The Budget 2009-2010 amended the Income Tax Act so as to tax notional income resulting from transactions in immovable properties under section 56 i.e. Income from other sources. Our focus in this write-up will be only on newly inserted provisions in section 56 pertaining to Immovable Property which is bound to result in more questions than their answers.
The Hon’ble Finance Minister provided for amendment of section 56(2) (Income from other sources) by inserting sub-clause (vii) to bring to tax unaccounted money rotating in the system via transactions in immovable properties. The existing section 56(2)(vi) provides for taxation of a sum of money exceeding Rs. 50000/- received as gift from non-relatives, as income from other sources. However all other gifts received in kind having ‘money’s worth’ say immovable property, were outside the purview of the existing provisions. In order to plug this hole, sub-clause (vii) has been inserted to provide that the value of any property received without consideration or for inadequte consideration will also be included in the computation of total income of the recipient. 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. The amendment pertaining to immovable property reads like this:
1) 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.
2) If an immovable property is received for a consideration which is less than the stamp duty value of the property and the difference between the two exceeds fifty thousand rupees (inadequate consideration), the difference between the stamp duty value of such property and such consideration shall be taxed as the income of the recipient.
This amendment will apply to all the transactions in immovable property taking place on or after the 1st day of October, 2009 and applies only to Individual & HUF assessees who RECEIVE any immovable property having a value which is lower than the stamp duty value. In such a case the sum to be added to the income of the person RECEIVING will be determined as under :-
(a) Acquisition without consideration (say as gift) :-
Stamp duty valuation (say Rs. 100 Lacs) minus Cost of acquisition (ZERO)= Rs. 100 Lacs will be added to the income from other sources.
(b) For a consideration which is less than the stamp duty valuation of the property
Stamp duty valuation (say Rs. 100 Lacs) minus Cost of acquisition (say 50 Lacs)= Rs. 50 Lacs will be added to the income from other sources.
In both the cases if the difference works out to be less than Rs. 50000/- then the above provision will not be applicable.
From the above it is clear that to bring to tax the difference between the agreement value and stamp duty value the following two conditions must be satisfied i.e.
1) The transaction must take place on or after 1st October 2009 and
2) The assessee must RECEIVE such property
Thus the crux of the amendment is the word RECEIVE. This word has not been directly defined in the Income Tax Act. Therefore we will take a trial to gather the meaning of receive from some other provisions of the Act , from other statutes and some judgments of court of Law. The dictionary meaning of the word receive may be
a) Come into the possession of something concrete or abstract
b) To get something that someone gives or sends to you
c) To deliberately accept
d) To take into one’s possession (something offered or delivered):
e) To get something in his own control
f) Something that reaches the assessee.
In section 5:- Scope of total income, the words receive or deemed to be received have been used but the same have not been defined. Income may accrue to an assessee without the actual receipt of the same. The said income can be received later on provided the assessee has got a right to receive the said income. An assessee may receive income which has neither accrued nor arisen. For example an assessee may receive salary in the month of March in respect of his salary for April (i.e. received in advance). Likewise the said assessee may receive his salary in the month of September in respect of his salary for the month of April (i.e. received in arrears.)
Income can’t be said to have resulted at all if there is no accrual but only receipt. For the purposes of the Act, income can be said to be received when it reaches the assessee but it can be said to have ‘accrued’ or ‘arisen’ only when the right to receive the said income becomes vested in the assessee.
Thus a mere claim to income without an enforceable right thereto cannot be regarded as accrued income for the purpose of the Income-tax Act though the assessee might have received it. it is manifest that if an assessee acquires a right to receive the income, the income can be said to accrue to him though it may be received later on. So the word Receive is not the conclusive proof of income having accrued nor does the word accrue mean the receipt of the income.
Receipt of immovable property
When can it be said that an immovable property has been received. Obviously when the same is received absolutely pursuant to a contract whereby the right, title, ownership and possession is transferred for a consideration. In legal terms this means that property can be received pursuant to a contract for a consideration and in accordance with the provisions of other laws affecting the transfer of property.
