Can HUF charge rent?

S.C. Vasudeva

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Q.My HUF, of which I am the Karta, owns a house at Panchkula and my wife and I, have been living in this house since its purchase. I am not paying any rent to the HUF. A portion of the house has been given on rent. Now, one of my sons, who is a member of the HUF, has been transferred to Chandigarh and has started living in the portion earlier given on rent to others. My query is whether the HUF can charge any rent from my son. If so, can my son claim exemption from tax allowable under Section 10(13) on the house rent allowance being paid to him by his employer. — v.k. gupta

A.In accordance with the provisions of Section 10(13A) of the Act, any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to such an extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations. The exemption in respect of the said allowance is granted provided the residential accommodation occupied by the assessee is not owned by him and assessee has actually incurred expenditure towards payment of rent in respect of the residential accommodation occupied by him. 

Your son seems to satisfy both the above conditions, and therefore, he should be entitled to claim the benefit under the aforesaid Section subject, 

however, to the limits prescribed under Rule 2A of Income Tax Rules 1962.  It may be added that the HUF would be liable 

to pay tax on such rental income. Please note that the HUF should charge prevailing market rent 

so as to avoid any 

objection by the tax department with regard to the determination of annual letting value of the let out portion for the purposes of assessing income from house property .

Equity contribution

Q.My wife and I jointly own a house in Gurgaon. The same has been held for more than three years. I am planning to sell the said house and buy a residential flat due to security reasons. The cost of the flat would be much higher than the sale proceeds of the house as the flat is on the top floor of the building and has terrace attached with each of the five bedrooms.  I have the following questions:  

• Can I sell my equity shares in various companies and utilise the entire proceeds to meet the deficit towards the cost of the flat. These shares have been held for more than two years and would be sold through  stock exchange on which security transaction tax would be paid.
• The period of two years for the purchase of the flat will be counted from the date of the possession of the flat or registration thereof in the name of myself and my wife. — dr. kanwal jain

A.Your queries are replied here under:

• You can utilise the proceeds from the sale of equity shares towards the purchase of the  residential flat. It is presumed that the shares held by you are also in joint names. The capital gain arising on sale thereof would be exempt from tax in view of the provisions of the Section 10(38) of the Income Tax Act, 1961 (The Act).
• The period of two years for the purchase of flat in my opinion, should be computed with reference to the date of possession and not from the date of registration. 

Is there any tax on investment in capital gain infra bonds?

Q.I inherited a plot from my father on his death in 1989. He had purchased the land in 1965 but the land had been registered in his name only after 1974 or so. It was subdivided among my brothers and sisters after his death. 

My queries are as under:

• I expect to sell my plot for Rs 1 crore. What a will be my tax liability in respect of gain arising on such a sale that I will have to pay in case I do not buy a residential house.
• If I put the proceeds in Capital Gain Infrastructure Bonds, what will be my tax liability after the three-year lock-in period? Will I have to pay tax on capital gain or interest earned on such bonds would be taxable ?
• From the date of sale of my plot do I get some grace period of a few months in which to decide whether to buy a residential house or  invest in tax-saving  bonds?
• I know that one can put the proceeds in a capital gain account only with a public sector bank and a residential house has to be constructed within three years or purchase a residential house within two years of the sale. What happens if I cannot construct or purchase any property within the prescribed period. Is there some provision for extension?  — s.k. sharma

A.Your queries are replied hereunder:

• You have not indicated the cost of the plot of land that you had inherited from your father in 1989. You have an option to adopt fair market value of the plot of land as on 1-4-1981 since the plot was purchased by your father prior to the said date. You would, however, be entitled to claim benefit for cost inflation index from the year it was held by your father. This is based on decisions of various courts. The amount of indexed cost so computed will be deducted from the sale consideration of Rs 1 crore so as to arrive at the amount of capital gain. It being a case of a long-term capital gain, the same would be taxable @ 20 per cent plus education cess of 3 per cent thereon. 
• In case the amount of capital gain is utilised for investing in the capital gain tax-saving bonds, you would be liable to pay tax on the amount of capital gain exceeding Rs 50 lakh as the tax saving bonds can be purchased for a maximum amount of Rs 50 lakh. You would be liable to pay tax on the amount of interest received/receivable on such bonds. 
• The investment in capital gain tax-saving bonds is required to be made within six  months of the date of sale of the capital asset.
• The amount of net consideration  accruing on transfer/sale of the plot can be utilised for constructing or purchasing a residential house so as to save the tax payable on the amount of capital gain provided the amount of net consideration utilised for purchase or construction of a residential house is equivalent or more than the cost of purchase or construction of the residential house. The construction has to be effected within three years after the date of sale.  However, the purchase of a residential house can be made within one year before or two years after the date of sale. The unutilised amount of net consideration is required to be deposited with a bank under capital gain scheme account before the due date of filing the return of income in respect of the year in which the capital gain arose. In case an assessee is not able to utilise the amount of net consideration within the period, as specified  herein above, the amount of the capital gain arising from the transfer of the capital asset shall be chargeable to tax as long-term capital gain in the previous year in which such  period of three years from the date of the transfer of the capital asset expires.

