Taxation on transfer of money/property without consideration or for inadequate consideration

Issue/Justification

The Finance Act, 2017 expanded the scope of section 56(2)(vii) and 56(2)(viia) by inserting a new clause (x) in sub-section (2) of section 56, so as to provide that receipt of the sum of money or any property by any person, without consideration or for inadequate consideration in excess of Rs. 50,000 shall be chargeable to tax in the hands of recipient under the head “Income from other sources”.

It has also widened the scope of existing exceptions by including receipt by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47 namely:

Section reference Particulars
Section 47(i) In relation to distribution of capital assets on partition of HUF
Section 47(vi) / 47(via) / 47(vii) In relation to transfer of capital asset in scheme of amalgamation
Section 47(viaa) In relation to transfer in a scheme of amalgamation of banking company with banking institution
Section 47(vib)/ 47(vic)/ 47(vid) In relation to transfer of capital asset in demerger
Section 47(vica) / 47(vicb) In relation to transfer of capital asset in business reorganization by a cooperative bank to successor cooperative bank

The below exempt transfers are currently not forming part of the exception to section 56(2)(x) of the Act:

  • As per provisions of section 47(iv) of the Act, any transfer of capital asset by a company to its subsidiary company is exempt from tax where

(a) the parent company or its nominees holds the whole of the share capital of the subsidiary company; and

(b) the subsidiary company is an Indian Company.

  • Similarly as per provisions of section 47(v) of the Act, any transfer of capital asset by subsidiary company to its holding company is exempt from tax where:

(a) the whole of the share capital of the subsidiary company is held by the holding company; and

(b) the holding company is an Indian Company.

Akin to amalgamation/demerger such inter-se transfers between holding company and subsidiary company are typically undertaken with an intention of internal reorganization or to comply with some regulatory requirement [Example: Transfer of shares of group companies, by the promoter holding company to its subsidiary company (being a non-operative financial holding company which shall hold the Banking and other financial services entities) to comply with Banking Regulations for the purpose of Universal Bank Licence, which requires all the regulated financial service entities of the group to be held under a non-operative financial holding company structure].

However, while exemption from applicability of section 56(2)(x) has been provided to certain transfers [which are exempt transfers under section 47] in the nature of amalgamation / demerger / business reorganisations, no such exemption in section 56(2)(x) has been provided to transfer of capital asset by holding company to its subsidiary company and vice-a versa [which is also an exempt transfer under section 47(iv) and section 47(v) of the Act].

Consequently, such transfer of capital asset (including shares) by holding company to its subsidiary company or vice-a-versa, without consideration or for a consideration which is less than FMV5, by an amount exceeding Rs.50,000, would be subjected to tax as ‘Income from other source” in the hands of the recipient.

Thus, despite the fact that transfer of capital asset by holding company to Indian subsidiary company and subsidiary company to Indian parent is not regarded as ‘transfer’ under section 47(iv) and section 47(v) of the Act, the same would be subjected to tax in the hands of the recipient under the newly introduced section 56(2)(x) of the Act. This would defeat the whole purpose of providing exemption to such internal re-organisations under section 47(iv) and section 47(v) of the Act and would result in genuine hardship to the assessee.

Further, the cost of acquisition of capital asset in the case of transfers covered within the provisions of section 47(iv) and section 47(v) [i.e. transfer of capital asset between holding company and subsidiary company], shall be the cost for which the previous owner acquired the property. Thus, there would be a inconsistency between the provisions of section 47(iv) and section 47(v) read with section 49 which stipulate transfer at cost versus section 56(2)(x) which stipulates transfer at fair market value. Accordingly, by bringing the aforesaid transactions under the ambit of section 56(2)(x) would not serve any meaningful purpose and would be contrary to the provisions of section 47(iv) and (v).

Suggestion

An amendment should be made in proviso to clause (x) of sub-section (2) to section 56 of the Act, which provides exemption to certain assesses / transactions / transfers from applicability of section 56(2)(x) to include ‘transaction not regarded as transfer under clause (iv) and clause (v) of section 47’ along with other transaction not regarded as transfer under clause [(i), (vi), (via), (viaa), (vib), (vic), (vica), (vicb), (vid), (vii) of section 47)

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax) 

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Category : Income Tax (26313)
Type : News (13231)
Tags : Budget (1925) Budget 2018 (369) ICAI (2497)

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