INCOME TAX: Income from other sources - a residuary head of income under the Income-tax Act, 1961

Income from other sources is a residuary head of income i.e. income not chargeable under any other head, and which is not excluded from the total income under the Act, is chargeable to tax under this head. All incomes other than income from salary, house property, business and profession or capital gains are covered under “Income from other sources”.

As back as in the year 1966, the Apex Court in the case of Nanikant Ambalal Mody v. S.A.L. Narayan Roy, CIT (1966) 61 ITR 428 : (1967) AIR 193 : (1966) SCR 295 (SC) had an occasion to deal with an interesting proposition that when an item of income was not taxable under a particular head, can it be brought to the tax within the clutches of the residuary Section 12 of the then prevailing 1922 Act. The Apex Court in a majority judgement held that it cannot be , though there was a dissenting opinion too.

Sections dealing with taxation of Income from Other Sources

In order to have an overview on Income from Other Sources taxation, we will see the sections of Income Tax Act, 1961 dealing with Income from Other Sources taxation. The sections are as given below:—

S.No.	Section		Contents
1.	56(1)		Chargeability of Income from other sources under the Income-tax Act, 1961
2.	56(2)(i)		Dividends
3.	56(2)(ib)		Winnings from lotteries, crossword puzzles, races, card games, etc.
4.	56(2)(ic)		Employee’s contribution towards provident fund, superannuation fund or Employees’ State Insurance Fund
5.	56(2)(id)		Income from interest on securities
6.	56(2)(ii)		Income from machinery, plant, or furniture which is let on hire
7.	56(2)(iii)		Income from composite letting of plant, machinery or furniture and building
8.	56(2)(iv)		Any sum received under a Keyman Insurance Policy including bonus
9.	56(2)(v)		Where money exceeding Rs. 25,000 received without consideration between 01.09.2004 and 31.03.2006
10.	56(2)(vi)		Income to include gift of money from unrelated persons—Where money exceeding Rs. 50,000 received without consideration between 01.04.2006 and 30.09.2009
11.	56(2)(vii)		Income to include transfer of money and/or property received between 01.10.2009 and 31.03.2017
12.	56(2)(viia)		Taxability of shares received by firm or company for inadequate or without consideration between 01.06.2010 and 31.03.2017
13.	56(2)(viib)		Share premium in excess of fair market value to be taxed as income
14.	56(2)(viii)		Income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b)
15.	56(2)(ix)		Any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset
16.	56(2)(x)		Money/property received without consideration or inadequate consideration on or after 01.04.2017
17.	56(2)(xi)		Taxability of compensation in connection to employment
18.	57		Deductions
19.	57(i)		Dividend or Interest on securities
20.	57(ia)		Employee’s contribution towards Provident Fund, Superannuation Fund, ESI Fund or any other fund setup for the welfare of such employees
21.	57(ii)		Rental income letting of plant, machinery, furniture or building
22.	57(iia)		Family pension
23.	57(iii)		Any other expenditure, not being an expenditure of a capital natural, laid out or expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction
24.	57(iv)		Deduction from interest on compensation or enhanced compensation
25.	58(1)		Provision in respect to amount not deductible from Income from other sources
26.	58(1A)		Any sum paid on account of income-tax/wealth tax is not deductible
27.	58(2)		Any amount specified by section 40A is not deductible while calculating income under the head “Income from other sources”
28.	58(3)		In respect of foreign companies expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible
29.	58(4)	Expenditure in connection with winnings from lotteries, crossword puzzles, races, games, gambling or betting is not deductible
30.	59(1)	Profits chargeable to tax
31.	Income exempt from tax
32.	10(10BC)	Compensation received or receivable by an individual of his legal heir on account of any disaster
33.	10(10D)	Any sum received under a life insurance policy
34.	10(15)	Interest on securities which is wholly excluded from total income
35.	10(19)	Family pension received by family members of armed forces including para military forces
36.	10(34)	Any income by way of dividends referred to in section 115-O
37.	Other provisions relating to Taxation of Income from other sources
38.	180	Provision related to Royalties or copyright fee, etc. for literary or artistic work (Rule 9(2)
	180A	Provision related to consideration for know-how
39.	Deemed Incomes : With effect from 01.04.2013
40.	68	Cash credits
41.	69	Unexplained investments
42.	69A	Unexplained money, etc.
43.	69B	Amount of investments, etc. not fully disclosed in books of account
44.	69C	Unexplained expenditure, etc.
45.	69D	Amount borrowed or repaid on hundi

[1] Dividends other than the dividends referred to in Section 115-O [Section 56(2)(i)]

Section 56(2)(i) deals with dividend income. In common parlance the dividend means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. Dividend becomes income of the shareholder on the date of its declaration at the annual general Meeting and not on the date of its actual payment.” - [CIT v. Laxmi Das Mul Raj Khatau (1948) 16 ITR 248 (Bom.)]

Dividend means

‘Dividend’, generally, means the sum paid to or received by a share holder in proportion to his shareholding in a company out of the total profit distributed. The word ‘deemed’ has not been defined anywhere in the Act.

Meaning as understood under company law is relevant

Being an inclusive definition, the expression ‘dividend’ means dividend as ordinarily understood under the Companies Act, and also the heads of payment or distribution specified therein.

[Hari Prasad Jayantilal & Co. v. V. S. Gupta, ITO (1966) 59 ITR 794 (SC)]

Dividend from Indian company or units of mutual fund

Dividend is paid by a company to the shareholder who possesses shares of the company. Dividend is a return to the purchasers of shares. On every year ending, dividend which is declared to the shareholders is decided according to the terms which are declared while issuing the shares.

Dividend is not impressed with character of profit

‘Dividend’ in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. Dividend distributed by a Company being a share of its profits declared as distributable among the shareholders, is not impressed with the character of the profits from which it reaches the hands of the shareholders.

[CIT v. Nalin Behari Lall Singha (1969) 74 ITR 849 (SC)]

Distribution can be physical or constructive

The expression ‘distribution’ is to give each a share. It can be physical; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them amount due to him. The only difference between the expression ‘Paid’ and the expression ‘distribution’ is that the latter necessarily involves the idea of division between several persons which is the same as payment to several persons. Distribution is a culmination of a process. - [Punjab Distilling Industries Ltd. v. CIT (1965) 57 ITR 1 (SC)]

Apportionment must be among more than one person

The expressions ‘distribution’ and ‘payment’ connote different meanings; distribution is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of ‘distribution’ the recipients would be more than one, while in the case of ‘payment’ the recipient may be a single person.- [CIT v. P.V. John (1990) 52 Taxman 221 (Ker)]

Distribution need not be in cash

Dividend need not be distributed in cash; it may be distributed by delivery of profit or right having monetary value. - [Kantilal Manilal v. CIT (1961) 41 ITR 275 (SC)]

Shares distributed as dividend must be valued at market value

When shares are distributed as dividend, amount of dividend should be taken to be the market value of those shares as on date on which person concerned becomes entitled to those shares; the fact that shareholder retains them and does not sell them is irrelevant. It would be wrong to say that when shares are distributed as dividend, the person who receives them gets only their face value in terms of money. What he really receives is the market value of those shares as on the date he became entitled to those shares. - [CIT v. Central India Industries Ltd. (1971) 82 ITR 555 (SC)]

Receipt not falling under statutory definition may yet be included

The definition of dividend is an inclusive definition and a receipt by a shareholder which does not fall within the definition, may possibly be regarded as ‘dividend’ within the meaning of the Act unless the context negatives that view. - [CIT v. Nalin Behari Lall Singha (1969) 74 ITR 849 (SC)]

Dividend” does not include

Dividend shall not include the following:

(i) Advance or loan made by money lending company in the ordinary course of business

Any advance or loan to a shareholder or specified concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. ‘Ordinary course of business’ shall mean that the loan or advance should be given to such shareholder at the same rate and terms as it is given to other borrowers.

Where interest accrued on advance was assessed to tax as business income of the assessee in the preceding years, it was held that writing off such advance shall amount to bad debt allowable under section 36(1)(vii) as the assessee was held to be in money lending business. - [CIT v. Realst Builders & Services Ltd. (2009) 178 Taxman 163 (Del.)]

In case where money lending is a substantial part of the business of a company, any advance or loan made to a share holder or the concern by the company in the ordinary course of business is not taxable as dividend. - [CIT v. Sivasubramaniam (1998) 231 ITR 656 (Mad)]

(ii) Dividend set off against loan which is deemed Dividend under section 2(22)(e)

Any dividend paid by a company which is set off by the company against the whole or any part of loan or advance previously paid by it and which has been treated as deemed dividend under section 2(22)(e). In this case the dividend so set off shall not be treated as dividend in the hands of shareholder.

However if the dividend paid is not set off against earlier deemed dividend, then in absence of set off such dividend will be taxable.

[Walchand & Co. (P) Ltd v. CIT (1993) 204 ITR 146 (Bom)]

FOR EXAMPLE

XYZ Ltd., gave a loan of Rs. 2,00,000 to Mr. A who had 12% shares in the company. The loan is still outstanding. Thereafter the company declared dividend and has to pay a dividend of Rs. 40,000 to Mr. A and the same is set off against such loan. In this case Rs. 2,00,000 shall be deemed dividend in the hands of Mr. A .

However, dividend of Rs. 40,000 which has been set off against such loan would not be liable to tax in the hands of Mr. A. But if such dividend has been declared after the loan is refunded by Mr. A, then Mr. A would be liable to pay tax on Rs. 40,000.

(iii) Buy back of shares in accordance with the provisions of section 77A of the Companies Act, 1956

Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956. It will be taxable as capital gains / loss to share holders as per section 46A.

(iv) Distribution under clause (c) or clause (d) of section 2(22) in respect of preference shares who are not entitled to participate in the surplus assets in the event of liquidation.

(v) Any distribution of shares made in accordance with the scheme of demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of capital in the demerged company is to be excluded from the definition of dividend.

Distribution to share holders in the event of liquidation or on reduction of share capital, to the extent of the accumulated profits of the company is included as dividend. But any such distribution in respect of any share issued for full consideration, where the share holder is not entitled to participate in the surplus assets in event of liquidation is excluded from the definition of dividend. In other words distribution to preference share holder on liquidation or reduction of capital shall not be treated as deemed dividend.

Distribution by a company of accumulated profits in the form of debentures, debenture-stock [Section 2(22)(b)]

(a) Any distribution to its shareholders by a company of Debenture, Debentures-Stock or Deposit Certificates in any form, whether with or without interest, to equity shareholders or preference shareholders ; and

(b) Any distribution of Bonus Shares to its Preference Shareholders.

to the extent to which the company possesses accumulated profits, whether capitalize or not.

KEY NOTE

(i) In above case the distribution need not entail release of assets of the company as it is required under section 2(22)(a).

(ii) This section is vary specific to define what is dividend like distribution of debenture to shareholders to the extent of accumulated profits shall be treated as Dividend.

(iii) Issue of Bonus Shares to Preference Shareholders is treated as Dividend under section 2(22)(b). But this is not so in case of issue of Bonus shares to equity shareholders either in Section 2(22)(a) or (b).

Distribution of accumulated profits at the time of liquidation [Section 2(22)(c)]

Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not…

Distribution by a liquidator by itself does not trigger taxability as dividend income, unless the company had accumulated profits before it went into liquidation.

KEY NOTE

Shareholders are subject to capital gains tax under section 46 (1) on assets distributed on liquidations. Capital Gain is calculated after deducting from consideration price or market value, the deemed dividend under section 2(22)(c).

Where on liquidation of company assets are sold at a price less than actual cost, profits assessable by virtue of fiction under section 41(2) would not form part of the accumulated profits for purpose of section 2(22)(c).

[CIT v. Express News Papers Ltd. (1998) 96 Taxman 548 (SC)]

Distribution must be actual, and not notional

The amount which did not reach the liquidator at any time cannot be treated as accumulated profits in his hands for the purpose of section 2(22)(c) by applying section 531A of the Companies Act.

[K.N. Narayana Iyer v. CIT (1993) 202 ITR 774 (Ker)]

Face value of shares is not deductible

The entire amount paid by the company to its shareholder will have to be treated as dividend. The face value of the shares cannot be deducted from such payment of dividend.

[CIT v. Jai Hind Investment Industries (P) Ltd. (1993) 202 ITR 316 (Cal)]

Accumulation need not be prior to liquidation

The words ‘attributable to the accumulated profits of the company immediately before its liquidation’ in section 2(6A)(c) of the 1922 Act cannot be read as equivalent to ‘accumulated before its liquidation’ in the sense that the company had gathered the amount in its hands before the date of liquidation. The phraseo-logy would only seem to indicate that the company had kept, collected and did not distribute, disburse or make some other similar provision in respect of the amount.

[CIT v. Scindia Steam Navigation Co. Ltd. (1980) 125 ITR 118 (Bom)]

Liquidation followed by distribution must be present

In order that section 2(22)(c) should apply, there must be a liquidation and in such liquidation there is distribution and that distribution is attributable to the accumulated profits of the company immediately before its liquidation. - [Southern Agencies (P) Ltd. v. CIT (1968) 70 ITR 838 (Mad)]

Date of dissolution is not date of liquidation

The date of liquidation under section 2(22)(c) cannot be interpreted to mean the date of dissolution.

[Kanhaiya Lal Bhargava v. Official Liquidator (1965) 56 ITR 393 (All)]

Amount referable to accumulated profits is taxable

The amount received by a shareholder from the liquidator which is referable to the accumulated profits of the company, is taxable as dividend by virtue of section 2(6A)(c). - [Gautam Sarabhai v. CIT (1964) 52 ITR 921 (Guj)]

Distribution of accumulated profits on the reduction of its capital [Section 2(22)(d)]

Any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1^st day of April, 1933, whether such accumulated profits have been capitalised or not.

Distribution to share holders on account of reduction of share capital attracts tax implications under section 2(22)(d) of the Act and also capital gains taxation under section 45 of the Act. - [Kartikeya v. Sarabhai v. CIT (1997) 228 ITR 163 (SC)

Date of resolution, and not date of payment, is relevant

The date of the resolution for the reduction of capital and not the several dates of payments to the shareholders, is the date for ascertaining the quantum of accumulated profits under section 2(6A)(d) of the 1922 Act [corresponding to section 2(22)(d) of the 1961 Act] - [Punjab Distilling Industries Ltd. v. CIT (1965) 57 ITR 1 (SC)]

‘Accumulated Profits’ redefined for purpose of Deemed Dividend [Section 2(22)(d)]

Up to assessment year 2018-19, any distribution of accumulated profits (whether capitalized or not) to the shareholders by a company is subject to Dividend Distribution Tax.

Companies with large accumulated profits used to adopt the amalgamation route to reduce accumulated profits so as to by pass the provisions of deemed dividend under Section 2(22)(d).

With a view to prevent such abusive arrangements, a new Explanation 2A has been inserted in section 2(22) to widen the scope of the term ‘accumulated profits’.

Applicable from Assessment Year 2019-20

As per the Explanation 2A, the accumulated profits/losses of an amalgamated company shall be increased by the accumulated profits of the amalgamating company (whether capitalized or not) on the date of amalgamation.

EXPLANATION 2A TO SECTION 2(22)

With effect from assessment year 2019-20, as per Explanation 2A in section 2(22) of the Act provide that in the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss as the case may be, shall be increased by the accumulated profits of the amalgamating company, whether capitalized or not, of the amalgamating company on the date of amalgamation.

Distribution of accumulated profits by way of advance or loan – Deemed dividend [Section 2(22)(e)]

Any payment by a company, (other than a company in which the public are substantially interested), of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan, to the extent of accumulated profits (excluding capitalised profits) to—

(a) a equity shareholder, who is beneficial owner of shares holding not less than ten per cent of the voting power; or

(b) any concern in which such shareholder (holding not less than 10% voting power) is a member or a partner and in which he has a substantial interest; or

(c) any person, on behalf, or for the individual benefit, of any such shareholder. Such shareholder here means a shareholder who is beneficial owner of share holding not less than 10% voting power,

Ø shall be treated as deemed dividend in the hands of the shareholder.

Application of Dividend Distribution Tax to Deemed Dividend under section 2(22)(e)

With effect from 01.04.2018, Dividend Distribution Tax chargeable under section 115-O also include dividend under section 2(22)(e) in the hands of company @ 30% (without gross up) With effect from 01.04.2018 Dividend Distribution Tax (DDT) structure—

v Dividend covered under section 2(22)(a) to 2(22)(d) – DDT @ 15% (with gross up)

v Dividend covered under section 2(22)(e) – DDT @ 30% (without gross up)

Deemed Dividend under section 2(22)(e) is chargeable to Divident Distribution Tax (DDT) @ 30% in hands of closely held co.

Conditions

Following conditions are required to be fulfilled for the applicability of section 2(22)(e):—

v TYPE OF COMPANY – should be one in which the public are not substantially interested i.e. should be a closely held Company.

v PERSON – should be a shareholder having not less than 10% of voting power.

v PAYMENT – should be by way of Advance or Loan, and made out of Accumulated Profits of the Company.

v In case loan or advance is to a concern, shareholder should have a substantial interest in that concern at any time during the year.

