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Tax queries: Pay tax on cash gift from nephew in excess of Rs 50,000

Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers on income tax and other levies.

Updated: Sep 05, 2018, 11.27 AM IST
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Every week, an expert selected by ET answers queries from our readers on income tax and other levies.
Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers on income tax and other levies.

One of my individual clients constructed a residential apartment. The completion certificate was obtained in 2014. However, nine flats are still unsold. And since 2014 she has been deriving rental income from the unsold stock. She had obtained loan from bank as well as unsecured loan from market. Bank loan has since been closed. I am to file the ITR for AY 18-19. My queries are as follows: 1. Whether consequent upon amendment in section 2(24), 2(42), 23(5) the stock is required to be converted to capital asset at FMV? 2. Whether interest on unsecured loan can be claimed from rent. Also, if we opt for deemed rent, interest can be claimed as deduction? 3. Conversion of stock of flats to capital assets attract huge Income tax. Is there any remedy to save the tax? —Pawan K Agrawal

In case of real estate developers, there are usual unsold stock lying with the developers at the year-end. These flats are let out for temporary period until the flats are sold. In such cases, there is no requirement for conversion of stock in trade into capital asset or treating the same to capital asset. Section 28(via) of I-T Act 1961, provides that fair market value of the inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner chargeable to tax under the head profits and gains of business or profession. However, so far CBDT has not prescribed the manner for such determination. You are holding nine flats since 2014 and deriving rental income. On these facts a view can be taken that you have treated the stock in trade into capital asset as your earning out of the asset continuously for a long period of time.

Unless you can demonstrate that your intention is not to hold the said flat as capital asset, there is a possibility that the department will treat it as a capital asset. In this situation, the provision of section 28(via) will be invoked and you will be liable to pay the tax. There is no distinction for claiming deduction on interest from Bank loan and unsecured loan u/s 24 of the I-T Act. Hence, interest paid on unsecured loan will be allowed as deduction while computing the rental income, even if it is deemed rent provided that you are able to established that the property have been constructed with that borrowed fund concerning the proportion of the unsold flats.

My nephew wants to give Rs 2.75 lakh as gift to me as I want to purchase a residential flat for my family. Is there any tax liability? —Sudit Sharma

Where any person receives any sum of money without consideration in excess of ?50,000 entire value received shall be taxable under Section 56 (2) of the I-T Act 1961. However, gifts received by an individual from his relative are tax-exempt. The term relative is defined under explanation to clause (vii) of section 56 of the I-T Act. Based on the definition of relative provided, you will not qualify for exemption. Therefore, you will be liable to pay tax on the gift received from your nephew.

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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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