The Indian Contract Act 1872
1) If a property is received pursuant to a contract the object or consideration of which is unlawful then the contract is void. Thus when the contract itself is void mere receipt of the property must not come under the provisions of 56(2)(vii).
2) If a property is received pursuant to a contract which is affected by coercion, fraud, misrepresentation etc. then the contract is voidable at the option of the contractee and if the contractee exercises its option to repudiate the contract then the contract fails and again the receipt of the property may not have any meaning.
3) A contract without consideration, ceteris paribus, is void unless it is in writing and registered. However property received as gift is not affected by this provision.
In the above circumstances mere receipt of the property without consideration/adequate consideration must not be taxed unless the same is received pursuant to a valid contract.
The Gift –Tax Act 1958
Property received without consideration or for inadequate consideration were generally covered by the Gift-Tax Act 1958. Though this Act has long been repealed, some of the provisions of it have been borrowed under section 56(2)(vii).
1) Where property is transferred without consideration or without adequate consideration , the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor. This is exactly what sec.56(2)(vii) proposes to do now except for the word transferred , the word received has been used in the sub clause (vii) with certain modification.
2) Where there is a release, discharge, surrender, forfeiture or abandonment of any interest in property by any person without consideration/adequate consideration, the value thereof was deemed to be a gift. Thus if a co-owner of a property releases his share in a property to the other co-owner without consideration/adequate consideration, the same may not be hit by sub-clause (vii) because the other co-owner is not receiving any property but only a part of that property.
3) Where a person absolutely entitled to property creates an interest or charge in favour some other person without consideration/adequate consideration, then the value of such interest or charge may not be treated as income from other sources under sub-clause (vii) because there is no receipt of any property.
4) Where an individual absolutely entitled to property converts such property into the property of HUF of which he is a member, then the value of the share foregone by the individual may not be treated as income of the HUF from other sources under sub-clause (vii) because there is no receipt of any property.
5) Where a person receives a property as gift which is revocable after a certain period of time say 5 years then also it may not be covered by 56(2)(vii) . If it were to be so then what will happen to the amount of tax paid by the donee u/s 56(2)(ii) when the gift is revoked and the property goes to the original owner.
In the above circumstances also conditional receipt of the property without consideration/adequate consideration must not be taxed unless the same is received absolutely and without any pre conditions.
The Transfer of Property Act, 1982
Under the Transfer of Property Act 1882 many situations have been visualized wherein mere receipt of the property does not confer any right, title etc. to the recipient of the property unless certain conditions, precedent or antecedent , are complied with. A few of such transfers are as under:
a) Transfer contingent on happening of specified uncertain event
b) Conditional transfer.-An interest created on a transfer of property and dependent upon a condition fails if the fulfillment of the condition is impossible, or is forbidden by law, or is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent, or involves or implies injury to the person or property of another, or the Court regards it as immoral or opposed to public policy.
c) Conditional transfer to one person coupled with transfer to another on failure of prior disposition
d) Condition that transfer shall cease to have effect in case specified uncertain event happens or does not happen
e) Transfer conditional on performance of act, no time being specified for performance.
f) Transfer conditional on performance of act, time being specified.
g) Transfer where third person is entitled to maintenance.
h) Transfer by ostensible owner.
i) Transfer by person having authority to revoke former transfer.
j) Transfer by unauthorized person who subsequently acquires interest in property transferred.
k) Transfer by one co-owner.
l) Transfer for consideration by persons having distinct interests.
m) Transfer by co-owners of share in common property.
n) Priority of rights created by transfer.
o) Improvements made by bona fide holders under defective titles.
p) Fraudulent transfer with intent to defeat or delay creditors.
