MADURAI BRANCH OF SIRC OF ICAI
GIFT RELATED TRANSACTIONS AND CAPITAL GAINS,
UNEXPLAINED INCOME AND PENALTY, PENALTIES IN SEARCH CASES
T.BANUSEKAR, FCA
20.05.2017
GIFT RELATED TRANSACTIONS AND CAPITAL GAINS
v Background
Under the Gift Tax Act 1958 gift tax was required to be paid by the person making the gift. In October 1998 the Gift Tax Act was repealed and thereafter no tax was payable in India on gifts made. Subsequent to this there was an increase in the instances where completely unrelated persons gave gifts to assessees and these gifts were used to explain the source of funds in the hands of assessees.
The Finance (No.2) Act 2004 sought to put an end to these transactions in a limited manner by introducing Section 56(2)(v) in the case of individuals / HUFs, which provided that where a sum of money exceeding Rs.25,000/- was received on or after 01.09.2004 by individuals / HUFs without consideration, the same would be chargeable to tax under the head Income from other sources. Exceptions were allowed, to exclude genuine gifts from the applicability of this section. This clause was applicable in respect of sums received before 01.04.2006. The Taxation Laws (Amendment) Act 2006 introduced Section 56(2)(vi) whereby the monetary limit was modified to Rs.50,000/- with effect from 01.04.2006. Section 56(2)(vi) was later restricted to receipts upto 30.09.2009 by the Finance (No.2) Act 2009 which introduced substantial modifications to the scheme of taxation of gifts by introducing Section 56(2)(vii) / 56(2)(viia) and 56(2)(viib). These sections expanded the chargeability to receipts in kind also. Therefore movable / immovable property received by individuals / HUFs without consideration or for inadequate consideration (where difference between the consideration and the actual / stamp duty value exceeded Rs.50,000/-) were also includible as Income from other sources. Transactions in shares of private limited companies at lower than fair market value (where difference between the consideration and the actual value exceeded Rs.50,000/-), and where recipient of the shares was a private limited company were included u/s 56(2)(viia) as deemed income from other sources. Share premium received in excess of fair market values of the shares issued were included u/s 56(2)(viib) as deemed income from other sources. Rules (Rules 11U and 11UA) were framed for valuation of the properties received.
The Finance Act 2017 has now amended Section 56 by restricting the applicability of clauses (vii) and (viia) to transactions upto 31.03.2017 and introducing Section 56(2)(x) to receipt of “gifts” on or after 01.04.2017. (It may be noted that Section 56(2)(viib) has not been amended / deleted)
By virtue of the amendment by Finance Act 2017, the following amounts are chargeable under the head Income from other sources in the hands of any person receiving the specified sums / properties:
Ø The entire / aggregate receipt of money in a previous year, such aggregate sum exceeding Rs.50,000/-, received from one or more persons without consideration
Ø Value of immovable property received for Nil consideration, where the stamp duty value of the property exceeds Rs.50,000/-
Ø Where immovable property is received for a consideration lower than the stamp duty value of the property and the difference between the stamp duty value and stated consideration exceeds Rs.50,000/-, the difference between the stamp duty value and stated consideration is chargeable to tax.
Ø Value of any property other than immovable property received for Nil consideration, where the fair market value of the property exceeds Rs.50,000/-
Ø Where any property other than immovable property is received for a consideration lower than the fair market value and the difference between the fair market value and stated consideration exceeds Rs.50,000/-, the difference between the fair market value and stated consideration is chargeable to tax.
v Exceptions to the applicability of Section 56(2)(x)
i. In the case of immovable property (whether held as capital asset or otherwise), where the date of agreement of transfer containing the value of consideration is different from the date of registration of the transfer, then the stamp duty value on the date of the agreement of transfer can be considered in place of the stamp duty value on the date of the registration. This can be done if a part or whole of the consideration has been paid on or before the date of the agreement of transfer, either by account payee cheque, account payee draft or by electronic clearing system through a bank account.
ii. Where the assessee disputes the stamp duty value on the ground that it exceeds the fair market value, and the stamp duty value has not been disputed in appeal or revision or reference, then the Assessing Officer can refer the valuation of the property to a Valuation Officer. If the value ascertained by the Valuation Officer is higher than the stamp duty value, the stamp duty value will be taken as the value of the property.
iii. Section 56(2)(x) will not apply in the following cases:
a. Receipt of money / property from any relative.
(For an individual, relative means spouse of the individual, sibling of the individual, sibling of the spouse, sibling of the parents of the individual, lineal ascendant / descendant of the individual or the spouse, spouse of any of the preceding persons. For an HUF, relative means any member of the HUF)
b. Receipt on the occasion of the individual’s marriage
c. Receipt under a will or by way of inheritance
d. Receipt in contemplation of death of the payer
e. From a local authority
f. From any entity referred to in Section 10(23C)
g. From a trust registered u/s 12A / 12AA
h. By way of transaction not regarded as transfer under specified clauses of Section 47
i. Receipt from an individual by a trust created for the benefit of the relative of the individual.
Gifts given on other occasions, viz. birthday, anniversary, etc. are not covered within the exceptions. Therefore aggregate of sums of money received as gifts on these occasions, and the value of other properties in excess of Rs.50,000/- for each property, will be chargeable to tax under Income from other sources.
v Section 50C and Section 43CA
Section 50C applies in the case of transfer of immovable property being land / building or both, where the same is held as capital asset.
