S.56 pertaining to gifts, deemed gifts / under-valuations

It is the considered view of the Government that in the materialistic world in which we are living, gifts are not possible from non-relatives. In the past, frequently claims were successfully made  by individuals about receipt of  huge amounts as gifts from other individuals even though the donor and the donee were not related to each other but there was natural love and affection. Government has not accepted such situations. So far as income tax law is concerned, such relations would not be recognized and gifts in such relations  would also become taxable. Government has  started taxing gifts of sum of money. Then realizing the possible leakage in cases of gifts in kind now virtually in  every budget proposals Government has started thinking in terms of roping in more items in the list of  gifts in kind.

Since October 2009 gifts of immovable properties and specified movable properties have been brought within taxing purview. So far taxable entities for gifts were only individuals and HUFs. By Finance Act, 2010 first step has been taken to expand the scope of taxable entities also.

1. Provisions of section 56(2) : Reg. popularly known as gifts :

Section 56(2) of the Income Tax Act, 1961 inter alia deals with receipts without consideration. Since most of such receipts tantamount to gifts, the provisions are popularly known for gifts and deemed gifts. Till 30 09 2009 only sum of money received without consideration was gift if the recipient is either an individual or a HUF. By the Finance No.2 Act, 2009 with effect from 01 10 2009 the provisions were so much expanded that they even included cases of  immovable properties received for inadequate consideration as compared to stamp valuation. The expanded provisions also include receipt of specified movable properties either without consideration or at inadequate consideration as compared to fair market value.

Pertinent to mention that even under expanded provisions, gifts from relatives and under specified exceptions continue to be beyond tax net.

Provisions as contained in section 50C taxing sales of land or building or both operative since 01 04 2002 affecting the vendors of such properties continue.

2. Enhanced cost of acquisition when sold as capital asset :

In transactions of immovable property received without/inadequate consideration or specified movable properties received without consideration or at inadequate consideration,  the provision continues that when the recipient of  immovable property was subjected to income tax on the basis of stamp valuation or receipt of movable property was subjected to FMV, as the case may be,  then in future when he sells the same property, his cost of acquisition of such capital asset would be such valuation which was subjected to income tax earlier and indexation would also be available on such valuation being his deemed enhanced cost of acquisition.

3. Relief provision with regard to stamp valuation :

If the recipient of the property claims before the income tax assessing officer that the stamp valuation is higher than the fair market value thereof, then he has remedy either to contest the stamp valuation before the concerned authorities or to request the assessing officer for valuation by valuation officer to be appointed by the income tax department.  In such a case, if income tax valuation comes equal to stamp valuation, then no case arises. But if the income tax valuation is lower than the stamp valuation then income tax valuation would be adopted. However, if the income tax valuation is determined higher than the stamp valuation, then stamp valuation is adopted and higher income tax valuation is disregarded. Therefore by seeking valuation by income tax department, the assessee cannot be worse off than what he is due to stamp valuation. Similar relief provisions are contained in section 50C for the vendor of the immovable property.

4. Immovable Properties would mean and include :

The immovable properties in this context means land or building or both. However, building should include part of the building and therefore flats, shops, galas etc. should get included. Further one may like to take a view that in a co-operative housing or premises society, what one is transferring is a share certificate and not an immovable property but one is not likely to succeed in such a view because the decisions under the stamp duty and registration laws as well as under the income tax laws are in one direction  having taken a view that in such a case share certificate is only in representative capacity and what one is really transferring is an immovable property represented by such share certificate.

5. Specified Movable Properties :

Provisions as inserted by the Finance (No. 2) Act, 2009  also cover receipts, either by way of purchase or otherwise,  of specified movable  properties namely  shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any  work of art, “bullion”. Bullion would include gold, silver, platinum, or palladium, in the form of bars or ingots. Some central banks use bullion for settlement of international debt, and some investors purchase bullion as a hedge against inflation.

