An attempt is made to highlight some of the salient features of Taxability of Gifts as Income under sections 56(vii) and (viia) of the Income Tax Act, 1961 (`the Act') i.e., mainly gifts received after 1-10-2009.
1.1 The charging section of the Gift Tax Act, 1957 was suspended w.e.f. 1-10-98 to say that Gifts made after 1-10-98 would not be chargeable to Tax. It is a misnomer to state that the Gift Tax Act has been abolished as it is only the Charging Section which has been kept in abeyance. In short it can be revived if the Legislature deems it fit.
The Law On Taxation Of Gifts
CA K. C. Devdas
Clauses (v) to (viia) of s. 56(2) incorporate the law on taxation of gifts. The author, an eminent Chartered Accountant, has meticulously analyzed the provisions of law and identified numerous problems therein. Using his vast experience in the subject, the author has proposed a number of credible solutions as well.
It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty
1.2 In order to augment the sources of revenue and as the charging provisions of Gifts Tax Act have been kept in abeyance, the Legislature in its wisdom introduced section 56(2) (v) of Income tax Act, 1961 with effect from 1-4-2005 to state that Gifts received without consideration by an individual or aHUF from any person after 1.9.2004 would be deemed as Income unless it is received from the exempted persons and categories as stated in the Proviso to section 56(2) (v) of the Act. There were amendments to this sub-clause by way of introduction of 56(2) (VI) of the Act with effect from 1-4-2007. Both the sub-clauses covered only Gifts of any sum of money subject to the stipulations laid down therein. In short gifts in kind were not covered under these sub-clauses.
1.3 In order to extend the taxability of Gifts to properties other than cash, sub-clause (vii) was introduced with effect from 1-10-2009 to cover gifts of immovable properties, shares and securities, jewellery, archaeological collections, drawings, paintings, sculpture, any work of art, and bullion (1-6-2010).
1.4 I t is the paper writer's view that taxability of gifts as income which started on a small scale to include only sums of money seems to have spread its net wide enough to include gifts in kind also. The future enactments would further see a plethora of items being added to the definitions of property so that gifts barring few exceptions would be covered under the Act. The Paper writer is reminded of the levy of service tax where it is started as a levy on 5 or 6 items and gradually got extended to over 100 services. The fate of taxability of gifts as income would also be the same and amendments are not far off to say that all gifts would be income except those specifically exempted. The Government is always contemplating to raise revenues and the taxability of gifts as income is very valuable tool. At the same time there would be a lot of litigation on the principles of valuation on the taxability of gifts under the Act like sections 68, 115JB and other vexatious provisions.
1.5 Be that as it may an attempt is made in this paper to highlight some of the features governing gifts covered by clauses (vii) and (viia) to section 56(2) of the Act. 1.6 Section 56(2) (vii) of the Act. The previous provisions of sub-clause (vi) of section 56 provided that any `sum of money' (in excess of the prescribed limited of rupees fifty thousand) received without consideration by an individual or HUF would be chargeable to income-tax in the hands of the recipient under the head `Income from other Sources'. However, receipts from relatives or on the occasion of marriage or under a will were outside the scope of the provisions of clause (vi) of sub-section (2) of section 56 of the Income-tax Act. Similarly, anything which is received in kind having `money's worth', i.e., property also remained outside the purview of these provisions.
Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted
The above section being an anti-abuse measure, has been amended by inserting a new clause (vii) in sub-section (2) to provide that the value of any property would be included in the computation of total income of the recipient as "income from other sources". Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. In a case where an immovable property is received without consideration and the stamp duty value of such property exceeds fifty thousand rupees, the whole of the stamp duty value of such property shall be taxed as the income of the recipient.
If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such cases, the provisions of existing section 50C and subsection (15) of section 155 of the Income-tax Act shall, as far as may be, apply, for determining the value of such property.
It has been provided that in a case where movable property is received without consideration and the aggregate fair market value of such property exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxed as the income of the recipient. If a movable property is received for a consideration which is less than the aggregate fair market value of the property and the difference between the two exceeds fifty thousand rupees, the difference between the fair market value of such property and such consideration shall be taxed as the income of the recipient.
The method for the determination of fair market value of property other than immovable property has been provided in rules 11U and 11UA of Income-tax Rules, 1961.
Consequential amendment has been made in section 2 by inserting sub-clause (xv) in clause (24) thus expanding the definition of income to include any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56. Further, section 49 has also been amended by way of inserting a new subsection (4) providing that for the purposes of computing capital gains, if the transaction of receipt of the asset is subject to tax under clause (vii) of sub-section (2) of section 56, then the cost of acquisition of the asset shall be the stamp duty value (for immovable property) or fair market value (for asset being a movable property), as the case may be.
