The Hindu Business Line : Curbing black money in realty

It suits both the buyer and the seller to resort to black money in real-estate transactions — the buyer to save on stamp duty and the seller to save on capital gains tax. But both have clearly been stumped — the guideline value prescribed by the stamp duty authorities is the norm for both the taxes.

The income-tax law before embracing the stamp duty value tried to call the seller’s bluff by making pre-emptive purchases — notify the department as soon as the agreement to sell is made if the proposed purchase consideration exceeded the norm — which was different for different cities — so that the department could purchase the property from him at such apparent consideration.

In my humble view, this was an infinitely better regime. The seller could make no grievance out of it because if the apparent consideration was, say, Rs 60 lakh, he should be indifferent to receiving the same no matter who the buyer is — the income-tax department or the party with whom he has negotiated.

Of course, the black component of Rs 40 lakh would not have been received assuming the black-white norm, as it were, was 60:40. And this is the reason why the scheme worked fairly well till the government chickened out when the slump in property prices in the year 2000 saddled it with unsold stock of properties. To my mind, pre-emptive purchases must be revived because it is much more objective than the regime of guideline value fixed by stamp duty authorities that admittedly can be arbitrary and high-pitched.

Loan from company

I am a director of a private company and I have decided to take a loan of Rs 5 lakh from it but my auditor has cautioned me that if I go ahead I will have to pay tax on this. Why?

Ashok Bajpai, Lucknow

Your auditor must have ascertained that the private company is giving you loan out of its accumulated profits and that you are having more than 10 per cent of the shares of the company. If this is so, any loan taken by you would be treated as dividend and taxable in your hands as income from other sources.

Account-payee cheque

Do payments to telephone department and insurance companies in respect of premiums also have to be made by an account-payee cheque if it is for a sum exceeding Rs 20,000 so as to avoid disallowance under Section 40A(3)?

Satheesh Kumar, email

Yes, if these amounts have been paid in respect of a business or profession whose income is assessable under the head Profits and gains of business or profession. Otherwise there is no disallowance which would be the case if such payments have been made for personal purposes.

Wife as director

I am a director in a private limited company rendering software services. My wife has also been made a director of the same company. We are both technically qualified. I heard that her salary from the company would be added to my salary and that I would have to pay tax on the combined income of her salary and mine. Is it true?

K.T. Purushotaman, Chennai

You haven’t given all the facts and hence I would have to make certain assumptions. First, the clubbing provisions are not attracted by mere reason of being a director; you must have had substantial interest in the company at any time during the relevant financial year, that is, 20 per cent or more of the equity shares of the company must be owned by you.

If this is the case, her salary would be added to your taxable income but the saving grace is she is technically qualified which I believe is relevant to the business carried on by your company because such a qualification bails you out of the clubbing provisions. In other words, she would have to pay tax independently in that event.

If she too has a substantial interest in the company, then you face the danger of your salary being clubbed with her taxable income in case she has greater taxable income than you otherwise. But once again the fact that you have got technical qualification would save the day for you.

Gift from spouse

I am confused. When a person gifts to his wife some money such gift is not taxable in her hands because she has received it from her relative. What then is the danger of giving such gifts?

Mondeepa Chatterjee, Kolkata

While cash gift received from one’s spouse is not taxable as income, the danger, as you put it, lies in the fact that any income arising from this gift in the hands of the wife would be added to the taxable income of her husband.

In other words, the bottom-line could be a heightened tax liability. Which is why the law has put paid to such a stratagem. But if what has been gifted is a non-income producing asset, then one need not worry.

What’s PPP?

Why is PPP unique to infrastructure?

Mukul Keswani, Noida

Public Private Partnerships (PPPs), by their very nature, are a perfect fit in the context of infrastructure projects. The state’s resources are after all limited and the void can be filled in by the private sector. At the same time it would be wrong to allow the private sector partner a freehand, including permanent ownership rights, because that would be against public interest.

Therefore, an expressway can be built by a private sector partner on Build Own Operate and Transfer (BOOT) terms so that during the concession period of, say, 15-20 years following the date of its completion, the private sector partner can recoup his investments with reasonable profits, after which the state or its agency would become its owner.

Financial closure

What is financial closure?

Supriya Damodaran, Chennai

Financial closure has greater relevance in the context of Public Private Partnerships (PPPs) where the three parties involved, government, private partner and lenders, have to sit together a number of times so that they are able to hammer out a mutually satisfactory agreement, mainly financial plan and capital structuring of the project with each one’s obligations being clearly spelt out.

Often, in the case of big projects, this takes a lot of time giving anxious moments to everyone because unless there is a satisfactory financial closure, the first dose of infusion of funds will not start delaying the execution of the project.

Long-term capital gains

My land has been taken over by the government but I got the compensation only after two years. I want to get exemption from long-term capital gains tax by investing in Section 54EC bonds.

But the problem is I got the compensation much later so that I couldn’t invest in the bonds within six months from the date of takeover of my plot. What to do?

Radha Vaiyalingam,

Sriperambadur

Don’t worry. Section 54H comes to your rescue. As per this section, for all tax shelters the rollover period starts from the date of receipt of compensation in case of compulsory acquisition by the government and not from the date of compulsory acquisition. So relax.

If you have got the compensation after two years, the period of six months within which you have to invest in Section 54EC bonds would be reckoned from the date of receipt of compensation.

Moreover, in case of compulsory acquisition, the tax liability arises not in the year of compulsory acquisition but in the year of receipt of compensation.

Thus, your case is quite clear — both the taxing event and the rollover period stand postponed to the year in which you got the compensation.

If you are able to invest in the bonds within six months from the date of receipt of compensation, you would be spared of tax liability if you otherwise comply with the terms of Section 54EC.

S. MURLIDHARAN

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