Tax Column

I am an individual and a resident of India. I have transferred USD 400,000 under LRS to my foreign bank account in the US. After retaining the money in the bank account for two years, I returned the money back to my Indian bank account. In between there was an appreciation in the exchange rate of dollar vis-à-vis rupee and as a result, I earned a profit of ₹4,000,000. Will this profit be subject to tax?

Both the Indian currency and the US currency are capital assets. Therefore, one has to read the definition of transfer under Section 2(47) of the Income Tax Act. Under that Section, the transfer includes sales, exchange or relinquishment of assets, etc. However, mere conversion of one currency into another cannot be considered as an exchange. The exchange within the meaning of Section 2(47) means the transfer of one capital asset from another capital asset and must involve two persons. In your case, the ownership of currency remains with you even after the conversion of USD into rupee.

Therefore, it is not an exchange of capital assets with another person. Further, it is just a conversion of one kind of currency into another kind of currency in the normal course of a transaction. As such, this conversion can never be considered as exchange within the meaning of Section 2(47). Further, the transfer of funds under LRS was not for the purpose of business. Therefore, provisions of Section 43A of the Income Tax Act are also not applicable in your case since it is not related to your business activity. The earning of ₹40 lakhs due to exchange fluctuations will not attract any Income Tax.

I am an individual residing in a tenanted house in Mumbai for more than 20 years. I have other two houses located in South India. Due to some pressure from the landlord, I surrendered the tenancy rights in a residential house where I was actually residing and received a compensation of ₹5 crore. Can I invest this amount in a residential house and enjoy an exemption under Section 54 of the Income Tax Act?

From your question, it is very clear that besides the tenancy rights in a residential premise you also own two residential houses in India. The tenancy rights are a capital asset and any gain that arises on the surrender of tenancy rights is subject to Capital Gain Tax. In your case, it is a long-term capital asset since you held the tenancy rights for more than three years. However, tenancy rights cannot be considered residential premises. Therefore, what you have transferred is tenancy rights and not residential premises.

As such, long-term capital gain is entitled to exemption under Section 54F of the Income Tax Act and not under Section 54 of the Income Tax Act. One of the conditions to avail of exemption under Section 54F of the Income Tax Act is that the assessee should not have more than two residential houses in India on the date of transfer. In your case, you are already having two residential houses. As such, you will not get any tax benefit under Section 54F of the Income Tax Act. Therefore, the entire ₹5 crore would attract long-term capital gain tax at 20 per cent plus applicable surcharge.

I have a family business managed as a private limited company. Could you let me know what is the new provision regarding the consequences of non-payment to MSME-registered vendors?

Most of our vendors are MSMEs. A new Clause (H) was inserted into Section 43B of the Income Tax Act with effect from the financial year 2023-24. Under this clause, for any payment due to MSMEs not made within the time limit, the entire amount will not be allowed as an expense while computing the taxable income. The disallowance under the new Section is applicable with regard to an expenditure claimed in the financial year 2023-24. This means that if the expense is already claimed before the financial year 2023-24, it cannot be disallowed. The disallowance applies only to the unpaid amount payable to micro and small enterprises and not to medium enterprises.

The time limit specified under the MSME Act is 15 days or 45 days (in case of agreement) from the date of goods delivered or services rendered. Further, any delay in payment would attract interest at the rate of three times to the RBI rate which works out to approximately 21 per cent. Such interest will also not be allowed as a deduction. Therefore, the amended clause aims to ensure timely payments and support the financial stability of smaller businesses. However, your company has to obtain registration certificates from micro and small enterprises for every financial year. You will be entitled to the provision only if your vendors produce this certificate.

I am an individual with no taxable income for the past many years. Therefore, I did not file my Income Tax Return. However, during the financial year 2023-24, I sold my residential house and received a sale consideration of ₹2 crore. The entire sale consideration has been reinvested in a new residential house. Do I have to file my return of income for the above-mentioned financial year?

The criteria for filing the tax return under Section 139(1) of the Income Tax Act is to have gross total income below the taxable limit before claiming any deduction under Section 54 or Section 54F. In your case, there will be a positive income before considering the amount of deduction under Section 54 of the Income Tax Act. Therefore, in view of the proviso to Section 139(1) of the Income Tax Act, you are under obligation to file a return of income and claim exemption under Section 54 of the Income Tax Act. Exemption will be denied if you do not file the return and the examining officer may reopen the assessment which will attract unnecessary litigation, penalty and additional taxes.