Substantial Interest

A person shall be deemed to have a substantial interest in a concern other than a company if he is, at any time during the previous year, beneficially entitled to not less than 20% income of such concern. In the case of a company, if he beneficially holds atleast 20% equity capital of the company.

This provision is applicable only with effect from 01.06.1987 and is applicable only to companies in which the public are not substantially interested i.e. closely held companies. Further, such loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan, etc. (exclusive of capitalised profits).

Trade advances which were in nature of commercial transactions cannot be assessed as deemed dividend

Trade advances which were in nature of commercial transactions cannot be assessed as deemed dividend Dismissing the appeal of the revenue the Court held that; Trade advances which were in nature of commercial transactions cannot be assessed as deemed dividend. - [CIT v. Deepak Vegpro (P) Ltd. (2018) 300 CTR 98 : 161 DTR 170 (Raj)]

Deemed dividend-Does not apply to a non-shareholder

The High Court rejected the contention of the revenue that the definition of deemed dividend under section 2(22)(e) does not contemplate or does not stipulate any requirement of assessee being a shareholder of the assessee like the one in the present case. The view taken in the present case that the recipient/ assessee was not a shareholder, thus is in consonance with the legal position noted by us hereinabove. We are of the further view that this Court merely restated this principle and which remains unaltered throughout from the case of Rameshwarlal Sanwarmal v. CIT(1980) 122 ITR 1 (SC). Followed CIT v. Universal Medicare (P) Ltd (2010) 324 ITR 263 (Bom). - [CIT v. Impact Containers (P) Ltd (2014) 367 ITR 346 : 270 CTR 337 : 225 Taxman 322 (Bom)]

Share application money cannot be treated as loan or deposit - Not assessable as deemed dividend

When the Tribunal gave a finding that the amount received by the assessee-company was share application money, the sum could not be treated as loan or deposit. Furthermore, share application money was retained for some months and shares were allotted in following year. Therefore, sec. 2(22)(e) was not applicable. (Related Assessment year 2008-2009) - [CIT v. Alpex Exports (P) Ltd. (2014) 361 ITR 297 (Del)]

Where the money was advanced by the company to a shareholder to purchase the property which ultimately did not materialize and such amount was paid back by the said shareholder, the Delhi Tribunal held that since the amount was given for business purposes of company i.e. to purchase a suitable business premises, and the assessee could validly perform such act on behalf of company in accordance with authority held by him through resolution of board of directors of company, amount in question could not be considered as deemed dividend. - [Sunil Sethi v. DCIT (2008) 26 SOT 95 (ITAT Delhi)].

Profits must be understood in commercial sense

The expression ‘accumulated profits’ occurring in section 2(6A)(e) of the 1922 Act (corresponding to section 2(22)(e) of the 1961 Act) or for the matter in any other clause means profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act. - [P. K. Badiani v. CIT (1976) 105 ITR 642 (SC)]

Deeming loans/advances as dividend is not violative of Constitution

Section 2(6A)(e) of 1922 Act [Section 2(22)(e) of 1961 Act] is not beyond the legislative competence of the Legislature. It also does not contravene the rights conferred under articles 19(1)(f) and 19(1)(g) of the Constitution. - [Navnit Lal C. Javeri v. K.K. Sen, AAC (1965) 56 ITR 198 (SC)]

Loan advanced to shareholder in ordinary course of business where lending of money is substantial activity of company – Cannot be treated as deemed income. - [ITO v. Krishnonics Ltd (2009) 308 ITR 8 : 120 TTJ 650 : 15 DTR 366 (ITAT Ahmedabad)]

No deemed dividend under section 2(22)(e) on trade advance in the nature of commercial transactions

CBDT vide Circular No. 19/2017, dated 12.06.2017 has clarified that trade advances which are in the nature of commercial transactions would not fall within the ambit of word “advance” for the purposes of Section 2(22)(e) of the Act and, as a result, does not qualify as dividend under such clause.

The above clarification has been issued by CBDT in the light of the various judgments wherein consistent view has been adopted on this issue.

Taxation of Dividends under Income Tax Act, 1961 - Section 115-O(1): Tax on Distributed Profits of Domestic Companies

In addition to the income-tax on total income of a domestic company for any assessment year:—

v Any amount declared, distributed or paid by such company.

v By way of dividends (whether interim or otherwise).

v Whether out of current or accumulated profits shall be charged to dividend distribution tax @ 15% (plus applicable surcharge and Health & Education Cess). Payable even if no income-tax is payable by a domestic company on its total income.

v DDT should be paid to the credit of the Central Government within fourteen days from the date of:

v declaration of any dividend; or

v distribution of any dividend; or

v payment of any dividend,

whichever is earlier.

No deduction shall be allowed to the company or a shareholder for DDT or any expense on dividend income “Dividends” for Section 115-O are as referred in section 2(22) except sub-clause (e) thereof.

No DDT on SEZ company - developing, developing & operating, developing, operating & maintaining

Credit For Dividend Received From Subsidiary [Section 115-O(IA)]

To mitigate cascading effect of DDT, relief is provided that dividend received by a company which is liable to DDT shall be reduced by dividend (for same Financial Year) which satisfies the following conditions:—

v Received from its subsidiary

v Subsidiary has paid DDT on such dividend

Company shall be subsidiary for reduction where another company holds more than half in nominal value of the equity share capital of the company. Further, same amount of dividend shall be taken into account for reduction only once. Interest payable for non-payment of tax by domestic companies simple interest @ 1% for every month or part thereof where the entire DDT payable is not paid within prescribed time from period beginning on the date immediately ,after the last date on which such tax was payable and ending with the date on which tax ax is actually paid.

Dividend received from a domestic company in excess of Rs. 10,00,000 is taxable in the hands of shareholders [Section 115BBDA]

With effect from assessment year 2017-18, as per section 115BBDA, dividend received in excess of Rs. 10,00,000 is taxable in the hands of shareholders in case following conditions are fulfilled -

v Person receiving dividend is a resident Individual or HUF or firm

v Dividend received from a domestic company is in excess of Rs. 10,00,000

Rate of tax

In case above mentioned conditions are fulfilled, dividend in excess of Rs. 10,00,000 is taxable at the rate of 10% .

Section 115BBDA is not applicable

v Section 115BBDA is not applicable on dividend specified in section 2(22)(e). [loan/advance paid to shareholder holding more than 10% voting rights; or

v to a business entity in which such shareholder has substantial interest]

Section 115BBDA would be applicable

With effect from assessment year 2018-2019, Section 115BBDA would be applicable to all persons except following -

(i) Domestic company

(ii) Charitable Trust or institution registered under Income Tax Act

(iii) Fund, Institution, Trust, University, Educational Institution, Hospital, Other medical institution referred to in Section 10(23C) of the Income Tax Act.

No deduction to be allowed from dividend taxable at special rate under section 115BBDA(1)[Section 115BBDA(2)]

No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of Income-tax Act in computing the income by way of dividends referred to in section 115BBDA(1)(a).

KEY NOTE

With effect from assessment year 2018-19, the provisions of section 115BBDA shall be applicable to a specified assessee resident in India.

Specified Assessee [Clause (a) To Explanation under Section 115 BBDA]

“specified assessee” means a person other than,—

(i) a domestic company; or

(ii) a fund or institution or trust 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

(iii) a trust or institution registered under section 12AA. In other words, all assessees other than a domestic company or a charitable trust approved under section 10(23C) or registered under section 12A or section 12AA shall be liable to pay tax @ 10% on the dividend income received by them in exceeding of Rs. 10,00,000/-.

GROSSING UP:

As TDS is deducted from such income @ 30%, such TDS is included in Dividend income actually received by way of reverse engineering. Such reverse engineering is also required to be done in case the organizing company pays tax on behalf of winner. It is to be noted that such calculation is required only in the case where dividend income actually received is given and not when dividend income is given. Reverse engineering is done in following manner:—

Dividend Income received × 100

(100 – 30)

Exempting section [Section 10(34)]

Any income by way of dividends referred to in section 115-O shall be exempt from income-tax.

In other words, Dividend received from an Indian company which has suffered dividend distribution tax is exempt from tax under section 10(34).

Dividend from a Cooperative Society

Taxable dividend in case of a co-operative society is calculated as follows:—

S. No.	Description	Amount (in Rs.)
(i)	Gross dividend	xxx
(ii)	Less : Collection charges	xxx
	Less : Interest on money borrowed	xxx
	Less : Any other expenditure	xxx
(iii)	TAXABLE DIVIDEND	xxx

[2] Winnings from lotteries, crossword puzzles, horse races and card games etc. - Income referred to in section 2(24)(ix) [Section 56(2)(ib)]

The winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever is taxable under section 56 under the head ‘income from other sources’.

Tax treatment

(i) No benefit of basic exemption

The benefit of basic exemption limit (i.e. For the assessment year 2020-21 - Rs. 2,50,000) is not allowed. In other words, if assessee earns Rs. 2,00,000 from casual income which is the total income in a financial year then also tax will be deducted irrespective of basic exemption limit.

(ii) No deduction is allowed under Chapter VI-A against casual income.

(iii) Expense incurred to earn such income is not allowed as deduction. Only deduction on account of expenses relating to owning and maintaining horses is allowed.

(iv) Tax on casual income is deducted at flat rate of 30% for all assessees under section 115BB.

(v) Losses cannot be set-off against casual income. Even casual losses cannot be set-off against casual income.

Casual Income

Casual income means any receipts which are of a casual and non-recurring nature. For example, income earned by way of winnings from lotteries, races including horse races, crossword puzzles, etc.

Prizes in kind

If the prizes awarded are in kind, the prize distributor will, before releasing the prize, ensure that tax has been paid in respect of the winnings.

It will either recover it from the winner or bear the tax liability itself and deposit TDS.

But if prizes are partly in cash and partly in kind, tax is deducted on the total value of the cash and kind from the cash. And, if the cash is insufficient to meet the TDS liability, either the winner or the prize distributor pays the deficit. This will depend entirely on the terms and conditions of prize scheme.

Winning of prize money on unsold lottery ticket held by the distributor of lottery is subject to rates prescribed under section 115BB

The receipt of the prize money is not in his capacity as a lottery ticket distributor but as a holder of the lottery ticket which won the prize. Therefore, the High Court held that the rate of 30% prescribed under section 115BB is applicable in respect of winnings from lottery received by the distributor.—

[Manjoo & Co. v. CIT (2011) 335 ITR 527 (Kerala)]

Income accruing to an agent/trader in respect of prizes on unsold/ unclaimed lottery ticket

Income accruing to an agent/trader in respect of prizes on unsold/ unclaimed lottery ticket in possession of the agent/trader is income from business and does not constitute winning form lotteries.

[Director of State Lotteries v. CIT (1999) 238 ITR 1 (Gau.)]

Bonus on prize is a winnings from lottery and not business income

Lottery agent receiving 10% as bonus on prize won on tickets sold by him—Bonus was dependent on winning of sold tickets by stockiest/agent— Not business income but winnings from lottery income.—[CIT v. G. Krishnan (1997) 228 ITR 557 (Mad.)]

Prize on winning a motor rally

Up to the assessment year 1972-73, receipts of a casual and non-recurring nature were exempt from tax. The Finance Act, 1972 introduced a statutory fiction so as to enlarge the concept of “income” by including with effect from the assessment year 1973-74, winnings from lotteries, crossword puzzles, races (including horse races), card games and other games of any sort or from gambling or betting of any form or nature. In the context of this legislative step and the dictionary meaning of the word “winnings”, it is clear that what is intended to be taxed is only a windfall that reaches a person without any effort or without any skill.

Tax incidence on winnings from lotteries, etc.

Section 115BB provides that gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining race horses), card games and other games of any sort or from gambling or betting of any nature whatsoever are chargeable to income-tax, at a flat rate of 30% (plus surcharge, 2% education cess and 1% secondary and higher education cess) on the gross winnings without claiming any allowance or expenditure irrespective of the fact whether such income is taxable as business income or income from other sources. The tax is to be levied on the entire gross winnings. However, where there is a diversion by overriding title as in the case of certain lotteries, a certain percentage has to be for gone either in favour of the Government or an agency conducting lotteries, then such amount will not be taxed in the hands of the recipient.

Even if the argument of the assessee that the winning from lottery is taken to to be received by him in the course of his business, it was held that the rate of 30% prescribed under section 115BB is applicable in respect of winnings from lottery received by the distributor. - [CIT v. Manjoo & Co. (2010) 195 Taxman 39 (Ker.)]

As lottery income is taxed at flat rate, the basic maximum exemption of income (say Rs. 2,50,000 for the assessment year 2020-21 is not available to the assessee. - [K. B. Syam Kumar v. ITO (2006) 284 ITR 218 (Cochin)]

Even if the assessee’s total income from other sources is less than exemption limit, entire winnings from lotteries, cross word puzzles etc. shall be taxable @ 30%.

In which year it is chargeable to tax

Where an assessee does not maintain any books of account lottery prize won by him would accrue in the year in which it is received by the assessee and not in year in which the prize is declared. - [CIT v. M. Ramachandran (2000) 74 ITD 385 (Mad.)]

Grossing up if net winnings is given

Tax is deducted at source under sections 194 and 194BB on payments in respect of winnings from lotteries or cross word puzzle or card game and other game of any sort exceeding Rs. 10,000 (Rs. 5000 in case of winnings from horse races) at the rate of 30%.

In case amount of prize is net received (after deduction of tax), it has to be grossed up:

PROVISIONS ILLUSTRATED

Winnings from lottery or Horse race in case of “A”
S. No.		Amount (in Rs.)
(i)	Winnings on 20.03.2019	10,00,000
(ii)	Less : Tax deduction @ 30%	3,00,000
(iii)	Net amount received by “A” [ i – ii ]	7,00,000

If a person wins a lottery of Rs. 10,00,000, tax must have been deducted @ 30% and net amount received by the assessee would be Rs. 7,00,000 (1,00,00,000 – 3,00,000). Grossing up would be done as follows:—

Source	Mode of conversion
Net winnings from lotteries or crossword puzzle or horse race or card games and other games	NET x 100/100 – (30) i.e.
Winnings from other races, gambling or betting	7,00,000 x 100 = 10,00,000 100 – 30

Amount not deductible [Section 58(4)]

In the case of an assessee having income chargeable under the head “Income from other sources”, no deduction in respect of any expenditure or allowance in connection with such income shall be allowed under any provision of this Act in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from, gambling or betting of any form or nature, whatsoever:

PROVIDED that nothing contained in this sub-section shall apply in computing the income of an assessee, being the owner of horses maintained by him for running in horse races, from the activity of owning and maintaining such horses.

Explanation : For the purposes of this sub-section, “horse race” means a horse race upon which wagering or betting may be lawfully made.

Thus, as per section 58(4), in the case of an assessee having income from winnings from lotteries, crossword puzzles, etc., no deduction in respect of any expenditure or allowance in connection with such income shall be allowed while computing such income. In other words, the entire income of winnings, without any expenditure or allowance, will be taxable. The deduction under sections 80C to 80U from Gross Total Income will also not be available from such income although such income is a part of the total income.

Where an assessee has incurred loss in horse race and has won another horse race, such loss shall not be allowed to set off from the winning of another horse race.

[3] Employees’ Contributions to Provident Fund etc. (i. e. towards staff welfare schemes) [Section 56(2)(ic)]

As per section 2(24)(x) read with section 56(2)(ic), any sum received by the assessee from his employees as contributions to any provident fund, recognized or unrecognized or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees is taxable in the hands of the employer under the head “Income from other sources” if it is not chargeable to income-tax under the head “Profits and gains of business or profession”.

“Due Date”.

Here, the due date means the date by which the assessee is required as an employer to credit an employee’s contribution to the employees’ account in the relevant fund under an Act, rule, etc. issued in that behalf [Section 36(1)(va)].

Section 36 of the Act provides for deduction in computing the income referred to in section 28. The relevant provisions applicable to the present cases would be Section 36(1)(va). As per section 36(1)(va), assessee shall be entitled to the deduction in computing the income referred to in section 28 with respect to any sum received by the assessee from his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employees’ accounts in the relevant fund or funds on or before the

Section 36(1)(va) : Any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

Explanation : For the purpose of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued there under or under any standing order, award, contract or service or otherwise.”

Therefore, any sum received by the assessee from his employees as contributions to any fund as aforesaid and is not deposited or deposited belatedly to the employee’s account, it becomes income of the assessee.

PROVISIONS ILLUSTRATED

XYZ Ltd. earned a profit of Rs. 17,00,000 during the previous year 2019-20 after debiting salary to employees Rs. 13,00,000. A contribution of Rs. 1,00,000 is included in the amount of salary of Rs. 13,00,000 by way of employees’ contribution towards provident fund. Out of the amount of Rs. 1,00,000, the company transferred Rs. 60,000 before the due date of crediting such payment and Rs. 40,000 after the due date of crediting such payment.

