TAX TALK-07.08.2017-THE HITAVADA
CA. NARESH JAKHOTIA
Capital gain is calculated by deducting the cost of acquisition of the asset, expenditure incurred wholly and exclusively in connection with the transfer, and cost incurred on improvement of the asset from the selling price. The three costs incurred are important for determining the capital gain on the sale of an asset.
Payment for eviction of tenant is eligible for deduction
My father age 91 is a landlord in Mumbai. One of his tenants is selling his premises to a party for X amount. Out of this, he will give 25% to my father & he will keep 75% with him.
- Is it legal for landlord to accept transfer amount by cheque from the buyer? What is the tax implication in above transaction?
- If the outgoing tenant is accepting proceeds in cash, than can the landlord still accept by cheque from the buyer? As one person is accepting cash & landlord is accepting cheque.
- Will the I.Tax ask as to why only the landlord is accepting cheque & no proceeds of the outgoing tenant is shown? Will they believe that only landlord has got proceeds & outgoing tenant has not got any sale proceeds of his tenancy as he has taken cash (not cheque shown)? [Shamim Parekhemail@example.com]
Whenever a property is sold, following deductions are permitted under the Income Tax Act-1961 while computing capital gain income:
Above costs are relevant as this are only allowed while computing capital gain amount.
- Cost of acquisition i.e., amount incurred for purchase of the property including stamp duty, taxes, registration expenses, brokerage etc paid at the time of acquisition.
- Amount incurred on the improvements like development, construction & other capital expenditure over the property. It includes expenses which are incurred to extend the life of an asset or increase its value. Expenses like routines repairs, maintenance, painting etc are not considered as capital expenditure & hence cannot form the part of cost of improvement.
- Amount incurred in connection with the transfer of the property like brokerage, legal expenses, advertisement for sale etc.
The cost of acquisition & improvement are allowed the benefit of indexation from the date of acquisition & improvement till the date of sale of the property if the assets sold is a long term capital assets. Indexation is a benefit given to the taxpayer to adjust the actual expenses with inflation prevailing in the economy by employing a price index issued by the Income Tax department. It takes into account inflation from the time of acquiring assets or incurring expenses up to the time the assets is sold. In short, it enables owner of assets to inflate the actual cost by taking into account the impact of inflation thereby resulting in a lower tax liability.
In case of rented premises, it’s not uncommon to see the payment to tenant at the time of vacating the property. The question is whether the payment to tenant is eligible for deduction while calculating the capital gain on sale of property? Whether the amount paid to tenant can be considered as cost of improvement or expenses in connection with the transfer? Whether anything that results in the improvement in the value of the assets or in the title of the property can be considered as cost of improvement or only real addition in the property can be considered so? The question is all the more relevant as the amount paid for surrender of tenancy right is in many cases is very high.
In CIT Vs. V. Indira 119 ITR 837 (Mad), it was held that the cost of any improvement refers to the improvement of the asset & not to the title of the asset & if the amount is paid only to improve the title of the owner rather than improving the asset then there is no scope for deducting the amount paid in computation of capital gains. However, the favorable view has been expressed in favor of the assessee, as under:
[Interestingly, even amount paid to the brother for vacating the premises in which they were residing without payment of rent was allowed as deduction in the case of Nanubhai Keshavlal Chokshi, HUF (2016) 161 ITD 0211 (Ahmedabad). It was held by the tribunal that without payment, owner would have to file a suit for possession and it would have been difficult to find prospective buyers. Another interesting observation was in CIT Vs. C. V. Sundarajan & Another (1984) 150 ITR 80 (Mad) wherein it was held that the amount paid to mother having right of residence in the property for obtaining relinquishment of such right was deductible u/s. 48(1) of the IT. Act, 1961.]
- In Bombay High Court in CIT vs. Miss Piroja C. Patel - 242 ITR 582, it was held that the seller had paid a certain sum as compensation to evict dwellers on the land. The assessee’s contention was that the compensation paid by her to the residents qualified as cost of improvement since it contributed to the improvement in the title of the land, thereby increasing the value of the land. The High Court upheld the assessee’s contention & allowed her to deduct the compensation paid while calculating capital gain tax on sale of the land. It has relied on CIT vs. Shakuntala Kantilal (1991) 190 ITR 56 (Bom) & also on Hardiallia Chemicals Ltd. vs. CIT (1996) 218 ITR 598 (Bom).
- Andhra Pradesh High Court in Naozar Chenoy vs CIT (1998) 234 ITR 0095:
The assessee had paid a certain amount to his tenants for vacating the premises before the sale & claimed deduction for such payment as expenses in connection with the transfer of the asset. The court held that this expenditure would be allowed as a deduction as it had a direct connection with the sale. Without the tenants vacating the premises, the sale would not have been possible, the court ruled.
- Madras High Court in the case of CIT vs. A. Venkataraman and others (1982) 137 ITR 846 (Mad) has held that the assesses had to give vacant possession under the agreement & so the payment made to the tenants to obtain vacant possession was an expenditure incurred wholly and exclusively in connection with the agreement of sale which preceded the transfer & in fulfillment of a condition of sale. The amount paid was, therefore, deductible as expenditure u/s 48(1).
- The Delhi High Court in CIT Vs. Shakuntala Rajeshwar 160 ITR 840 (Delhi) has also decided in favor of the assessee.
In your specific case, it appears that the tenant has found out the buyer for the property who will be purchasing the property from your father. Your father would be getting 25% of the sale consideration whereas 75% will be received by the tenant.
- From the income tax perspective, landlord (i.e., your father) should accept the amount by cheque. Acceptance in cash of an amount exceeding Rs. 20,000/- against sale of immoveable property is prohibited u/s 269SS of the Income Tax Act-1961.
- Payment of 75% to the tenants should be properly documented by some agreement, MOU or other documents so as to be eligible for deduction. To claim deduction, onus is on the landlord to prove the payment. It is advisable to make the payment to the tenant by cheque only as it will act as additional evidence in support of your claim. Further, any person (tenant) cannot accept Rs. 2 Lakh or more in cash as the same is prohibited u/s 269ST of the Income Tax Act-1961.
Please clarify the following queries on Family Pension. I am a Doctor serving Govt. Sector and drawing annual salary Rs. 26.50 Lakh. I am also drawing Rs. 6.10 Lakh annually (Drawing monthly basis) as family pension (on behalf of my husband who died during service) from same employer. My queries are:
- Is above amount received under family pension is chargeable under Income Tax Act?
- If chargeable then any deduction / tax benefit is allowed for family pension?
- Under which section, this deduction can be claimed during filling of return and how to be mentioned in ITR-1?
- Separate return will be required for both income or single return will be sufficient? How to be mentioned both income in ITR-1? [Dr. S. Sahu, Korba (CG)- firstname.lastname@example.org]
Family pension is a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death. It is taxable in the hands of the recipient as “Income from Other Source”. However, Rs. 15,000/- or 1/3rd of family pension is eligible for deduction against family pension income. No separate return is required to be filed for the family pension income and the same is required to be incorporated in the return to be filed by the recipient.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at email@example.com]