The Registration Act 1908
a. Registration means recording of the contents of a document with a Registering Officer. The documents are registered for the purpose of conservation of evidence, assurance of title, publicity of documents and prevention of fraud. Also, registration helps an intending purchaser to know if the title deeds of a particular property have been deposited with any person or a financial institution for the purpose of obtaining an advance against the security of that property. Thus, by Registration, a transaction of immovable property becomes permanent public record. Secondly, according to Transfer of Property Act right, title or interest can be acquired only if the deed is registered.
b. The necessity of Registration
Section 17 of the Act lays down that, among others, an instrument which creates or extinguishes any right or title to or in an immovable property of a value of more than one hundred rupees requires Compulsory Registration. Registration is also compulsory under The Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, Management and Transfer) Act 1963 as well as under The Maharashtra Apartments’ Ownership Act, 1970.
c. A registered document operates from the time from which it would have commenced to operate if no registration thereof had been required or made, and not from the time of its registration.
d. Consequences of Non-Registration of a document
1. An unregistered document cannot be produced as evidence in a court of law. However such unregistered document affecting immovable property may be received as evidence of part performance of a contract for the purposes of section 53A of the Transfer of Property Act, 1882
2. An unregistered document fails to confer any title given by the document.
Whether registration is necessary for the amended section 56(2)(vii) of the Income Tax Act 1961
An overwhelming majority of the decisions of the courts of law in India have taken a stand that for taxing the capital gain, registration of the sale deed is not necessary under the provisions of the IT Act and that a transfer will be complete if possession was delivered and consideration was received, even if the sale-deed was not registered. The same is supported by the definition of the word transfer in the Income Tax Act 1961. According to Sec 2(47)(v) of the Act transfer, in relation to a capital asset, includes, any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 .
Section 53A of the Transfer of Property Act provides for part performance. –
If a transferee, in part performance of a contract to transfer ,for consideration, any immovable property takes possession of the property or any part thereof and is willing to perform his part of the contract, then the transferor is debarred from enforcing against the transferee any right in respect of the property of which the transferee has taken possession despite the fact that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force.
a. Only Individuals and HUF are affected by the new provisions and that too, only in respect to properties received on or after 1st October 2009.
b. If property is received before 1st October 2009 the same may not yet be hit by the new provisions if the same had been received pursuant to section 53A of the Transfer of Property Act which provides for part performance of contract.
c. It is ridiculous that the amendment applies only to individuals and HUF and not to others. These assessees put in their hard earned money for purchase of residential premises and are largely dictated by the terms of developers/builders whereas large corporate houses who are known to indulge in rampant money laundering have been left untouched.
d. Can it be justified that in a residential building where the stamp duty valuation is say about Rs. 10000/- per square feet and the agreement value is , say Rs. 7000/- per sq. feet, the difference of Rs. 3000/- per sq. feet will be treated as income u/s 56(2)(vii), if that property is purchased by an Individual or an HUF . Hold the breath, if a company happens to purchase the adjoining apartment in the same building at an agreement value of Rs. 7000/- per sq. feet, nothing will be added to its income u/s 56(2)(vii) because this amendment does not apply to it. This is inequality par excellence.
e. If a bank auctions a residential premise for say Rs. 60 Lacs while the stamp duty value of the same is say Rs. 100 Lacs , what will happen to this difference of Rs. 40 Lacs. Will it still be added to the income of the purchaser u/s 56(2)(vii) ?
f. Presumptions have to be drawn to their logical end. If it is presumed that the difference of Rs. 3000/- per sq. feet as stated above is an unaccounted income of an individual taxable u/s 56(2)(vii) then this presumption must be drawn further and bring to book the receiver of this difference by treating the difference as additional value of sales and tax him accordingly on this difference either as capital gain or income from business as the case may be even if it may amount to taxing the same income twice. This is a natural corollary of ill-perceived presumptions.
In our opinion this is a case fit enough to be challenged before an appropriate court of law for its impropriety , discrimination and unequal treatment of all equal.
C.A. LALIT MUNOYAT
B.Com.(Hons.), CS, FCA, ISA
# 098201 93508
CA. SUBHASH PARAKH