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  • Tax Matters: What is the capital gain if asset is sold exactly a year later?

    Insurers deduct 1% TDS on maturity proceeds of life insurance policies if the premium paid is more than 10% of the sum assured

    I sold my shares on 01 December 2018. These were acquired by me on 01 December 2017. Will the gain considered as long or short term as I did not file my return for the financial year 2018-19?

    — Uttam Patole, e-mail

    Equity shares in a company listed on a recognized stock exchange in India held for more than 12 months are considered long-term capital asset. In the case of Bharti Gupta Ramola versus Commissioner of Income Tax (CIT) in 2012, it was held that the period of holding of capital asset includes fraction of a day. Thus, if the date of sale of an asset is 01 December 2018, the period of holding should be calculated till 01 December 2018. Thus, the gain will be long term as the period of holding is more than 12 months. In other words, fraction of a day is to be counted.

     

    I have been paying LIC policy premium by cash since the last few years. How will the recent proposal of 5% tax deduction at source (TDS) on maturity proceeds of life insurance policies affect me?

    — Tejindar, e-mail

    If the premium does not exceed 10% of the sum assured for life policies issued after 01 April 2012 and 20% of the sum assured for policies issued before 01 April 2012, then the amount received on maturity or amount received as bonus is fully exempt from IT, as per Section 10(10D) of the Income Tax (IT) Act, 1961. Maturity proceeds of policies taken after 01 April 2013 on the life of a person with disability under Section 80U of the IT Act or disease specified under Section 80 DDB of the IT Act are tax-free provided the premium paid does not exceed 15% of the sum assumed.

    Currently, under Section 10 (10D) of the IT Act, insurers deduct 1% TDS on maturity proceeds of life insurance policies if the premium paid is more than 10% of the sum assured. Policy holders not providing permanent account number (Pan) card to insurers attract TDS of 20%.

    The Union Budget 2019-20 has proposed levy of 5% TDS on maturity proceeds of life insurance policies. The Union government will also deduct TDS on bonus payments. However, there will be no TDS on maturity proceeds arising out of death of a policyholder or if it is less than Rs 1 lakh.

    While policy holders can claim credit for the TDS deducted in IT return, they will have to pay taxes on the proceeds if their policy does not meet the criteria under Section 10 (10D).

     

    What is the process for refund of the goods and services tax (GST)?

    — Dipesh Rana, e-mail

    Refund includes refund of tax and interest paid on exports of goods or services or both. It covers inputs or input services used in effecting such zero-rated supplies of goods or services or both. Other types comprise refund on supply of goods regarded as deemed exports or refund of utilized input tax credit (ITC) at the end of any tax period in case the rate of tax on output supplies is less than the rate of tax on input.

    Refund application in Form GST RFD-01 is to be filed electronically before the expiry of two years from the relevant date. Auto generated acknowledgement is received in Form GST RFD-02. If there are any deficiencies, Form RFD-03 is generated and sent to the tax payer asking him to correct his application.

    If any tax refundable under Section 54(5) of the Central GST (CGST) Act, 2017, to any applicant is not dispatched within 60 days from the date of receipt of application under Section 54(1), interest not exceeding 6% is payable on such refund from the date immediately after the expiry of the 60 days from date of receipt of application under Section 54(1) till the date of refund of such tax.

    When the application relates to refund of ITC, the electronic credit ledger is debited by the applicant of an amount equal to the refund so claimed.

    Doctrine of unjust enrichment through GST is applied while granting refund. If it comes to the notice that the tax payer is ‘unjustly enriching' himself, then the GST refund amount is transferred to consumer. A registered person can claim the balance available in the electronic cash ledger by filing the return as per the dates mentioned under GST.

    When the GST refunds arise from export of goods and services, then the authorized officer can issue a provisional refund order, through GST Form RFD 04, of 90% of the GST refund claim subject to certain conditions.

    A specialized agency of the United Nations Organization or any multilateral financial institution and organization, notified under the United Nations (Privileges and Immunities) Act, 1947, consulate or embassy of foreign countries or any other person or class of persons, as notified under Section 55 of CGST Act, is entitled to a refund of Integrated GST, CGST and State GST paid by it on inward supplies of goods or services or both. An application has to be filed for the refund in GST RFD-10 before the expiry of six months from the last day of the quarter in which such goods or service were received.

    If there is failure to file refund claim within the prescribed timelines, then GST is not refunded and credit may be blocked forever. If an order for refund is the subject matter of an appeal or further proceeding or when any other proceeding under the CGST Act is pending and the commissioner is of the opinion that grant of such refund is likely to adversely affect revenues on account of malfeasance or fraud committed, he may, after giving the tax payer an opportunity of being heard, withhold the refund till such time as he may determine.

     

    I will be filing income tax (IT) return in near future. What important points do I have to keep in mind?