Calculate the taxable income of XYZ Ltd. for the assessment year 2020-21.

SOLUTION:

S. No.	Particulars	Amount (in Rs.)
(i)	Net profit as per P&L A/c	17,00,000
(ii)	Add: Employees’ contribution towards provident fund treated as income of the company	1,00,000
(iii)	Total Income	16,00,000
(iv)	Less : Amount credited by the company before the due date of crediting such sum 60,000	60,000
(v)	Taxable income of XYZ Ltd.	15,40,000

Thus, the company is not allowed the deduction of Rs. 40,000 credited by it after the due date of crediting such sum. The same interpretation holds while computing income from business or profession. If the credit of employees’ contribution is not made upto the “due date”, deduction under section 36(1) (va) is not available even if—

(i) salary is actually paid to employees before the, “due date”, or

(ii) employees’ contribution to provident fund is paid within the previous year.

[4] Income by way of Interest on Securities [Section 56(2)(id)]

Interest by way of interest on securities provided the income is not chargeable to income-tax under the head “profits and gains of business or profession”.

Basis of charge – chageability of interest on securities

Interest on securities is taxable under the head “Income from other sources” if the same is not chargeable to tax under the head “Profits and gains of business or profession” when the securities are held as investment.

Interest on securities may be taxable on “due” basis or on “receipt” basis, depending upon the system of accounting if any adopted by the assessee. If the assessee follows the cash system of accounting, then the interest is taxable on “receipt basis” otherwise it shall be taxable on due basis. If no system of accounting is adopted by assessee, it will always be taxable on “due” basis. It is taxable in hands of the person who holds the securities on record date (date on which interest becomes due) and whole amount of interest would be taxable in hands of assessee who holds it on record date whether he holds securities for whole period or not.

Meaning of “Interest on Securities” [Section 2(28B)]

According to section 2(28B) “interest on securities” means,—

(i) interest on any security of the Central Government or a State Government;

(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act;

Provision regarding Interest on Securities

Government or other organisation issue securities other than shares which provide some amount as interest in return to securities’ holders. Issuing securities is an another way of getting loan from public so interest is paid in return to such loan.

There are two types of securities. They are tax free security and taxable security. Taxable security only attract TDS so it is necessary to gross up the net amount of tax free security. Generally they provide the net amount after deducting the TDS from it so we have to gross it up by reverse calculation. If a listed security which is recognized by stock exchange and unlisted securities are taxed at 10% of TDS. Therefore, the net amount is divided by 90 and multiplied by 100 to gross it up. Interest on securities is taxed on the person who holds the security at the time of declaring such interest. When a person sells his security at a day before the date of declaring the interest by the company or government, interest is provided to the person who buys it.

Tax Implications—Investment in Debentures : Interest income

v Interest received by investors is included in regular income.

v Premium received, if any, on redemption of debentures can be considered as interest income.

Interest on Securities Exempt

The interest on securities of the following description is exempt from tax—

(i) interest on notified securities, bonds or certificates issued by the Central Govt.

(ii) interest to an individual or a HUF on 7% Capital investment Bond or on notified Relief Bonds.

(iii) interest to non-resident Indians on notified bonds.

(iv) interest on securities held by issue Department of the Central Bank of Ceylon.

Interest received from bonds

A bond is a fixed income instrument carrying a coupon rate of interest and is issued for a fixed tenure.

The tenure of the bonds is usually 10/15 or even 20 years. They are also listed on stock exchanges to offer an exit route to investors. The bonds are tax-free, secured, redeemable and non-convertible in nature.

There are three ways in which assessee can buy bonds – (i) through debt funds, (ii) capital gain bonds and (iii) tax-free bonds.

(i) TAXATION ON INCOME FROM DEBT FUNDS

Debt funds deliver two kinds of returns – dividends and capital gains. Dividends earned from debt funds are tax-free in the hands of investors. However, the fund house pays a dividend distribution tax of 28.84% on your behalf.

Corporate bonds are debt securities issued by private or public corporations. Interest on corporate bonds is taxable on accrual basis at slab rates. Interest will be charged according to method of accounting followed.

Assessee can trade these bonds on the markets. In which case, capital gains will apply to his returns. If assessee holds debt funds for under three years, his returns will be short-term gains, and he will have to pay tax according to applicable slab. If assessee hold it for three years or more, he will have to pay long-term capital gains at the rate of 20% with indexation or 10% without.

(ii) TAXATION ON INCOME FROM CAPITAL GAIN BONDS

Capital gains bonds are a great way to invest your long-term capital gains to save tax. Under section 54EC of the Act, assessee can get tax exemption if he put his long-term gains, say from property investments, into these special bonds issued by government bodies National Highway Authority of India or the Rural Electrification Corporation Limited. He earns a guaranteed rate of interest on the bond.

There are, however, certain conditions that he must fulfill:

(a) He must invest his LTCG within six months of the transaction.

(b) Bonds will not be redeemable before 36 months.

The interest assessee earns on these bonds is, however, taxable according to his income slab.

The difference between the purchase and sale price of the bond is treated as capital gains. The capital gains will be long-term if these bonds are held for more than 12 months otherwise the gains will be short-term. These are tax efficient if held for more than 1 year. Capital gains are taxed on redemption of bonds; Short-term capital gains - as per slab rates; long-term capital gains - 10%, without indexation interest – As per slab rates. Bonds held for a period up to 12 months can result in short-term capital gain that is taxed as ordinary income.

(iii) TAX ON INCOME FROM TAX-FREE BONDS

Tax-free bonds are issued by government organizations, typically in the infrastructure sector. To encourage investments into these bonds, the government has given a 100% tax exemption on interest income from tax-free bonds under section 10(15)(iv)(h) of the Act. Some of the public undertakings which raise funds through the issue of tax-free bonds are IRFC, PFC, NHAI, HUDCO, REC, NTPC, and Indian Renewable Energy Development Agency.

NO TAX ON INTEREST INCOME FROM TAX-FREE BONDS [SECTION 10(15)(iv)(h)]

As the name suggests, interest earned from tax-free bonds is exempt from tax. In simple terms, irrespective of the income slab one need not pay any income-tax on the interest income. The interest received from tax free bonds is exempt under Section 10(15)(iv)(h) of the Act. There will, however, not be any tax benefit on the amount of investment made in such bonds. Further investment in tax free bonds is also deliberated as risk free as the investment is made in government securities. Also if these bonds are redeemed upon maturity then the capital gain is taxable at a concessional rate of 10% (without indexation).

NO APPLICABILITY OF TDS ON INTEREST INCOME

There is no applicability of TDS on interest income. Such bonds are also listed on stock exchanges and traded only through demat accounts.

[5] Income from letting out of Plant, Machinery or Furniture [Section 56(2)(ii)]

Income from plant, machinery or furniture belonging to the assessee and let on hire is taxable as income from other sources if the same is not chargeable to tax under the head “Profits and gains from business or profession”.

Permissible deductions from income from letting out of machinery, plant or furniture [Section 57(ii)]

As per section 57(ii), where income is derived from letting out of machinery, plant or furniture on hire and also buildings where the letting of building is inseparable from the letting of such machinery, plant or furniture and the income from such letting is not chargeable to income-tax under the head “Profits and gains of business or profession”, the following expenses incurred in respect of these assets are deductible :

The following deductions are available:

(a) Current repairs to the premises held otherwise than as a tenant;

Current repairs of building – The expression “current repairs” connotes repairs which are attended to when the need for them arises from the point of view of the assessee and which are not allowed to be accumulated. As a result of expenditure for current repairs an already existing asset is preserved and maintained. The object of such expenditure is not to bring a new asset into existence. If the amount spent is for the purpose of bringing into existence a new asset or obtaining a new advantage, then such an expenditure would be a capital expenditure which is not allowed to be deducted.

(b) Insurance Premium towards physical safety of the premises;

Insurance premium against risk of damage or destruction of the premises – As per section 30, any premium paid in respect of insurance against risk of damage or destruction of premises is deductible.

Amount spent on account of current repairs of machinery, plant and furniture are deductible while computing income from other sources in respect of machinery, plant or furniture let on hire alongwith building under section 57(ii) of the Act.

(d) Insurance of plant, machinery or furniture;

Amount spent on account of insurance of machinery, plant and furniture are deductible while computing income from other sources in respect of machinery, plant or furniture let on hire alongwith building under section 57(ii) of the Act.

(e) Deduction for depreciation in respect of machinery, plant and furniture;

Depreciation on building, plant, machinery or furniture used upon block of assets in the same manner as allowed under section 32 in the case of Profits & Gains from Business & Profession. Deduction for depreciation in respect of machinery, plant, furniture and building is allowed to be deducted in respect of loss or decline in their value which gradually occurs due to physical wear, tear and decay over their useful life; it is generally limited to losses or decline in value which cannot be restored by current repairs and maintenance.

(f) Any other expenditure not being expenditure of capital nature expanded wholly or exclusively for the purpose of earning such income.

Section 56(2)(ii) provides that income from machinery, plant or furniture belonging to the assessee and let on hire is taxable as ‘Income from other sources’ if the same is not chargeable to tax under the head “profits and gains of business or profession”. Where the assessee-company leased out printing machinery and a distillery plant on rent and the assessee never carried on at any time either the business of printing or that of a distillery, it was held that the income received by the assessee by way of rent from leasing of printing machinery, etc., should be assessed under the head “Income from other sources”. - [Dharak Ltd. v. CIT (1986) 25 Taxman 196 (Ker.)]

[6] Income from Composite Letting of Plant, Machinery or Furniture and Building [Section 56(2)(iii)]

If an assessee lets on hire machinery, plant or furniture and also buildings and the letting of building is inseparable from the letting of machinery, plant or furniture, the income from such letting would be chargeable to tax under the residuary head where it is not chargeable under the “Profits and gains of Business or Profession”. Broadly classifying following nature of rent received on hire of assets specified above is taxed under Income from Other Sources:

(a) If there is letting of Building as well as the assets & both form Part & Parcel of the same transaction since the two lettings are inseparable, e.g., Theatre Building and its Furniture is taxable under the head “Income from Other Sources”, if not charged as Business Income.

(b) If there is letting of Building as well amenities but without any letting of Assets, then this section is not applicable & the whole of such Income earned will be taxed under “Income from House Property”.

Text of Section 56(2)(iii)

Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head “Profits and gains of business or profession”.

Permissible deductions from income from composite letting of plant, machinery or furniture and building [Section 57]

The following deductions are available:

v Current repairs to building

v Repairs to plant, furniture

v Depreciation

v Insurance premium or

v Any other expenditure

v is allowed under section 57. It is to be noted that Deduction on account of only current repairs is allowed, in case of capital repairs, depreciation on such capital repairs is allowed.

Income from inseparable lease of building and furniture

Lease of building fully equipped and furnished for running a hotel and other ancillary purposes on fixed monthly rent for building and also hire for the furniture and fittings — Inseparable letting of building and furniture — Income liable to be assessed under section 12 of the Indian Income-tax Act, 1922 (corresponding to section 56(2)(iii) of the Income-tax Act, 1961).

Where the assessee company leased out a building fully equipped and furnished for the running of a hotel and other ancillary purposes on a fixed monthly rent for the building and also a fixed monthly hire for the furniture and fittings and the letting out of the building and the furniture was inseparable, it was held that the income derived by the assessee from the lease was liable to be assessed under section 12 of the Indian Income-tax Act, 1922 (corresponding to section 56(2)(iii) of the Income-tax Act, 1961).

When a building and plant, machinery or furniture are inseparably let, the Act contemplates the rent from the building as a residuary head of income.

What is therefore, necessary to examine is whether the letting is by way of business. Whether a particular letting is of business has to be decided in the circumstances of each case. Each case has to be looked at from a businessman’s point of view to find out whether the letting was the doing of business or the exploitation of his property by the owner. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is carried on.—[Sultan Brothers Private Ltd. v. CIT (1964) 51 ITR 353 (SC)]

Where facilities are provided to the tenants of the leased house property, the services charges could be taxable as income from other sources. - [Tarapore & Co. v. CIT (2002) 259 ITR 389 (Mad.)]

FOR EXAMPLE

Mr. ‘A’ lets out buildings along with air conditioning plant, tube-wells, refrigerators, etc. Though separate rent is fixed in the lease deed refers to them collectively as “demised premise”, it will be a case of inseparable letting and the entire rental income will be assessable as income from other sources.

[7] Any sum received under a Keyman Insurance Policy including Bonus [Section 56(2)(iv)]

Income referred to in section 2(24)(xi), if such income is not chargeable to income-tax under the head “Profits and gains of business or profession” or under the head “Salaries”. In other words, any sum received by a person including bonus on a Keyman Insurance Policy may be chargeable under profits and gains of business or profession or as salaries.

Text of Section 2(24)(xi)

Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

Explanation : For the purposes of this clause, the expression “Keyman insurance policy” shall have the meaning assigned to it in the Explanation to clause (10D) of section 10;

Keyman insurance can be defined as an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the employee and the benefit, in case of a claim, goes to the employer. The ‘keyman’ here would be any person employed by a company having a special skill set or substantial responsibilities and who contributes significantly to the profits of that organization.

Who can be a Keyman

Anybody with specialized skills, whose loss can cause a financial strain to the company are eligible for Keyman Insurance. For example, they could be:

(i) Directors of a Company

(ii) Key Sales People

(iii) Key Project Managers

(iv) People with Specific Skills

A keyman insurance policy, as defined in Explanation to section 10(10D) means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatever with the business of the first mentioned person.

The above definition implies the following ingredients of a keyman insurance policy:

(i) It is a life insurance policy.

(ii) It is a policy taken by one person on the life of another person.

(iii) The relationship between such persons should either be that of an employer-employee or any other business relationship.

FOR EXAMPLE

Mr. ‘A’ is the Chief Operating Officer of XYZ Ltd. (the company). XYZ Ltd. is heavily dependent upon Mr. A for its business operations and, thus, Mr. ‘A’ is ‘a key person’ or a ‘keyman’ of the company. Sudden death of Mr. ‘A’ will seriously affect the business operations of the company. To insure against such losses, the company may take out an insurance policy on the life of Mr. ‘A’. Such a policy is known as ‘Keyman Insurance Policy’.

Tax Treatment

Tax treatment of keyman insurance policy can be classified as follows:—

(a) In the hands of the person taking the policy

The premium paid by the person taking the keyman insurance policy (hereinafter referred to as the first mentioned person) is an allowable expenditure in his hands under section 37(1) of the Income-tax Act. Section 37(1) reads as below:—

“Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.” The premium for keyman insurance policy is a revenue expenditure laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee and, hence, is squarely covered by the above provision. Even in case of a firm, premium paid for a keyman insurance policy taken on the life of a partner, is an allowable expenditure under section 37(1). This has been judicially upheld by the Mumbai Tribunal ‘B’ Bench in the case of ITO v. Modi Motors (2009) 27 SOT 476.

It was held that the premium paid against Keyman Insurance Policy in the name of partners is allowable expenditure.— [ITO v. Modi Motors (2009) 27 SOT 476 (Mum.)]

As far as the maturity proceeds are concerned, generally any amount received, under a life insurance policy, including the sum allocated by way of bonus on such policy, is excluded from the total income of the recipient under clause (10D) of section 10 of the Act. However, the Finance (No. 2) Act, 1996, has amended section 10(10D) so as to exclude receipts under keyman insurance policy from the ambit of exemption. Simultaneously, sub-clause (xi) has been inserted in clause (24) of section 2 so as to include the sum received under keyman insurance policy in the definition of ‘income’. Further, clause (vi) has also been inserted in section 28 by the above Finance Act.

The net effect of the above amendments is that if the policy matures in the hands of the first mentioned person, then the maturity proceeds are taxable as business income in his hands.

(b) In the hands of keyman

The premium paid by the first-mentioned person is not taken as a perquisite under section 17(2) in the hands of the keyman. This is because; keyman policy is for the benefit of the first mentioned person and not the keyman. Since no personal advantage or benefit is derived by the keyman, it cannot be termed as a perquisite in his hands.

Maturity proceeds in the hands of keyman

Ordinarily, a keyman insurance policy can mature only in the hands of the first-mentioned person. However, the first mentioned person may assign the policy in favour of the keyman or his family members.

Section 17(3) has been similarly amended by the Finance (No. 2) Act, 1996 so as to include any sum received under a ‘Keyman Insurance policy’ within the ambit of ‘profits in lieu of salary’. A similar amendment has been made in section 56(2). A reasonable interpretation of the above two amendments in section 17(3) and section 56(2) implies that if the first mentioned person assigns the policy in favour of the keyman or any of his family members, then the surrender value will be taxable in the hands of the

keyman under section 17(3) or in the hands of the family members under section 56(2)(iv).

Needless to say that after assignment, the policy will loose the character of a ‘Keyman insurance policy’ and, hence, the ultimate maturity in such a case will be covered by section 10(10D).

Amount received from a life insurance policy – Exempt from tax

Any amount received under a life insurance policy, including bonus is exempt from tax under section 10(10D).

