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Take the value of your share capital instead of receiving asset

I am a dormant partner in a firm in Jaipur. The firm is going to be dissolved. I want to know whether I should receive the amount in my capital account as well as share of profits by cheque or whether my dues should be settled by being given a capital asset of the partnership firm. - K R Jaiswal, Dubai

If you receive your share of capital as well as profits by cheque, there would be no capital gains tax liability to the firm. However, if the firm settles your dues by transfer of any asset of the firm, the provisions of section 45(4) of the Income-tax Act, 1961 will apply. In such a case, tax will be payable by the firm and the fair market value of the asset given to you will be deemed to be the sale price for determining the capital gains in the hands of the firm.

In other words, capital gains tax will have to be paid by the firm where capital assets are distributed among the partners at the time when the firm is dissolved.

The Karnataka High Court has also held that even when a partner retires and receives his capital and share of profits by cheque, without receiving any capital asset, no capital gains will arise under section 45(4). Therefore, it would be advisable for you to take the value of your share capital in the firm by cheque instead of receiving any asset from the firm.

I have been informed that there is a move to make insider trading regulations more strict. I need information on this issue as I am doing research on the subject. C P Mehta, Dubai

The Securities & Exchange Board of India has set up a committee recently to suggest measures for tightening the insider trading regulations. The committee has now given its report and suggested that policy makers should also be brought within the purview of insider trading regulations. It has further been suggested that close relatives of company officials, fund managers, brokers and traders should be treated as insiders.

The committee has made a clear distinction between generally available information and unpublished price-sensitive information. It has been recommended that promoters, directors, employees and their immediate relatives should disclose trades exceeding Rs.10 lakhs within a quarter to the stock exchanges.

It is also recommended that companies should be allowed to conduct due diligence only for the purpose of making an open offer under the takeover code. In all other cases, the board of a company would have to give an opinion that permitting due diligence is in its best interest.

My wife has gone back to India as she has got a good job with an attractive remuneration package. She is entitled to house rent allowance from the company which is quite substantial. At present she is staying with her mother, but she is planning to take a house on rent for three years. I am told that the house rent allowance which she gets is free of tax in India. Please clarify. R K Banerjee, Doha

House rent allowance is exempt from tax under section 10(13A) of the Income-tax Act, 1961. This is subject to fulfilment of certain conditions, the most important being that rent should actually be paid to a landlord. Further, what is exempt from tax is only the quantum of rent which exceeds 10 per cent of the salary.

Therefore, while your wife stays with her mother, she will have to pay tax on the full house rent allowance as no exemption would be available. If she takes a property on rent, the house rent allowance would be exempt only to the extent the rent actually paid exceeds 10 per cent of the salary; the balance house rent allowance would be taxable.

Further, she would have to furnish to the tax department the permanent account number of the landlord if she is paying rent to him in excess of Rs.1 lakh per annum. If the landlord does not have a permanent account number, he will need to give a declaration that he does not have this number but his full name and address would have to be provided to the tax department. Your wife will also have to file with her company the actual rent receipt given by the landlord; otherwise, the exemption will not be granted.

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

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