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June 9, 2000

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"Does alimony get a tax exemption?"

The Rediff Money Channel presents everything you wanted to know about tax issues, but didn't know whom to ask.

Could you explain to me what constitutes casual, non-recurring income exempt from tax? I would very much appreciate it if you could produce the detailed list of all items which fall under this category.

K Sundaram

Casual income has not been defined in the Income Tax Act and hence its meaning has to be understood in the general sense. The meaning of casual may be understood as something that is unplanned, accidental, unexpected, that of a non-recurring nature etc. Section 10(3) of the I.T. Act specifies that all receipts which are of casual and non-recurring nature are exempt from tax to the extent of Rs 5,000 (Rs 2,500 in respect of winnings from races including horse races). The basic conditions that need to be satisfied to avail of this exemption are as follows:

  • The receipt should not be chargeable as capital gains
  • The receipts should not be arising from business or the exercise of a profession or occupation
  • The receipts should not be by way of addition to the remuneration of an employee
  • It should be casual in nature and non-recurring
An illustrative list of casual income is as follows:
  • Winning from lottery
  • Winning from card games
  • Winning from races such as horse racing
  • Gifts of purely personal nature

I have got shares under ESOP from a software company. According to the law, I paid income tax when I bought the shares. The tax was around Rs 2 million @ 33 per cent (market price - allotment price) and I paid around Rs 1 million for the shares. I had taken loan from a bank @ 15.81 per cent per annum.
Till today, I am not able to sell the shares because of delay in the allotment procedures. Now, the market has crashed and the share price has fallen down by around 60% since I bought the shares.
So I had paid a huge amount of money as tax for the income which I had never received. I am also paying interest for the loan and the bank is asking me to sell off the shares and repay the loan.
If I sell the shares now, I will be getting nothing as profit because of the tax I paid to the government.
The allotment date was March 27, but we paid tax in April.

  • Is it possible to get back the tax?
  • Since I paid it as income tax on perks, is it considered as capital loss?
  • Can I adjust the tax against next year tax (income tax or capital gains)?

Prakash Govindaraj

For the financial year 1999-2000, the value of any security allotted or transferred, directly or indirectly by an employer to an employee free of cost or at concessional rate is considered as perquisite and hence is taxable in the hands of the employee. As in your case the date of allotment was March 27, 2000, the same pertains to the financial year 1999-2000 and is taxable as part of salary for that year.

You have mentioned that you have not been able to sell the shares due to delay in the allotment procedures. We would be in a position to advice you on any other ways available to save the tax if we know the exact procedural delay that has happened in your case. The date of acquisition of shares will be the one on which the same have been earmarked in your name.

As genuinely the ESOP allotment was in the nature of perquisite and accordingly tax has been paid on it, refund of such tax paid as such would not be possible.
The income tax paid was on the perquisite value of such allotment and hence would not be considered as capital loss. Moreover, you cannot adjust such tax paid against next year's income tax.
The interest on money borrowed to purchase asset is considered to be part of actual cost of asset. In your case, in the event of your selling such ESOP shares, the cost of acquisition of such securities shall be its fair market value on the date of exercise of option.

I teach in a public school where my children also study. Being teacher's wards, the children receive free tution and bus charges. In the FY 1999-2000, the school has charged I.T. on these "perquisites". Are "education fee and bus charges" which are not charged from the wards of teacher a perquisite in the hands of employees and liable to tax. If the answer is in the affirmative, are deductions of children education allowance exempt u/s 10(14) of IT Act.