[8] Where money exceeding Rs. 25,000 received without consideration between 01.09.2004 and 31.03.2006 [Section 56(2)(v)]

Text of Section 56(2)(v)

[1][Where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1^st day of April 2004 [2][but before the 1^st day of April, 2006], the whole of such sum:

PROVIDED that this clause shall not apply to any sum of money 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) from any local authority as defined in the Explanation to section 10(20); or

(f) 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 section 10(23C); or

(g) from any trust or institution registered under section 12AA.

Explanation : For the purposes of this clause, “relative” means—

(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);]

KEY NOTE

1. Inserted by the Finance (No. 2) Act, 2004, with effect from 01.04.2005.

2. Inseted by the Taxation Laws (Amendment) Act, 2006, with retrospective effect from 01.04.2006.

Objective of introducing section 56(2)(v)

In the Budget Speech of 2004 while introducing the Finance (No. 2) Act, 2004, Finance Minister stated the objective of amendment as follows:

“......... I abolished gift-tax in 1997. That decision remains, but the loophole requires to be plugged to prevent money laundering. Accordingly, purported gifts from unrelated persons, above the threshold limit of Rs. 25,000, will now be taxed as income.”

Explanatory Memorandum to Finance (No. 2) Bill, 2004 Modification of the definition of income to include receipts in cash or credit otherwise than for consideration.

It is proposed to insert a new sub-clause in the definition of income so as to provide that any sum received on or after the 1st day of September, 2004, by an individual or a Hindu undivided family from any person, in cash or by way of credit, otherwise than by way of consideration of goods and services shall be included within the definition of income under section 2(24) of the Income-tax Act. It is also proposed to provide a general threshold limit of Rupees twenty-five thousand. In addition to this, in the case of an individual’s marriage, the aggregate of gifts received upto Rupees one hundred thousand will not be charged to tax.

Gift received on the occasion of daughter’s marriage of assessee is not exempt from tax

Assessee received the gift from NRI friends and relatives on the occasion of marriage of daughter as shoguns. The Assessing Officer has held that the gifts were received on occasion of assessee’s daughter’s marriage and not the marriage of assessee and the cheques were in the name of the assessee and the same were credited by the assessee to his bank account hence, the said amount is taxable as income from other sources, which was upheld by the Commissioner (Appeals). On appeal to the Tribunal, the Tribunal held that “A perusal of the provisions of section 56(2)(vi) read with the proviso

thereunder clearly reveals that they shall not apply to any sum of money received ‘on the occasion of the marriage of the individual’. Therefore, the word ‘individual’ in the context of marriage can only be the bride or bridegroom and cannot include group of individuals”. As the cheques were in the name of assessee which were credited to his account the addition was justified as income from other sources. On appeal High Court affirmed the view of Tribunal (Related Assessment year 2007-08). - [Rajinder Mohan Lal v. DCIT (2013) 263 CTR 231 : 218 Taxman 213 : 95 DTR 126 (P&H)]

Maternal Cousin (mother’s sister’s son) is not a relatives

The assessee received gift from his mother’s sister’s son which was added to income by the Assessing Officer on the ground that maternal cousin was not a relative as per section 56(2)(v). Gift received from mother’s sister’s son is taxable under the head “income from other sources”. Mother’s sister’s son is not a relative as per section 56(2)(v) and therefore, gift received from him is taxable under the Act. (Related Assessment year 2006-07) - [ACIT v. Masanam Veerakumar (2013) 143 ITD 664 : 157 TTJ 141 (ITAT Chennai)]

Amount received by legal heir for abstaining from contesting the will of deceased

Assessee, a legal heir of deceased having received a compromise amount under a settlement with the legatee for agreeing to the Court granting probate in respect of the last will of the deceased and withdrawing his caveat against grant of probate, the abstinence of the assessee from contesting the will constituted the consideration for payment and, therefore the provisions of section 56(2)(v) are not attracted and the amount received by the assessee can not be treated as income under section 56(2)(v). (Related Assessment Year 2006-07). - [Purvez A. Poonawala v. ITO (2011) 138 TTJ 773 : 55 DTR 297 (ITAT Mumbai )

Gift received from HUF—Exempt—HUF is a “relative” under section 56(2)(v), (vi) & (vii)

Where assessee receives gift from HUF it was held that though the definition of the term “relative” does not specifically include a Hindu Undivided Family, an ‘HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is ‘a group of relatives’. As a gift from a “relative” is exempt, a gift from a ‘group of relatives’ is also exempt since the singular will include the plural. (Related Assessment year 2005-06). - [Vineetkumar Raghavjibhai Bhalodia v. ITO (2011) 46 SOT 97 : 58 DTR 412 : 140 TTJ 58 (ITAT Rajkot)]

Gifts received by minor sons - Maternal Uncle

Section 56(2)(v), read with Explanation speaks of relationship between the donor and donee and not deemed assessee, maternal uncle of the assessee who made gifts of Rs. 5 Lakhs to two minor sons of the assessee is not a “relative” of the donees within the meaning of Explanation to section 56(2)(v) and therefore, the impugned sum is chargeable to tax in the hands of the assessee under the provisions of section 56 read with section 64. (Related Assessment year 2005-06)

[ACIT v. Lucky Pamnani (2011) 135 TTJ 607 : 129 ITD 489 : 49 DTR 501 (ITAT Mumbai)]

Amount received and repaid as a loan cannot come within the ambit of section 56(2)(v). - [CIT v. Saranapal Singh (HUF) (2011) 237 CTR 50 : 198 Taxman 202 (P & H)]

Where the repayment capacity of assessee is very poor, interest free loan is not to be treated as gift under section 56(2)(v)

Assessee received a huge loan without any security and interest as a mark of gratitude, irrespective of his repayment capacity. The Assessing Officer made addition under section 56(2)(v) vide raising contention that in absence of any obligation on part of assessee to repay loan, entire transaction was of nature of gift which was given a colour of a loan. It was held that there no provision under section 56(2)(v) to treat loan as gift, which might not be repaid. - [Chandrakant H. Shah v. ITO (2009) 28 SOT 315 (ITAT Mumbai)]

Lineal Ascendant or Descendant

Lineal ascendant or descendant means ascendant or descendant in the right line without any deviation. This will include line from father to son, and grand son and great grand son and vice versa, from mother to daughter, and grand daughter and great grand daughter and vice versa. - [CIT v. Dhannalal Devilal (1956) 29 ITR 165 (Raj)]

[9] Income to include gift of money from unrelated persons – where money exceeding Rs. 50,000 received without consideration between 01.04.2006 and 30.09.2009 [Section 56(2)(vi)]

Section 56(2)(vi) has been introduced by Taxation Laws (Amendment) Act, 2006. It replaces Section 56(2)(v) with effect from assessment year 2007-08. Section 56(2)(vi) applies to any sum of money received without consideration by an individual or HUF, from any person, if the aggregate value thereof exceeds Rs. 50,000 in a previous year. The section was effective upto 30.09.2009.

In other words, Section 56(2)(vi) provides that any sum of money (in excess of the prescribed limits of Rs. 50,000) received without consideration by an individual or HUF will be chargeable to income-tax in the hands of the recipient under the head “income from other sources”.

However, anything which is received in kind having ‘money’s worth’ i.e. property is outside the purview of the existing provisions.

Text of Section 56(2)(vi)

[1][Where any sum of money, the aggregate value of which exceeds Rs.50,000, is received without consideration by an individual or a Hindu Undivided Family, in any previous year from any persons on or after 01.04.2006 [2][but before the 1^st day of October, 2009], the whole of aggregate value of such sum shall be chargeable to income-tax under the head “income from other sources”:

PROVIDED that this clause shall not apply to any sum of money 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) from any local authority as defined in the Explanation to clause (20) of section 10; or

(f) 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

(g) from any trust or institution registered under section 12AA.

Explanation : For the purposes of this clause, “relative” means—

(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).]

KEY NOTE

1. Inserted by the Taxation Laws (Amendment) Act, 2006, with effect from 01.04.2007.

2. Inserted by the Finance (No. 2) Act, 2009, with effect from 01.10.2009.

PROVISIONS ILLUSTRATED : GIFTS [Section 56(2)(vi)]

The amount of gifts is taxable as follows:—

S. No.	Particulars	Amount taxable
(i)	Cash Gift Rs. 50,000	whole amount is taxable
(ii)	Immovable property without consideration with stamp duty value exceeding Rs. 50,000	whole amount is taxable
(iii)	Movable property without consideration with fare market value exceeding Rs. 50,000	whole amount is taxable
(iv)	Movable property without adequate consideration and difference between fare market value and consideration exceeds Rs. 50,000	the whole of difference between fare market value and consideration is taxable

In case of immovable property if there is inadequate consideration, Tax would be charged on the transferor in nature of capital gains on the basis of stamp duty value but there would be no tax on the transferee.

Difference between the provisions of erstwhile Section 56(2)(v) and Section 56(2)(vi)

The only difference between the provisions of erstwhile Section 56(2)(v) and Section 56(2)(vi) was that Section 56(2)(v) applied to each individual gift exceeding Rs. 25,000 whereas Section 56(2)(vi) applied to a case where aggregate value of gifts received during the previous year exceeded Rs.50,000. In a case where the aggregate value of amounts received during the previous year exceeded Rs. 50,000, the entire amount was chargeable under this clause and not merely the excess over Rs. 50,000.

KEY NOTE

Amounts received from relatives as also amounts received on the occasion of marriage of the individual, under a will or by way of inheritance, in contemplation of death of the payer, etc. were not chargeable under this clause.

Gifts – Trust – Beneficiary - Amount received by beneficiary from trusts could not be said to be received without consideration and hence could not be taxed under section 56(2)(vi)

Allowing the appeal of the assesse, the Tribunal held that ,amount received as beneficiary from trusts was nothing but his own income in his status as a beneficiary of said trust character of income in hands of beneficiary would remain same, hence the amount received cannot be sad to be without consideration hence cannot be assessed under section 56(2)(vi). (Related Assessment Year 2008 - 09) [Sharon Nayak v. DCIT (2016) 159 ITD 143 (ITAT Banglore)]

Gift - Where assessee was an AOP sum of Rs. 1.60 crore received by it without consideration could not be included in its total income

Assessee was a beneficiary trust assessed in status of AOP. It received a gift from settlor's wife during year towards trust fund which was not included in total income in terms of Section 56(2)(vi). The Assessing Officer included said amount in income of trust. The ITAT held that any sum exceeding Rs. 50,000/- can fall within ambit of section 56(2)(vi) only if it is received by an individual or HUF. Since assessee was an AOP and not any individual or HUF, such a receipt could not be included in its total income within framework of Section 56(2)(vi). (Related Assessment Year 2010-2011)

[Mridu Hari Dalmia Parivar Trust v. ITO (2016) 179 TTJ 577 : 158 ITD 521 : 139 DTR 143 (ITAT Delhi)]

Distribution of income by trust to beneficiaries not chargeable to tax under section 56(2)(vi)

Distribution of income by a trust to its beneficiaries would not be construed as amounts received without consideration by the beneficiaries, and hence, section 56(2)(vi) of the Act would not apply to such receipts. It also held that the Assessing Officer had an option to assess the amount received by the taxpayer from various trusts as a beneficiary of such income, either in the hands of the trust or in the hands of the beneficiary. The Tribunal further held that if such option was exercised by the Assessing ffocer and income was taxed in the beneficiary’s hands, income would be classified in the hands of the beneficiary in the same manner as it was classified in the hands of the trust.

[Mrs. Sharon Nayak v. DCIT – Date of Judgement : 27.05.2016 (ITAT Bangalore)]

Lump sum alimony from ex-husband - Not assessable as income from other sources

In August 2007 i.e. during previous year assessee received lump sum payment from her ex-husband, a foreign national as per diverse agreement executed in the year 1990. Assessing Officer held that as the amount received without consideration and the assessee has not received the same from the persons covered under definition of relative as provided in exemptions to section 56(2)(vi) hence assessable as income from other sources. On appeal Tribunal held that receipt represented accumulated monthly installments of alimony, which had been received as a consideration for relinquishing all her past and future claims, and therefore, provisions of section 56(2)(vi) would not be applicable. (Related Assessment Year 2008-09) - [ACIT v. Meenakshi Khanna (2013) 158 TTJ 782 :143 ITD 744 : 96 DTR 220 (ITAT Delhi]

[10] Income to include transfer of money and/or property receiver between 01.10.2009 and 31.03.2017 [Section 56(2)(vii)]

The Finance Act, 2009 inserted section 56(2)(vii) with effect from 01.10.2009. Simultaneously with introduction of this section, section 56(2)(vi) was deleted. Section 56(2)(vi) did not cover receipts in kind whereas section 56(2)(vii) covers receipts in kind as well. Section 56(2)(vii) covers receipt of property mentioned therein. Such receipt may be without consideration or for a consideration which is less than its stamp duty value/fair market value Receipt of immovable property without consideration is chargeable to tax if such receipt is on or after 01.10.2009 and other conditions are satisfied.

Text of Section 56(2)(vii)

[1][Where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 [2][but before the 1st day of April, 2017,—

(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;

[3][(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:

PROVIDED 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 of this sub-clause:

PROVIDED FURTHER that the said proviso shall apply only in a case where the amount of consideration referred to therein, 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;

(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:

PROVIDED that where the stamp duty value of immovable property as referred to in sub-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, as far as may be, 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:

PROVIDED FURTHER that this clause shall not apply to any sum of money or any property 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 donor, as the case may be; or

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

(f) 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

(g) from any trust or institution registered under section 12AA; or

[4](h) by way of transaction not regarded as transfer under clause (vicb) or clause (vid) or clause (vii) of section 47

Explanation : For the purposes of this clause,—

(a) “assessable” shall have the meaning assigned to it in the Explanation 2 to section 50C(2);

(b) “fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed;

(c) “jewellery” shall have the meaning assigned to it in the Explanation to section 2(14)(ii);

(d) “property” [5][means the following capital asset of the assessee, namely:—]

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures; [6][***]

(viii) any work of art; [7][or]

(ix) bullion;

[8][(e) “relative” means,—

(i) in case of an individual—

(A) spouse of the individual;

(B) brother or sister of the individual;

(C) brother or sister of the 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 the person referred to in items (B) to (F); and

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

(f) “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;

KEY NOTE

1. Inserted by Finance (No. 2) Act, 2009, with effect from 01.10.2009.

2. Inserted by Finance Act, 2017, with effect from 01.04.2017

3. Substituted by the Finance Act, 2013, with effect from 01.04.2014. Prior to its substitution, sub-clause (b), as substituted by the Finance Act, 2010, with retrospective effect from 01.10.2009, read as under:

“b) any immoveable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property”

4. Inserted by the Finance Act, 2016, with effect from 01.04.2017]

5. substituted for “means-” by the Finance Act, 2010, w.r.e.f. 01.10.2009,

6. Word “or” omitted. Ibid. with effect from 01.06.2010.

7. Inserted. ibid

8. Substituted by the Finance Act, 2012, with retrospective effect from 01.10.2009. Prior to its substitution, clause (e) read as under:

(e) “relative” shall have the meaning assigned to it in the Explanation to clause (vi) of sub-section (2) of this section”

Transfer of immovable property for a consideration which is less than the stamp duty value, the difference is assessable as income in the transferee’s hands [Section 56(2)(vii)]

If purchase value and stamp assessable value difference to be assessed as deemed income from other sources in the hands of the buyer of a property. These provisions have been amended with effect from 01.04.2014 so as to provide that where any immovable property is received by an individual or HUF for a consideration which is Rs. 50,000/- less than stamp duty value of the property. The stamp duty value of such property as exceeds such consideration shall be taxable in the hands of the individual or HUF under the head “Income from other sources”. However, the provision is applicable for transactions above Rs. 50,000/-.

In other words, Finance Act, 2013 has substituted clause (b) of section 56(2)(vii) with effect from 01.04.2014 providing, inter alia, that where an individual or Hindu Undivided Family receives, in any previous year, from any person or persons any immovable property on or after 01.10.2009—

(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

v shall be chargeable to income-tax under the head “Income from Other Sources”.

Section 56(2)(vii) applicable in the case of Individual & HUF only

It is important to note that provision of section 56(2)(vii) applicable in case of transferee of immovable property covers only Individual or HUF, whereas provisions of section 50C/43CA applicable to the transferor of the property cover all the assessees. It implies that if the transferee of property is a person other than individual or HUF i.e. a Company, Firm, LLP etc., provision of section 56(2)(vii) shall not be applicable. Thus, if an immovable property is purchased by a person other than an individual or HUF for a consideration which is less than Stamp Duty Value/Circle Rate, there will not be any implication or attraction of the provision of this section.