Section 43CA applies in the case of immovable property being land / building or both, where the same is held as otherwise than as capital asset (in other words, if the property is held as business asset)
In both instances, where the consideration received or accruing as a result of transfer of the property is lower than the stamp duty value, then the stamp duty value will be adopted as the full value of consideration for the transfer of the property for the purpose of computing the capital gains / profits from the transfer of the property.
Where the date of agreement of transfer containing the value of consideration is different from the date of registration of the transfer, then the stamp duty value on the date of the agreement of transfer can be considered in place of the stamp duty value on the date of the registration. This can be done if a part or whole of the consideration has been paid on or before the date of the agreement of transfer, either by account payee cheque, account payee draft or by electronic clearing system through a bank account.
Where the assessee disputes the stamp duty value on the ground that it exceeds the fair market value, and the stamp duty value has not been disputed in appeal or revision or reference, then the Assessing Officer can refer the valuation of the property to a Valuation Officer. If the value ascertained by the Valuation Officer is higher than the stamp duty value, the stamp duty value will be taken as the value of the property.
v Section 50CA
This provision is inserted by Finance Act 2017 and is applicable with effect from Assessment year 2018-19:
· Transfer is by any assessee
· Transfer is of unquoted shares
· Shares are held as capital asset
· Stated consideration is lower than fair market value of the shares determined in the prescribed manner
If the above conditions are met, the fair market value of the shares as determined above will be taken as the full value of consideration of the transfer.
Draft rules for valuation of shares have been issued but not yet notified. It has been proposed to insert Rule 1UAA for this purpose.
v Section 50D
In the cases where consideration for the transfer of any capital asset is not ascertainable or cannot be determined, then the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration for the transfer.
v Section 56(2)(x) vis-à-vis Section 50C, 50CA, 50D and Section 43CA
Immovable property with stamp duty value of Rs.500 is transferred for Rs.350. (Or, shares with fair market value of Rs.500 are transferred for Rs.350) The consequences of this transaction under the various provisions of the Income Tax Act:
Particulars / 56(2)(x) / 50C / 50CA / 50D / 43CAImmovable property held as capital asset is transferred for lower than stamp duty value / Income in the hands of the receiver of the property = Rs.150
Difference between stamp duty value and stated consideration is chargeable as Income from other sources / Stamp duty value is deemed to be the full value of consideration for transfer of the property.
Rs.150 will be added to capital gains / NA / NA / NA
Immovable property held as stock-in-trade is transferred for lower than stamp duty value / Income in the hands of the receiver of the property = Rs.150.
Difference between stamp duty value and stated consideration is chargeable as Income from other sources / NA / NA / NA / Stamp duty value is deemed to be the full value of consideration for transfer of the property.
Rs.150 will be added to business profits.
Unquoted shares held as capital asset are transferred at lower than fair market value / Income in the hands of the receiver of the property = Rs.150.
Difference between fair market value and stated consideration is chargeable as Income from other sources / NA / Fair market value is deemed to be the full value of consideration.
Rs.150 is added to capital gains. / NA / NA
Capital Asset other than immovable property or unquoted shares is transferred for lower than fair market value / Income in the hands of the receiver of the property = Rs.150.
Difference between fair market value and stated consideration is chargeable as Income from other sources / NA / NA / ??
Can this be invoked to subject the capital gains to tax in the hands of the person transferring the asset? For eg, jewellery, paintings, drawings, etc?
If so, Rs.500 will be deemed to be the full value of consideration and capital gains accordingly computed. / NA
v Double taxation
By virtue of Section 56(2)(x), difference between stated consideration for transfer of property and the stamp duty value or fair market value, as the case may be, is chargeable to tax in the hands of the receiver of the property as Income from other sources. Correspondingly, in the hands of the transferor, the stamp duty value or the fair market value is deemed to be the full value of consideration in place of the stated consideration for the purpose of computing capital gains.
Therefore, to the extent of the difference between stamp duty value / fair market value and the stated consideration, there is double taxation, once in the hands of the transferor and again in the hands of the transferee. This is at the point of the transfer.
The position in the event of subsequent transfer of the asset is handled in Section 49(4)
v Cost of acquisition in the event of subsequent sale (49(4))
Ø Where the asset is a capital asset
Section 49(4) prescribes that where Section 56(2)(x) has been invoked, then in the event of subsequent transfer of the property, the value taken for the purpose of Section 56(2)(x) will be deemed to be the cost of acquisition while computing gains on the subsequent transfer.
It may however be noted that in the first instance the income is charged to tax as Income from other sources though the asset is a capital asset. In the subsequent transfer the income is chargeable to tax as Capital Gains. Therefore the tax rate differential will still have to be suffered by the recipient of the property.
Further, if the recipient of the property treats the same as stock-in-trade, then the benefit of Section 49(4) would anyway not be available.
Where the asset is not a capital asset
Corresponding provisions in the case of transfer of property held as stock-in-trade have not been made. Therefore the double taxation suffered in the first instance is not offset in the subsequent transfer.
UNEXPLAINED INCOME AND PENALTY
Section 68 – Unexplained cash credits
Section 69 – Unexplained investments
Section 69A – Unexplained money, bullion, jewellery or other valuable article
Section 69B – Investments, bullion, jewellery, or other valuable article not fully disclosed in books of account
Section 69C – Unexplained expenditure
Section 69D – Amount borrowed or repaid on hundi
v Tax on unexplained income – Section 115BBE