About four months ago, a commercial property belonging to me was settled among our family members – myself, my wife, and two married daughters, through a proper registered settlement deed. Please let me know the tax treatment to be followed as far as the rent received is concerned. Will it have to be divided into four parts and taxed against each individual? How will capital gains be calculated if we plan to sell the property?
?Vilas
The answer will depend upon the way the property is settled. If the share of each one is well demarked and defined, the rent will be collected separately by each individual. If the property continues to be a joint holding, with the share of each one being a percentage of the property, you will be taxed as an Association of Persons. Similar treatment will be accorded to the capital gains as well.
My two brothers and I (Resident Indians) have owned an agricultural property since March 1976. My youngest brother desires to acquire the land from us in order to convert, develop, and sell the entire area.
Can we two brothers gift our share in the property to him so that he can develop and sell it, and he in turn gifts a certain amount to us? Will this incur the stamp duty and registration charges? Will he earn long-term capital gains or short-term capital gains on our share gifted to him if he sells the property after a year?
?Jadeja
A gift of real estate from close relatives is not completely free from the applicability of stamp duty. It attracts lower stamp duty than the duty applicable on an outright sale.
Income from agricultural land, inclusive of capital gains thereon, is free from income tax. However, agricultural land situated within 8 kilometres of the local limits of any municipality, notified area committee, town committee or a cantonment board, and which has a population of not less than 10,000 according to the last preceding census, is considered as a capital asset. Consequently, sales made of such lands situated within the limits would attract tax as capital gains. [CIT v Shubhlata & Others 13TCR91 (1998)].
For computing long-term capital gains arising out of the subsequent sale by the donee or the legatee, the cost of the property is the cost incurred by the donor when he originally acquired it, or the Fair Market Value as on 1.4.81 as assessed by an official chartered valuer, whichever is higher. Explanation ?iii? to Sec. 48, defines ?indexed cost of acquisition to mean an amount, which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later?.
This means that in the case of an inherited or gifted property, the cost of acquisition is the cost to the original holder (or FMV as on 1.4.81) but the date of acquisition for indexing should be taken as the date of the inheritance or the gift. However, the character of long or short term depends upon the date of acquisition of the original holder. In case this original holder has also acquired the property by way of a gift or inheritance, then it will be the date of the very first holder who purchased or constructed the property.
Does your brother intend to build any superstructure on the land before selling the same? In that case …
Where the cost of land and the superstructure is separately available, the sale consideration can be apportioned between cost of the land and that of the building for computation of capital gains separately. CIT v Smt. Lakshmi B Menon & Anr (2003) 264ITR76.
Thus, in some cases, it may turn out that the land is long term and the superstructure is short term. The same principle may be applied in your case. The land can be taken as long term and the appreciation arising out of the development of the land may be taken as short term.
Cross gifts are not permitted. If that was possible, every sale transaction can be camouflaged as a gift from the seller to the buyer of a product or service and a gift from the buyer to the seller cash. We would like you to avoid this.
We suggest…
You two elder brothers authorise your younger brother to develop the land and pay him for his services. After the development is complete, let all the land get sold at the same time, but in the names of each individual.
There will be no stamp duty and registration charges payable by any of you. Since the indexation will be available from 1981-82 the long-term capital gains (LTCG) will be much lower. Moreover, the LTCG will be divided among the three brothers.
Recently, Colgate Palmolive (India) reduced their share capital by reducing the face value of their shares from Rs 10 to Re 1 effective from 1.11.07. It refunded a difference of Rs 9 per share to the share holder.
The question – Rs 9 per share received by me and other share holders is regarded as a deemed dividend and hence tax free or it is regarded as long-term or short-term capital gains based on date of acquisition of shares by the share holder?
?Noshiir Mobedjina
The Rs 9 per share will be considered as a deemed dividend in the hands of the share holder and hence exempt from tax. However, the company will pay a 17% dividend distribution tax on account of the reduction of capital.
The authors may be contacted at wonderlandconsultants@yahoo.com