These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after such date.
The Finance Act, 2010 amended the definition of Property u/s. 56(2) (vii) of the Act w.e.f. 1-10-2009 to provide that section 56(2)(vii) will have application to the "Property" which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.
Further clause (vii) of section 56(2) was amended w.e.f. 1-10-2009 to provide that it would apply only if the Immovable Property is received without any consideration (Underlining mine) and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of Immovable property.
1.7 The Finance Act of 2010 w.e.f. 1-6-2010 has introduced yet another sub-clause to section 56(2) which is numbered as sub-clause (viia) to tax shares of a company, not being a company in which public are substantially interested, received by a firm or a company (Not being a company in which the public are substantially interested). Thus the Taxable assessee's are closely held companies and firms.
The aggregate value of inadequate consideration or absence of consideration should exceed Rs. 50,000/. When the shares are received without consideration or for Inadequate consideration and the lack of consideration is more than Rs. 50,000/-, then the entire amount of shortfall in consideration would be taxable. In case the aggregate shortfall in consideration is less than Rs. 50,000/- no chargeability arises. The method of ascertaining Fair Market Value (`FMV') of shares has been laid down in Rule 11UA(C) of Income Tax Rules, 1962 (`IT Rules'). However, the proviso to clause (viia) clearly provides that this clause shall not apply to any such property received by way of transaction not regarded as Transfer under Clause (via), (vic), (vicb) (vid) or clause (vii) of section 47.
Accordingly shares received on account of the transactions governed of the aforesaid clauses of Section 47 would not be liable to tax. Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted.
2. Having brought out the salient features of amendment made to Section 56(2) (vii) and introduction of clause (viia) to the Act, I would dwell in a nut shell to the provisions of Section 56(2) governing gifts in general in the concept of gifts, related persons, exempted categories, threshold etc.
2.1 Provisions of Section 56(2)(vii) applicable only if the recipient of sum of money or specified property is an Individual or HUF The provisions of section 56(2) (vii) inserted w.e.f. 1-10-2009 are applicable only if the recipient of sum of money or specified property is an Individual or HUF.
However section 56(2)(viia) has been introduced to cover partnership firms and certain companies if they receive specified shares.
2.2 Provisions not applicable in case the specified properties are received from a relative or in other prescribed circumstances The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are applicable in case the specified properties are received from a relative or in other prescribed circumstances. In the following circumstances the prescribed amounts or the value of the property received are not chargeable to tax u/s 56(2)(vii) of the Act
(i) Any receipt of sum of money or any property from any relative;
(ii) Receipt on occasion of the marriage;
(iii) Receipt under a Will;
(iv) Receipt by way of inheritance;
(v) Receipt in contemplation of death;
(vi) Receipt from a local authority as defined in the Explanation to section 10(20;
(vii) Receipt from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C);
(viii) Receipt from any trust or institution registered u/s 12AA.
2.3 Meaning of relative
The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are not applicable in case the specified properties are received from a relative or in other prescribed circumstances.
The term "relative" as defined includes spouse, brother, sister, brother or sister of spouse, brother or sister of either of the parents, any lineal ascendant or descendant of the individual or of the spouse and spouse of any of the persons mentioned above. Following is the list of some persons considered relative of an individual for the purpose of section 56(2)(vii).
2.4 Specified properties covered u/s. 56(2) (vii):
The provisions of section 56(2) (vii) are applicable w.e.f. 1.10.2009 on the receipt of a sum of money and specified properties, as mentioned hereunder.
For this purpose "property" means the following "property" capital assets –
(i) Immovable property being land or building or both;
(ii) Shares and securities;
(iv) archaeological collections;
(v) drawings ;
(vii) sculptures ;
(viii) any work of art; or
(ix) bullion (w.e.f. 1-6-2010)
These are summarized below–
(a) Sum of money
Where any sum of money exceeding Rs.50,000 in aggregate in any previous year is received by an individual or HUF without any consideration the aggregate sum shall be deemed to be the income of the recipient.
(b) Immovable property transferred without consideration
Where immovable property is received by an individual or HUF without any consideration and the value of such property for stamp duty purpose exceeds Rs. 50,000, the value of the said property for the stamp duty purpose would be taxable as income from other sources.
(c) Transfer of specified properties other than immovable properties without consideration Where a property, specified for this purpose, other than immovable property, is received by an individual or HUF without any consideration and the fair value of the same exceeds Rs.50,000 then the fair market value of the property shall be deemed to be the income of the recipient.
