Interest-free loan is not a sum without consideration

I had taken Rs 5 lakh as unsecured loan from my HUF's current account in December 2007 and deposited it into my savings bank account. I repaid the amount to my HUF account in June 2008. All these transactions have been reflected in the balance sheet of my account and the HUF account. However the income-tax officer has treated the Rs 5 lakh as income in my hands under the head income from other sources u/s 56(2)(vi) and has issued a demand notice u/s 156. Is the income-tax officer correct in assessing the sum as income in my hands? — Bharti Bhushan Jindal

Section 56(2)(vi) seeks to tax any sum received without consideration, which could also include the transfer of certain assets without consideration. This section also provides for certain exceptions.

In your case, apparently you have taken a loan from the HUF without interest and repaid it to the HUF. This cannot be said to be a sum received without consideration. What can come under section 56(2)(vi) is only sums that need not be repaid or returned. Money that comes without interest but which has to be repaid cannot be roped into this section. This view is also supported by the decision in Chandrakant H.Shah v ITO [2010] 124 ITD 177 (Mum).

The assessing officer therefore does not appear justified in treating the Rs 5 lakh as income in your hands.

I have a long-term capital gains of Rs 10 lakh. The sale consideration that gave rise to the capital gains was Rs 15 lakh. I propose to buy a land immediately after the sale of the property which gave rise to the long-term capital gains. I propose to sell the land so purchased within a month and use the proceeds in acquiring a new house which will be purchased before March 31, 2011.

In such circumstances will I be eligible for the exemption u/s 54F? Can I use the consideration from the sale of the property which gave rise to the long-term capital gains for acquiring the land and thereafter use the sale proceeds from the sale of the land for investment in a new house and still be eligible for the exemption u/s 54F? — Meharnath

Section 54F allows an exemption subject to satisfying the following conditions: The assessee is an individual or HUF; the gain arises from the transfer of a long term capital asset not being a residential house; the assessee does not within two years purchase or three years construct any residential house other than the new house; the assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.

The quantum of exemption available is as follows: If the amount invested is more than or equal to the net consideration then the entire capital gain; if the amount invested is less than the net consideration then the amount invested x capital gain/net consideration

So long as you comply with these conditions, the exemption will be available u/s 54F.

The fact that you have used the sale proceeds from the transfer of the asset which gave rise to the capital gains by way of investment in land and again used the sale proceeds of the sale of such land for reinvestment so as to claim exemption as required u/s 54F will not disentitle you to such claim.

You may, however, note that any capital gains arising from the sale of land will be short term capital gains on which tax will be payable by you.

I live in a flat in Mumbai. For acquiring this flat I had availed a housing loan from a bank. I have been availing the tax benefits u/s 24 in respect of the interest on housing loan and also the deduction u/s 80C in respect of the principal repayment on housing loan.

I have purchased a flat in Bangalore in August 2010 again by availing a housing loan from bank. This property in Bangalore is let out. I would like to avail of the tax benefits u/s 24 and u/s 80C in respect of the Bangalore property instead of the Mumbai property though I continue to live in Mumbai. Can I do so? — B.V. Gopinath

You have stated that the Bangalore property is let out. You would have to show the rental income from that property as income from house property subject to the deductions available there from in respect of (i) any municipal taxes paid, (ii) 30 per cent of the net rental income (standard deduction available u/s 24) after reducing such taxes and also (iii) the interest on the loan taken which can be claimed without any ceiling limit as the property is let out.

You can also continue to claim the deduction u/s 24 in respect of the interest on the property at Mumbai which is self-occupied subject to the ceiling of Rs 1.50 lakh as this property is self-occupied.

You can claim deduction u/s 80C in respect of the principal repayment of both the housing loans subject to the limits u/s 80C.

Section 80C allows a deduction of a maximum of Rs 1 lakh which is available in respect of certain payments and investments which also includes the principal repayment of a housing loan taken from certain specified institutions, including banks.

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