Tax must on redeveloping

QI stay in an old dilapidated house in Mumbai. This house was constructed in 1970 as a flat by a co- operative housing society. There are 24 flats and all the flat owners have agreed to handover their flats for re- development. The builder has agreed to handover a new flat in the building along with a compensation of ` 10 lakh to each one of us. I wanted to know whether the compensation received shall be taxable. What will be the tax liability for the exchange of new flat for the old one? DEEPAK Mumbai

A) It is apparent that the builder will be constructing more than the existing number of flats. The existing flat owners own a flat along with undivided share of land. The undivided share in land will get redivided in the process of re- development since the new flats to be constructed will be more than the existing number of flats. This would mean the flat owners are also transferring a portion of undivided share in land apart from their flat to the developer.

You would be getting a new flat in exchange for transfer of your existing flat and also ` 10 lakh as compensation. The same will be deemed as a transfer under Section 2( 47) of the Income Tax Act. The cost of the new flat and the compensation will be deemed as the full value of consideration for transfer of your existing flat. Long term capital gain will be worked out by deducting the cost of acquisition ( by applying cost inflation index) of your existing flat from the value of full consideration. You will however be eligible to claim exemption under Section 54 by investing the long term capital gain arising on sale of existing flat if all conditions are satisfied.

QMost of our employees are holders of the NSC, the contribution to which qualify for deduction under Section 80C of the Income- Tax Act. With regard to the notional income for each year from such certificates, this is also being treated as re- invested, so that we add the annual accretion as re- investments in NSC and claim deduction on such amount also. This is also reckoned for tax deduction purpose on the basis of statement given by us. Our auditor now insists that the income from NSC should be included as income liable for tax deduction at source, if we want the deduction to be considered for purpose of tax deduction at source. What is the correct position of law? PREM KUMAR Hyderabad

A) Interest on NSC in the context of Section 80C accrues from year to year but is accumulated to be paid on the date of redemption. Your auditor’s view that such annual accretion is taxable as income is true. The income, however, will be taxable as “income from other sources”. Since TDS is limited to salary, taxability of the income other than salaries is not within the purview of the disbursing officer. There is no obligation on the part of the employer to include any income other than salary, unless the assessee chooses to have the tax deducted on the basis of his entire income.

The writer is a chartered accountant. You can your send queries to info@ rathiandmalani. com