Income Tax 21 Jan,2020
Critical Capital Gain Issues That Require Attention of the Finance Minister
S. KrishnanCA



1. Issues faced by NRIs

There are 2 issues that are being faced by NRIs whenever they apply for a nil or lower deduction certificate under section 197 of the Income-tax Act (the Act)

The first one is hiccups in issuing lower deduction certificates

Though a new sub-section 5A in section 45 of the Act was introduced by the Finance Act 2017, effective Assessment Year 2018-19as per which the capital gain liability gets triggered only when the completion certificate is obtained by the builder in cases where the Joint Development Agreement(JDA)is registered, yet controversy still exists in the case of Non-resident Indians (NRIs) when they apply for a certificate for lower deduction of tax under section 197 read with section 195 of the Act involving cash consideration which would be received as soon as the JDA is signed, but the liability to capital gain tax would arise in a later year. How would the officer issue a certificate for (lower) tax deduction and how would the assessee submit capital gain workings as the liability would occur only in the later year? So, this issue requires suitable amendment. It should be understood that any payment made to a non-resident Indian seller by the purchaser, whether he is a resident or non-resident, tax has to be withheld and paid to the government by the purchaser at full rate in the absence of a certificate.

The second issue is the methodology that is being adopted by the Income-tax Department now while granting approval for lower deduction of tax under section 197 of the Act for NRIs vis-à-vis proposed investment under section 54EC of the Act by NRIs. The Income-tax authorities citing their internal circular adopt that they cannot take cognisance of the proposed investment in capital gain bonds and tax will have to be withheld by the buyer of the property even on this amount. This attitude is resorted to by the Income-tax authorities in spite of the NRI assessee filing an affidavit on the following lines.

"This to further state that as aforesaid I shall be investing a sum of Rs.50 lakhs in capital gain bonds and if need be, necessary directions may be issued in this regard to the purchaser of my property to withhold this amount from payments to be made to me and investment on my behalf in my name in Capital Gain Bonds.

If the NRI assessee invests in capital gain bonds out of his own resources, the assessee may be questioned by the Income-tax Department at the time of assessment as to how the amount invested not out of sale proceeds would qualify for deduction under section 54EC of the Act. Of course, though there are judicial decisions in favour of assessees in that the investment in capital gain bonds need not come from sale proceeds of capital assets yet the issues would get solved only at the appellate stage.

2. Issue common for Resident Indians and NRIs

One issue which is common for both Resident Indians and NRIs is regarding capital gain exemptions as per which only purchase of property prior to one year of sale of the existing property is exempt but construction is not covered in that exemption. Though most of the judicial authorities do not make a distinction between purchase and construction, it is better that the Act is amended so as to extend the benefit to include construction in such cases.


Let the Government take cognisance of these issues and come out with suitable amendments.