capital gains

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jasvir walia (Querist)
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08 February 2011 Please advice and explain the tax treatment on the following query

The bank sanctioned the loan to company by having first charge on fixed asset (movable & Immovable) along with two collateral securities namely residential house (seven co-owners-Inherited including Managing Director) and one shop (Two co-owners other than for residential property). The co-owners also stood as third party guarantors. The bank classified the account as NPA and recalled the advance U/s 13(2) of the SRFAESI Act, 2002 and directed the company to pay the total outstanding within 60 days and in case of non compliance of this notice, the bank will sell the mortgaged asset which is given as collateral security.
The bank took the symbolic possession of the residential house and shop. The company filed a CWP with the high court with a request to restrain the bank from taking over the physical possession of the property. The High Court ordered to maintain status quo during the pendency of writ petition.
During the pendency of writ petition, the company and bank entered into an agreement and decided to sell the residential house. The entire sale proceeds are to be deposited was the precondition in the loan account prior to sale deed being executed. The bank specifically mentions original document and sale deed will be executed only after the receipt of sale proceeds of the above said property i.e. prior to sale. Further, the company has to also regularize the balance loan amount which is repayable in 51 EMI’s with the condition that the shop will remain as collateral security and all the guarantors including that of residential house co-owners will remains guarantors till the disposal of entire loan liability.
The court directed the prospective buyer to deposit the entire sale proceeds directly in the loan account of the company and after that sale deed can be executed. The entire sale proceeds were directly deposited in the bank loan account by the buyer and sale deed was executed after that only as per the agreement with the bank and directions of the High Court.
Please advice and explain the tax treatment for co-owners and company:-
 FOR CO-OWNERS:- There are seven co-owners of the above said sold property with defined share. Kindly enlighten the taxation of capital gain as sales proceeds of the property is entirely appropriated towards repayments of loan taken by company and the co-owners did not received any money not even a single paisa out of the sale proceeds.

 FOR COMPANY:-Accounting treatment for direct deposit of sale proceeds in bank loan account of the company by the buyer. How to reflect the transactions in the books of account of the company.

 FOR COMPANY:-Tax implication for the company on receipt of amount which was deposited in the loan account of company on account of sale proceeds of the collateral security sold of the guarantors.

CA.Jasvir Walia

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Guest (Expert)

09 February 2011 Very long query . make it small please but understandable.

jasvir walia

jasvir walia (Querist)
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30 April 2011 I THINK NO ONE HAS TIME TO RESOLVE IT

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jasvir walia

jasvir walia (Querist)
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30 April 2011 can any one have answer

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 Let's address the tax treatment for both the co-owners of the residential house and the company, based on the scenario described:

### Tax Treatment for Co-Owners of the Residential House:

1. **Capital Gain Taxation:**
- The residential house was sold to repay the company's loan, and the entire sale proceeds were directly deposited into the company's loan account.
- Even though the co-owners did not physically receive any proceeds from the sale, they are still liable to pay capital gains tax based on their share of ownership in the residential house.
- **Calculation of Capital Gain:**
- Capital gain will be computed based on the difference between the sale consideration (proportionate share of the total sale proceeds deposited by the buyer) and the indexed cost of acquisition of the property.
- Indexed cost of acquisition refers to the cost adjusted for inflation over the years of ownership.
- Each co-owner will calculate their capital gain based on their share in the property. The share can be determined based on the ownership percentage documented in the registry or other legal agreements.

2. **Tax Implications:**
- The co-owners should report their respective share of capital gains in their individual income tax returns.
- The tax rate applicable will depend on whether the capital gain is short-term (if the property was held for less than 24 months) or long-term (if held for 24 months or more).
- They can avail deductions under Sections 54 or 54F of the Income Tax Act, if applicable, by reinvesting the capital gains in specified assets (like another residential property) within the stipulated timeframes.

### Tax Treatment for the Company:

1. **Accounting Treatment:**
- The entire sale proceeds from the residential house were deposited directly into the company's loan account to repay the outstanding loan to the bank.
- In the books of accounts of the company, this transaction will be recorded as a reduction in the outstanding loan liability.
- The sale proceeds should be matched against the loan repayment liability and appropriately recorded to reflect the reduction in the company's overall debt.

2. **Tax Implications:**
- The company will not incur any capital gains tax liability because it did not directly receive the sale proceeds as income.
- However, the reduction in the loan liability will need to be accounted for in the financial statements of the company.
- There will be no tax implications related to the sale proceeds received for the company, as the proceeds were used solely for loan repayment.

3. **Treatment of Collateral Security:**
- The shop remains as collateral security for the balance loan amount.
- The company should continue to account for the shop as collateral in its books and ensure compliance with the terms agreed upon with the bank.
- The guarantors, including the co-owners of the residential house, remain liable until the loan is fully discharged.

### Conclusion:

- For the co-owners of the residential house, capital gains tax will be applicable based on their respective shares, even though the proceeds were directly deposited into the company's loan account.
- The company will reflect the sale proceeds as a reduction in its loan liability and will not have any tax liability on the proceeds themselves.
- Proper documentation and legal advice should be sought to ensure accurate computation of capital gains and compliance with tax laws.

This guidance should help clarify the tax treatment for both the co-owners and the company involved in the sale of the residential house under the described circumstances.