Tax Column

I am an individual and one of the beneficiaries along with my younger brother in a Private Family Trust which was created by my father. The Trust has invested in land and decided to dispose of the same in the current financial year. The Trust is likely to make substantial capital gain of ₹5 crore. Can the Private Family Trust invest in a residential house and get capital gain exemption? [EasyDNNnews:PaidContentStart]

From your query, it is very clear that the Private Family Trust was established by your father for the benefit of specific individuals, i.e., you and your brother. The benefit of reinvestment of capital gain in a residential house is normally available to individuals and HUF. In my opinion, although the Private Family Trust is a different entity, it is nothing but created exclusively for the benefit of individuals. In fact, the Private Family Trust is always Taxed under the status of AOP. Therefore, if the Private Family Trust invests the entire capital gain in the residential premises for the use of beneficiaries, the Private Family Trust is entitled to exemption of the entire capital gain if it is invested in a new residential house under section 54F of the Income Tax Act. However, you have to ensure that no individual has more than one residential house in their name at the time of transfer of land. 

I am holding shares in a closely held company since 2001. In the last financial year, I have received 10,000 bonus shares. I am planning to sell my entire shareholding during the current financial year. Kindly let me know whether my proposed sale would be subject to long term capital gain tax or short-term capital gain tax. What would be the tax calculation in respect of bonus shares? 

In case of a closely held company, i.e., unlisted company in India, the holding period of bonus shares for capital gain tax purpose is calculated from the date of allotment of bonus shares and not from the date of acquisition of original shares, i.e., in your case, 2001. Therefore, if you propose to sell the entire shareholding in the current financial year, then the holding period of bonus shares would be less than 24 months. Therefore, the bonus shares would become short term capital asset. The original shares are the long-term capital asset since the holding period is more than 24 months and would be subject to long term capital gain tax at 12.5 per cent plus applicable surcharge. 

Since the bonus shares are issued free of cost, cost of acquisition would be considered as Nil and therefore, the entire sale consideration of bonus shares will be taxed as short term capital gain in your hands which is at 30 per cent plus applicable surcharge. 

However, long term capital gain you can reinvest in a residential house if you do not have more than one residential house on the date of transfer of shares, subject to cap of `10 crore under section 54F of the Income Tax Act. No exemption is available for short term capital gain. 

I am a partner in a family partnership firm where my other two brothers are also partners. The firm had purchased land almost 30 years back with an intention to carry out Construction activity. However, the firm has never carried out any business activity nor has any intention to do so. In the accounts, the land was shown as stock-in-trade initially which was continued from year to year. Now we propose to sell the land. Whether it would be taxed as long term capital gain or business income? Kindly advise. 

There is no dispute that the land was never used in business and nor development, trading or commercial activity was undertaken on the said land. Therefore, in substance, the land was held as capital asset and investment for appreciation. The Courts have always held the principle of substance over form; therefore, nomenclature in the accounts cannot establish the true character of land, which in your case, is investment / capital asset. Therefore, in my view, the land is a capital asset, even if you have shown it as stock-in-trade in the books, particularly when the firm has never carried out any development activity on the said land nor the firm was in the business of buying and selling land. As such, the land held by the firm is a longterm capital asset and not a business asset. If you sell the land, then you offer the capital gain as long term capital gain and pay tax at 12.5 per cent plus applicable surcharge. The department may take a contrary view if your case is selected for scrutiny, but you have a fair chance of winning at the appellate stage. 

I am an individual and want to form a family trust to protect assets and its continuity of ownership. My wife and my children would be the beneficiaries along with me. I would also be a trustee as well as settlor. Is it possible to create a family trust where I could be a settlor, a trustee and a beneficiary? Is there any income tax implication? 

Yes; under the Indian Trust Laws, settlor of a family trust could be a trustee and beneficiary. There is no legal provision. However, if the same individual acts in all the three roles, i.e., settlor, trustee and beneficiary, then under the Income Tax Act, the trust may be classified as a revocable trust. In a revocable trust, the settlor retains control and can revoke the trust which may lead to taxability of the trust’s income in the hands of the settlor, i.e., you. Further, the purpose of having a family trust is to protect the assets and continuity of the assets which is not available if the trust is revoked as under the Indian Income Tax Act, the asset of revocable trust is still considered as asset of settlor. Therefore, my advice to you is that you become settlor and beneficiary but appoint some independent person as trustee in place of you. 

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