In respect of such movable properties, it is provided that if  the aggregate fair market value of such movable properties received during the year without consideration exceeds Rs.50000/-, then such aggregate value is income in the hands of recipient. In a case one receives such properties by payment of their respective prices, but if the difference between the aggregate of prices so paid  and the aggregate of fair market values thereof exceeds Rs.50000/-, then such difference would be income in the hands of the recipient. For purposes of determination of fair market value, rules have already been framed effective from 01 10 2009.

These provisions concerning movable properties as enacted by the Finance (No. 2) Act, 2009 were enacted in such a manner that even a purchaser of such movable properties in normal course of his business would have got affected if the purchase was found to be at less than the prescribed fair market value. To remove such hardship, the provisions have been amended by the Finance Act, 2010 so that these provisions with regard to movable properties would apply only when in the hands of the recipient individual or HUF such movable property is a capital asset and not as stock in trade.

6. Gifts received from relatives :

Section 56(2) inter alia provides that sums received without consideration from following relatives are not income:

(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 clauses (ii) to (vi).

(vii)  in case of a Hindu undivided family, any member thereof;

7. Whether gifts received from relatives are not taxable ? :

One cannot conclude like that Section 56(2) provides that gifts received from non- relatives are income but no where in the Income Tax Act,1961 it is provided that gifts received from relatives are not income and therefore tax free. Therefore, it is not a case that section 56(2) places the gift from relatives beyond taxing provisions. If gifts are received from specified relatives, the recipient will have to prove genuineness of such gifts with reference to identity of the donor, capacity of the donor, source of funds of the donor, etc.

8. A company cannot receive a gift but can receive at inadequate consideration :

Further, so far section 56(2) of the Income Tax Act,1961 treats receipts without/inadequate consideration  as income if the recipient is an individual or HUF. Other categories of assesses including a company and a firm have been kept out of the taxing purview. Although  in my considered view, a company cannot receive gift under the general law as well as under the provisions of the Income Tax Act, 1961.

A gift necessarily involves a contract because the gift to be valid and complete has to be accepted by the donee. Section 25 of the Indian Contract Act, 1872 lays down a very basic law that a contract without consideration is void ab initio. Relevant exception for the contract to be valid without consideration is for an agreement in writing, registered under the provisions of the Registration Act, 1908 and such an agreement is on account of natural love and affection. The section does not affect to the gift actually made by the donor to the donee.

A claim of gift by a company cannot sustain as natural love and affection is not possible towards an artificial person. Further, as far as gift of the property is concerned section 122 of the Transfer of the Property Act, 1882  requires that transfer of property by way of gift must be accepted by the donee and inter alia such acceptance must be made during life time of the donor and before the donee dies. The provisions using the words like death of donee are logically in the context of an individual and not in the context of an artificial person. In such a view of the matter, it is not possible for a company to claim gift and therefore receipts of sums of money without consideration may not escape taxation in the hands of a company under other provisions of the Income Tax Act, 1961. Similarly, receipt of immovable property or movable properties without consideration also may not escape taxation in the hands of a company. However, if the company receives specified movable properties at a price less than fair market value, the new provisions concerning deemed undervaluation of properties would not cover such company and therefore taxation u/s. 56(2) would not be attracted. None the less, the new provisions of the receipt of specified movable properties for inadequate consideration do not cover a company or a firm.

9. Firm and closely held company brought within purview :

Finance Act, 2010 makes a starting point to tax a firm and a company in a specified situation. The Finance Act, 2010 has provided to tax a firm or a closely held company when it receives shares of a closely held company either without consideration or at a consideration less than the fair market value. The provisions will not apply if such shares are received in the course of amalgamations, mergers, demergers and re-organisations. When afterwards such company or firm transfers such shares the valuation whereof either fully or partly subject to income tax, then at the time of subsequent transfer of such shares, the cost of acquisition would be the fair market value which was earlier taken into consideration for taxation u/s. 56(2).  It is pertinent to mention here that as far as this category is concerned, the Act does not distinguish between receipt as capital asset and receipt as stock in trade.

