Income Heads – Some Issues – Capital Gains

Even after reading at length Income heads there are some issues which holds worth for Further consideration, some of them are being discussed here.

Capital gains from long-term capital asset – Investment in a flat/house under the self-financing scheme of the City Development Authority / Housing Board – Whether to be treated as construction for the purposes of capital gains :- Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession. The Board have been advised that under the above circumstances, the inference that can be drawn is that the, D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains. In Mrs. Seetha Subramanian v. ACIT [1996] 59 ITD 94 (Mad. – Trib.) with the following observations :

“. . . The assessee also relied upon certain circulars issued by the CBDT. One of the circulars was [Circular No. 471, dated 15th October, 1986. This was issued by the CBDT clarifying the posi­tion that where an assessee acquires a flat by an allotment under the self-financing scheme of the Delhi Development Authority, the allotment itself is sufficient compliance for getting the benefit under section 54F, even though the assessee has not paid all the instalments due under the said scheme. Later by another Circular No. 672, dated 16th December, 1993, the CBDT has issued clarifi­cation extending the same benefits for acquisition of houses or flats on allotment under similar schemes. Therefore it was con­tended that the intention of the Legislature was to invest in the acquisition of a residential house and completion of construction or occupation is not required. We find force in the argument of the learned counsel for the assessee. The said intention is very clear from the two circulars issued by the CBDT, where it was held that an assessee is entitled to the benefit of sections 54 and 54F, if an assessee gets an allotment under the self-financing scheme and pays the first instalment of the cost of the construction. From that it is clear that in order to get the benefit under section 54F the assessee need not complete the construction of the house and occupy the same. . . .” (p. 98).

If assessee has retained more than one house for the purpose of his own or parents own residence and not for any other purpose, the capital gain arising on transfer of each house would qualify for the exemption under section 54 provided other conditions are satisfied [ Letter No. 207/24/76 dated 25^th March 1977]

Whether capital gain arising from transfer of a self-occupied residential house would be entitled to exemption : The question appeared to have been raised because Asset sold should be a residential house income of which is taxable under the head Income from House Property. As the annual value of a self-occupied house would be taken to be nil by virtue of section 23(2) of the Act, an Assessing Officer may take the plea that the income of such a house is not chargeable under the head ‘Income from house property’. The Board held the view that such a construction of the aforesaid provision in section 54 of the Act is not correct. Income from a self-occupied residential house is chargeable under the head ‘Income from house property’ even though in certain circumstances such income may be computed at nil or at a negative figure by virtue of section 23(2) read with section 24 of the Act.[ Circular 538 dated 13^th July 1989]

Clarification regarding computation of tax in respect of long-term capital gains under section 112:- Some people are interpreting the provisions of section 112 in such a manner that the tax payable on long-term capital gains is to be computed on the entire amount of long-term capital gains without applying the provisions of set-off of loss contained in section 71(2) where there is loss under any other head. As a result, it has been interpreted that the provisions of section 112 will override those of section 71, effectively denying the benefit of set-off of loss from a source other than “capital gains”. The confusion in interpreting the provisions of section 112 is arising mainly from the interpretation of the initial part of section 112 :

‘Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”…’

The above phraseology contains two significant expressions, “total income” and “includes any income”. The total income is to be computed in the manner prescribed in the Income-tax Act. Set-off of loss as per the provisions of sections 70 to 80 is a stage which is part of this procedure. When this procedure is adopted for computing gross total income or total income, only the amount of income after set-off remains under a head as part of gross total income or total income. Only that amount of long-term capital gains which is included in the total income would be subject to tax at a prescribed flat rate. Thus, if there was a loss of Rs. 10,000 from business and there is long-term capital gains of Rs. 30,000, then after setting off of loss of Rs. 10,000 with long-term capital gains, only Rs. 20,000 would remain under the head “Capital gains” to be included in the gross total income or total income. The flat rate of tax will be applicable in respect of Rs. 20,000 and not Rs. 30,000, since the amount of long-term capital gains included in that total income is Rs. 20,000. (Here it is assumed that the total income ignoring, long-term capital gains, is above the exemption limit).