Rakesh Maheshwari

Perquisites exempt from tax include:

  • Goods manufactured and sold by the employer to his employees either free of cost or at subsidised rates
  • Privilege passes and tickets granted by railways to its employees
  • Transport provided by an employer engaged in the business of carriage of goods or passenger either free of charge or at a concessional rate
Under section 17(2)(iii), the value of any benefit or amenity granted or provided free of cost or at a concessional rate in the case of a specified employee is treated as a perquisite in his hands. Specified employee means:
  • A director of a company
  • A person drawing an annual income of Rs 24,000 (exclusive of value of any benefits or amenities not by way of monetary payments)
  • A person holding a substantial interest in the company (ie holding beneficial interest in shares entitling him to more than 20 per cent of the voting rights in the employer company)
From the above, it is clear that both the facilities enjoyed by you will be treated as perquisites in your hands.

I have worked in a company for about two years and left them subsequently. My previous company contributed a fixed percent of my salary to a company superannuation fund and company managed employee provided fund. Now I am working on a free lance basis and wish to apply to my former employers/ trustees for the return of my EPF accumulations and to buy a LIC SA policy. Please advise the position regarding income tax.

Mahesh

The accumulated balance due and becoming payable to an employee under a recognised provident fund will be excluded from his total income in the following situations:

  • If he has rendered continuous employment with the employer for a continuous period of 5 years. For computing the period of 5 years the period of employment if any with any former employer is also to be considered
  • If he transfers the balance in the account to another recognised provident fund account maintained by another new employer
In your case, if you do not satisfy the above conditions, then any amount withdrawn by you would be subject to tax. Any TDS made by your former employer for the same previous year can be adjusted against the tax liability.

I applied for a plot of land with Ghaziabad Development Authority (GDA) in October 1988 by depositing a registration amount of Rs 7,200. In February 1989, the GDA sent me a reservation letter for the plot, the cost of which was worked out to be Rs 69,440. No specific plot number was given at this stage although location of the plot in a particular colony and plot category was mentioned. Accordingly, I deposited a balance of Rs 62,240 in March 1989. The reservation letter mentioned that we were likely to be given possession of the plot during 1991. However, only in February 1996 did I get the possession offer mentioning the specific plot number. I never got any letter of allotment mentioning any specific plot number. After paying a lease rent of Rs 6,944, I took possession of the said plot in September 1996. Now, I wish to sell the above plot. My accountant says that February 1996 would be date for calculating the index cost of the plot as then only did I get the specific plot number.

My contention is that since I paid all the dues related to the cost of the plot in March 89, I should be allowed to use this date for calculating the indexed cost of the plot. Kindly give your opinion on this situation and also help me work out the indexed cost of the plot in the present financial year.

I also bought another plot of the similar kind as above in the name of my brother. I invested the money and have shown this as interest free loan to my brother. What is the best way of transferring this plot in my name now ? I want to sell both the above plots and invest the money in purchasing a already constructed flat. In case my brother sells the plot in his name, he will be liable to pay capital gains tax. In case the plot is sold for Rs 300,000 today, how much tax would he have to pay?

Dr R S Gupta

We have quoted below the definition of transfer u/s 2(47)(vi), and have accordingly answered your query:
"Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, Company or other association of persons or by way of any agreement or any arrangement or in any manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property."

Based on the above definition, we are of the opinion that if the reservation letter issued to you can be treated on par with an agreement to sale, the transfer of a plot took place on the date of reservation, only the same has been identified in 1996. Hence accordingly, indexation benefits should be taken from the reservation date.

The indexed cost of acquisition would be as follows:
Cost of acquisition: Rs 69,440
Year: 1988 - 89
Cost Inflation Index for 1988 - 89: 161
Cost Inflation Index for 1999 - 2000: 389
Indexed Cost of acquisition for 1999 - 2000: Rs 167,777

As you are planning to invest the proceeds of sale of property owned by your brother, capital gains tax would be attracted, no matter who sells or transfers the property. As you have not specified the cost of acquisition of the plot purchased by your brother we are unable to provide you with the amount of capital gains that would arise on such sale.

Can a man claim the divorce alimony amount paid by him to his ex-spouse to be considered for exemption from taxable income?

Pravin Kulkarni

As payment of divorce alimony to ex-spouse is merely an application of income the same is not eligible for any deduction or exemption.

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