The Hindu : Profit on sale of depreciable asset will be short-term capital gains

Online edition of India's National Newspaper
Monday, Jan 26, 2004

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Business

Profit on sale of depreciable asset will be short-term capital gains

QUESTION: Our organisation is a registered partnership firm. We own a commercial building in which we are doing business. The title deed is in the name of the firm. We purchased the building in the year 1992. Till date, we have claimed depreciation thereon. Now we are planning to sell the building. We have unabsorbed business losses, which have been accumulated over the past five years. Please let us know if the profit on the proposed sale of the building can be set off against those unabsorbed losses. If not, how the profit on the proposed sale will be treated for income tax and/or capital gains tax purposes?

ANSWER: Sec. 50 specifically provides that the profit on sale of an asset, which has been allowed depreciation at any time will be treated as short term capital gains. Since carried forward loss can be set off only against business income, past losses cannot be set off against capital gains, whether short term or long term. If, however, the loss related to unabsorbed depreciation, the inference would have been different.

VRS payment in instalments — how is it taxed?

Q: I am eligible for VRS payment in five equal instalments, which will now be taxed in the respective years. Do I get the exemption limit of Rs. 50,000 and benefit of tax rebate under Sec. 88 for each year of such receipt?

A: While the limit of Rs. 5 lakhs will be cumulative one for all the amounts received by it in different years, there is no reason at all why the assessee should to get the basic exemption limit and tax rebate in respective years, when the payment is made in instalments and, therefore, assessed in different years. There is certainly no bar for standard deduction, basic exemption limit and normal tax rebates allowable under the law.

Notified bonds and schemes u/s 10(15)(i)

Q: In your question and answer in The Hindu dated September 22, 2003, you have mentioned about the tax exemption under Sec. 10(15) under Chapter III. As I am a voluntarily retired person from bank, I request you to give me the details of the section and the various deposit schemes that fall under the section, which will enable me to ascertain my tax liability and investment.

A: Some notified bonds and schemes under Sec. 10(15)(i), some of which are not in vogue, are: (1) 12-year National Savings Annuity certificates; (2) Treasury Savings Deposit Certificates (10 years); (3) Post Office Cash Certificates (5 years); (4) National Plan Certificates (10 years); (5) National Plan Savings Certificates (12 years); (6) Post Office National Savings Certificates (12 years/ 7 years); (7) Post Office Savings Bank Accounts; (8) Public Account of the nature referred to in item (6) in the Table below rule 4 of the Post Office Savings Account Rules, 1981 (limited to Rs. 5,000); (9) Post Office Cumulative Time Deposits Rules, 1981; (10) Scheme of Fixed Deposits governed by the Government Savings Certificates (Fixed Deposit) Rules, 1968; (11) Scheme of Fixed Deposits governed by the Post Office (Fixed Deposits) Rules, 1968; and (12) Relief Bonds, 2002 and 2003.

Over and above these notified bonds, interest from deposits in Non-Resident Non-Repatriable Rupee Deposit Scheme is notified for exemption only for non-residents. Resurgent India Bonds issued by State Bank of India is also notified under Sec. 10(15)(i). Many of the above bonds are not now available but income from those bonds, which are still not matured, will be exempt, even if acquired by purchase.

Some other bonds like Railway bonds, and some Municipal bonds, which were notified are traded and available in secondary market. The course for the investor is to look for advertisements, so that the new issues, the income from which is tax free, can be ascertained from the brochure/ prospectus more easier after verification, since the relevant notification is bound to be cited.

Property income — what is self-occupation?

Q: I am an employee unable to occupy the property because of my employment elsewhere. Do I lose the right to exemption under Sec. 23(2)(b) merely because my parents live in it?

A: The fact that the parents live in it would mean that it continues to be occupied by the owner though not physically by him. The parents are either dependent on him or not dependent. If they are dependent on him, it has to be treated as occupation by himself. If they are not dependent, the annual value is bound to be taken, as it has to be presumed that it has been let out at a value less than the annual value.

Sale of computer programme — is it taxable?

Q: Are capital receipts for sale of computer programmes developed personally as a hobby over a period of about ten years and sold to an Internet dotcom company for Internet use subject to income tax? If so, how are my expenses to be accounted and allowed as deductions? Advance tax has been paid and refund claim is yet to be disposed off. The ITO seems to be in two minds.

A: If there is outright sale of the programme, which has been developed by the reader, not as a professional or as part of business, but as a hobby, such amount is a capital receipt in lieu of the right to copyright of the programme, which is a capital asset. If no cost had been incurred, it may not be liable to tax, since it is established law that, where there is no cost, there is no liability as decided in CIT v B. C. Srinivasa Setty (1981) 128 ITR 294 (SC), but this law is nullified in respect of sale of certain assets by treating the cost to be nil.

