NRI PROBLEMS
My family is running an educational institute in India which is approved under the Incometax Act as a charitable trust. In the past, the income of the trust has been given exemption by the tax department. However, from last year the Assessing Officer proposes to tax the income on the ground that the trust is conducting coaching classes and charging fees for the same. Do you think he is justified in his stance? — T Laxman, Dubai
So long as the objects of the charitable trust are for promoting education which has been accepted by the tax department in the past, there would be no justification for taking a different view. Courts have held that once the registration is granted to the trust under section 12-AA of the Income-tax Act, 1961, and the tax department has exempted the income during the past years, tax cannot be levied unless there is a change in the objects of the trust and they cease to be charitable in nature. Recently, the Delhi High Court held that The Institute of Chartered Accountants of India, which is a charitable trust, cannot be made liable to tax on its income merely because it charges fees for conducting coaching classes. It was also held that placement fees charged cannot be taxed because these activities are ancillary in nature. It cannot be said that the Institute is carrying on any trade, business or commerce.
My father who is living with my brother in Pune has a large house which he has owned for many years. Since the value of the property has sky-rocketted, he would like to receive regular income by mortgaging this property to a bank. I am told this is now possible, but I need some more details. — S K Lokhande, Doha
What your father has in mind is taking a loan under a reverse mortgage scheme. Under this scheme, a monthly or quarterly amount would be paid to your father by the bank as long as he lives. Earlier, the loan was restricted to a twenty-year period, but this restriction has now been removed and, therefore, the bank can continue to give him the monthly or quarterly amount, subject to the bank’s policy of restricting the outstanding dues, including the accumulated interest, to the percentage fixed by the bank with regard to the value of the property. Some banks restrict the aggregate of the loan with interest to sixty per cent of the value of the property. The monthly or quarterly amounts received by the person who has mortgaged his house is not taxable as income. At the time when the mortgage is created, there is no capital gains tax liability. It is only at the end of the loan period, when the property is required to be sold to recover the loan with interest, that capital gains tax liability will arise on sale of the property by the bank. Therefore, the heirs will only receive the amount which remains with the bank after the capital gains tax liability is satisfied.
My wife has a house in Bangalore which she inherited from her father. The property was let out many years ago to a tenant. He has now approached my wife that he would like to assign his tenancy in favour of a third party who has agreed to pay a certain amount if he is accepted as the new tenant by my wife. The present tenant will take sixty percent of that amount and forty per cent will be paid to my wife as consideration for accepting the new tenant at the same old rent. I am worried about the tax implications. — K Gowda, Sharjah
The surrender of the tenancy right by the present tenant would amount to transfer under section 2(47) of the Income-tax Act. Therefore, it would result in tax being payable on the capital gains made by the present tenant in respect of sixty percent of the amount received by him. Assuming that he had paid no amount to your wife’s father when he was made a tenant several years ago, the cost of such tenancy right would be nil. Hence, on the entire amount received by the present tenant, capital gains tax would be payable at the rate of twenty percent. As far as your wife is concerned, the amount received from the new tenant for transferring the tenancy at the old rent to his name would be liable to tax as income from other sources. Hence, the normal rate of income-tax would apply subject to the initial exemption of Rs.2 lakhs. The Income-tax Appellate Tribunal has held in a similar case that the amount received by a landlord for accepting a new tenant is not taxable under the head Capital Gains. Such amount can only be taxed under the head Income from Other Sources.