(d) Transfer of specified properties other than immovable properties for a consideration lower than fair market value
Where a property specified for this purpose, other than immovable property is received by an individual or HUF for a consideration and such consideration is less than the fair market value of the property by an amount exceeding Rs. 50,000, the fair market value reduced by the consideration paid, would be taxable as income from other sources.
For the purpose of computing capital gains on subsequent transfer of such property by the recipient, cost of acquisition u/s.49 shall be increased by the amount of value taxed as above under the head `income from other sources'.
3. Threshold limit: (Rs. 50,000)
The threshold limit of Rs. 50,000/- would apply separately for each kind of receipt in the form of cash, immovable property and other property.
4. Stamp Duty Value to be adopted in case of Immovable Property
Stamp duty value as is assessed or assessable by any authority or Central Government or State Government for the purpose of stamp duty is to be adopted. It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty. In the cases where documents have not been executed or registered, there are likely to be dispute in determination of assessable value in view of positive or negative aspects of a property.
In respect of immovable properties the A.O. has also been authorized to make reference to Valuation Officer.
5. Fair Market Value/Valuation of Jewellery
As per Rule 11UA(a), The Valuation of Jewellery will be made as per Rule 11(UA)(a) of I.T. Rules 1962.
6. Determining FMV for Archaeological collections, drawings, paintings etc:
Rule 11UA(b) governs the valuation of the above items.
7. Taxable event is Receipt
The Taxable event is receipt of money or immovable property or property other than Immovable property. As regards sum of money, shares, drawings, paintings etc., are concerned, they can be taken as received when they are physically handed over and as regards shares when they are transferred in the name of the recipient.
In the case of immovable property received without consideration, it appears that the receipt would be treated as complete ownership vests on the date of execution of the deed though registered later. Thus ownership relates back to the date of execution of the deed though registered at a later date. The concept of possession of the property coupled with registration or as envisaged in sections 2(47) (v) and (vi) and section 27of the Act can also be enforced to determine the date of receipt.
8. Corresponding provisions in Direct Tax Code (`DTC')
Under DTC section 56(2) which with taxation residuary income includes any income in the nature of gifts under sections 56(2)(h) and (i) of DTC which reads as under:
"(h) the aggregate of any money's and the value of any specified property received, without consideration by an individual or a HUF;
(i) the amount of voluntary contribution received by a person, other than an individual or HUf, from any other person;"
Section 56(3) provides the exceptions for the amount received under 56(2)(h) and is pari materia with section 56(2)(vii) of the Act except that the meaning of the word relative will not include any lineal descendant of a brother or sister of the either the individual or of the spouse of the individual. Likewise the definition of "specified property" under section 56(4) of the DTC is the same as in section 56(2)(vii) except that it does not include Bullion.
Section 56(4)(d) of DTC states that:
"the value of any property by referred to in clause (h) of sub-section(2) shall be:-
(i) the stamp duty value in the case of an immovable property as reduced by the amount of consideration, if any, paid by the assessee; and
(ii) the fair market value in the case of any property as reduced by the amount of consideration, if any, paid by the assessee.
9. Issues for Consideration
• Whether the provisions of sub-clause (viia) of Section 56(2) of the Act would apply to convertible debentures?
• Whether Family Settlements wherein the shares are allotted inter-se amongst family members to avoid disputes would be covered by the aforesaid provisions.
• A firm or a proprietary concern may hold the shares of a closely held company. On conversion into a company all the Assets of Firm/Proprietary concern become the assets of the company. On such conversion, if shares are received by the company at less than the specified value, would the provisions of Section 56(2) (viia) be attracted. Likewise, what would be the position of a partner contributing shares of a closely held company as his capital contribution on becoming partner of a firm?
• What would be the position of shares received through "Will" by a firm or a company?
• How would be the provisions of sub-clause (viia) of Section 56(2) of the Act apply to transfer of right of shares or receipt of bonus shares.
• Company "A" has issued Bonus shares in the ratio of 1:1. Prior to the issue of Bonus the price of each share is Rs.2000/- and Ex. Bonus the price is Rs.1100/-. In such a case the value of two shares (original and Bonus) is Rs.2200 as against cost/pre Bonus of Rs.2000/-. The actual benefit is only Rs.200/. The Assessing Officer suppose contemplates to adopt the FMV of the Bonus shares i.e. Ex. Bonus he may consider income of Rs.1100/- per Bonus Share ignoring the fact that the price of original share has diminished by Rs.900/- per share due to issue of Bonus shares. What would be the position?
I have made an attempt to highlight some of the salient features of Gifts being treated as deemed income within the meaning of Sections 56(2)(vi) (vii) & (viia) of the Act and being a complicated subject prone to vexatious litigation.