Taxability under section 56(2)(vii) at a glance

Nature of assets		Conditions for Taxability		Whether single or all receipts are considered for limit of Rs. 50,000	Value chargeable to tax
Any sum of Money without consideration		If aggregate value exceeds Rs. 50,000		All receipts	Whole amount if same exceeds Rs. 50,000
Any immovable property without consideration		If stamp duty value exceeds Rs. 50,000		Single receipt	Stamp duty value
Any movable property without consideration		If fair market value (FVM) exceeds Rs. 50,000		All receipts	The aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property
Any movable property for consideration which is less than fair market value (FVM)		If fair market value (FVM) exceeds Rs. 50,000		All receipts	Consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, the aggregate fair market value of such property as exceeds such consideration [i.e. whole of such aggregate FMV less consideration].
Provisions Illustrated : Taxability under section 56(2)(vii)
S. No.	Transaction		Is there an eligible gift [i.e., it can be the transaction to be considered as “gift” for the purpose of section 56(2)(vii)]			Is the gift taxable
(i)	Mr. “A” received a sum of Rs. 2,00,000 on the occasion of his birthday, from his friend		Yes [sum of money received is ‘eligible gift’]			Yes [since the transaction does not fall under exempted category]
(ii)	Mr. “B” received a sum of Rs. 2,00,000 on the occasion of his marriage, from his friend		Yes [sum of money received is ‘eligible gift’]			No [since the transaction falls under exempted category]

(iii)	Mr. “C” purchased a site in Bangalore for Rs. 40,00,000. Its stamp duty value was Rs. 50,00,000	Yes [immoveable property received for inadequate consideration is ‘eligible gift’]	Yes [since the transaction does not fall under exempted category]. The difference between ’actual consideration and stamp duty value exceeds Rs. 50,000. Hence, the transaction is taxable. The taxable amount is Rs. 10,00,000 which is the amount of difference between purchase price and stamp duty value.
(iv)	Mr. “D” received 2 Kgs of Gold from his employer who was on death bed contemplating his death.	Yes [moveable property without consideration is ‘eligible gift’]	No [since the transaction falls under exempted category]
(v)	Mr. “E” received a gift of M. F. Hussain Paintings through his Uncle’s Will.	Yes [moveable property without consideration is ‘eligible gift’]	No [since the transaction falls under exempted category]
(vi)	Mr. “F” was given ‘Ancient Sculptures’ worth Rs. 75,00,000 by the local authority of Mumbai, for being its Brand Ambessador.	Yes [moveable property without consideration is ‘eligible gift’]	No [since the transaction falls under exempted category]
(vii)	Mr. “G” received a gift of M. F. Hussain Paintings through his Uncle’s Will.	No [moveable property has been acquired for adequate consideration and hence there is no ‘gift’ as per provisions of section 56(2)(vii)]
(viii)	Mr. “H” received Rs. 5,00,000 from ‘ABC’ Trust (Registered under section 12AA) for meeting his medical expenses.	Yes [sum of money received is ‘eligible gift’]	No [since the transaction falls under exempted category]
(ix)	Mr. “I” received a scholarship of Rs. 3,00,000 from his college	Yes [sum of money received is ‘eligible gift’]	No [since the transaction falls under exempted category]
(x)	Mr. “J” received Preference Shares of XYZ Ltd., on the death of his father as inheritance.	Yes [moveable property received without consideration is ‘eligible gift’]	No [since the transaction falls under exempted category]

Provisions of section 56(2)(vii) not applicable

Provisions of section 56(2)(vii) not applicable to following transactions, not regarded as transfer under section 47:—

(a) Section 47(vicb)—Business reorganisation of co-operative bank

TEXT OF SECTION 47(vicb)

“any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank.

Explanation : For the purposes of clauses (vica) and (vicb), the expressions “business reorganisation”, “predecessor co-operative bank” and “successor co-operative bank” shall have the meanings respectively assigned to them in section 44DB;”

(b) Section 47(vid)—Scheme of Demerger

TEXT OF SECTION 47(vid)

“any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking;”

(c) Section 47(vii) – Scheme of Amalgamation

TEXT OF SECTION 47(vii)

“any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if—

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian company;]

Section 56(2)(vii) not to apply if the property is Stock-in-Trade in the hands of the recipient

The provisions section 56(2)(vii) will not apply to stock-in-trade, raw material and consumable stores in case of any business of such recipient. The scope of deemed income is only to tax the transactions which are in kind and not the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income.

Gifts not chargeable to tax [Section 56(2)(vii)]

Any sum of money or property received by an individual or HUF in the following circumstances shall not be chargeable to tax:—

(a) Gifts received by an individual from his relatives;

(b) Gifts received by an HUF from any of its Member;

(d) Gifts received by an individual or HUF under a will or by way of Inheritance;

(e) Gifts received in contemplation of death of the payer;

(f) Gifts received from any local authority;

(g) Gifts received from any fund, foundation, university, educational institution, hospital, medical institution, any trust or institution referred to in Section 10(23C);

(h) Gifts received from any trust or institution registered under Section 12AA;

(i) Share received as a consequences of demerger or amalgamation of a company under clause (vid) or clause (vii) of section 47, respectively;

(j) Share received as a consequences of business reorganization of a co-operative bank under section 47(vicb).

What is meant by “in contemplation of death”

Under clause (d) of the second proviso to section 56(2)(vii), any sum of money or other specified movable property received ‘in contemplation of the death of the payer’ is granted exemption from tax. It is, therefore, necessary to understand the exact import of what is meant by ‘in contemplation of death’.

The requirements of a ‘gift in contemplation of death’ are laid down in section 191 of the Indian Succession Act, 1925. This section reads as follows:

“191. Property transferable by gift made in contemplation of death—

(1) A man may dispose, by gift made in contemplation of death, of any movable property which he could dispose of by will.

(2) A gift is said to be made in contemplation of death where a man, who is ill and expects to die shortly of his illness, delivers, to another the possession of any movable property to keep as a gift in case the donor shall die of that illness.

(3) Such a gift may be resumed by the giver, and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made.”

Thus, two important requirements laid down in this sub-section are,—

(i) the donor must be ill and expects to die shortly of the illness, and

(ii) possession of the property should be delivered to the donee, apparently during the lifetime of the donor.

The requirement of ‘delivery’ is well-impressed in the three Illustrations given below section 191 of the Indian Succession Act, 1925, which read as follows:—

ROVISIONS ILLUSTRATED - 1

A, being ill, and in expectation of death, delivers to B, to be retained by him in case of A’s death,—

v a watch:

v a bond granted by C to A:

v a bank-note:

v a promissory note of the Central Government endorsed in blank:

v a bill of exchange endorsed in blank:

v certain mortgage-deeds.

A dies of the illness during which he delivered these articles. B is entitled to—

v the watch:

v the debt secured by C’s bond:

v the bank-note:

v the bill of exchange:

v the money secured by the mortgage-deeds.

PROVISIONS ILLUSTRATED - 2

Mr. “A”, being ill, and in expectation of death, delivers to Mr. “B” the key of a trunk or the key of a warehouse in which goods of bulk belonging to Mr. “A” are deposited, with the intention of giving him the control over the contents of the trunk, or over the deposited goods, and desires him to keep them in case of Mr. A’s death. Mr. “A” dies of the illness during which he delivered these articles. Mr. “B” is entitled to the trunk and its contents or to Mr. A’s goods of bulk in the warehouse.

PROVISIONS ILLUSTRATED - 3

Mr. “A”, being ill, and in expectation of death, puts aside certain articles in separate parcels and marks upon the parcels respectively the names of Mr. “B” and Mr. “C”. The parcels are not delivered during the life of Mr. “A”. Mr. “A” dies of the illness during which he set aside the parcels. Mr. “B” and Mr. “C” are not entitled to the contents of the parcels.

Kinds of gifts received taxable under section 56(2)(ii)

With effect from 01.10.2009, the following three kinds of gifts received by an individual or HUF from an unrelated person or persons shall be taxable under section 56(2)(vii).

(i) GIFT OF MONEY:

Where any sum of money is received by an individual or a Hindu Undivided from any person or persons without consideration the aggregate value of which exceeds Rs. 50,000, the whole of aggregate value of such sum shall be taxable in the hands of the recipient.

(ii) GIFT OF IMMOVABLE PROPERTY:

(a) Without consideration—

Where any immovable property is received by an individual or HUF from any person without consideration the stamp duty value of which exceeds Rs. 50,000, the stamp duty value of such property shall be taxable.

(b) Acquired for inadequate consideration—

Where such immoveable property is acquired by an individual or HUF for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration shall be taxable in his hands.

(iii) GIFT OF PROPERTY OTHER THAN IMMOVABLE PROPERTY:

(a) Without consideration—

Where any property other than immoveable property is received by an individual or HUF, the aggregate fair market value of which exceeds Rs. 50,000, the whole of the aggregate fair market value of such property shall be taxable.

(b) Acquired for the inadequate consideration—

Where such property other than immoveable property is acquired for a consideration which is less than the aggregate fair market value of the property by amount exceeding Rs. 50,000 the aggregate fair market value of such property as exceeds such consideration shall be taxable.

PROVISIONS ILLUSTRATED

Mr. “A”, the friend of Mr. “B”, has gifted an immovable property to Mr. “B” whose stamp duty value on the date of gift is Rs. 90,00,000

(a) What shall be the value of gift taxable under section 56(2)(vii)

(b) What shall be the amount taxable if Mr. “B” purchased the above property from A for a consideration of Rs. 70,00,000

SOLUTION:

(a) The whole of amount of Rs. 90,00,000 shall be taxable with hands of Mr. “B”

(b) Rs. 20,00,000 i.e. Rs. 90,00,000 – Rs. 70,00,000 shall be the value of inadequate consideration so taxable.

Sum of money received without consideration (commonly known as monetary gift) by an individual

PROVISIONS ILLUSTRATED

During the year 2017-18, Mr. “A” Raja received a gift of Rs. 5,00,000 from his father. Apart from gift of Rs. 5,00,000, he received gift of Rs. 3,00,000 from his friends residing abroad and gift of Rs. 25,000 from friends of his spouse on his wedding anniversary. Compute taxability of the gifts in the hands of Mr. “A”.

SOLUTION

Any sum of money (i.e., generally known as gift) received by an individual/ HUF without adequate consideration is charged to tax, if the following conditions are satisfied:—

(i) The sum of money is received by an individual or HUF on or after 01.10.2009.

(ii) Such sum of money is received without consideration.

(iii) The aggregate value of such sum received during aforesaid period exceeds Rs. 50,000.

Considering the above provisions, the tax treatment of gifts in the hands of Mr. “A” will be as follows:—

(a) Gift received from father will not be taxed, since father falls under the definition of a relative. Hence, nothing will be charged to tax in respect of gift of Rs. 5,00,000 received from father.

(b) Gift received from any person other than relative and otherwise than on prescribed occasions is fully taxed. Hence, gift of Rs. 3,00,000 received from friends of Mr. “A” residing abroad and gift of Rs. 25,000 received from friends of spouse of Mr. “A” on the occasion of his wedding anniversary will be fully taxed.

Immovable property received without consideration/adequate consideration by an individual

PROVISIONS ILLUSTRATED

On 01.08.2017, Mr. “A” gifted a plot of land to his friend, Mr. “X”. The market value of such plot was Rs. 30,00,000 and the value of the plot adopted by the Stamp Valuation Authority for charging stamp duty was Rs. 40,00,000.

On 25.03.2018, Mr. “X” purchased a residential building (building P) from one of his friends. The building was purchased for Rs. 52,00,000, however, the value of the building adopted by the Stamp Valuation Authority for charging stamp duty was Rs. 60,00,000. Advise Mr. “X” regarding the tax treatment of above items.

SOLUTION

Any immovable property received without consideration (i.e., received by way of a gift) by an individual/HUF is charged to tax, if the following conditions are satisfied:—

(i) Any immovable property is received by an individual or HUF on or after 01.10.2009.

(ii) Such property is received without consideration.

(iii) The stamp duty value of such property exceeds Rs. 50,000.

In above case, the stamp duty value of the property adopted by the Stamp Valuation Authority for charging stamp duty will be treated as income of the receiver.

Considering above provisions, full stamp duty value in respect of plot of land of Rs. 40,00,000 will be charged to tax in the hands of Mr. “X” .

Since the building acquired on or after 01.04.2013, the entire difference of Rs. 8,00,000 (being greater than Rs. 50,000) would have been changed to tax.

Specified movable property received without consideration (commonly known as non-monetary gift) by an individual

PROVISIONS ILLUSTRATED

During the Financial year 2017-18, Mrs. “X” received following gifts from her relatives/friends:—

(i) Painting received from her friend. Fair market value of the painting is Rs. 3,00,000.

(ii) Archaeological collection received from her mother. Fair market value of such archaeological collection is Rs. 4,00,000.

(iii) Jewellery received from her relatives on her birthday. Fair market value of the jewellery is Rs. 5,00,000.

􀂾 Advise her regarding the tax treatment of above items.

SOLUTION

In the above case, the fair market value of the prescribed movable property will be treated as income of the receiver.

Nothing contained in aforesaid provisions will apply to the following cases:

v Property received from relatives.

v Property received by a HUF from its members.

v Property received on occasion of the marriage of the individual.

v Property received under Will/ by way of inheritance.

v Property received in contemplation of death of the payer or donor.

v Property received from a local authority.

v Property received from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10(23C).

Considering above provisions, the tax treatment of various items received by Mr. “X” will be as follows:—

(i) In respect of painting received from her friend, the fair market value of the painting, i.e., Rs. 3,00,000 will be treated as her taxable income.

(ii) Nothing will be charged to tax in respect of archaeological collection received from her mother, since mother comes under the definition of relative.

(iii) Nothing will be charged to tax in respect of jewellery received from her relatives on her birthday.

Specified movable property received without adequate consideration by an individual

PROVISIONS ILLUSTRATED

During the year 2012-13, Mr. “A” purchased the following capital assets:

(a) Shares purchased for Rs. 5,00,000, the fair market value of the shares is Rs. 7,00,000.

(b) Sculptures purchased for Rs. 3,85,000; the fair market value of the sculptures is Rs. 4,50,000.

Ø Advise him regarding the tax treatment of above items.

SOLUTION

Any prescribed movable property acquired for less than its fair market value by an individual/HUF is charged to tax if the following conditions are satisfied:—

(i) Any prescribed movable property is received by an individual or HUF on or after 01.10.2009.

(ii) Such property is received for a consideration, but aggregate fair market value of such properties received by the assessee during the previous year exceeds the consideration of these properties by Rs. 50,000. In other words, the aggregate fair market value of all such properties is higher than the consideration and the aggregate gap is more than Rs. 50,000.

Prescribed movable property means shares/securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art and with effect from 01.06.2010 bullion, being capital asset of the assessee.

In above case, aggregate fair market value in excess of aggregate consideration of such properties will be charged to tax.

Nothing contained in aforesaid provisions will apply to the following cases:

· Property received from relatives.

· Property received by a HUF from its members.

· Property received on occasion of the marriage of the individual.

· Property received under Will/by way of inheritance.

· Property received in contemplation of death of the payer or donor.

· Property received from a local authority.

· Property received from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10(23C).

Considering above provisions, the tax treatment of various items received by Mr. “A” will be as follows:—

· The above provisions will apply only in respect of prescribed movable property.

Considering the definition of prescribed movable property, shares and sculptures will only come under the definition of prescribed movable property.

(a) The fair market value of shares is Rs. 7,00,000 and the purchase price is Rs. 5,00,000. The excess of fair market value over the purchase price will amount to Rs. 2,00,000 for shares. Hence, Rs. 2,00,000 will be charged to tax in respect of purchase of shares.

(b) The fair market value of sculptures is Rs. 4,50,000, respectively, and the purchase price is Rs. 3,85,000. The excess of fair market value over the purchase price will amount to Rs. 65,000 for sculptures. Hence, Rs. 65,000 will be charged to tax in respect of purchase of shares and sculptures.

(c) Motor-car does not come under the definition of prescribed movable property. Hence, nothing will be taxed in respect of purchase of motor-car.

Reference to Valuation Officer under section 142A(1)

The Assessing Officer may for the purposes of assessment or reassessment, make a reference to a Departmental Valuation Officer (DVO) to estimate the value including fair market value, of any asset, property or investment for the purposes of section 56(2). The provision is enabling provision to give effect to the powers of the Assessing Officer under section 56(2)(vii)/(viia).

