PERSONAL INCOME TAX: IMPORTANCE OF OTHER LAWS IN TAX PLANNING – HERE IS EXPLAINED HOW?

[PARAS MEHRA]

Introduction

Tax laws are getting complex day by day and also scope for simple tax planning is also getting narrower day by day. In this dynamic environment, knowledge of only tax laws will not help you to sustain the proper tax planning. Knowledge and better understanding of different laws is very much important. Like, if you are dealing with any capital gain case, then knowledge of Transfer of Property act, 1882 is very much important. This is only one of those examples. Hence, with this article, let us understand the importance of other laws in the tax planning. Further, for better understanding we have given this article the shape of a live case. Let us proceed.

Facts of the Case

Few years ago, a person named Abdul Rehman (Name changed) (hereinafter referred to as ‘asseseee’) sold a vacant land and earns a profit of around 2 crores in the total transaction (technically which is called capital gain). He wants to save the tax so he invested the total funds into a house property and claims exemption on grounds of investment under section 54f of the income tax act, 1961. As per section 54f, individual and HUF can claim exemption from capital gain if the consideration from sale of asset is invested into a house property, however with an important condition that you should not own more than one residential house at the time of claiming exemption. At the time of claiming exemption, assessee owns two residential houses.

The important question?

After reading the facts and the section 54f, it is very clear that assessee is liable to income tax and will not be able to claim the exemption because he own two houses at the time of claiming exemption. In other words, if the asseseee at the time of exemption owns only a single house then he could have been saved and could also claim the exemption as well. So the important question is that, is there any way to save the tax or not?

The affirmative answer

Yes, there is an answer and that too is affirmative. This tax can be saved. Assessee can claim the exemption as well.  Let us understand the tax planning:

Assessee named is Abdul Rehman. He is a Muslim by religion. He owns two houses and this is the only hindrance to claim the exemption under section 54f. So if we can solve this problem, assessee would be able to claim the exemption and ultimately can save tax.

To solve this problem, tax planner suggests assessee to gift the house (the one which is in village and family members are actually staying in there) to anyone in the family orally and without any written agreement or deed because practically it won’t be possible to have written gift deed from back date moreover when the case is under scrutiny. However, assesses asks that how it will help, because it is not valid in law and also the assessing officer will not accept this contention and that is too because a gift without a proper signed instrument is invalid as per Transfer of Property Act, 1882. After listening to client, he said the following words:

“Look sir, first of all understand that you are Muslim and your transaction will be covered under Mohammedan Law. Under the Mohammedan law, essentials of the gift are declaration by donor(i.e. you) and acceptance by done (any family member) and possession must have been transferred from donor to donee (which is already a case as family members were staying in there for a long time) just to make a Oral gift totally valid (Also, this law is unaffected by the provision of Transfer of Property Act 1882).

So in your case, your family stays in the village, so if you gift your property to any close relative before claiming exemption, then all the condition which are mentioned in the Mohammedan law will be fulfilled and your transaction will be treated as gift without any written paper or agreement. Accordingly, you left with only one house and you are eligible for exemption and hence case solved.”

So, assessee took the same contention before the authorities and these contentions are accepted and penalties were taken off.

The Other side of the transaction

There is another question which may be asked from this transaction is that the member who will receive the property may also be liable to tax under section 56 of the income tax act. The answer is no. Section 56 does not apply when any property is gifted to any relative, and hence income will not be held taxable in the hands of receiver.

This kind of transaction makes you understand that how it is important to understand the different laws for the tax planning because, there is a very thin line of difference between the tax planning and tax avoidance. It is never recommended to use the colorable device or structure to avoid tax. Hence, it makes more important and more sense to the understand the varieties of laws to have a proper legible tax planning. 

Let us understand the law again in bit more detail:

The term ‘Mohammedan Law’ is a useful expression so far is India is concerned. India is not an Islamic state and hence Islamic law does not apply here. However, certain part of it still applies to Muslims in India; the portion of Islamic Civil Law, which relates to (i) Inheritance, (ii) Will, (iii) Gifts etc is applicable to Muslims in India.

Let us first understand how transfer is affected under section 123 Transfer of Property Act, 1882;

“For the purpose of making a gift of immovable property, transfer must be affected by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses.”

 “For the purpose of making a gift of movable property, transfer must be affected either by a registered instrument signed as aforesaid or by delivery. Such delivery may be made in the same way as goods sold may be delivered”

However in our case, since the assessee is a Muslim by religion and it governed by Mohammedan Law, essentials of valid gifts are declaration by donor and acceptance of the gift by the done and delivery of possession. Further, this rule is unaffected by the provisions of section 123 of transfer of property act, 1882 stated above. This is made very clear by section 129 of the transfer of property act, 1882, which reads as follows:

“Saving of donations mortis causa (an act to take effect at the death of the donor by which he disposes of the whole or a part of his property) and Muhammadan Law – Nothing in this chapter relates to gifts of movable property made in contemplation of death, or shall be deemed to affect any rule of Muhammedan Law”.

Hence, it is very much clear that oral gifts are valid in law and gift made in consonance of Muhammadan law are totally valid.

Conclusion

Every law and facts are very much important in any disputed case, but to keep in mind is that facts are always more important than law to understand. Always try to understand the facts of the case in as much detail as possible because this will help you to apply the appropriate law carefully and more importantly correctly.

(Author is CA Paras Mehra, a practicing Chartered Accountant and founder of www.Quickcompany.in, a portal to register your companies online. For any question/feedback, feel free to write us at [email protected].)

(Note: The above article contains the story which is purely fiction and has no resembles with any real life case. This case law is produced in such a format just to make them better understand the case, facts and the law produced above. This case, article or author does not promote in any case the illegitimate tax planning and the author is strictly against such practices. This article only explains the importance of other law in income tax laws.  Author will accept no liability if anybody gets harmed or aggrieved with the above article in any case.)

Discussions to this article

[Mayra arora]

Tax planning plays major role in India. Big Decisions is providing income tax calculator to you for tax planning. You can make smart investment by using tax calculators.

[chintan grover]

Good information given in this post. Tax planning is a common but important term. It’s an art of arranging your finances in such a way that you would avoid taxes. Unfortunately most of the people fail to understand the importance of tax planning. The solution is to plan financial transactions and seek advice of professionals.