jack (md) 21 October 2011

Does relinquishment of assest/rights attract capital gains?

Dear lawyers plz suggest your valuable feedback.

The assessee(My mother) had entered into an agreement to purchase a Agricultural land comes in gram pancyat, but situated with in the 8km limit of municipality/corporation areas. we my mother paid Rs. 1,60,000 as an advance to the ( owner is my mothers sister, blood relation)owner, on may 1997. Both parties had reserved the right to specific performance of the agreement. After fourteen years,now oct 2011, another agreement was entered into between the parties by which the assessee agreed for termination of the earlier agreement and allowed the owner to sell the said property to any person and at any price of his choice and in consideration of the same the assessee will be received a sum of Rs. 40 lakhs along with the amount advanced to the owner. This deal is being done through the high court.

My question is, that 40 lakhs amount will be comes under income tax limits?

.. do i need to pay the income tax for the amount against the relinquishment of right& assest.?

If cash received in the form of gift will it also entertain income tax?

Please suggest a way to avoid tax to get the money in white( through legal process)..

looking a positive and accurate suggestions from my lawyers friends

Thanks and regards

jack

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5 Replies

(Guest)

in your case it is clear there are 2 separate agreements. in 1st agreement your mother advances money to the owner but the title of property is retained by the owner and since full price is not paid, the title is not transferred. there is no sale.

in 2nd agreement the owner returns the advance money to ur mother along with 40 lakh. this 40 lakh is not sale consideration because the property was not sold to your mother.there is no question your mother sale it back.

now there is no capital gain in your case.

if you show this 40 lakh as a gift from the owner, then u will have not to pay income tax on it because income tax is paid on income and not on gift.

therefore my advice is that you should show this 40 lakh as gift in order to evade income tax.

sunil rajpal (FCA prop) 19 November 2011

however 40 lakh will attract gift tax

Shailesh Kumar Shah (Advocate) 01 March 2012

Dear Mr.Sunil Rajpal

Gift tax is not applicable on said transaction as per Section 56(2)(vii) of the Income Tax act.

C. P. CHUGH (Practicing Lawyer) 02 March 2012

There are conflicting facts in the querry, however, in case the sum of Rs. 40.00 Lac are being received under the decree of the Court against relinquishment of a right, it would be LTCG and would be subject to taxation as per provision contained in the ACT and also subject to allowability of indexation on the total consideration of first agreement entered into in 1997 irrespective of the amount actually paid against such agreement. The cost of right now deemed to be relinquished would be the consideration stated in the agreement and not the actual payment made against the agreement.

2. Gifts from relatives are exempt from any taxation and are also not subject to any limitation. However while making and Gift or receiving a Gift one has to see the Capaity of the Donor. if your mother;s sister is a person of means, then there is no bar for making her the gift to her sister and in case she does not have sufficient means and would be gifting after receipt of sale consideration of relinquished rights in the property, the same could be termed as coloring device by the Deptt and may be taxed in your hands.

And where is a question of any taxation if all transaction are being done in cash and unaccounted ?

Vineet (Director) 02 March 2012

Very well answere by Mr Chugh.

I would like to differ on only one point. Since its a case of renunciation of right, the cost will be what pas paid in 1997 to obtain such right and not the total agreed consideration.

Your mother can take gift by cheque from her sister and the same will not be taxable in her hand. However, her sister will not get any benefit of such gift while computing her capital gains tax. I understand she will pay this gift from the sum received on sale of the said property, so the same is well explained.