Relative - Hindu Undivided Family (HUF) - Gift by the mother of the Karta of the HUF, to the HUF is liable to be taxed as the mother can not be considered as member of HUF - Revision was held to be justified – Assessee was directed to produce valuation report as per rule 11UA

Dismissing the appeal of the assesse the Tribunal held that; Proviso to section 56 (2) (vii) provides definition of “relatives‟ in case of individual and HUF separately. It provides that above clause for taxability shall not apply to any sum of money or property received from any “relative‟. The “relative‟ have been mentioned separately with respect to an individual, and with respect to a Hindu undivided family. Therefore, in case of Hindu undivided family, if the gift is not received from member of such HUF then such sum is chargeable to tax. The “relatives‟ mentioned with respect to an individual cannot be considered when the recipient of the property is an HUF. Further, it substitutes the earlier definition of the “relative‟ when there was no reference about what constitutes “relatives‟ with respect to the HUF. It only talks about “relatives‟ with respect to an individual. Therefore, earlier the issue was that if the gift is received by an HUF from its members, probably it was taxable. To remove that lacuna and to give benefit to the HUF, the above amendment was made. The amendment also speaks through “notes on clauses‟ that now the definition of „relative‟ shall also include any sum or property received by an Hindu undivided family from its members apart from the persons referred to in the explanation with respect to an individual. It does not provide that if gift is made to an HUF by any of the „relatives‟ of those individuals comprising the HUF, who is not the member of the HUF, then such gift is not chargeable to tax. If such a view were accepted, then gift to HUF would never be chargeable to tax if it were received from the “relatives” of the members of such HUF. We are afraid that is not the language as well as the intention of the legislature. Even otherwise, When the language of the law is clear, support of the “notes on clauses‟ to the amendment does not help the assessee. Revision was held to be justified, however the assessee was directed to produce valuation report as per rule 11UA. (Related Assessment year 2013-14)

[Subodh Gupta (HUF) v. PCIT(2018) 169 ITD 60 (ITAT Delhi)]

Gift received by an individual from HUF is not exempt

The assessee claimed that gift of certain amount received from his Hindu undivided family (HUF) was exempt from tax under section 56(2)(vii). However, the Assessing Officer held that the term 'relative' in Explanation (e) to Section 56(2)(vii) does not include HUF as donor and, therefore, added the impugned amount to assessee's income under Section 68.

On further appeal, the Tribunal held in favour of revenue that as per Explanation to Section 56(2)(vii) members of an HUF are its relatives. Therefore, if HUF receives any sum from any of its member, such sum shall not be chargeable to tax. However, in vice-versa cases when member receives any sum from the HUF, same would be chargeable to tax as the term ‘relatives’ defined under said Explanation does not include HUF as a relative of such individual. The legislative intent is very clear that an HUF is not to be taken as a donor in case of an individual recipient. Thus, the assessee's plea of having received a valid gift from his HUF was rightly declined and impugned addition was to be upheld. - [Gyanchand M. Bardia v. ITO (2018) 93 taxmann.com 144 (ITAT Ahmedabad)]

Receipt of bonus shares not subject to tax under section 56(2)(vii)

Receipt by an individual shareholder of bonus shares issued by the company would not be subject to tax in the recipient’s hands, although the same was received without consideration.

Delving into the legislative history of section 56(2)(vii) of the Act, the Tribunal observed that this provision was primarily introduced to address abuse arising out of abolition of the Gift Tax Act, 1958. It also observed that the erstwhile Gift Tax Act never included within its ambit issue of bonus shares issued by a company to its shareholders as gift. Further, it also observed that the bonus issue was detrimental to the shareholder in terms of value per share, which was counterbalanced by the additional number of bonus shares received. Therefore, the total value of equity shares post issuance of bonus shares remained the same. Since the issue of bonus shares was by capitalising profits of the company, it did not result in increase in net asset value of the company. In addition, any profit derived by the taxpayer on account of receipt of bonus shares was theoretically offset by the depression in the value of the equity shares already held by him. Therefore, it did not result in the taxpayer getting a property without consideration. Relying on the case of Sudhir Menon HUF, and also on the Supreme Court decision in the case of CIT v. Dalmia Investment Co. Limited (1964) 252 ITR 567 (SC), it observed that the bonus shares were ranked pari passu with the original shares, and they had to be valued at the average of both bonus and the original shares, with the total value of all shares remaining the same. Therefore, the Bangalore Tribunal held that in case of issuance of bonus shares, consideration had indeed flown out from the holder of the shares, which was reflected in the depression in the intrinsic value of the original shares held by him, and the bonus shares could thereby not be said to have been received without consideration. - [DCIT v. Dr. Rajan Pai [ITA No. 1290/ Bang/ 2015 (ITAT Bangalore)]

Gift received from HUF - Exempt - HUF is a “relative” under section 56(2)(v), (vi) & (vii)

Where assessee receives gift from HUF it was held that though the definition of the term “relative” does not specifically include a Hindu Undivided Family, a ‘HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is ‘a group of relatives’. As a gift from a “relative” is exempt, a gift from a ‘group of relatives’ is also exempt since the singular will include the plural. (Related Assessment year 2005- 06). - [Vineetkumar Raghavjibhai Bhalodia v. ITO (2011) 140 TTJ 58 : 58 DTR 412 : 46 SOT 97 (ITAT Rajkot)]

Karta’s mother not relative of HUF, upholds taxability of gift under section 56(2)(vii)

Delhi ITAT upholds revision under section 263 in order to tax gift received by assessee-HUF from mother of Karta (not member of HUF) under section 56(2)(vii) for assessment year 2013-14; During relevant assessment year, assessee received 75000 equity shares from mother of the Karta of assessee-HUF, rejects assessee’s stand that the said gift was not covered by 56(2)(vii) taxability as it would qualify as gift from ‘relative’; Firstly, ITAT notes that the proviso to Section 56(2)(vii) provides definition of ‘relatives’ in case of individual and HUF separately, clarifies that the ‘relatives’ mentioned with respect to an individual cannot be considered when the recipient of the property is an HUF; ITAT observes that Karta’s mother was not member of assessee-HUF and accordingly not covered by the ‘relative’ definition for HUF, thus rejects assessee’s stand that gift from karta’s mother amounts to gift from relative; Also rejects assessee’s stand that where all the members of the HUF are individuals related to the donor, then they very much also fall within the definition of the term ‘relative’ on collective basis, further distinguishes assessee’s reliance on plethora of rulings on facts; With regards to valuation, ITAT rejects Revenue’s adoption of the definition of ‘fair market value’ (‘FMV’) as provided under section 2(22B), ITAT notes that specific Rule 11UA shall be applicable which provides for valuation for the purposes of Section 56 and remits matter back to Assessing Officer to verify FMV as per Rule 11UA:

[11] Taxability Of Shares Received by a Firm or a Company for Inadequate or without consideration between 01.06.2010 and 31.03.2017 [Section 56(2)(viia)]

Text of Section 56(2)(viia)

[1][Where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, [2][but before the 1st day of April, 2017], any property, being shares of a company not being a company in which the public are substantially interested,—

(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 in the hands of recipient;

PROVIDED that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under section 47(via) or (vic) or (vicb) or (vid) or (vii).

Explanation : For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii).]

KEY NOTE

1. Inserted by the Finance Act, 2010, with effect from 01.06.2010.

2. Inserted by the Finance Act, 2017, with effect from 01.04.2017.

With effect from 01.06.2010, if the following conditions are satisfied, then the value of such shares will be taxable:—

(i) Recipient is a firm or closely held Company (i.e. Company in which public are not substantially interested).

(ii) The asset (which is received) is in the form of shares in a closely held Company.

(iii) These shares are received from a person or group of persons on or after June 1, 2010.

(iv) Without consideration or inadequate consideration.

(v) Such shares are not received by way of transaction in a scheme of amalgamation, demerger.

If the above conditions are satisfied, then the value of such shares will be taxable in the hands of recipient as follows:—

(a) If such shares are received without consideration , the aggregate fair market value on the date of transfer would be taxed as income of the recipient firm, Company, if it exceeds Rs. 50000/-.

(b) If shares are received for inadequate consideration, the difference between the aggregate fair market value and consideration would be taxed as income of the recipient firm or the Company, if such difference exceeds Rs. 50,000/-.

WITHOUT CONSIDERATION

The aggregate Fair market value of which exceeds Rs. 50,000, such amount of FMV is to be taxed in hands of recipient.

FOR INADEQUATE CONSIDERATION

Where difference between Fair Market Value and Consideration exceeds Rs. 50,000, such difference is to be taxed in hands of recipient.

KEY NOTE

This section would not include transactions undertaken for the purpose of re-organization, amalgamation and demerger.

Transactions not covered under section 56(2)(viia) [Proviso to Section 56(2)(viia)]

The transactions undertaken for business reorganization, amalgamation and demerger which are not regarded as transfer under section 47(via), (vic), (vicb), (vid) and (vii) shall be excluded from the application of section 56(2)(viia). Hence, the following transactions shall not be covered under section 56(2)(viia):—

(i) Transfer of shares held in an Indian company, in a scheme of amalgamation, by the amalgamating foreign company to the amalgamated foreign company subject to certain conditions being satisfied. [Section 47(via)]

TEXT OF SECTION 47(via)

Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if—

(a) at least twenty-five per cent of the shareholders of the

amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

(ii) Transfer of shares held in an Indian company, in a scheme of demerger, by the demerged foreign company to a resulting foreign company subject to certain conditions being satisfied. [Section 47(vic)]

TEXT OF SECTION 47(vic)

Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if—

(a) the shareholders holding not less than three-fourths in value of the shares] of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

(b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

(iii) Transfer by a shareholder, in a business reorganization shares held by him in the predecessor co-operative bank, in consideration of allotment of shares in the successor co-operative bank. [Section 47(vicb)]

TEXT OF SECTION 47(vicb)

Any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank.

(iv) Transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company in consideration of demerger of the undertaking. [Section 47(vid)]

TEXT OF SECTION 47(vid)

Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking.

(v) Transfer by a shareholder, in a scheme of amalgamation, of shares in the amalgamating company in consideration of allotment to him of shares in the amalgamated Indian company. [Section 47(vii)]

TEXT OF SECTION 47(vii)

Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if—

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian company.

PROVISIONS IN BRIEF

Chargeability section		Income as per section	For the period applicable assessment years	Limit of exemption
56(2)(v)	2(24)(xiii)	01.03.2004 to 30.03.2006	2005-06, 2006-07	25,000/-
56(2)(vi)	2(24)(xiv)	01.04.2006 to 30.09.2009	2007-08, 2008-09, 2009-10, 2010-11	50,000/-
56(2)(vii)	2(24)(xv)	01.10.2009 onwards	2010-11 and onwards	50,000/-
56(2)(viia)	2(24)(xv)	01.06.2010 onwards	2011-12 and onwards	50,000/-

CBDT’s Circular No. 3/2019 dated 21.01.2019

Subject : Section 56 of The Income-Tax Act, 1961 - Income From Other Sources - Chargeable As - Applicability of Section 56(2)(viia) or Similar Provisions under Section 56(2) For issue of Shares By a Company

As mentioned in Circular No. 02/2019, a comprehensive review of the subject matter relating to interpretation of the term "receives" as used in, inter alia, section 56(2)(viia) of the Income-tax Act, 1961 (the Act) and similar provisions contained in section 56(2) of the Act has been made by the Board in view of pendency of this issue in various judicial forums and clarifications sought by stakeholders. Based on the above, the following position is hereby clarified.

2. Keeping in view the plain reading as well as the legislative intent of section 56(2)(viia) and similar provisions contained in section 56(2) of the Act, being anti-abuse in nature, it has been decided that the view, as was taken in Circular No. 10/2018 [subsequently withdrawn by Circular No. 02/2019] that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of section 56(2)(viia) or similar provisions contained in section 56(2) of the Act.

3. Therefore, any view expressed by the Board in Circular No. 10/2018 shall be considered to have never been expressed and accordingly, the said circular shall not be taken into account by any Income-tax authority in any proceedings under the Act.

CBDT’s Circular No. 02/2019 dated 04.01.2019

Reference is invited to the Circular No. 10/2018 dated 31.12.2018 on the captioned subject.

2. It has been brought to the notice of the Board that the matter relating to interpretation of the term "receives" used in section 56(2)(viia) of the Income-tax Act, 1961 (the Act) is subjudice in certain higher judicial forums. Further, representations have been received from stakeholders seeking clarification on other similar provisions in section 56 of the Act.

3. Accordingly, the matter has been reconsidered by the Board. Given the fact that the matter relating to interpretation of the term 'receives' used in section 56(2)(viia) of the Act is pending before judicial forums and stakeholders have sought clarifications on similar provisions in section 56 of the Act, the Board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued

4. In view of the above, the Circular No. 10/2018 dated 31st December, 2018 issued from file No. 173/616/2018-ITA-I is hereby withdrawn and the aid circular shall be considered to have been never issued.

5. A fresh comprehensive circular on the subject shall be issued in due course.

Under valuation of shares - The "fair market value" of shares acquired has to be determined by the taking the book values of the underlying assets and not their market values

Allowing the appeal of the assesse the Tribunal held that; on the plain reading of above Rule, it is revealed that while valuing the shares the book value of the assets and liabilities declared by the TEPL should be taken into consideration. There is no whisper under the provision of 11UA of the Rules to refer the fair market value of the land as taken by the Assessing Officer as applicable to the year under consideration. Therefore, we are of the view that the share price calculated by the assessee of TEPL for Rs. 5 per shares has been determined in accordance with the provision of Rule 11UA. (Related Assessment year 2014-15) - [Minda SM Tecnocast (P) Ltd. v. ACIT (2018) 170 ITD 12 (ITAT Delhi)]

There is no applicability of section 56(2)(viia) of the Act in case of buy back of shares by the Company from its existing shareholder

Hon’ble ITAT while deciding the issue of applicability of the provision of section 56(2) (viia) of the Act referred to the Memorandum explaining the said provision and observed that a combined reading of the said provision and the memorandum suggests that the provision has role to play only when the subject matter (i.e. shares) is of other company and not of the same company who receives it. Hon’ble ITAT categorically observed that own shares cannot become a property of the recipient company for the applicability of section 56(2)(viia) of the Act and cannot be brought to tax. It categorically held that if the present situation of buy back of shares were to be taxed under section 56(2)(viia) of the Act, the language of the section would have been completely different. It finally concluded that there is no applicability of section 56(2)(viia) of the Act to the facts under consideration and allowed the issue in favour of the Assessee and against the Revenue.

Section 56(2)(viia) is a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts. The primary condition for invoking Section 56(2)(viia) is that the asset gifted should become a “capital asset” and property in the hands of recipient. If the assessee-company has purchased shares under a buyback scheme and the said shares are extinguished by writing down the share capital, the shares do not become capital asset of the assessee - company and hence section 56(2)(viia) cannot be invoked in the hands of the assessee company.

The provisions of section 56(2)(viia) should be applicable only in cases where the receipt of shares become property in the hands of recipient and the shares shall become property of the recipient only if it is “shares of any other company”. In the instant case, the assessee herein has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital and hence the tests of “becoming property” and also “shares of any other company” fail in this case. Accordingly we are of the view that the tax authorities are not justified in invoking the provisions of section 56(2)(viia) for buyback of own shares. (Related Assessment Year 2014-15) - [Vora Financial Services (P) Ltd v. ACIT (2018) 194 TTJ 746 : 171 ITD 646 : (2019) 178 DTR 58 (ITAT Mumbai)]

Interest income from fixed deposits must be netted off against pre-operative expenses incurred in connection with setting up of its project where the fixed deposits are raised by the assessee solely with the intention of utilizing them in setting up its project.

The ITAT while deciding the issue of applicability of the provision of section 56(2) (viia) of the Act referred to the Memorandum explaining the said provision and observed that a combined reading of the said provision and the memorandum suggests that the provision has role to play only when the subject matter (i.e. shares) is of other company and not of the same company who receives it. Hon’ble ITAT categorically observed that own shares cannot become a property of the recipient company for the applicability of section 56(2)(viia) of the Act and cannot be brought to tax. It categorically held that if the present situation of buy back of shares were to be taxed under section 56(2)(viia) of the Act, the language of the section would have been completely different. It finally concluded that there is no applicability of section 56(2)(viia) of the Act to the facts under consideration and allowed the issue in favour of the Assessee and against the Revenue. - [Shristi Hotel (P) Ltd. v. DCIT - Date of Judgement : 18.07.2018 (ITAT Kolkata)]

[12] Share Premium in excess of fair market value to be taxed as income [Section 56(2)(viib)]

The Finance Act, 2012 has introduced a new clause (viib) to section 56(2) in the Act, according to which, with effect from April 1, 2013, that portion of consideration received for the issue of shares of a public unlisted company or private company to an Indian resident that is in excess of the fair market value of those shares, will be subject to tax in the hands of the companies under the head “income from other sources”.

Background

Section 56(2) lists income chargeable to income-tax under the head ‘Income from Other Sources’. Finance Act, 2012 inserts clause (viib), with effect from 01.04.2013 (assessment year 2013-14) to include ‘share premium’ received by a company in excess of its fair market value, as its income chargeable under the head ‘Income from other sources’. The clause is as follows:—

“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 fair 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.”

Finance Act, 2012 simultaneously amends the definition of ‘income’ in section 2(24) by inserting clause (xvi) to include the above consideration exceeding fair market value as ‘income’. With a view to safeguard the genuine investment by bonafide companies it is provided that this clause will not apply to:

(i) A venture capital undertaking receiving the consideration for issue of shares from a venture capital company or a venture capital fund; and

(ii) A company receiving the consideration from a class or clases of persons (‘Notified persons’) as may be notified by Central Government.

