HRA exemption

 S. C. Vasudeva    

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Q.A friend of mine is serving as an engineer in Punjab Government. His wife is a doctor working in a government hospital. The place of posting of my friend is 25 km from the place of his wife's posting. Is my friend eligible for claiming House Rent Allowance under the rules as his wife is also claiming HRA? What should be the minimum distance between their posting places to make both of them eligible to claim HRA?  — Manish

A.I presume your query relates to the provisions relating to exemption of House Rent Allowance being received by your friend.  The reply given hereunder is based on this presumption.

Section 10 (13A) of the Act exempts any special allowance granted to an assessee by his employer to meet the expenditure actually incurred on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him to such extent as may be prescribed. Such exemption is available where the residential accommodation is not owned by the assessee and the assessee has actually incurred expenditure on the payment of rent (by whatever name called) in respect of the residential accommodation occupied by him.

On the basis of the above provisions, your friend would be entitled to claim the exemption to the extent prescribed in case he has actually incurred expenditure for payment of rent and residential accommodation is not owned by him. The issue with regard to distance from headquarters is not relevant for claiming such exemption. In case the expenditure for residential accommodation is being incurred by your friend's wife and not by him, he will not be entitled to claim such exemption. 

Service tax on purchase of flat

Q.I would like to know the service tax rate applicable on the purchase of flat and the time it is applicable from? Is it also applicable on preferential location charges and other things such as car parking, power back up? If yes, then at what rate? Please clarify other things also which a consumer must know in this regard. — Taranjit

A.Your queries are replied hereunder:

• At present the rate of service tax is 14.5 per cent.
• Service tax on any service provided or to be provided to any person by or another person in relation to the construction of residential complex became effective from 16.06.2005.
• It is also applicable on service for providing preferential location or for the development of complex (except service in relation to parking space).  The rate of tax on such service would remain the same.
• The following issues should be kept in view for the purposes of chargeability of service tax in such cases. 

(i). Residential Complex;

"Residential complex" means any complex comprising -

• a building or buildings having more than 12 residential units
• a common area and
• any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout and the construction of such complex is intended for personal use as residence by such person.

Personal use and a residential unit have been defined as under:   

• “Personal use” includes permitting the complex for use as residence by another person on rent or without consideration;
• “Residential unit” means a single house or a single apartment intended for use as a place of residence". 

(ii) Scope of taxable service:

The CBEC vide Circular No. B1/6/2005-TRU, dated 27.7.2005 (Annex 30.4) in paragraphs 13.3 to 13.5 has enumerated the services which are taxable under this category.  The same are reproduced below:

"13.3 This service would generally cover construction services in respect of residential complexes developed by builders, promoters or developers.  Such residential complexes are normally constructed after obtaining approval of the statutory authority for their layout.  For the purpose of this levy, residential complex means -

• a building or buildings located within a premises;
• total number of residential units within the said premises are more than 12;
• having common area;
• having  common facilities or services; and
• layout of the premises has been approved by the appropriate authority.

Common area would include roads, staircases and other similar areas where residents of the residential complex have easement rights.  The list of facilities prescribed is merely illustrative and not exhaustive.  Some residential complexes may also contain other facilities such as market or shopping complex, schools, security, banks, gymnasium, health club, sports facilities, power back up and the like.

13.4 However, residential complex having only 12 or less residential units would not be taxable.  Similarly, residential complex constructed by an individual, which is intended for personal use as residence and is constructed by directly availing services of a construction service provider, is also not covered under the scope of the service tax and not taxable.

13.5 Post constructions, completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal journey and carpentry and similar services done in relation to a residential complex, whether or not new, would be included as part of the construction activity of residential complexes for the purpose of levy of service tax." 

The definition of taxable service in relation to construction of complex service has been amended w.e.f. 1.7.2010 by adding an explanation.  The CBEC vide letter D.O.F No. 334/1/2010-TRU dated 26.2.2010 in paragraph 8.6 has clarified as under:

"In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder / promoter / developer to the prospective buyer and the Service tax would be charged accordingly.   This would only expand the scope of the existing service, which otherwise remain unchanged."

No rebate allowed on loan for plot

Q.Plot loan of Rs 10 lakh was taken from ICICI Bank in July 2013 and was repaid in full up to 2014 with interest of Rs 1,75,000. Again in 2014 housing loan of Rs 20 lakh was taken from State Bank of India for construction of aforesaid plot. The construction was completed in November, 2015. The installments along with interest are being paid regularly. 

a) Whether interest paid to ICICI Bank on plot loan as well as the pre-EMI will be deducted from the income? 

b) If so how much amount of interest can be deducted?

c) Should such deduction of interest be shown in assessment year 2014-15 income tax return as the same is yet to be filed? — Rajiv

A.Your queries are replied hereunder:

a) Interest paid on loan raised for purchase of a plot is not deductible from the total income. The repayment towards the principal amount is also not deductible under Section 80C of the Income Tax Act, 1961 (The Act) in case the loan has been raised for purchase of a plot.

b) As pointed out in (a) above, such interest is not deductible from total income.

c) This question would not arise in view reply to your query at (a) & (b) above being in negative.  

It may be added that interest paid for purchase of plot can be added as part of the actual cost of plot. The benefit in this respect can be availed as and when the plot is sold.

Sale of property on GPA

Q.I have given general power of attorney to my brother in respect of my share in the ancestral immovable property. As a gesture of goodwill, I have not claimed the sale proceeds from the said property. My question is:

• Whether the long-term capital gain accruing from the sale of my ancestral property in question is taxable in my hands or my brother who has actually received the money. 
• If I withdraw/cancel my power of attorney, what would be my responsibility for the past transactions? — Anil sharma

A.The long-term capital gain arising from the sale of ancestral property owned by you in respect of which general power of attorney has been executed in favour of your brother would be taxable in your hands. The withdrawal of general power of attorney would enable you to prevent future actions in respect of said property. It may not be possible to question the actions taken by your brother prior to the withdrawal of power of attorney, unless you can establish that a fraud had been committed by the power of attorney holder.