The Hindu Business Line : A brother and sister tie-up on property

A PREMISES is owned jointly and in equal proportion by a brother and sister. This premises is let on lease to a bank. The rent that used to be paid by the bank until 1998-99 was Rs 9,900 per month to each co-owner.

From 1999-00 onwards the rent was revised and the increase was paid only to the sister on the mutual consent of the other co-owner, as she, apart from being a widowed senior citizen, was blind, suffering from cancer and diabetic.

The lady obtained TDS exemption certificates from the assessing officer (AO) for non-deduction of tax at source, and this was addressed to the bank concerned.

But the same had not been obtained for some of the years. In the years in which they were not obtained, the bank deducted tax at source on the amount paid to her. She filed her returns and got refunds.

As regards the other co-owner, tax was deducted since his share continued to be only Rs 9,900 a month.

In February 2003, there was a survey at the bank and the TDS officer raised an objection stating that tax should have been deducted on the payment made to the other co-owner since his share in the rent exceeded Rs 1,20,000 per annum, though the same may have been paid to his sister.

This gave rise to a demand of Rs 8,00,000 by way of tax, interest and penalty to the bank. The bank filed an appeal against the orders and, at the same time, stopped paying the rent as it wanted to retain it towards the liability. Kindly clarify whether the co-owners can be treated as association of persons (AoP) or body of individuals (BoI) in assessment. Also clarify whether the demand can be recovered by the bank from the co-owners.

Shyamala

Reply

It is assumed that the co-owners have a definite and certain share in the property. The assessing officer appears right in his view that tax should have been deducted on the share of rent payable to the brother. The fact that such rent was paid to the sister will not make a difference since that is not a case of diversion by overriding title but only a case of application of income by the brother.

This being the case, the bank can resist the claim to the extent of tax already paid by the co-owners.

This would be based on the instructions of the Board that tax recovery may not be enforced from the payer if the payee has included the sum received from the payer/credited by the payer as his income and has also paid tax on the same [CBDT Circular in F.No.275/201/95-IT(B) dated January 29, 1997].

Also, if the shares of the co-owners are determinate and known, it would not be possible to assess the co-owners as AoP or BoI.

If, however, their shares are indeterminate and unknown, they could be assessed as AoP or BoI depending on whether they acquired the property as joint owners or whether the property devolved on them as joint owners.

Query

I received Rs 10 lakh as compensation from my employer at the time of termination of my employment in financial year 2001-02.

This was paid as compensation for the loss suffered by me on account of non-payment of salary relating to the financial years 1994-95 to 1996-97. This compensation was arrived at after considering the returns that I would have earned by investing the salary if it had been received in the respective years.

Is the compensation taxable as salary or under any other head in my assessment?

V. Rajagopalan

Reply

Though the compensation that has been received by you has been fixed on the basis of the returns that you would have earned if the salary had been received in the respective years, the fact remains that the compensation is in the nature of salary and would, therefore, be taxable only under the head salary.

Since the salary would have been due to an extent in the respective financial years it should have been taxed in the financial years 1994-95 to 1996-97, that is, the years to which they relate.

The balance would be taxable in the year of receipt, that is, in financial year 2001-02, since they were not due before this year.

Income under the head salaries is taxable when it is due or when received, whichever is earlier.

Query

My income before claiming deduction under Section 80L exceeds Rs 1,50,000.

But if the deduction under the Section is taken into account, the income falls below Rs 1,50,000.

I also have some retirement benefits, which, if taken into account, will take my income above Rs 1,50,000; these, it may be noted, are exempt under the Income-Tax Act.

Will I be eligible for rebate under Section 88 at 15 per cent or 20 per cent?

V. S. Kumar

Reply

The query apparently pertains to 2005-06. The percentage of rebate will depend on the gross total income, which is to be computed before allowing deduction under Sections 80CCC to 80U. Since the income before such deduction exceeds Rs 1,50,000, you can claim rebate under Section 88 only at 15 per cent and not 20 per cent. Exempt income is not to be included in determining the gross total income, that is, the income before deduction under Sections 80CCC to 80U.

Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.

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