Query No. 1: – Section 54F Exemption An individual purchased a second house property in December 2018 for a total consideration of Rs. 1.15 crores The individual borrowed a home loan from a nationalized bank to the extent of Rs. 1.20 crores. The individual received the possession of the house in April 2020 and he started occupying the house from June, 2020</strong >

In December 2020, the individual sold the shares of a private limited company for a total consideration of Rs. 2 crores. (cost of acquiring the shares was negligible and shares were held since 2014). Out of the money received from sale of shares, the individual repaid the entire home loan of Rs. 1. 20 crores in January 2021.</strong >

Can the individual claim exemption u/s. 54F from long term capital gains arising on sale of shares against repayment of home loan?</strong >

Answer

S. 54F grants relief from tax on capital gains in respect of any long term capital assets other than residential house. S. 54 and 54F are in Pari- materia. The common condition under both the provisions it that the assessee must purchase or construct a residential house before or after the transfer of the asset which yield capital gains.

In this case, the assessee sold the share of private limited company and repaid the entire home loan of Rs 1.20 crores, which he had taken for purchase of house instead of purchasing or constructing house. Hence he is not entitled to claim exemption u/s 54F of the Act.

Query No. 2: Transfer of depreciation Company A has transferred a depreciable capital asset to its wholly owned subsidiary company B during the year 2018. The WDV value in the hands of the company A as on date of transfer is Rs. 10 crs. As per the independent valuer report the value of the said asset is Rs. 8 crs. The company B has been claiming depreciation on WDV value of 10 crs. During the year (June 2020), company A ceased to hold 100% shareholding in company B.</strong >

a) How to give effect to provisions of S. 47A and S. 49(3). Alternatively, would the situation be different if the capital asset would have been valued at Rs. 12 crores by independent valuer.</strong >

b) Whether withdrawal of such exemption under section 47A will have any tax implication under section 56(2)(x) in the hands of WHOS since earlier the receipt was excluded from 56(2)(x) by virtue of 1st proviso to clause (x) of section 56(2).</strong >

c) Whether Company needs to revise its of deprecation and how to give effect of same in Tax Audit and Return of income.</strong >

Answer:

In case, where a capital asset is transferred by a company to a wholly owned subsidiary company and the transferee company is an Indian company, the transferor company is exempted from capital gain tax.

As per Explanation (6) to S, 43(1) and Explanation (2) to S. 43(6) the transferee company is entitled to depreciation only on the basis of written down value of the asset in the hands of transferee company, irrespective of the actual consideration paid by it.

S. 47A provides that if within eight years of such transfer:-

1. the transferee company converts the capital assets into, or treat it as stock-in- trade of its business, or
2. the parent company ceases to hold the entire share capital of the subsidiary, the capital gain exempted under these clauses would be taxable as the income of the accounting year in which transfer had taken the place.

So from the above, legal position, it is clear that wholly owned subsidiary B is entitled to claim depreciation on WDV of capital asset of A amounting to Rs. 10/- crores Therefore valuation of independent valuer of Rs. 8/- crores or 12/- crores has no significance.

Further, in the account year 2022/23 i.e. for assessment year 2023/24 when holding company A ceased to hold 100% shareholding in company B, the holding company A will have to pay tax on whatever capital gains claimed as exempted u/s.47(iv) and thus Exemption would be withdrawn and it would be liable to pay tax under the head “capital gains” by virtue of the provisions of S, 47A r. w. s.49(3) of the Act.

Query No. 3: (Taxation of Salary)

As per the terms of employment agreement, an employee is eligible to receive a bonus linked to the profits of the company at the end of the financial year (April-March). The employee’s salary income (other than bonus) is Rs. 10 crores. The company determined the bonus payable based on the audited accounts during the Board meeting held on July 10,2023. The bonus was be paid to the employee on July 15, 2023. The employer company deducted tax u/s, 192 by applying a personal tax rate.</strong >

Can the employee offer a bonus in his personal income tax return for Financial year 2022-23 basis that the bonus become due to him on March 31, 2023? If yea, how ill this be reflected practically in the Income tax Department’s system and the taxpayer’s return of income.</strong >

Answer

No, bonus becomes due to employee only on July 10, 2023. Therefore the same will be taxable in the hands of employee in the assessment year 2024/25. Employee can claim TDS in the assessment year 2024/25. S.16 contemplates a tax on salaries which are due, whether paid or not. Even it covers salaries which are paid, whether due or not. Thus Salary paid in advance is assessed in the year of payment, it can not be taxed in later when it become due.