The taxman can come to different conclusions in different years on similar facts. . .
I have shares in several listed companies for many years which I occasionally sell to book profit. Similarly, I also buy and sell shares through my stockbroker and make decent surplus on the same. In my income tax assessments till year 2005-06, my capital gains including those for shares held for two or three months, have been accepted by the Income tax department. In fact, in the assessment order, the tax officer has noted that I am an "investor deriving capital gains on sale of shares".
However in assessment year 2006-07, the tax officer has branded me as a trader in shares and has raised a large tax demand including penal interest etc. Is he right? Can the tax officer go back on my status as an investor that he accepted in earlier years? Is this not pure harassment and illegal?
-- Ramniklal Shah
Your hostile reaction to the tax official's large tax demand rejecting your claim of short term capital gain tax at the rate of 10 per cent is reasonable. However, without holding any brief for the Income tax Department, let me tell you that under the Income Tax Act, each year is a separate assessment and treatment in the earlier year(s) is not binding to be followed in subsequent year(s).
In other words, the tax officer is entitled to come to a different conclusion in subsequent year on similar facts. Having said this, let me also tell you that the reason for the change in the treatment lies in the changes made by Finance Act 2004 with effect from October 1, 2004 from assessment year 2005-06 under which long term capital gain has been exempted on listed securities sold through stock exchange on which STT is paid and only 10 per cent tax on short term capital gain instead of 30 per cent applicable to other incomes like salary, house property, interest etc.
Prior to the amendment, the tax on short term capital gain was also 30 per cent and hence made no tax difference. But now the difference is 20 per cent (30-10) of the short term capital gain, if treated as business income.
Coming to your case, you should surely vehemently contest the tax officer's rejection of your investor status in an appeal to the appellate bodies contending that the tax loss of 20 per cent to the Income Tax authorities cannot be the basis of rejection of your investor status and that you are an investor and eligible to concessional tax rate of 10 per cent and the tax demand raised by the tax officer should be cancelled.
On June 7, 2007, I earned short term capital gain of Rs 27 lakh on sale of my residential ownership flat (held for less than three years). I have salary income of Rs 13 lakh and interest on bank deposits of Rs 75,000. Where can I invest to save on my capital gain tax?
-- Suresh Kumar
The Income Tax law does not provide for any tax concession for short term capital gains except on listed securities sold on a recognised stock exchange on which securities transaction tax (STT) has been paid. Thus, you will be taxed on your gross total income of Rs 40.75 lakh (Rs 27 lakh + Rs 13 lakh + Rs 75,000) as reduced by Rs 100,000 under section 80C to Rs 39.75 lakh (Rs 3.97 million), if you contribute to employee provident fund, PPF, life insurance premia, equity linked savings schemes, National
Savings Certificate etc. The total tax on your income works out to Rs 12.93 lakh (Rs 1.29 million). Needless to add, you need to pay advance tax in instalments on September 15, 2007; December 15, 2007 and March 15, 2008.
I am an individual residing in Mumbai. I live in a rented house with my husband and pay rent to the owner who is also an individual. Should I deduct tax at source while making the rent payment?
-- Swati Patil
While all persons other than individuals and Hindu Undivided Families have to deduct income tax at source at the time of making payment of rent if it exceeds Rs 120,000 per annum, individuals and HUFs have to deduct only if their own total sales or gross receipts or turnover from business in the immediately preceding previous year exceeds Rs 40 lakh (Rs 4 million) per annum or if the professional income exceeds Rs 10 lakh a year. You may accordingly decide whether you have to deduct tax at source or not.
The writer is chartered accountant.
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