The exception given to venture capital companies and venture capital funds appears to stem from the fact that these entities are regulated under the SEBI (Alternative Investment Fund) Regulations, 2012 and hence there is some measure of scrutiny already in place over investments made by them.

The explanation to Category I AIF under SEBI (AIF) Regulations provides that “Venture Capital Company” or “Venture Capital Fund” will be eligible for tax “pass through” benefits as per Section 10(23FB) of the Income Tax Act, 1961.

As such this clause (viib) introduced by the amendment will mainly affect the participation of private equity funds or high net worth individuals or risk capital. The clause will also impact genuine start-ups and other Small and Medium Enterprises (SMEs) looking to grow rapidly particularly in the services sector, as they depend upon angel investors or private equity funds for their funding as they are thinly capitalized. Such funding is normally at a substantial premium as the underlying assets of the start up do not support a higher fair market value. Thus, such funding normally depends on future prospects of the company rather than the current value of the assets of the company. This provision could destroy the developing culture of angel investors and private equity funds; funding promising entrepreneurs, who have the skills or intellectual property but very few tangible assets. The provisions may therefore encourage companies to form Limited Liability Partnerships, to raise foreign exchange from angel investors residing outside India, subject to applicable FDI requirements or to raise funds from individual Indian resident investors by issuing convertible debentures of the company.

With a view to address concerns raised by the angel investors, exclusion has been granted from levy of such tax to certain notified class of persons by way of an enabling provision. Since the notification has not been issued by the Central Government in this regard, it is difficult to comment on the group of permitted class of investors that would be excluded. It is applicable from the assessment year 2013-14 as follows:—

(a) Recipient is a Private Limited Company.

(b) It receives consideration for issue of shares (preference shares or equity shares) from a resident.

If the above conditions are satisfied, the aggregate consideration received for such shares exceeds the fair market value of shares, shall be chargeable to tax as income from other sources in the hands of recipient Company.

Objective of the amendment to section 56(2)(viib)

The amendment has been classified under the heading “Measures to Prevent Generation and Circulation of Unaccounted Money”. Companies were issuing shares at a substantial premium to convert the unaccounted money without providing any valuation justifying the premium.

The amendment covers such unjustified premium and the excess is being taxed as income in the hands of the company. The provisions of section 56(2)(viib) are applicable in the context of shares issued by a closely held company to a resident shareholder (the said provisions do not apply to shares issued to non-residents).

The amendment of the Rules to allow DCF valuation for valuing the equity shares is a welcome change. This will avoid taxation which could have otherwise arisen if only Balance Sheet based book values were allowed to be taken for valuation purposes. Further, in the case of investment by nonresident shareholders, while clause (viib) of section 56(2) would not have applied, any indirect downstream investment (say, through a holding company into other operating companies) could have created tax exposures for the downstream operating company, had the DCF method not been allowed. Also, this would have conflicted with the FDI policy, where even down stream investment by an Indian company having FDI (and owned/ controlled by non-residents) is required to be made as per DCF valuation.

With the amendment to section 68 by the Budget, 2012, in respect of share capital and share premium, the insertion of section 56(2)(viib) to treat the amount in excess of FMV as income is not warranted. If we look through both the amendments to section 56(2)(viib) and section 68, it is short of a double jeopardy. The department should not resort to the new provisions of section 56(2)(viib) if the source of amount in the hands of shareholder/ applicant of shares is satisfactorily proved under section 68, as the new proviso to section 68 itself casts a onerous duty. The law makers have not envisaged a situation where an addition may be made under section 68 and if the shares are issued at price more than FMV, the Assessing Officer may also make deemed addition under section 56(2)(viib). It is suggested that a proviso should be added to section 56(2)(viib) to mitigate such hardship by providing that the addition under section 56(2)(viib) will not be made to the extent income is deemed under section 68. Moreover, the Hon’ble FM should also keep in mind that as a result of amendment by the Budget, 2012, the tax rate for amounts to be added under section 68 is now prescribed at highest marginal rate under section 115BBE with effect from the assessment year 2013-14.

Extract of object Memorandum of Finance Bill, 2012

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.

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.

Text of Section 56(2)(viib)

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 that exceeds the face value of such shares, the aggregate consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has underreported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.

PROVIDED that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or a specified fund”

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.

Explanation: For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such 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, on the date of issue of shares, 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,

(aa) “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992;

(ab) “trust” means a trust established under the Indian Trusts Act, 1882 or under any other law for the time being in force;’;

whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;

Applicability of clause (viib) to section 56(2)

Applicability of clause (viib) to section 56(2) applies to closely held company (a company in which public are not substantially interested) receiving any consideration for issue of share from any resident. The consideration for the issue of shares exceeds face value of the shares. The aggregate consideration received for issue of shares exceeds the Fair Market Value of the shares. Such excess over and above the Fair Market Value shall be taxable in the hands of Company under the head ‘Income from Other Sources’.

The section applies only if a closely held company issues shares at a premium. The reason for not applying this section to a widely held company is that SEBI monitors and approves the price at which shares are issued by a widely held company.

v This section does not apply where a closely held company issues shares to a Non-Resident at a premium in excess of FMV. The reason seems to be that non-resident will not like to convert his white money abroad in dollars into black money in India. Moreover, the money received from non-resident is regulated by FEMA and also by rules of RBI.

v With a view to safeguard the genuine investment by bonafide companies it is provided that this clause will not apply to:

(i) A venture capital undertaking receiving the consideration for issue of shares from a venture capital company or a venture capital fund; and

(ii) A company receiving the consideration from a class or classes of persons (‘Notified persons’) as may be notified by Central Government.

Upto Assessment year 2019-20 - Definition of venture capital fund only includes Category I AIFs

Section 56(2)(viib) of the ITA provides that where a company, not being a company in which the public are substantially interested receives any consideration, from a resident for issuance of shares, that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value (“FMV”) of the shares shall be charged to tax. However, this provision does not apply to consideration for issuance of shares received: (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Government in this behalf.

From Assessment year 2020-21 - Incentives for Category II Alternative Investment Fund (AIF)

With a view to facilitate venture capital undertakings to receive funds from Category II AIF, the Finance Act, 2019 with effect from Assessment year 2020-21 amended the said section to extend this exemption to fund received by venture capital undertakings from Category II AIF as well.

Alternate Investment Fund ("AIF")

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.

Further, certain exemptions from registration are provided under the AIF Regulations to family trusts set up for the benefit of 'relatives‘ as defined under Companies Act, 1956, employee welfare trusts or gratuity trusts set up for the benefit of employees, 'holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc.

Categories AIF

(a) Category I AIF:

o Venture capital funds (Including Angel Funds)

o SME Funds o Social Venture Funds

o Infrastructure funds

AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.

(b) Category II AIF

AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012.

Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.

(c) Category III AIF

AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.

Venture capital

Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors,investment banks and any other financial institutions.

Venture Capital Funds

Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities.

Venture capital is a type of equity financing that gives entrepreneurial or other small companies the ability to raise funding. Venture capital funds are private equity investment vehicles that seek to invest in firms that have high-risk/high-return profiles, based on a company's size, assets, and stage of product development.

v Venture capital funds manage the money of investors who want private equity stakes in startup and small- to medium-sized enterprises.

v Unlike mutual funds and hedge funds, venture capital funds focus on early-stage investment, and high-growth firms that are risky, and have long investment horizons.

v Venture capital funds are considered seed money or early-stage capital.

v Investors make a return when a portfolio company exits, either through an IPO, merger, or acquisition.

Compliance with the notification of exemption issued under section 56(2)(viib) [With effect from Assessment year 2020-21]

Notified companies (start-up companies) are exempted from taxability of consideration received for issue of shares, in excess of the FMV of such shares, subject to fulfilment of certain specified conditions.

With effect from Assessment year 2020-21, the said provision has been amended so that it provides that exemption will be withdrawn if the company fails to comply with any of the specified conditions and the income will be liable to tax in the year of such failure.

Determination of fair market value [Rule 11UA—Income Tax Rules]

Fair Market Value of the shares shall be determined in accordance with:

(i) Such method as prescribed under Rule 11U and Rule 11UA or

(ii) As may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares 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, whichever is higher.

Applicability of section 56(2)(viib)

PROVISIONS ILLUSTRATED

The following are the details of the shares issued by XYZ Ltd. Discuss the applicability of provisions of section 56(2)(viib) in the hands of the company:

S. No.	Face Value of Shares (in Rs.)	Fair Market Value (FVM) of shares (in Rs.)	Issue price of shares (in Rs.)	Applicability of section 56(2)(viib)
(i)	100	150	270	The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium [i.e. issue price exceeds the face value of shares]. The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib). Rs. 120 [i.e. Rs. 270 – Rs. 150] shall be treated as income in the hands of XYZ Ltd.
(ii)	100	120	110	The provisions of section 56(2)(viib) are attracted in this case since the shares are issued at a premium. However, no sum shall be chargeable to tax under the said section as the shares are issued at a price less than the FVM of shares.
(iii)	100	90	98	The provisions of section 56(2)(viib) are not attracted in this case since the shares are issued at a discount, though the issue price is greater than the FMV.
(iv)	100	90	110	The provisions of section 56(2)(viib) are not attracted in this case since the shares are issued at a premium. The excess of the issue price of the shares over the FMV would be taxable under section 56(2)(viib). Therefore, Rs. 20 (Rs. 110 – Rs. 90) shall be treated as income in the hands of XYZ Ltd.

Unquoted equity shares - Discounted cash flow method - Net asset value method - Option to adopt the method of valuation is with assessee - When no defect is found in valuation of shares arrived on basis of discounted cash flow method addition made by the Assessing Officer on basis of net asset value method was to be set aside

The assessee submitted valuation per equity share computed on the discounted cash flow method as per the certificate of Chartered Accountants wherein the value per shares was arrived at Rs. 54. 98 per share. The Assessing Officer did not accept said valuation and applied Net Asset Value method as per which value of share came to Rs. 26.69 per share. Applying the said value, the Assessing Officer made addition under Section 56(2)(vii)(b) of the Act. Tribunal held that the provisions of Section 56(2)(vii)(b) gives an options to assessee to adopt any of methods which can be compared with Net Asset Value Method and Assessing Officer shall adopt value whichever is higher. Accordingly the since discounted cash flow method is one of prescribed method and, moreover, Assessing Officer had not found any serious defect in facts and details used in determining fair market value under said method, impugned addition made by him was deleted. (Related Assessment year 2014-15) - [ACIT v. Safe Decore (P) Ltd. (2018) 169 ITD 328 : 165 DTR 339 (ITAT Jaipur)]

Provisions of section 56(2)(viib) couldn’t be invoked in the case of the assessee-co. because by virtue of introducing cash in the company by 'S' for allotment of equity shares with unrealistic premium the benefit had only passed on to her daughter 'V' and there was no scope in the Act to tax when cash or asset was transferred by a mother to her daughter. - [Vaani Estates (P) Ltd. v. ITO (2018) 98 taxmann.com 92 (ITAT Chennai)]

Provisions of section 56(2)(viib) can apply to excess consideration despite satisfactory explanation provided under section 68 of the Act

It was held that whether the amount received by the taxpayer in the form of share premium has been correctly offered to tax, is an issue to be examined with reference to section 56(2)(viib) of the Income-tax Act, 1961 (the Act) and if it is found that the share premium has not been correctly offered to tax as provided therein, the taxpayer has to be assessed in accordance with the said provision.

[WA No. 1297 of 2018 in WP (C) No. 3485/ 2018 - Kerala High Court ]

Market value of other business assets not relevant to determine FMV value of unlisted shares of a company

The assessee-company was deriving its income under the head 'rental and interest income'. It acquired shares of another entity at Rs. 5 per share. The value of such shares was derived on basis of book value of assets of issuing co. in accordance with Rule 11UA of the Income Tax Rules. Valuation Report from a CA firm was also produced in support of claim.

The Assessing Officer was of the view that the fair market value (FMV) of the land as per the circle rate should be taken into consideration while determining the value of the shares of issuing co. Accordingly, he substituted the book value of the land with FMV of the land as per the circle rate and determined the value of shares at Rs. 45.72 per share.

The Tribunal held in favour of assessee that Rule 11UA contains the provisions for determination of fair market value of a property, other than an immovable property. Rule 11UA provides that while valuing the shares the book value of the assets and liabilities declared by the issuing co. should be taken into consideration. There is no provision in Rule 11UA as to substitute the FMV of land with its book value while calculating the FMV of shares. Therefore, the share price calculated by the assessee of issuing co. at Rs. 5 per share had rightly been determined in accordance with the provisions of Rule 11UA.

[Minda S M Technocast (P) Ltd. v. ACIT (2018) 92 taxmann.com 29 (ITAT Delhi)]

Builder developer – Section applies only to individuals and HUF and also, held that it seeks to tax the transferee of the property and not the transferor
The assessee was a builder/developer following the project completion method of accounting. During relevant assessment year, the assessee offered certain net profit on sale of flats as its business income. Assessing Officer took a view value of flats sold was to be determined by applying provisions of section 56(2)(vii)(b)(ii). High Court held that said section applies to individuals and Hindu Undivided Family. It also held that it seeks to tax the transferee of the property for having given consideration less than the stamp value by ₹ 50,000/ or more for purchase of the property. (Related Assessment year 2009-10)

[CIT v. Neelkamal Realtors & Erectors India (P) Ltd. (2017) 246 Taxman 274 (Bom)]

[13] Income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b) [Section 56(2)(viii)]

As per section 56(2)(iii), any income by way of interest received on compensation or on enhanced compensation, as the case may be, shall be chargeable to tax under the head “Income from other sources”, and as per section 145B(1) such income shall be deemed to be the income of the year in which it is received, irrespective of the method of accounting followed by the assessee.

KEY NOTE

Up to assessment year 2010-11, such interest was taxable on due basis as per Supreme Court’s decision in the case of Rama Bai v. CIT (1990) 181 ITR 400 (SC).

Background

The statutory provisions for the income in the nature of ‘Interest received on compensation or on enhanced compensation’ were brought to Income Tax by the Finance Act, 2009. When these provisions were introduced, the Memorandum explaining the provisions of the Finance Bill, 2009 had this to say:

Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation

The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama Bai v. CIT (1990) 181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. This has caused undue hardship to taxpayers.

With a view to mitigate the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Further, it is proposed to insert clause (viii) in section 56(2) to provide that income by way of interest received on compensation or on enhanced compensation referred to in section 145A(2) shall be assessed as “income from other sources” in the year in which it is received. This amendment will take effect from 01.04.2010 and shall accordingly apply in relation to assessment year 1998-99 (wrongly mentioned in the Bill, as it appears; please read as 2010-11) and subsequent assessment years.’’

Text of Section 56(2)(viii)

[1][Income by way of interest received on compensation or on enhanced compensation referred to in [2] [sub-section (1) of section 145B(1);]

KEY NOTE

1. Inserted by the Finance (No. 2) Act, 2009, with effect from 01.04.2010.

2. Substituted for “clause (b) of section 145A” by the Finance Act, 2019 with retrospective effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.

Text of Section 145B(1)

145B. (1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.

Deduction from such Interest [Section 57(iv)]

In the case of above interest, which is taxable under other sources, a deduction of a sum equal to 50% of such income shall be allowed under section 57(iv) even if the actual expenditure is less than the said deduction. Apart from this no other deduction shall be allowed from such an income under any other clause of section 57.

Interest on enhanced compensation of land in case of cash system of accounting

Where the assessee is following cash system of accounting interest received on enhanced compensation under Land Acquisition Act, is taxable on receipt basis irrespective of pendency of appeal in higher Courts in respect of such compensation. - [CIT v. Smt. Burfi (2010) 46 DTR 354 (P&H)]

[14] Any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset [Section 56(2)(ix)]

Section 56(2)(ix) provides that any amount received as advance or otherwise in the course of negotiations for transfer of a capital asset which has been forfeited by the seller for non-compliance by the buyer with the clauses in the agreement would be taxable as income under head ‘Income from Other Sources’.

Text of Section 56(2)(ix)

[1] [any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,––

(a) such sum is forfeited; and

(b) the negotiations do not result in transfer of such capital asset.]

KEY NOTE

1. Inserted by the Finance (No. 2) Act, 2014, with effect from 01.04.2015.

Reasons for introduction of section 56(2)(ix) – change in tax treatment of amount forfeited

There were several problems and complexities in the old law and many a times it was also used to regulate the unaccounted money and therefore the new law has been introduced with Section 56(2)(ix) coming into force from Assessment Year 2015-16 onwards. A proviso for the same has also been inserted in Section 51 for the same so as to ensure that double taxation does not happen.

Background

The case of Travancore Rubber & Tea Co. Ltd. v. CIT (2000) 243 ITR 158 (SC) is quashed by Finance Act, 2014 with effect from assessment year 2015- 16 & onwards, in which it was held that, the advance money forfeited, by the seller of capital asset, shall be reduced from the cost of the assets and if the advance money forfeited, exceeds the cost of acquisition, then the excess shall be a Capital Receipt not taxable.

