The Hindu Business Line : Long-term capital gains versus loss on share deals

I HAVE long-term capital gain computed without the benefit of indexation from sale of shares of XYZ Ltd of Rs 50,000 and long-term capital loss computed with the benefit of indexation of Rs 25,000 from the sale of shares of ABC Ltd. How is the tax to be computed on the gain for the assessment year 2005-06? Can rebate under Section 88 be claimed against the tax, if any, payable on the capital gains? Please note that I have other incomes which exceed Rs 1 lakh.

Rajesh

Reply

It should be possible for you to set off the loss computed with the benefit of indexation against the gain computed without the said benefit. This would mean that the net long-term capital gain would Rs 25,000 on which the tax will be computed at 10 per cent, which will mean that the tax on the long-term capital gain will be Rs 2,500. You will have to pay tax on your other incomes at the slab rates applicable to you. While you can claim rebate under Section 88 in respect of the tax on other incomes, the tax on long-term capital gains will not be eligible for any rebate under Section 88 in view of the express prohibition contained in Section 112.

Query

I have earned long-term capital gains. I propose to purchase a residential plot in Hyderabad and construct a house there later. I also have a long-term capital loss of Rs 3 lakh. Barring a 50 per cent share in a housing plot located in a different town, I do not own any immovable property. This plot was gifted to me by my father. The other half of the plot is to be gifted to my mother and on which a house is to be constructed; and this is where my parents will reside. My wife's aunt gifted her a flat in 1999. Though the value stated in the gift deed is very low, the property fetches a rent of Rs 90,000 per annum. I seek your clarification on the following:

Will the rental income of my wife be clubbed in my hands?

If this flat owned by my wife is sold later and if another house is purchased in our joint names with the help of a housing loan from my employer and with my own funds, will the clubbing provisions in respect of the rent on the new house be attracted?

What will be the implications of my father gifting half the plot of land to me?

Prasad Madhira

Reply

The rental income that is currently received by your wife will not be included in your hands. It will be assessed only in her hands. Under Section 64(1), what can be clubbed is only income derived from an asset which is transferred by one spouse to another for inadequate consideration. In the instant case, it was your wife's aunt who gifted her the property and, therefore, Section 64(1) will not be attracted. In respect of the rent that the new property would realise, the clubbing provisions may be attracted if the money used to acquire the property is in the form of a gift to your wife. On the other hand, if this money used for construction is only treated as a loan owing from your wife, who will also include the interest that you will pay on the housing loan, the clubbing provisions will not be attracted. This loan can be recovered from your wife out of the rental income.

On your father gifting you a 50 per cent share in the plot, no tax implications will arise. Section 56(1)(v) only seeks to bring to charge a sum of money received without consideration from an individual. In your case, what is received is not money but a plot of land. In any case, a gift received from a relative, which includes father, will not be brought to charge under this section.

Query

In financial year 2003-04, I sold the shares of certain listed companies. The gain arising out of the sale is computed without the benefit of indexation. On certain other shares the loss is computed with the benefit of indexation. The gain and the loss so arrived have been set off and tax has been paid on the net gain at 10 per cent. The assessing officer (AO) is of the view that such set-off is not possible. Is this view correct?

M. R. Keshavamoorthy

Reply

There seems to be no express provision permitting such set-off. However, such set-off seems logical and should be possible. If this were not possible, the benefit conferred on an assessee to pay tax at 10 per cent of the gain, which is long term on sale of listed securities and computed without the benefit of indexation, would be substantially watered down.

This issue, however, is not one that is free from doubt.

(Mail your queries to taxtalk@thehindu.co.in or by post to Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.)

Rajesh

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