The Hindu Business Line : Is it better to construct a small, tiled house for tax benefit?

I would like to invest in residential land for long-term capital gains. This is with reference to Sections 54 and 54F. I would like to know the following: Is it better to construct a small, tiled house practically of insignificant value on the land or keep an open plot of land? What proof will I have to submit to prove that there is a house on the open plot of land? As it is the price of land that appreciates and not of the house, I do not wish to take an electrical or water connection.

Dr Manohar Balge

Neither Section 54 nor Section 54F mandates the quality or cost of construction. What is mandated is the amount to be spent for begetting these tax benefits. While Section 54 requires the entire long-term capital gains to be invested in another house within the prescribed time, Section 54F requires the entire net consideration to be so invested in order to be fully exempt from tax. If you do not comply with this requirement, you will not be eligible for full exemption. If you are unwilling to invest thus, the better course for you would be to invest under Section 54EC in National Highway Authority or Rural Electrification bonds with a lock-in period of just three years. That would be hassle free.

Business vs capital loss

A company entered into a contract with a State government undertaking to construct a dam and to execute related works for a consideration. The said undertaking, instead of paying the contracted amounts, due to dearth of funds, issued 7-year bonds at par towards `consideration' with 6.5 per cent per annum interest. The company held these bonds for three months and thereafter sold in the open market at a loss and the same is debited to profit and loss (P&L) account for the year-ended March 31, 2005 `as loss on sale of bonds'.

The assessing officer intends to treat this as short-term capital loss and the bonds as short-term capital asset. The company contends that it is business loss only, as the bonds in question were received as part of consideration and it never intended to invest in the bonds. Please clarify whether it is business loss or short-term capital loss.

P. G. Reddy, email

The company's contention is undeniable and the assessing officer's stand cannot bear legal scrutiny. I am sure on appeal the company's stand would be vindicated. This is clearly a case of consideration for sale of goods in kind, which is not proscribed by any law. And losses from realisation of such consideration is very much integral to the trading operations of the company and, hence, a business loss.

Mom's gift taxable?

Is gift received from one's mother taxable as income?

Chandra, email

One's mother is one's linear ascendant, gift from whom is exempt from income-tax completely.

Vehicle service

Insurance companies settle claims directly to the motor vehicle service dealer for vehicles given for service by its customer which have met with accident. In that case, on behalf of the owner of the vehicle, can the insurance company making payment to the motor vehicle service dealer deduct tax at source, either fully or party? Will there be TDS for this transaction?

Satyanarayanan, email

There is no provision in the income-tax law warranting deduction of tax at source from the motor vehicle service provider.

TDS under Section 194A

The assessee is a firm carrying on the business of plying buses. It has got a bus that has been financed by a finance company. Is the assessee firm required to deduct income-tax at source from the interest included in the instalments of repayments to the finance company? In the agreement executed between the said parties, the word hire purchase has not been mentioned. However, the bus is hypothecated to the finance company, but the bus is in the name of the firm, that is, the borrower.

Shyam Sundar Gupta, Ludhiana

The assessee is a partnership firm presumably. Only individuals and HUFs, in general, have been spared of the burden of having to deduct tax at source under Section 194A. Therefore, the assessee will have to deduct tax at source, as it is a case of borrowing and the interest presumably is more than Rs 5,000 per financial year. In case it is lesser, there is no need to deduct tax at source and indeed it cannot be deducted.

Options and futures

What are call and put options, and futures?

Mohan V., Chennai

An option, by definition, gives the option holder the right to enforce the contract without a concomitant liability to go through with it. An option, say, at the rate of Rs 10 per share of a blue chip company to buy it two months hence at Rs 540 per share gives the option holder the right to buy it at that price no matter what the going rate is at that time. Should the price rise to Rs 600 per share, obviously the option holder would enforce the buy option and if it is below Rs 540 he would not. A put option operates with reference to sell options. Futures is a structured forward contract. In a forward contract, unlike in an option, the contract has to be gone through at the appointed date. Options allow one to operate on a scale larger than the one permitted by his finances.

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