Taxpublishers.in - Monday Corner Answer to the Quiz for the week (19 Aug 2024)

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Quiz for the week (19 Aug 2024): Sharma (age 85) has a house property at Delhi which was self-acquired by him. He is not keeping good health. He took Rs.30 lakhs as lump-sum amount from SBI by way of reverse mortgage about 15 years ago. He has a son Gopal who resides in Dubai and a married daughter who resides in Mumbai. Sharma wants to execute a ‘will’ in favour of his son. Also, his son Gopal has enough money to repay the reverse mortgage loan of Sharma to keep him debt-free. Anyway, Gopal would sell the property the moment he gets the title. Gopal also contemplates that he can keep the money in bank FD or in mutual funds if not used for clearing the reverse mortgage loan. Is there any scope for tax planning for Gopal possible with regard to repayment or non-repayment of reverse mortgage of property by his father? Best Answer : Firstly, it should be noted that the amount received , either in lumpsum or in instalment, in a transaction of reverse mortgage referred to in section 47 (xvi) is exempt under section 10(43) of the Act. Gift of property by father Sharma to son Gopal is also a tax-free transaction as it is not covered by section 56(2)(x) of the Act. When the property is debt-free by repayment of loan, any capital gain on sale of property would be chargeable to tax as long-term capital gain. The repayment of loan would not help the taxpayer Sharma to claim the same as deduction since the mortgage created is a self-created encumbrance by him. [ V.S.M.R. Jagadishchandran (Decd.) v. CIT (1997) 227 ITR 240 (SC) / CIT v. Attili N.Rao (2001) 252 ITR 880 (SC). On the other hand, if the property is gifted by father to son with existing loan, Gopal can claim the repayment of loan post-gift as cost of acquisition of property since the repayment of loan clears the encumbrance and improves his title in the property. This would effectively reduce the capital gain liability. [CIT v. Aditya Kumar Jajodia (2018) 407 ITR 107 (Cal.)] Where the property is inherited by Gopal then the mortgage created by the previous owner Sharma upon repayment by Gopal is to treated as cost of acquisition as held in Rm. Arunachalam v. CIT (1997) 227 ITR 227 (SC). Therefore, it is suggested that Sharma gifts the property to his son Gopal who upon repayment of loan could claim such repayment also as cost of acquisition. Else, when Gopal inherits the property by ‘will’, the repayment of loan would also be treated as cost of acquisition of property besides the cost of acquisition to the previous owner.

Quiz for the week (19 Aug 2024):

Sharma (age 85) has a house property at Delhi which was self-acquired by him. He is not keeping good health. He took Rs.30 lakhs as lump-sum amount from SBI by way of reverse mortgage about 15 years ago. He has a son Gopal who resides in Dubai and a married daughter who resides in Mumbai. Sharma wants to execute a ‘will’ in favour of his son. Also, his son Gopal has enough money to repay the reverse mortgage loan of Sharma to keep him debt-free. Anyway, Gopal would sell the property the moment he gets the title. Gopal also contemplates that he can keep the money in bank FD or in mutual funds if not used for clearing the reverse mortgage loan. Is there any scope for tax planning for Gopal possible with regard to repayment or non-repayment of reverse mortgage of property by his father?

Best Answer :

Firstly, it should be noted that the amount received , either in lumpsum or in instalment, in a transaction of reverse mortgage referred to in section 47 (xvi) is exempt under section 10(43) of the Act. Gift of property by father Sharma to son Gopal is also a tax-free transaction as it is not covered by section 56(2)(x) of the Act.

When the property is debt-free by repayment of loan, any capital gain on sale of property would be chargeable to tax as long-term capital gain. The repayment of loan would not help the taxpayer Sharma to claim the same as deduction since the mortgage created is a self-created encumbrance by him. [ V.S.M.R. Jagadishchandran (Decd.) v. CIT (1997) 227 ITR 240 (SC) / CIT v. Attili N.Rao (2001) 252 ITR 880 (SC).

On the other hand, if the property is gifted by father to son with existing loan, Gopal can claim the repayment of loan post-gift as cost of acquisition of property since the repayment of loan clears the encumbrance and improves his title in the property. This would effectively reduce the capital gain liability. [CIT v. Aditya Kumar Jajodia (2018) 407 ITR 107 (Cal.)]

Where the property is inherited by Gopal then the mortgage created by the previous owner Sharma upon repayment by Gopal is to treated as cost of acquisition as held in Rm. Arunachalam v. CIT (1997) 227 ITR 227 (SC).

Therefore, it is suggested that Sharma gifts the property to his son Gopal who upon repayment of loan could claim such repayment also as cost of acquisition. Else, when Gopal inherits the property by ‘will’, the repayment of loan would also be treated as cost of acquisition of property besides the cost of acquisition to the previous owner.