode of computation of capital gain. While computing, the cost of acquisition of the asset shall be taken as the cost of acquisition of the previous owner and the cost of improvement shall be the cost incurred by the previous owner or / and the assessee as the case may be. On such cost of acquisition and cost of improvement ‘indexed cost of acquisition’ and ‘indexed cost of improvement” shall be worked out and allowed as a deduction apart from expenditure incurred in connection with the transfer, to compute the capital gain. The philosophy behind the provision is that earlier transfer having not been considered as a transfer, the liability to capital gain would be on original cost to the previous owner. While working out the period of holding, period of holding by the previous owner, shall be considered as period of holding of the assessee as per section 2(42A) Explanation (b) of the Act.

Q.4 Gift received by HUF

As per section 56(i)(v) gift from relative is not includible in total income. However the definition of “relative” given as per explanation does not cover member/coparcener/Karta. Please clarify the position as it defines relatives in respect of individual. Whether the Gift received by HUF from relatives of Karta will be exempt or not ?

Ans. Gift received by HUF from any relative of Karta, would be liable to tax. Proviso is applicable only in respect of an individual receiving the gift from the relative.

Q.5 Capital gain liability

A person has transferred his plot of land by giving Power of Attorney, agreement for sale and possession of plot by taking full consideration. As per section 53A of transfer of Property Act, the same will be considered as transfer and also as per section 2(47) the same will be deemed as transfer and liable for capital gain tax. The assessee has declared the income from capital gains accordingly. In subsequent year the purchaser transferred it by registered sale deed. There has been substantial difference in the sale price as per sec. 50C. Kindly enlighten whether the subsequent transfer by the purchaser will effect the capital gain liability of the original transferor? As the transfer was not got registered by the first transferor there was no applicability of sec. 50C.

Ans. Any sale with possession whereby giving power of attorney or entering into agreement of sale is considered as transfer u/s. 2(47)(v) and is liable for capital gain when the possession is delivered u/s. 53A of Transfer of Property Act. Subsequent sale by the purchaser on a higher amount would not attract provisions of sec. 50C in respect the first owner. I am of the view that the subsequent transfer by the purchaser will not effect the capital gain liability of the original transferor. However, it may be clarified that the Stamp Act of practically every State considers such sale with possession as a transfer liable to Stamp duty on full sale consideration. Such document has to be got registered under the Indian Registration Act and the Registering Authority would be entitled to substitute fair market value to the recorded sale consideration. On such registration, provision of sec.50C would become applicable on the original transferor or first owner.

Q.6 Payment of one time lease money/road tax

Property constructed on leasehold land of local authority. Option exercised to deposit 11 times of annual lease money as full payment to get the lease payment exempted. Whether to be capitalized or debited as 1/11th each year by deeming it as deferred Revenue expenditure?

Like wise the 15 year Road Tax for vehicle to be treated as Capital / Revenue or Deferred Revenue expenditure.

Ans. There is no concept of deferred revenue expenditure except u/s. 35D of the Act. Deposit of 11 times of annual lease money to local authority as well as 15 year Road Tax for vehicle should be considered as a revenue expenditure and not a capital expenditure. It should be allowed in full. It is advisable to claim in the year of payment. If the Assessing Officer disallows, shall allow as deferred revenue expenditure in the other years. There shall be no liability of penalty, being a debatable question of law.