News Column

NRI Problems

June 16, 2014

I am planning to return to India in October. I want to start a small scale enterprise. When I approached an urban co-operative bank with a proposal to give me a loan, there was some reluctance to do so. I found out that the bank has committed to give a large loan to a public sector unit and, therefore, was not entertaining small proposals. Is this justifiable?

P K Naidu, Doha

An urban co-operative bank is primarily set up for the benefit of lower income groups, small businessmen and farmers. The banks are supposed to give loans to small and medium enterprises which is mandated by the co-operative character of the bank. However, some urban co-operative banks have been violating this principle and have been giving short term loans to public sector units in order to improve their income and profitability.

The Reserve Bank of India has issued a notification advising urban co-operative banks to adhere to the co-operative principle and not to give large value loans to public sector units or government undertakings.

These banks have been directed to cater to the needs of middle and lower income groups, specially businessmen who are setting up small scale units.

Therefore, you should complain to the Reserve Bank if your bank declines to sanction the loan for your business.

I acquired a plot of non-agricultural land in April 2011. The conveyance was registered in November 2012. I would now like to sell this plot of land and invest the capital gains in such bonds which would give me the benefit of exemption in respect of capital gains. However, my Chartered Accountant in India has cautioned me on the ground that I may not be eligible to claim the exemption as the plot of land may be treated as a short-term asset. What are your views?

S Mazumdar, Dubai

Your Chartered Accountant has erred on the side of caution because tax officers would be determining the three-year period from the date of registration of the sale deed. In order to get the exemption from capital gains under section 54-EC of the Income-tax Act, 1961, it is necessary that the asset should be held for atleast three years. Courts have generally taken the view that the date on which possession has been received would be the starting date for determining the three-year period. The date of execution or registration of conveyance of the property is not relevant. Therefore, litigation would arise as the tax officers are contesting this view in appeal.

Hence, it would be advisable to hold on to your plot of land and sell it only after the three-year period commencing from the date of registration is over. You would be entitled to claim exemption in respect of the capital gains to the extent of Rs.50 lakhs in a financial year, provided the notified bonds under section 54-EC are purchased within six months from the date of sale of the land.

A discretionary trust has been set up by my father outside India. I am one of the beneficiaries of the trust. I may be returning to India after two or three years. Would any income be liable to tax in India in my hands when I become resident in India in view of this settlement of trust?

P S Modi, Bahrain

When you become resident in India under the provisions of the Income-tax Act, 1961, you will be liable to tax on your world income from the financial year when your status is that of a resident and ordinarily resident. Where a discretionary trust is set up, a beneficiary acquires a right to receive income only when the trustees exercise their discretion. The trustees may earn income from the assets of the trust but may not distribute it or may distribute it only to some of the beneficiaries.

Therefore, when you become resident in India, you will be liable to tax only when the trustees exercise their discretion and give you a share of the income. At that time, you will be liable to pay tax even if the income is received by you outside India. If no distribution is made in your favour, nothing will be taxed in your hands, as your right to receive the income will arise only when discretion in your favour is exercised by the trustees.

The writer is a practising lawyer, specialising in tax and exchange management laws of India.

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Source: Khaleej Times (United Arab Emirates)

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