Gifting property to one child

Q.I am a retired senior citizen (88 years old). I have seven adult children. I own two plots measuring 500 sq yd each, one of which is under construction. The plot was registered in my wife’s name even though the entire purchase amount and the cost of construction was borne by me during my service. My wife expired a few years back without leaving a Will. I now want to gift the other plot to my youngest daughter who is not doing so well financially. All other children are well settled.

What would be the legal implications of this and how I should go about it? The plot still stands registered in my wife’s name.  — m.m. singh

A.It  is noted from the facts given in the query that the plot is registered in the name of your wife but the funds in respect thereof were provided by you. It may not be possible for you to gift the plot as it is registered in the name of your wife who has expired. Even though funds were provided by you, you have no authority to gift the plot as you are not the registered owner. It would be advisable to get the plot mutated in the name of all the legal heirs. Thereafter, a gift deed be  executed in favour of your daughter by all such legal heirs.

Right assessment of the cost

Q.I have inherited a residential house from my father who had passed away in 2001. The said property had been built by my father from his own funds. For the purpose of computing capital gain, I have indexed the fair market on 1.4.1981 at the time of sale of the said property in 2013 but the assessing officer is insisting that the indexation would be allowable from the year in which the property was inherited by me. Is the contention of the assessing officer correct? — ravi kumar

A.On the basis of literal interpretation of the provisions of Section 48 of the Act, the interpretation presented by the assessing officer is correct. However, there are decisions of the Hon'ble Tribunal and the high courts, which have agreed with the view of the assessee that the indexation benefit should be allowed from the year in which the previous owner had held the capital asset or from the financial year 1981-82 whichever is later. The decisions of high courts are given below for your reference: 

• CIT vs Manjula J. Shah (2012) 204 Taxman 691 (Bombay)
• Arun Shungloo Trust vs CIT (2012) 205 Taxman  456 (Delhi)
• CIT vs Gautam Manubhai Amin (2013) 218 Taxman 319 (Guj)

There is also a decision of Delhi Benches of ITAT in the case of Aftab Seth vs Deputy Director of Income Tax (International Taxation) Circle 2(2) (2009) TIOL-566-ITAT-DEL. You may, therefore, give reference of these decisions to the assessing officer before he completes the assessment. I am sure you will be able to get the benefit at the appellate stage if the Assessing Officer does not accept your contention.

Can I sell my flat before getting registration?

Q.I had booked a flat in Mohali in March 2014 by paying 95 per cent of its cost plus car parking and club charges. Now in April 2016,  the builder wants me to take permissive possession for doing internal work by paying the remaining 5 per cent cost plus other charges.

The registration, however,  will be done only after 5-6 months as the project is not yet formally complete. Some people have taken the possession and are living there. My query is that if I take the possession, can I sell the flat before it is registered and will this transaction come under long-term capital gain or short -term gain? — vaibhav

A.According to the provisions of the Act a capital asset held for a period of more than three years is considered a long-term capital asset. Any profit arising on sale of such a capital asset is treated as a ‘long term capital gain’. 

Sale of flat immediately after taking the possession in April 2016 would not enable you to claim that the profit arising on such a sale is a long-term capital gain as by taking possession you would have become a owner of the flat and three-year period would be counted from the date of ownership i.e.  April 2016. The profit arising on sale of such a flat would be treated as a short-term capital gain. However in case you sell your property rights in the flat which exist before taking the possession, period of three years would be counted from March 2014. In such a case it may be possible to claim that the profit arising on such a sale is a long-term capital gain.