Two Recent Important Judgements In Income Tax : Very Important

1. LTA to be tax exempt only for domestic travel : 

Tax exemption on leave travel allowance or LTA can be claimed only on domestic travel and cannot be clubbed with an overseas journey. If an air ticket comprises Indian and overseas components, no exemption will be provided either on the entire cost or on partial Indian travel.

Case: 15 th May 2013

This was clarified in a recent ruling by the Chandigarh bench of the Income Tax Appellate Tribunal (ITAT) while hearing an appeal of a PSU bank employee. The employee, Om Prakash Gupta, had argued that since the final destination was India, the entire airfare claimed by him should be tax exempt. His travel included visits to Singapore and Malaysia.

Gupta further appealed that if not the entire amount, at least the cost incurred on the Indian leg of the journey should be considered for tax exemption. But the ITAT bench denied his appeal. "Section 10 (5) of the Income Tax Act and Rule 2B do not stipulate that journey to any place in India would be made via a place outside India.

The intention of the legislature was certainly not to grant exemption for reimbursement of the value of the LTA where the journey was performed via a foreign country," the bench observed, ruling out any exemption.

The LTA exemption is available for travel expenses (comprising air, road or rail fare) by the employee and his family for two journeys performed in a block of four calendar years, subject to fulfilling various conditions. The current block of four years expires in December this year.

Under the tax laws, even for domestic travel, where the journey is performed in a circular form touching different places, the exemption is limited to the travel expenses that would be admissible from the place of origin to the farthest point reached in India, by the shortest route.

The Central Board of Direct Taxes in its October 5, 2012 circular relating to TDS from salary income for 2012-13, had made LTA claim processing norms stringent. It was made mandatory for employers to satisfy themselves that the LTA claimed was treated as tax exempt in accordance with the laws. Further, employers were required to collect and preserve supporting evidence of LTA claims made by employees.

These strict processing norms are likely to continue for current financial year. "As the Chandigarh ITAT has clarified that even the India portion of the airfare is not eligible for tax exemption, due care must be taken while computing TDS against employees' salaries," claims a vice-president (payroll) of an IT company.

2 .Home loan prepayment fee eligible for tax benefit :

A ruling by the Mumbai bench of the Income Tax Appellate Tribunal spells welcome relief for taxpayers who have paid huge sums as prepayment or foreclosure charges on early repayment of their housing loans.

Such taxpayers can claim prepayment charges as deductible under the head income from house property and could set it off against other heads of income, such as salary income. This will help in saving tax.

Case: 16 th May 2013

Hearing an appeal filed by Windermere Properties, the tribunal examined the definition of interest. Interest on housing loan is admissible as a deduction under income from house property. The bench comprising R K Gupta and R S Syal observed, "The appellant had obtained a loan from HDFC for acquisition of property. The bank accepted the early repayment of loan on receipt of prepayment charges (of Rs 1.56 crore). It is obvious that these prepayment charges have a live and direct link with the housing loan."

Dismissing the stand taken by the tax department, the tribunal bench added, "It is beyond our comprehension as to how the amount paid as interest for the housing loan taken is allowable as a deduction but the amount paid as prepayment charges of the very same loan is not deductible."

Both the direct interest and prepayment charges were held by the tribunal to fall within the definition of the term interest and allowable as a deduction from house property income.

"This ruling will help those who had paid prepayment charges during FY 2012-13. This payment will be deductible from income from house property. As a next step in the tax computation, salaried employees can claim a set-off against their salary income while filing their returns, the due date for which is July 31," explains Sonu Iyer, tax partner, Ernst & Young.

It must be noted that the Reserve Bank of India in June last year had prohibited banks from charging foreclosure charges or prepayment penalties of any kind on home loans taken on floating interest basis. Against this backdrop, it is likely that taxpayers for the financial year 2012-13 would have paid foreclosure charges only during April and May 2012. However, tribunal decision will also help in the course of pending assessment of earlier years.

Source : Times Of India