Post Budget taxability of Gifts and of Transactions without consideration or inadequate consideration
The Gift tax was abolished with effect from October 01,1998. Thereafter, the practice of bogus foreign gifts itself had started with Government offering immunity for such gifts as part of disclosure scheme, but then the practice continues even after the amnesty period had expired. Unaccounted income found its way in many ways as in acquisition of immovable property, new constructions pretended borrowings and unreal gifts. Money laundering also took place by way of such gifts than by any other means, so that monitoring of foreign gifts became important not only from tax point of view but more importantly for tackling money laundering, In order to curb bogus capital- building and money laundering, a new clause (v) was inserted in section 56 to provide that any sum received without consideration on or after September 1, 2004 by an individual or a Hindu Undivided Family from any person, shall be treated as income from other sources. A threshold limit of twenty five thousand rupees was provided. If the amount so received exceeded this limit, the whole amount became taxable. This limit has been inserted with effect from April 01, 2006 to fifty thousand rupees through inserting clause (vi) to sub section (2) of section 56. The above sum shall not be taxable, if received:
a) from any relative; or
b) on the occasion of the marriage of the individual, or
c) under a Will or by way of inheritance or
d) in contemplation of death of the payer; or
e) any sum of money received from any local authority as defined in Explanation to section 10(20); or
f) any sum of money received from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution refereed to in section 10(23C); or
g) any sum of money received from any trust or institution registered under section 12AA.
For the purposes of the clause (vi), the term ‘relative’ has been defined in the Explanation thereto to mean the
i) spouse of the individual
ii) brother or sister of the individual
iii) brother or sister of the spouse of the individual.
iv) Brother or sister of either of the parents of the individual,
v) Any lineal ascendant or descendant of the individual;
vi) Any lineal ascendant or descendant of the spouse of the individual.
vii) Spouse of the person referred to in clause (ii) to (vi)
Thus, upto September 30,2009 ‘any sum of money’ received by an individual or Hindu Undivided Family from any person or persons, without any consideration was liable to tax under section 56(2)(v) or (vi). The word ‘sum’ has been used only to indicate an amount of money [see CIT vs. Aloo supply Co. [121 ITR 680 (Ori)].
The question before the Mumbai Tribunal in Chandrakant H. Shah vs. ITO [28 SOT 315] was whether a loan transaction is covered by section 56(2)(v) of the Act. The Hon’ble Tribunal observed that from the perusal of the Finance Minister’s Speech made while introducing the provisions of section 56(2)(v) has been apparent that section 56(2)(v) has been brought on the statute to fill up the vacuum created by abolition of the Gift tax Act, 1958 in the year 1997. Thus, the provisions of section 56(2)(v) apply to the transactions where undisclosed/unaccounted income of a person is brought in his hand by way of purported gifts. Accordingly, the loan transaction is not covered under section 56(2)(v), Further, the Hon’ble Tribunal has also observed that in section 56(2)(v), the term ‘consideration’ is neither prefixed by the word ‘adequate’ nor it is suffixed by the word ‘money’ or ‘moneys’ worth. Hence, if in any transaction there exists consideration as per the provisions of the Indian Contract Act, 1872, such transaction would not come into the ambit of this section. Under the provisions of the India Contract Act, 1982 a person can make a proposal to the other for his acceptance and when such proposal is accepted such proposal becomes a promise. The person making the proposal is called ‘promisor ’ and the person accepting the proposal is called ‘promisee’. Therefore, it was a transaction having a consideration, and the same would not fall within the ambit of the provisions of section 56(2)(v).
Again the Jaipur Bench of the Hon’ble Tribunal in ITO vs. Komal Kumar Bader [33 SOT 58] has held that the agricultural land cannot be considered as ‘any sum of money’ and therefore the provisions of section 56(2)(v) cannot be applied. Had, the intention of the Legislature been to cover any asset apart from money, it could have used the word ‘asset’ or any other word denoting movable/immovable properties
However, the Finance (No. 2) Act, 2009 with effect from October 01,2009, inserted clause (vii) to section 56(2), which provide that apart from ‘any sum of money’, any immovable property or any property would also be chargeable to tax.
The said clause provides that if an individual or Hindu Undivided Family receives, in any previous year, from any person or persons on or after October 01,2009 –
a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
b) any immovable property, –
(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty, value of such property as exceeds such consideration (this clause is proposed to be omitted by the Finance Bill, 2010);
c) any property, any property, other than immovable property, -
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
The first proviso to the said clause provides that where the stamp duty value of immovable property as referred to such clause (b) is disputed by the assessee on grounds mentioned in section 50C(2), the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and section 155(15) shall apply in relation to the stamp duty value of such property for the purpose of sub clause (b) as they apply for valuation of capital asset under those sections.
The second proviso provides for exception to chargeability of tax as mentioned in first proviso to section (vi) of section 56(2) e.g. relative, occasion of marriage etc.
The Explanation defines ‘fair market value’ of property, other than an immovable property, means the value determined in accordance with the method as may be prescribed.
The Explanation further defines; property means:
i) immovable property being land or building or both,
ii) shares and securities,
iv) archaeological collection;
vii) sculptures or
viii) any work of art.
‘Relative’ shall have the meaning assigned to it in the Explanation to clause (vi) of section 56(2).
‘Stamp duty value’ means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.
The Finance Bill, 2010 proposes to amend section 56 to include within its ambit transactions undertaken in shares of a company (not being company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested. The object of this amendment is to prevent the practice of transferring unlisted shares at prices much below their fair market value, However, an exception is also proposed by excluding the transaction undertaken for business reorganization, amalgamation and demerger which are not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act.
Consequential amendment are proposed in –
(i) section 2(24), to include the value of such shares in the definition of income.
(ii) Section 49 to provide that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax under the provisions of section 56(2).
These amendments are proposed to take effect from June 01, 2010 and will, apply in relation to the assessment year 2011-12 and subsequent years.
It is proposed to amend the definition of ‘property’ as provided under section 56 so as to include transaction in respect of ‘bullion’.
This amendment is proposed to take effect from June 01, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.
It is proposed to amend section 142A(1) to allow the Assessing Officer to make a reference to the Valuation Officer for an estimate of the value of property for the purposes of section 56(2).
This amendment is proposed to take effect from July 01, 2010.