The Hindu Business Line : Is my Gulf income taxable?

A few days back I read some news articles which stated that the income earned in Gulf countries will be taxed in India as these countries do not levy tax on individuals in respect of the income earned there?

Is this true, and what is the correct position in law? A. R. Gopal

This confusion arises out of a misconception that the benefit of double taxation avoidance agreements (DTAAs) between two countries can be taken if both the countries charge tax on the same income.

In fact, this issue first came up before the Authority for Advance Rulings (AAR) in Cyril Eugene Pereira (1999 239 ITR 650), where the AAR held that the benefit of DTAA will not be available unless the income is taxed in both the countries.

A similar view was taken in the Ruling reported in 241 ITR 61. A contrary view was however taken in Mohsinally Alimohammed Rafik (1995 213 ITR 317 AAR). The Supreme Court, in Union of India vs Azadi Bachao Andolan & Another (2003 263 ITR 706 SC), overruled the ruling in Cyril Eugene Pereira and impliedly approved the Mohsinally Alimohammed Rafik ruling.

As a result of this apex court decision, it appears that the controversy is now reasonably set at rest and the department should not be able to tax the income that is earned in the Gulf by denying the benefit of DTAA merely on the ground that these countries do not tax the same income.

This view also finds support in ADIT vs Green Emirate Shipping & Travels (2006 100 ITD 203 Mumbai) decision.

My mother has some fixed deposits in her name.

The accrued interest on these fixed deposits would be around Rs 50,000 per annum. As she has no ‘other income’ and because her income is less than the maximum amount not chargeable to tax she does not file returns.

The amount received on maturity of the fixed deposits will however be fairly large.

Can an assessing officer (AO) hold that the entire income by way of interest is to be assessed in the year of maturity since it has not been offered to tax in the earlier years on accrual? Bhavesh Savla

Income under the heads profits and gains of business or profession or income from other sources is to be assessed based on the method of accounting regularly employed by the assessee, being the cash or mercantile system of accounting. The method of accounting is essentially at the option of the assessee.

If your mother chooses to follow the mercantile system of accounting, thereby accounting for the interest on accrual, it will not be possible for an AO to force on her to follow the cash system of accounting merely because it will yield larger revenue by way of taxes.

I sold a piece of farmland in December 2006. This land was acquired in the financial year 1992-93.

The proceeds of sale were collected in December 2006 and I invested 60 per cent of the amount in a new flat. I am still left with a balance of Rs 6.50 lakh.

On what amount will capital gains tax be charged? What are the options available for me to reduce the capital gains by way of making investments and when should this be done? Mukul Girish

The capital gains will be computed by reducing from the full value of consideration, the indexed cost of acquisition of the farm land.

In respect of the investment made in a residential house being a flat you will be able to claim exemption under Section 54F subject to satisfying the conditions stipulated by the section.

As regards any other mode of investment to claim exemption, the same may not be possible since for the purpose of claiming exemption under Section 54EC which may have been possible in your case, the reinvestment has to be in bonds of the National Highway Authority of India or the Rural Electrification Corporation within six months from the date of transfer.

Since this period has already been crossed, it appears that you may not be able to claim an exemption under any other provision in respect of the capital gains.

I work for an Indian company. During the last financial year I went to the UK on a project in March 2007.

My salary for the month of March was computed wrongly by my employer at £2950 while my salary was only £2700. Though the salary that was ultimately paid to me was only £2700 reduced by the various deductions, tax was deducted at source taking my salary to be £2950.

My employer says that the only solution is for me to file a return and claim a refund. Is my employer right in saying so? Is there no other solution to a problem created by my employer due to no folly of mine? Nikhil

You unfortunately have no solution except to file a return and claim the refund in respect of the excess tax deducted by your employer.

Your employer cannot do much and the only alternative left for you is to claim a refund with the income-tax department by filing a return. The fact that the tax was deducted at source and that there was no default on your part which lead to such excess deduction, will not in any way make a difference and as already stated there are no other options to choose from.

I incurred loss from dealing in derivatives last year.

Will I be able to carry the same forward and set it off against the income of the current year?

If so, for how long can it be carried forward and set off? Bharti Goel

Loss from dealing in derivatives will be treated as regular business loss if the following conditions are satisfied: a) the transaction is carried on through a registered broker or sub-broker or by banks or mutual funds; b) the transaction is carried out electronically on screen-based systems; c) the transaction is supported by a time stamp contract note; and d) the contract note indicates the client identity and the number allotted under the SEBI Act, the SCR Act or the Depositories Act and also gives the permanent account number of the client.

Such loss can be set off against any income other than income under the head ‘salaries’ and the balance can be carried forward and set off only against business income within a period of right assessment years immediately succeeding the assessment year in which the loss was first computed.

If the conditions stated are not satisfied, the loss will be treated as a speculative business loss and cannot be set off against any other income of the same year but can be carried forward and set off against speculative business income within a period of four assessment years immediately succeeding the assessment year in which the loss was first computed.

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

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