REPLY :  

The stand taken by your partner is incorrect. The partners are holding the property on behalf of the firm. Sale of business undertaking having movable and immovable assets entails tax liability in the hands of the firm. Tax has to be paid by the firm on the capital gains made by it on sale of the shop and other assets. Only after paying taxes and other liabilities the remainder can be divided amongst the partners. Failing which all the partners would be liable to pay tax jointly and severally. There are two alternative methods by which you can calculate the tax liability of the firm: (A) To sell the shop as a slump sale where the gains are treated as long term if the shop was owned for more than three years even though some of the assets comprised in the shop may be held only for a few months. Also no distinction is made between depreciable assets or non- depreciable assets. Sale consideration less net worth of the shop, i.e. capital plus free reserves would be taxable as capital gain. The disadvantage of this method is that indexation would not be allowed and the firm has to pay tax at 20 % plus surcharge. (B) Shop and the assets are sold individually. Capital gains on shop would be arrived at after taking advantage of indexation and the tax rate would be 20 % plus surcharge. Profit/loss on other depreciable assets would be dealt with as normal business profit/expenditure.

REPLY :  

Your query is very interesting and raises some very basic questions, which are not properly dealt with under the present law. For the benefit of the readers I would like to elaborate on various aspects of the situation posed in your query.

a. Let us first examine whether the asset you are intending to sell is short term or long term asset. In case of capital assets including house properties acquired by way of succession, inheritance, will, gift, partition of HUF etc., the period for which the asset was held by the previous owner would be added to the period for which the asset is held by you. Therefore the period for which the house is held is from 1979 to 2000 and hence a long- term asset. Its sale would attract the provisions applicable to long term assets and hence lower tax.

b. Long term capital gain = Sale consideration – [Indexed cost of acquisition + Indexed cost of improvement

• Cost of acquisition by your father or the fair market value as on 1.4.1981 whichever is beneficial, would be taken as cost of acquisition in your hand since you have become the owner through succession.
• In case of properties received under succession, the payment made by a legal heir for clearing off the mortgage created by the previous owner is to be added in the cost of acquisition. Supreme court held similar view in R.M. Arunachalam v. CIT. Therefore the payments made by you in securing releases of your property is also added to cost of acquisition.
• Both cost of acquisition as well as cost of improvement if any, would be subject to indexation i.e. the cost should be increased to compensate for the inflation factor by applying appropriate index. The indexation factor is applied with respect to the year of acquisition or 1981 whichever is beneficial to the assessee. except in case of succession, where it is taken to be the year of succession. In your case the date of acquisition for indexation should have been taken as 1979 i.e. the year in which it was first held by your father or 1981. But the irony is that you will get advantage of indexation only from the year in which property was first held by you i.e. 1998.

It must be noticed that for determining the nature of asset whether short term or long term, the date of holding takes into account the period for which the asset was held by he previous owner i.e. your father. But when it comes to determining the year from which the indexation benefit is to be given then year of succession is taken.

To drive home my point allow me to take hypothetical figures where the cost of acquisition by your father in 1998 was Rs. 2,00,000; mortgage charges paid by you in 1998- Rs. 50,000 and sale value in year 2000 – Rs. 6,00,000 and fair market value in year 1981 Rs. 2, 27,000. Indextaion factor for 1998 would be 389/351 and the resultant taxable long-term capital gain would be Rs. 2,93,012.

If the anomaly in the law is ignored and the date of acquisition for the indextaion is taken as 1981 then the factor would be389/100 and there would be long term capital loss of Rs 4,77, 530.

REPLY :  

Every year, there is two-fold addition into your investment portfolio of ULIP i.e. on account of annual contribution of Rs. 6000 made by you and also on account of reinvestment of annual income accrued on these contribution made so far. This income is reinvested into units after paying a small premium to the life Insurance Corporation. I am sure you must have been claiming deduction under section 80 L as far as annual income on ULIP, upto the year ended March 2000 is concerned. With effect from 1.4.2000, however, whole of the income received from UTI is exempt from Income-tax under section 10(33).

Your specific queries are dealt as under:

a) You are entitled to take advantage of cost-inflation-index to arrive at yearly indexed cost of acquisition of Units, acquired out of annual premiums paid and also on account of reinvestment of annual income accrued as per the scheme.

b) As far as Income- tax rate on Capital Gains is concerned, you have the option to choose from following:

• 20% of long-term capital gain calculated after allowing adjustment on account of cost- inflation-index as calculated in a) above; OR
• 10% of long term capital gain without allowing for adjustment of cost-inflation-index. 

c) You can set-off short-term capital loss against long term capital gain or vice-versa arising in the financial year 2000-2001. 

d) Newly inserted section 54EC allows you to save on the capital gains tax if long term capital gains arising out of ULIP are invested into redeemable bonds issued by National Bank for Agriculture and Rural Development (NABARD) or The National Highways Authority Of India. The lock in period for these bonds is three years. 

REPLY :  

Loss arises either at the point of sale or at the time of valuation of unsold stocks at the close of the year. Whenever investments depreciate to zero value you may write off these and claim loss in the income tax return. Shares with negligible value, which you are not able to sell through stock Exchange, may be sold to known persons at the negligible value and you may claim long term capital loss which can be used to offset capital gains, thereby unlocking dead investment. ~

REPLY :  

NIL. Capital gain on sale of fixed assets after 36 months would be treated as long-term capital gain which entitles you to an adjustment on account of inflation, provided you have not claimed any depreciation against such fixed asset. Cost inflation index facilitate calculation of cost-of-acquisition at the present value and the cost-of-acquisition of your shop shall be deemed to be 250000x389 /125 =778,000. (Cost inflation index may be referred from Income-tax ready- reckoner). Thus, there would be net long-term capital loss of Rs.78,000, when you sell the shop.