    — By Umarao Jangid, e-mail

    Changes have been introduced in filing IT return (ITR). The manner of providing details of salary has been changed. Now detailed breakup of allowances and deductions also need to be reported. Insure that Form 16 and ITR match.

    The tax payer needs to report the tax deduction and collection account number of the tenant if tax is deducted at source under Section 194I and permanent account number (Pan) if tax is deducted at source by individual or Hindu undivided family under Section 194IB of the IT Act, 1961.

    Net asset value as on 31 January 2018 needs to be mentioned to calculate long-term capital gains from equity shares or equity-oriented mutual funds as per the grandfathering clause.

    Tax payer filing ITR 2, 3, 5 or 6 has an option to provide script-wise details with the international securities identification number of long-term capital gain as per Section 112A of the IT Act. Else, he can enter the aggregate value of capital gain.

    Tax payers required to submit profit and loss account and balance sheet of the relevant assessment year will also have to submit manufacturing and trading account. If agricultural income exceeds Rs 5 lakh, details such as area in acres, ownership, district and pin code need to be reported.

    Tax payers also need to mention the head of income to claim tax deduction at source credit as per 26AS. Form 26AS should be matched. Details of unlisted equity shares held, residential status and directorship have to include name, Pan and director identification number of the company.

    Also, exempt income, if any, has to be disclosed. If returns are not filed within due date, then tax payers with income up to Rs 5 lakh are liable for late fees of Rs 1000 and those with income beyond Rs 5 lakh have to pay late fees of Rs 5000 up to December 2019 and Rs 10000 thereafter up to March 2020 along with the interest.

     

    I sold a property inherited from my parents. They died without preparing Will. Hence, my married sister was also eligible to get 50% of the property. Instead of taking the 50% share of Rs 2.30 crore due to her, she took only Rs 41 lakh on reaching an understanding with me. Consequently I filed my return after reducing Rs 41 lakh from Rs 2.30 crore. The assessing officer (AO) is not prepared to give me the benefit under Section 48 of the Income Tax (IT) Act, 1961. What should I do?

    — By Madan Lal, e-mail

    In the case of Assistance Commissioner of IT (CIT) versus Kamlakar Moghe, the Bombay High Court (HC) in 2015 ruled that the tax payer, who had received a property with clause in his mother's will overriding the title in favor of his three sisters, payment made by the tax payer to his sisters for acquiring the absolute title in property is to be reduced as expenditure while computing capital gains on sale of the property.

    In the case of CIT versys Abrar Alvi, the IT Appellate Tribunal (ITAT) in 2001 allowed deduction of the amount paid by the tax payer to his son who had filed a suit seeking injunction restraining the tax payer from selling the property. The tribunal found that there was an acrimonious dispute between father and son and the amount was paid to remove encumbrance. The Bombay HC held that the tribunal had rightly allowed deduction.

    In the case of CIT versus A Venkataraman, it was held by the Madras HC in 1982 that the amount paid by the tax payer to tenants to get land vacated should be allowed as deduction in computation of capital gains under Section 48(i) of the IT Act.

    In the case of Naozar Chenoy versus CIT, the Andhra Pradesh HC in 1998 held that the amount paid by the tax payer to tenants for vacating the premises could be deducted while computing capital gains arising from the sale of the building as it had nexus with the transaction. Without the tenant vacating the premises, the building could not have been sold.

    In the case of Balachandra Bhatavadekar versus Assistant CIT, it was held by the ITAT, Mumbai, in 2010 that payment made to persons claiming to be legal heirs for betterment of title was expenditure incurred in removing encumbrance to transfer and is deductible.

    In the case of CIT verus Miss Piroja C Patel, the Bombay HC in 2002 noted that, as the tax payer and other co-owners sold a piece of land owned by them after eviction of hutment dwellers by paying them compensation, the expenditure incurred for having land vacated would certainly amount to cost of improvement. Therefore, compensation paid by the tax payer and other co-owners to hutment dwellers for vacating the land was an allowable expenditure .

    In the case of Nanubhai Keshavlal Chokshi Hindu undivided family versus IT officer (ITO), the Ahmedabad tribunal in 2016 noted the tax payer had shown certain long-term capital gains from sale of house property. He had claimed deduction of certain amount paid to his brothers for vacating the house as expenditure incurred for improvement of asset. The ITO declined deduction on the grounds that the tax payer was the sole occupant of the property.

    The brothers were neither living in capacity of tenant nor were paying any rent. The tax payer's brothers were candid in their statement: they were residing in the house with the tax payer. Though they were not paying any rent, electricity bills were being paid by them. Thus, payment made by the tax payer to the brothers was to be considered as expenditure incurred for improvement of the asset or title. The tax payer was, therefore, entitled to claim deduction of cost of payment.

    The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.
    Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com

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