The Hindu Business Line : Tax on income from inheritance

I am a tax assessee for the past few years and have filed returns till last year. My father had lent a me few lakhs (his retirement benefits, sale of property, etc) to some family friends and the same has been returned to my account through demand drafts this year. He was managing the money and has paid income-tax till last year. He had started construction of a building and I am finishing it with the above-said money. Both my parents who were in government service are no more now. Please tell me if I have to pay tax or show the source for the money which I have inherited from my parents? Or will I have to do it only from the moment I derive income from the inheritance?

Jeevan, email

If your father had written a will and bequeathed the proceeds of repayment of the subject loan to you, the repayment of loan to you cannot be added to your income. The matter would however get complicated had he died intestate — without writing a will. In that case his estate would devolve as per the law of succession applicable to you. If you are a Hindu, your mother, you, your brothers and sisters would all get an equal share. You may in that case have to prove that all these relatives willingly gifted their respective shares to you because gifts from relatives — mother excepted — like money received through will and inheritance are also tax-free. If this is satisfactorily proved, only the mother's share that has been gifted to you would be added to your taxable income. I suggest you go for proper legal advice since the matter involves sensitive matters not fully brought out in your query.

AO trouble

In 1994 a public limited company in Gujarat manufacturing edible oil needed extra working capital for the purchase of raw material. The Managing Director's NRI friend was approached for this purpose. The friend agreed to help provided he was issued fresh shares after obtaining permission from SEBI and the RBI. The Managing Director of this company was able to get the permission from the authorities. And fresh shares were issued to the extent that the friend became a majority shareholder and was appointed as Chairman of this company in January 1995. The old management, however, continued to mange the affairs of the company. This friend was living in the the UK and with the permission of the Board of Directors nominated three Directors. I was one of the nominated Directors along with one from Mumbai and one from abroad. Owing to certain reasons the company closed its factory and paid of workers' and State government liabilities. Nominee Director from Mumbai and I resigned officially from the Board of Directors in 2004. In December 2006 we received a letter from ITO in Gujarat regarding some penalty proceeding for the accounting year 1995-96. We informed the ITO that we had already resigned and we have nothing to do with the company and that he should take up the matter with the NRI Chairman. The ITO has not accepted our plea instead he has sent us a demand note to pay the penalty. ITO has addressed his letters and demand note considering the company as private limited company instead of public limited company. Can the ITO take action against a retired Director of the public limited company. We are under the impression that the retired Directors of the public limited company are not liable for any action. We never received any fees or any other payment from this company.

Lal Mirchandani, email

It appears your company did not inform the Assessing Officer about the factum of discontinuance of the business within 15 days of discontinuance as required by Section 176(3). Had it done this, things might not have come to this. Nor any steps to liquidate the company now that its substratum has gone seems to have been initiated which would have deflected all the liabilities on to the liquidator if were remiss in his responsibility in setting aside the amount notified by the Assessing Officer as the tax due.

Since you were one of the directors while the matter, which is the subject of penalty proceedings took place and you happen to be in India, the Assessing Officer has zeroed in on you. You should cooperate with him in the penalty proceedings. Of course, you will not incur any personal liability because yours admittedly was not a private company. Even in case of a private company what can be recovered from Directors is tax and not penalty.

(ASK! Send in your querieson accounting, auditing, corporate law and taxation to ask@thehindu.co.in.

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S. Murlidharan

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