But, the same has now been annulled by the Finance Act, 2014; the amount forfeited would be taxed as income from other sources under section- 56, and subsequently no question arises for capital receipt not taxable.

Old law with respect to amount forfeited on sale of property

Earlier the amount forfeited on the sale of asset was reduced from the cost of acquisition of asset. As the cost of acquisition was reduced, the net gains on the sale of property would automatically increase.

The old and the New Provisions can be explained with the help of the following

PROVISIONS ILLUSTRATED

Mr. “A” purchased a property for Rs. 15,00,000 in 2003 and sold it to Mr. “B” in 2016 for Rs. 85,00,000 and received an advance of Rs. 5,00,000 for the same.

The deal did not materialise as Mr. “B” was unable to make the balance payment as a result of which Mr. “A” forfeited the entire amount. Mr. “B” now intends to resell this property to Mr. “C” for Rs. 95,00,000 in 2018.

Tax treatment under new law

Tax on amount forfeited in 2016:—Advance forfeited of Rs. 5,00,000 in 2014 would be taxable under head “Income from Other Sources” in the year of receipt.

Tax on Sale in 2018:—Long Term Capital Gains = Sale Price (-) Indexed Cost of Acquisition

Tax treatment under old law

Under Section 51, the amount forfeited of Rs. 5,00,000 was required to be subtracted from the cost of acquisition i.e. Rs. 15,00,000. Therefore, the net cost of acquisition would be Rs. 10,00,000 (15,00,000 – 5,00,000). This cost of acquisition would be indexed and then subtracted from the sale price to arrive at the Long Term Capital Gains.

Under the Old Law – no tax was required to be paid in the year in which the advance was forfeited and is only liable to be paid in the year of actual sale.

However, under the New Law – tax would be required to be paid both in the year of forfeiture as well as in the year of Sale.

Tax treatment in the hands of the buyer

(a) The amount paid by the Buyer which has been forfeited does not amount to relinquishment of a right and therefore would not be allowed to be claimed as a Capital Loss.

(b) If the Seller fails to honour the deal and pays back the Buyer the advance as well as some amount because of failure to dishonor the deal, this amount would be treated as Capital Gain because it amounts to relinquishment of a right by a buyer.

For the purpose of this section, Capital Asset will be taken as defined in section 2(14).

Accordingly, where any capital asset was on any previous occasion, the subject-matter of negotiation for its transfer and any advance money or other money received is forfeited by the assessee, then the amount so forfeited shall be taxable as Income from other sources under section 56(2)(ix).

Here, other money received includes:

(a) any earnest money received for guaranteeing the performance of the contract and not forming part of sales consideration.

(b) any advance amount received under an agreement to sell & subsequently purchaser failed to pay balance amount as per agreement.

Taxability of advance for transfer of a capital asset in brief [Section 56(2)(ix)]

v Taxability of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset.

v Such sum shall be chargeable to income-tax under the head ‘income from other sources’ if such sum is forfeited and the negotiation do not result in transfer of such capital asset.

In order to avoid double taxation of the advance received and retained

With effect from assessment year 2015-16, Section 51 provides that where any sum of money received as an advance or otherwise in the course of negotiation for transfer of a capital asset has been included in the total income of the assessee for any previous year, in accordance with the provision of clause (ix) of section 56(2), such amount shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

PROVISIONS ILLUSTRATED - 1

An Agreement for Sale of property on 29.11.2017 for a total consideration of Rs. 70,00,000/- to be paid on or before 05.03.2018 and, towards earnest money, an amount of Rs. 4,00,000/- was paid on 29.11.2017 and another Rs. 3,00,000/- on 30.11.2017, that means, altogether Rs. 7,00,000/- was paid, being 10% of the total sale consideration. The purchaser, however, could not pay the balance amount of Rs. 63,00,000/- before 05.03.2018, consequently, the sale deed could not be executed. Seller, therefore, did not return the earnest money to the purchaser. The same property was purchased by the assessee in September, 2013 for Rs. 50,00,000/-. Compute taxable income for assessment year 2018-19.

SOLUTION

In the present case, 10% of advance money forfeited i.e. Rs. 7,00,000/- will be taxable as “Income from other sources” under section 56(2)(ix) for the assessment year 2018-19.

PROVISIONS ILLUSTRATED - 2

Mr. X purchased an asset on 01.01.2010 for Rs.5, 00,000. He entered into an agreement to sell the asset on 31.07.2017 and received Rs. 7,50,000 as earnest money. The sale did not materialize and he forfeited Rs. 7,50,000 on 15.08.2017.

SOLUTION

Now as per section 51, the forfeited amount on capital asset will be taxed as income from other sources. Here the above mentioned case was nullified by the amendment made in Finance Act, 2014.

v The excess amount of money forfeited over and above the cost of acquisition which is Capital Receipt not being taxed as upheld in judgment of Supreme Court in Travancore Rubber & Tea Co. Ltd. v. CIT (2000) 243 ITR 158 (SC) is now taxable in the Financial year of receipt of money of advance which pertains to forfeited amount.

v Where in case the cost of acquisition of asset is more than the forfeited amount of money, then the said amount is taxable in the year of receipt of forfeited money under the head “Income from other sources” as against existing provision which leads to delay in taxation of forfeited amount, as the same is taxable in the year of sale of capital asset.

[15] Money/Property received without consideration or inadequate consideration on or after 01.04.2017 [Section 56(2)(x)]

Background

Under the provisions of section 56(2)(vii), any sum of money or any property which is received without consideration or for inadequate consideration (in excess of the specified limit of Rs. 50,000) by an individual or Hindu undivided family is chargeable to income-tax in the hands of the resident under the head “Income from other sources” subject to certain exceptions. Further, receipt of certain shares by a firm or a company in which the public are not substantially interested is also chargeable to income-tax in case such receipt is in excess of Rs. 50,000 and is received without consideration or for inadequate consideration. The definition of property for the purpose of this section includes immovable property, jewellery, shares, paintings, etc. These anti-abuse provisions are currently applicable only in case of individual or HUF and firm or company in certain cases. Therefore, receipt of sum of money or property without consideration or for inadequate consideration does not attract these anti-abuse provisions in cases of other assessees.

In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, the Finance Act, 2017, inserted a clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the 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 the recipient under the head “Income from other sources”.

Text of Section 56(2)(x)

[1] [where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

(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,—

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

[2][(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent of the consideration:]

Provided that where the date of 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 agreement may be taken for the purposes of this sub-clause :

Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of agreement for transfer of such immovable property:

Provided also that where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of this sub-clause as they apply for valuation of capital asset under those sections;

(c) any property, other than immovable property,—

(A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(B) 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 :

Provided that 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 [3] [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.

Explanation.—For the purposes of this clause, the expressions "assessable", "fair market value", "jewellery", "property", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).]

KEY NOTE

1. Inserted by Finance Act, 2017, with effect from 01.04.2017.

2. Substituted for existing item (B) of sub-clause (x) of sub-section (2) of Section 56 by Finance Act, 2018, with effect from 01.04.2019.

3. Inserted by Finance Act, 2018, with effect from 01.04.2018.

Clause (x) is inserted in section 56(2) to provide that the following receipts during a previous year would be taxable as income in the hands of any person, under the head ‘Income from Other Sources’ subject to the other provisions relating thereto, made in the clause:

(a) Any sum of money without consideration, in aggregate exceeding Rs. 50,000 during the financial year; or Any immovable property without consideration, the stamp duty value of which exceeds 50,000; or

(b) Any immovable property for a consideration which is less than stamp duty value by an amount exceeding Rs. 50,000; or

(c) Any movable property (as defined and specified) without consideration where aggregate fair market value whereof exceeds Rs. 50,000; or

(d) Any movable property (as defined and specified) for consideration which is less than fair market value by an amount exceeding Rs. 50,000.

Analysis of the proposed clause (x) to section 56(2) - Scope of taxation of gifts as income from other sources expanded for all taxpayers

The inserted clause (x) to section 56(2)(x) is a comprehensive provision that incorporates:

(i) the existing provisions of section 56(2)(vii) (which applied to individuals and HUFs);

(ii) the existing provisions of section 56(2)(viia) (which applied to closely held companies and firms); and

(iii) certain additional features.

Scope of taxation of gifts as income from other sources expanded for all taxpayers

Unlike the provisions of section 56(2)(vii) and section 56(2)(viia), which applied only to specified categories of persons referred to therein, the inserted clause (x) will apply to all persons. Thus, all individuals, HUFs, companies (regardless of whether they are companies in which the public are substantially interested or individuals and artificial judicial persons will be covered by this provision.

Taxation of money received without consideration [Section 56(2)(x)(a)]

If any sum of money is received by any person without consideration, the aggregate in whole year if exceeds Rs. 50,000/-. - Then, whole of the aggregate value of money received will be considered as “Income from Other Sources”.

Taxation of immovable property received [Section 56(2)(x)(b)]

Section 56(2)(x)(b) inter alia, provides that:

(a) A person receives an immovable property from any person.

(b) Stamp duty value is more than consideration.

Ø If these conditions are satisfied, the difference between consideration and stamp duty value is taxable as income in the hands of recipient under section 56(2)(x) under the head “Income from other sources”.

Here property term include the following :

v Land and building (immovable)

v Shares and securities (Securities Include debenture, bonds etc).

v Jewellery (Jewellery includes ornaments made of gold, silver, platinum or any other precious metal whether or not attach any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel .Precious or semi-precious stones also include in the term of jewelry, whether it is set or not in any furniture, utensil or other article or worked or sewn into any wearing apparel)

v Archeological collection

v Drawings

v Paintings

v Sculpture

v Any work of art

v Bullion (Gold And silver in their purest form)

KEY NOTE

Only single transaction is considered for calculating threshold limit of Rs. 50,000/- In the case of immovable property received as a gift. Where as in other cases (cash or movable property) all transactions in financial year are taken into consideration for calculating threshold limit of Rs. 50,000/-

Exceptions to Section 56(2)(x)

Section 56(2)(x) shall not apply to any sum of money or any property received from following [Fourth Proviso to Section 56(2)(x)]

(i) From any relative

(ii) On the occasion of the marriage of the individual

Gift received by any person (without limit) on the occasion of the marriage is tax free in the hand of individual (recipient).

For example:

If your friend or relative or any other person gift you on your marriage than nothing will be taxable.

(iii) Under a will or by way of inheritance

Any sum of money or any property is received under a will or by way of inheritance it is totally exempt from Gift Tax. So if any person gets a Property worth Rs 50,00,000 and some other things worth Rs 50, 00,000 through inheritance, than he will not have to pay any tax on such gift received.

(iv) In contemplation of death of the payer or donor, as the case may be

Any sum of money or any property is received in contemplation of death is also exempt from gift tax.

A gift received in contemplation of death means when men, who is ill and expects to die shortly because of his illness, give his movable property possession to another to keep as a gift in case if he will die because of that illness.

Such a gift may be resumed by the giver; and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made.

(v) From any local authority as defined in the Explanation to clause (20) of section 10

There is no tax liability occur when any amount received from local authority trust or university as a gift hence recipient is not liable to pay tax on such gift.

(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 subclause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10

(ix) by way of transaction not regarded as transfer under clause (i) or 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.

KEY NOTE

Section 47(i) : distribution of capital assets on the total or partial partition of a HUF

Section 47(iv) : transfer of a Capital assets by a company to its subsidiary company

Section 47(v) : transfer of a Capital assets by a subsidiary Company to the holding company.

Section 47(vi) : transfer during amalgamation… where amalgamated Company is an Indian Company

Section 47(via) : transfer during amalgamation where amalgamated company is foreign company.

Section 47(viaa) : transfer during amalgamation of a banking company with a banking company.

Section 47(vib) : transfer, in a demerger, of a Capital assets by the demerged company to the resulting company, if the resulting company. is an Indian company.

Section 47(vic) : transfer in a demerger, of a Capital assets, being a share(s) held in an Indian company., by the demerged foreign company.

Section 47(vica) : any transfer in a business reorganization, of a Capital assets by the predecessor co-operative bank to the successor co-operative bank

Section 47(vicb) : any transfer by a shareholder, in a business reorganization, of a capital asset being a share or shares held by him in the predecessor co-operative bank

Section 47(vid) : any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking

Section 47(vii) : any transfer by a shareholder, in a scheme of amalgamation, of a Capital assets being a share or shares held by him in the amalgamating company

No adjustment where the variation between stamp duty value and the sale consideration is not more than 5% of the sale consideration [With effect from assessment year 2019-20]

Where any person receives any immovable property for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

(i) the amount of Rs. 50,000; or

(ii) the amount of 5% of the consideration

Ø shall be charged to tax under the head ”Income from other sources”

In other words, Section 56(2)(x) applicable only if stamp duty value exceeds 105% of consideration - From the assessment year 2019-20, section 56(2)(x) will be applicable if the following conditions are satisfied —

(i) A person receives an immovable property from any person.

(ii) Stamp duty value exceeds 105 per cent of consideration.

(iii) Difference between consideration and stamp duty value is more than Rs. 50,000.

From the assessment year 2019-20, the difference between stamp duty value and consideration is taxable under the head “Income from other sources” only if the above conditions are satisfied.

PROVISIONS ILLUSTRATED – 1:—

S. No.	Nature of asset	Consideration type	Existing Taxable Value	Taxable value for Financial Year 2019-20
1	Money	Without Consideration	The whole amount if it exceeds Rs. 50,000	Same
2	Movable property	Without Consideration	FMV (Fair market value) of the property if it exceeds Rs. 50,000	Same
3	Movable property	Inadequate Consideration	Difference between FMV and actual consideration if such difference exceeds Rs. 50,000	Same
4	Immovable property	Without Consideration	Stamp value of the property if it exceeds Rs. 50,000	Same
5	Immovable property	Inadequate Consideration	Difference between stamp value and actual consideration if such difference exceeds Rs. 50,000	Difference between stamp value and actual consideration if such difference exceeds Rs 50,000 or 5% of consideration whichever is higher

PROVISIONS ILLUSTRATED – 2:—

Say Mr. X sold a flat to Mr. Y for a consideration of Rs. 80 Lacs. However at the time of registration, value adopted by stamp valuation authority is Rs. 82 Lacs. Then in such a case:

For Mr. X: Full value of consideration (i.e. sale price) will be deemed to be Rs. 80 Lacs only. Since stamp duty value does not exceed 105% of consideration (i.e. 105% of Rs. 80 Lacs = 84 Lacs).

For Mr. Y : Rs. 0 (NIL) will be treated as Income from other sources (Since difference of Rs. 2 Lac is less than Rs. 4 Lacs (i.e. Rs. 50,000 or 5% of Rs. 80 lacs = 4 Lacs, whichever is higher).

PROVISIONS ILLUSTRATED – 3:—

Say Mr. X sold a flat to Mr. Y for a consideration of Rs. 80 Lacs. However at the time of registration, value adopted by stamp valuation authority is Rs. 90 Lacs. Then in such a case:

For Mr. X: Full value of consideration (i.e. sale price) will be deemed to be Rs. 90 Lacs only. Since stamp duty value is > 105% of consideration.

For Mr. Y : Rs. 10 Lacs will be treated as Income from other sources (Since difference of Rs. 10 Lac is greater than Rs. 4 Lacs (i.e. Rs. 50,000 or 5% of Rs. 80 Lacs = 4 Lacs, whichever is higher).

Section 56(2)(x) not applicable in transactions between holding and 100% subsidiary companies

Fourth proviso to section 56(2)(x) has been amended with effect from the assessment year 2018-19. After this amendment, section 56(2)(x) will not be applicable if a capital asset is received by a holding company from its 100 per cent subsidiary company (and vice versa) provided the transferee-company is an Indian company.

Illegally encroached land is not a capital asset; profit arising on its sale is taxable as income from other source

Property illegally encroached by assessee would not be considered as ‘Capital asset’ under section 2(14) and, consequently, gain arising from transfer of such property could not be assessed as capital gain but as income from other sources. - [ITO v. Bhagwant T. Fatnani (2015) 58 taxmann.com 227 (ITAT Mumbai)]

[16] Taxability of compensation in connection to business or employment [Section 56(2)(xi)]

Section 56(2)(xi) provides that any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto, shall be chargeable to income tax under the head "Income from other sources".

Text to Section 56(2)(xi)

[1][any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.]

KEY NOTE

1. Inserted by Finance Act, 2018, with effect from 01.04.2019.

The amendment by making all compensations (whether capital or revenue in nature) received on termination of contract subject to tax has remove the ambiguity on whether any compensation received on the termination of a contract is taxable under the Income Tax Act, considering that it was arguable to treat such compensation as capital receipt.

Head	Section	Particulars
Business Income	28(ii)(e)	any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, as the case may be, of any contract relating to his business shall be chargeable to tax under the head “Profits and gains of business or profession”.
Income from Other Sources	56(2)(xi)	any compensation due or received by any person, by whatever name called, at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto shall be chargeable to tax under the head “Income from Other Sources”.

INCOME TAX

Thursday, 8 August 2019

Income from other sources - a residuary head of income under the Income-tax Act, 1961

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