10. Gifts received from non relatives in specified circumstances  :

Gifts received from non relatives are generally taxable. However, there are certain exceptions under which gifts received from non relatives are also not taxable.

Gifts received on the occasion of marriage of an individual even from non relatives are not an income.

Further following receipts without consideration are also not income :

i. under a Will or by way of inheritance;

ii. in contemplation of death of payer;

iii. from local authority as defined in Explanation to section 10(20);

iv. educational or medical institution or fund etc. referred to u/s. 10(23C);

v. trust or institution registered u/s. 12AA.

11. Gift in contemplation of death :

A gift is said to be made in contemplation of death when the donor is ill and he expects to die shortly out of such illness and delivers to another possession of the movable property to be kept by another person as gift in case a donor dies of that illness. A gift in contemplation of death can be made of any movable property which the donor could dispose off under a Will. It is possible for the donor to resume such a gift before he dies. Further in a case where donor recovers from the illness during which he made the gift then such a gift will not take effect. Further if the donor survives the person to whom such gift was made then also such gift does not take place.

If such property instead of being given away in contemplation of death is made subject matter of the Will then the bequest under a Will would require executor’s assent to perfect the title of the legatee and will be subject to probate, when applicable.  Gifts in contemplation of death can be made only of a movable property.

12. Sum or property received by HUF from members not taxable

Under the existing provisions of clause (vii) of sub-section (2) of section 56 any sum or property received by an individual or HUF for inadequate consideration or without consideration is deemed as income and is taxed under the head “Income from other sources”.  However, in the case of an individual, receipts from relatives are excluded from the purview of this section and are therefore treated as not taxable. The definition of relative as given in this sub-clause is only in relation to an individual and not in relation to a HUF. Also any sum or property received without consideration or inadequate consideration by an HUF from its members would also be excluded from taxation.

13. Share premium in excess of the fair market value to be treated as income

Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income- tax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value—

(i) as may be determined in accordance with the method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

14. Amendments by Finance Act 2017

Section 56(2)(vii) and Section 56(2)(viia) shall apply only for gift (money/immovable or movable property/ shares of closely held company) received on or before 01.04.2017. Any gift received on or after 01.04.2017 shall be dealt in the manner specified in section 56(2)(x).

As per Section 56(2)(x):-

where any person receives, in any previous year, from any person or persons

(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 shall be taxable as income from other source.

(b)  any immovable property,—

(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property shall be taxable as income from other source

(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. However wef A.y 2019-20, immovable property received for a consideration , the stamp duty value of which exceeds 105 percent of the consideration and the difference between stamp duty and consideration exceeds Rs 50000, than the difference amount between stamp duty and consideration  shall be taxable as income from other source

It should be noted that, that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes provided that the the amount of consideration for the said immovable property , or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property.

(c)  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 shall be taxable as income from other source

(ii) for a consideration which is less than the 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 shall be taxable as income from other source

 This clause shall not apply to any sum of money or any property received—

 (I)  from any relative; or

(II) on the occasion of the marriage of the individual; or

(III)  under a will or by way of inheritance; or

(IV)  in contemplation of death of the payer or donor, as the case may be; or

(V)  from any local authority as defined in the Explanation to clause (20) of section 10; or

(VI)  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 clause (23C) of section 10; or

(VII)   from or by any trust or institution registered under section 12A or section 12AA; or

(VIII)  by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or

(IX)  by way of transaction not regarded as transfer under clause (i) or 11[clause (iv) or clause (v) or] clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or

(X)  from an individual by a trust created or established solely for the benefit of relative of the individual.

Also Read:

Taxation of Gift- Under Income Tax

Taxability of Gifts received from Relatives & Non Relatives

CA TARUN GHIA  – ghiatarun@rediffmail.com

(The Article was Originally written by CA Tarun Ghia which was later updated by us with subsequent amendments)

(Republished With Amendment)