The Hindu Business Line : Advance against dividend?

Loans and advances given by all closely-held companies, that is, in the case of private sector companies whose shares were not listed in a recognised stock exchange on the last date of the relevant previous year, are taxable as dividend in the hands of dominant shareholders, that is, shareholders who have got at least 10 per cent stake in the company.

But this is subject to the condition that at the time of giving of loan the company had accumulated profits. If there were accumulated profits at the time such shareholder took loan, there of course would be a tax on such deemed dividend but the loan can be set off against his actual dividend entitlement when it is declared.

For example, if such a shareholder takes a loan of Rs 2 crore and the company thereafter sets off the loan against his dividend entitlement of Rs 3 crore, the position would be as follows:

deemed dividend taxable in his hands, Rs 2 crore; and

actual dividend on which dividend distribution tax is payable, Rs 1 crore.

But this is not a complete consolation because while DDT rate is 17 per cent, the maximum marginal rate for individuals is 34 per cent.

LTC tax benefit

How frequently is the leave travel concession tax benefit available?

Avinash Baliga, email

According to the income-tax rules, fares paid or reimbursed by the employer in respect of two journeys performed in a block of four calendar years are exempt from tax.

In the event, it is possible that the employee might perform both the journeys in the very first year and avails of the benefits if the employer has no objection to providing the same twice in the same calendar year. In that case, of course, there won’t be any tax benefit in the remaining years of the block.

Sale of flats

I have been approached by a builder to allow him to construct flats on a land owned by me on a 50:50 sharing basis with 50 per cent of the flats of identical size and quality being given to me free of cost as consideration. What are the tax implications assuming some of the flats are residential and some are commercial?

Sujeet Kishan, Hyderabad

The land belongs to you and you would presumably be giving a General Power of Attorney (GPA) to the builder to go ahead and sell the flats after construction by offering the buyers a share of the undivided interest in the land.

The Income-Tax Act recognises sale of property on power of attorney basis subject to it being in conformity with Section 53A of the Transfer of Property Act. Thus if the consideration is agreed upon and becomes payable immediately or later on and possession of the property is parted with, the transaction will attract tax forthwith.

Effectively what you have done is to sell your land and acquire flats in lieu thereof as consideration. You would have effected a transfer under Section 2(47) of the I-T Act as soon as you conform to the requirements of Section 53A of the Transfer of Property Act and it would be in your own interest to expedite completion of construction because tax becomes payable immediately no matter whether you have received consideration or not.

Perhaps, you would even be justified in asking for advance to be returned at the time of handing over of the flats to you. The consideration being in kind, its value would be ascertained by taking what the remaining 50 per cent of the flats have fetched to the developer. It makes no difference if the flats developed are commercial.

HRA exemption

An employee stayed in the transit house owned by a group telecom company for the first three months of the financial year when he was in the employ of the group parent-finance company. Subsequently, he was taken on the payroll of the telecom company which gave him rent-free accommodation and computed his perquisite in the prescribed manner. Can he claim HRA exemption for the first three months because his family lived at another place for which he had to pay rent?

Vimal Soni, email

First, he must have received a specific allowance called house rent allowance during the relevant period from his employer. Second, he must have paid rent in respect of a house occupied by him.

The issue is can occupation by family deemed to be occupation by him? While there seems to be no direct case law on the issue, courts have made it clear in a different context which is germane to the issue on hand that even occupation by a cousin would be sufficient to make a house self-occupied.

Neither Section 10(13A) nor Rule 2A made thereunder stipulate that the house in respect of which rent has been paid must be located in the same town or city where the person is working as an employee though one might add that this must be taken as axiomatic.

But then there is nothing axiomatic about a fiscal law. Therefore you should go ahead and claim the exemption if you are otherwise entitled to.

S. MURLIDHARAN

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