Taxation of Gifts received/Specified assets purchased (Sec-56(2)(x) of Income Tax Act – 1961

This article is all about the taxability of gifts received or specified assets purchased by any person.

Situation prior to Finance Act – 2017:- Prior to Finance Act, 2017, any gifts received or specified assets purchased, by an Individual/HUF, at a price lower than the fair market value were taxable under section – 56(2)(vii).

Situation after Finance Act – 2017, w.e.f. 1st of April, 2017: – Finance Act 2017, has introduced sec-56(2)(x) which extends the applicability of these provisions to all the assesses. (i.e. applicable from A.Y. 2018-19 means, F.Y. 2017-18)

♠ Provisions of section – 56(2)(x) (Introduced by Finance Act – 2017)

According to the provisions of sec-56(2)(x), where any person receives any of the following, during the previous year, from any person or persons, shall be taxable under the head Income from Other Sources-

S.No. Assets Gifted/Purchased Mode Taxability as Gift
1. Money Without any Consideration Whole of the amount received, if it exceeds Rs. 50,000/-
2. Immoveable property (being Land or Building or both) Without any Consideration Stamp duty value of property (if it exceeds Rs. 50,000/-)
With Consideration* Taxable value = Stamp duty value – Purchase price paid

(only if stamp duty value exceeds Rs. 50,000/-)

3. Specified assets being Securities, Jewellery, Archaeological collections, Drawings, paintings, Sculptures, or any art of work, Bullion. Without any Consideration Aggregate of Fair Market value (if it exceeds Rs. 50,000/-)
With Consideration Taxable value = Aggregate of Fair Market Value – Purchase price paid.

(only if fair market value exceeds Rs. 50,000/-)

*(Relaxation under sec – 50C) In case, where the date of agreement(DOA) and date of registration(DOR), of transfer of such immoveable property are different, then the stamp duty value as on the date of agreement shall be taken into account, subject to the conditions that-

  • Whole or part of the consideration is paid on or before the date of agreement; and
  • Consideration so paid by way of account payee cheque, account payee demand draft, or by use of electronic clearing system through a bank account.

♠ Non Applicability of Section – 56(2)(x) 

Sec – 56(2)(x) of IT Act – 1961, does not includes any receipt of money, property or specified assets-

  • From any Relative;
  • From any person, on the occasion of marriage of the individual;
  • Under a will or by way of inheritance;
  • In contemplation of death of the payer;
  • From any Local Authority, defined u/s 10(20);
  • From any fund, foundation, organization, institution, university, hospital or other medical institution referred to in section – 10(23C);
  • From any trust or institution registered u/s 12AA;
  • By way of certain transactions , not regarded as transfer u/s 47;
  • From an individual by a trust created or established solely for the benefit of relative of the individual.

Note: –

1) Fair market value of the specified assets, means the value computed in accordance with the Rule 11UA.

2) Relative means:-

a)     Spouse of the individual;

b)     Brother or sister of the individual;

c)      Brother or sister of spouse of the individual;

d)     Brother or sister of either of the parents of the individual;

e)     Any lineal ascendant or descendant of the individual;

f)       Any lineal ascendant or descendant of the spouse of the individual;

g)     Spouse of persons referred to in (clause b to f);

h)     In case of a HUF, any member of the HUF.

3) Sec – 56(2)(x) is not applicable on stock-in-trade, raw material and consumables stores.

4) According to the provisions of sec-49(4), in case of transfer of a property, value of which subject to the provision of sec-56(2)(x), cost of acquisition in the hands of recipient shall be deemed to be the stamp duty value/Fair market value.

♠ Transactions u/s 47(i.e. transfer), which are not subject to sec- 56(2)(x)

  • Receipt of capital asset on the total or partial partition of HUF;
  • Receipt of capital asset by an amalgamated company from an amalgamating company;
  • Receipt of capital asset, being shares of Indian company by a foreign company on amalgamation of another foreign company;
  • Receipt of capital asset by a banking institution on amalgamation of banking company;
  • Receipt of capital asset by resulting company (being Indian company) on demerger from a demerged company;
  • Receipt of capital asset, being shares of Indian company by a resulting foreign company on demerger of another foreign company;
  • Receipt of capital asset by successor co-operative bank on business re-organization;
  • Allotment of shares in successor co-operative bank in lieu of shares in predecessor co-operative bank in business re-organization;
  • Receipt of capital asset, being shares from resulting company, on demerger of undertaking, by shareholders of demerged company;
  • Receipt of capital asset, being shares from amalgamated company(being Indian company), on amalgamation, by shareholders of amalgamating company;

♠ Transactions u/s 47(i.e. transfer), which are subject to sec- 56(2)(x)

  • Transfer of asset by holding company to its subsidiary company;
  • Transfer of asset by Subsidiary company to its holding company;
  • Transfer of asset on conversion of Partnership firm into a company;
  • Transfer of asset on conversion of Proprietorship concern into a company;
  • Transfer of asset on conversion of company into LLP
  • Transfer of stock exchange on conversion of stock exchange into a company.

In all the above cases, the difference between the SDV/FMV and transfer price shall be deemed as income from other sources in the hands of recipient.

♠ Practical example to understand the provisions of sec – 56(2)(x)

Example-1: – Mr. A transfers his residential property to Mr. B for Rs. 20Lakhs on 1st of May, 2017, purchased by him for Rs. 10Lakhs on 15th April, 2016. The value as per stamp duty valuation authority is Rs. 26Lakhs. Mr. A also gifted one of his land to Mr. B on 1st of September, 2017. This land was purchased by Mr. A in year 2009.  The value of land as per stamp duty valuation authority is Rs. 15Lakhs. Mr. B sold this land on 25th of February, 2018 at Rs. 40Lakhs.

The income of Mr. A and Mr. B taxable under the head “Capital Gain” and “Income from other sources” are as follows-

Solution: – Computation of income of Mr. A and Mr. B chargeable under the head “capital gain” and “income from other sources”

Taxable income of Mr. A –

Particulars Amount (in Rs.)
Income chargeable under the head capital gain
A Sales Consideration 26,00,000
B Less: Cost of Acquisition 10,00,000
C Short Term Capital Gain (A-B) 16,00,000

Taxable income chargeable under the head other sources – NIL 

Taxable income of Mr. B –

Particulars Amount (in Rs.)
Income chargeable under the head capital gain
A Sales Consideration 40,00,000
B Less: Cost of Acquisition (deemed to be stamp duty value as per sec 49(4)) 15,00,000
C Short Term Capital Gain (A-B) 25,00,000

 

Particulars Amount (in Rs.)
Income chargeable under the head other sources
A Difference between the stamp duty value and purchase price paid in respect of immoveable property, (SDV exceeds Rs. 50,000/-) taxable under section 56(2)(x).

(i.e. 26,00,000 – 20,00,000)

6,00,000
B Stamp duty value of property, being land received without consideration, exceeding Rs. 50,000/- taxable under section 56(2)(x). 15,00,000

Disclaimer: The contents of this article have been prepared in accordance with the relevant provisions, and information available at the time of preparation. The views and opinions expressed in this article are those of the author and the author does not take any responsibility and cannot guarantee that no inaccuracy occurs. This article cannot be quoted without the consent of the author. 

Do write for any Queries/suggestions or Questions at csvaishalijain.leo@gmail.com

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