In the assessee's case, the programme could not be treated as a "right to manufacture, produce or process an article or a thing," brought to tax even if the cost is nil effective from 1998-1999 nor is it a "trade mark or name associated with business" in which case, it is taxable from assessment year 2002-03.

A software programme will probably be more in the nature of copyright. Computer programme was recognised as entitled to copyright in England in 1988. Indian Patents law did not recognise patent protection for computer programme, but Sec. 2(O) of Copyright Act now recognises computer programme and computer data as creative work entitled to copyright protection (see page 80 of B. L. Wadhera's Law relating to Patent, Trademarks, Copyright Designs & Geographical Indications (5th Edition). It is treated as a capital asset specifically included under Sec. 32(1) for purposes of depreciation, but not so specifically included by name either as computer programme or as a copyright under Sec. 55, so as to justify adoption of nil cost. In the result that, where it is a self-created asset and there is no cost, it should not be assessable at all. If any expenses are claimed as cost, the argument that no cost was incurred and that, therefore, there is no liability to capital gains tax will not be available. But if liability for capital gains is conceded, cost including capital expenditure directly incurred can be claimed.

Deduction of tax by the buyer of the programme on the basis that it is assessee's professional income is probably because it was understood by the buyer that the assessee is carrying on a profession in computer consultancy. This inference is obviously incorrect. It is understood from the reader's letter that the programme is developed as a hobby in the background of knowledge of astrology. If astrology, however, is the profession of the reader, receipt could be treated as incidental to the profession of astrology, so as to be treated as income from astrology.

The inference may essentially depend on facts. Now that tax has been deducted, the only course is to await refund for any excess that might have been deducted at source.

Interest for default of non-deduction by payer cannot be recovered from payee Q: I am an income-tax assessee. On the income-tax remitted for the salary received during 2001-02, Income-tax Officer, ...... has charged interest under Sec. 201(1A) in his letter No...... dated ......, as the tax has been deducted in one lump sum instead of monthly instalments. Based on this, a sum of Rs. 4018 has been deducted from my current pay as penalty/interest and the same has been remitted by my employer, whose appeal was negatived Similarly twenty two of my colleagues have been charged interest to the tune of about Rs. 40,000. From the Tax Forum in The Hindu dated January 1, 2003, I understand Sec. 201(1A) which provides for interest from the date on which tax was deductible to the date of payment, would have application only to the tax that was deductible as at the end of the financial year in respect of tax deduction from salaries. Please advise.

A: The employer in reader's case was not correct in deducting tax from salaries in one lump sum instead of doing it on monthly basis. However, as opined in these columns, Sec. 201(1A) provides for interest from the date on which such tax was deductible to the date on which such tax is actually paid. Sec. 192(3) relating to tax deduction at source from salaries provides for increase or reduction of the amount deducted for the purpose of adjusting any excess or deficiency.

Short or excess deductions from month to month occur for various reasons. Proportionate monthly deduction does not occur even in respect of payments by the Government and no interest is charged on such payments only because they are not chargeable, since law itself provides for adjustment in later months, the last such adjustment being the pay bill for the last month of the year drawn during the year. Interest cannot be levied for short deduction for earlier months.

No interest is also payable by the Government for excess deduction in earlier months. In respect of other items of payments liable for tax deduction, the due date is fixed by the statute and no adjustment is permitted. In the case of salary, the question of short deduction can arise only at the end of the year.

Be that as it may, if any interest is payable for short or nil deduction, such interest is payable by the person responsible for tax deduction at source.

The omission to deduct tax is not the fault of the payee, that is, employee in this case. It is neither fair nor proper in law to pass on the interest liability for a tax default of the employer to the employee.

Unfortunately even banks merely debit the tax and the interest for such non-deduction to the account of the depositor-account-holder, where they are charged with interest for the default for non-deduction of tax from interest on deposits.

In all such cases, it is a matter between the person responsible for tax deduction and the Income-tax Department. They can only recover tax, which should have been deducted, if the payee had not meanwhile paid the tax, even as made clear in the amendment made to Sec. 191 by Finance Act, 2003.

Since the Income-tax Department is not in the picture in the reader's case, it is for the employees to point out that the amount of interest charged on them is not justified either under general law or the income-tax law. It is for the employer to avail all the remedies under the laws to have the wrong levy of interest cancelled. Whether they are successful or not in getting it cancelled, there is no right of recovery of such amount of interest or penalty from employees.

S. Rajaratnam

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Profit on sale of depreciable asset will be short-term capital gains