Transactions in Movable and Immovable Properties And Anti-abuse Provision Section 56(2)(x), Income Tax Act, 1961

Introduction

The legislature, from time to time has introduced various anti abuse provisions in order to avoid tax evasion and revenue leakage. Section 56(2)(x) of the Act is one of the special deeming provisions which is introduced to avoid laundering of unaccounted income. The Finance Act, 2017 has widen the scope of section 56 by inserting the section 56(2)(x) of the Act. The Hon’ble Finance Minister in his budget for the Finance Bill, 2017 proposed to introduce a section 56(2)(x) of the Act to bring any money, immovable property or specified movable property valued more than fifty thousand under a tax regime if it is received by any person without consideration or with an inadequate consideration.

Before insertion of section 56(2)(x) the Act, the Income Tax Act, 1961 provided for certain special deeming provisions to tax such transactions entered by the assessee for the value which is less than the stamp duty value/ market value. The said special provisions were introduced mainly to avoid tax evasion and money laundering. The Finance Act, 2002 inserted section 50C of the Act which provides that with effect from 01.04.2003, the transfer of capital asset being land or building or both for a consideration, which is less than the Stamp duty value of such capital assets is taxable under the deeming provisions of section 50C of the Tax. As a result, the stamp duty value of such immovable property is deemed to be the full value of consideration for the purpose of computation of Capital Gains under section 48 in the hands of transferor.

While interpreting the said provisions, various courts have held that the same cannot be attracted to the transactions where an agreement is not registered and the stamp duty value is not determined by the stamp valuation authority. To overcome such situation and to prevent the leakage of revenue, an amendment was proposed vide Finance Act, 2009 to include the transactions in the purview of this section where the amount of stamp duty value is yet to be assessed which was applicable from 1st October, 2009 and shall accordingly apply in relation to transactions undertaken on or after such date. Since, the said provision was not applicable to the assets held as a stock in trade, the Finance Act, 2013 introduced another special provision of section 43CA of the Act to determine the full value of consideration for transfer of an assets other than capital assets for computing business income in the hands of a transferor. The said provisions are mainly attracted in the hands of builders/developers who sold the property held as a stock in trade for the consideration less than the stamp duty value. Thus, the builders and developers are also liable to pay additional tax as per the provisions of section 43CA of the Act the Act if the stamp duty valuation of the property is higher than the consideration received / accrued on the transfer of such immovable property.

Sections 50C and 43CA of the Act are applicable in the case of transferor of an asset and the same do not have any implications in the hands of transferee. Thus, to give similar effect in the case of transferee and to maintain parity under the statute, the legislature introduced section 56(2)(vii) of the Act vide Finance Act 2009 through which any sum of money or any property which is received without consideration or for inadequate consideration exceeding fifty thousand by an Individual or HUF after 1st October, 2009 but before 1st April, 2017 was chargeable to tax under the head “Income from other sources” subject to certain exceptions. Further, the scope of the said section was expanded by introduction of section 56(2)(viia) of the Act through the Finance Act, 2010 with effect from 1st June, 2010. As per section 56(2)(via), any receipt of certain shares by a firm or a Private Limited company is chargeable to income-tax under the head Income from Other Sources if such receipt is in excess of fifty thousand or it is received without consideration or for an inadequate consideration.

Subsequently, the Finance Act, 2012 introduced another section 56(2)(viib) which is applicable in the case of a private limited company. As per this section, if a company received any consideration for issue of shares exceeds the face value of such shares, then, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be taxed under the head Income from Other Sources.

The aforesaid anti-abuse provisions were applicable only in the case of individual or HUF and firm or company in certain cases. Thus, the receipt of sum of money or property without consideration or for inadequate consideration did not attract these anti-abuse provisions in cases of other assessees. Therefore, in order to prevent such practice, a new clause (x) in sub- section (2) of section 56 has been introduced to tax the such receipts in the hands of the recipient under the head “Income from other sources”. The provisions of section 56(2)(x) of the Act came into operation with effect from 1st April, 2017 as per which any money or a property exceeding the value of fifty thousand rupees received by any person on or after 1st April, 2017 shall be chargeable to tax as “Income from Other Sources”.

Further, certain exceptions are also provided to this section by keeping the receipts by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47 of the Act out of the purview of tax regime. Consequential amendment has also been proposed in section 49 of the Act to determine the cost of acquisition.

Further, in the background of COVID-19 Pandemic, certain relaxation provisions were introduced in Finance Act, 2022 giving retrospective effect from 1st April, 2020. These provisions shall apply from the Assessment Year 2020-21. As per these provisions, the tax benefit has been provided to the assesses on the amount received for medical treatment and on account of death due to COVID-19 Pandemic. The Finance Ministry has released a press statement dated 25.06.2021 to announce that income-tax shall not be charged on the amount received by a taxpayer for medical treatment from employer or from any person for treatment of COVID-19 during FY 2019- 20 and subsequent years. Further, in order to provide relief to the family members of such taxpayer, exemption shall be provided to ex- gratia payment received by the family members of a person from the employer of such person or from other person on the death of the person on account of COVID-19 during FY 2019-20 and subsequent years. Also, it was stated that the exemption shall be allowed without any limit for the amount received from the employer and limited to Rs.10 lakh in aggregate for the amount received from any other persons. This is a good step taken by the government to provide the relief to the assessees for the difficulties faced during Covid-19 Pandemic.

Scope of section 56(2)(x) of the Act:

The provisions of section 56(2)(x) of the Act are anti-abuse provisions which are mainly brought into statute to avoid money laundering. This section applies to all the assesses who receive any sum of money or movable/ immovable property value of which in excess of fifty thousand without consideration or for inadequate consideration. The scope of section 56(2)(x) of the Act is briefly discussed as under:

  1. If any person receives a sum of money without consideration or for inadequate consideration which is valued in excess of fifty thousand then, such sum shall be treated as “Income from Other Sources”.
  2. If any person receives any immovable property
    1. without consideration and the stamp duty of which exceeds fifty thousand then, the value of stamp duty of such property shall be treated as “Income from Other Sources”.
    2. For a consideration less than stamp duty value of the property then, the difference between stamp duty value and consideration shall be treated as “Income from Other Sources” if such amount is more than fifty thousand or the amount equal to ten percent of consideration, whichever is higher. Vide Finance Act, 2021, this difference has been enhanced from five percent to ten percent in case of such property and up to twenty percent in a case where the property is being a residential unit.
    3. The valuation of stamp duty can be done in accordance with the provision of section 50C of the Act and the assessee can challenge the same as per such section. This provision can be attracted especially in case of a buyer who purchased a property for a consideration less than stamp duty value.
    4. The cost of acquisition of the property shall be determined as per section 49(4) of the Act.
  3. If any person receives any movable property
    1. Without consideration and fair market value of which exceeds fifty thousand then, the entire fair market value of such property is treated as “Income from Other Source”.
    2. For a consideration less than fair market value and the difference between fair market value and the consideration is more than fifty thousand then, the aggregate fair market value as exceeds such consideration shall be treated as “Income from Other Sources”.
    3. The fair market value of the property shall be determined in accordance with the method under rule 11U & 11UA of the Income Tax Rules, 1962
  4. Section 56(2)(x) of the Act excludes any sum of money or any property from taxability if it is received –
    • From any relative; or
    • On the occasion of marriage; or
    • Under a will or by way of
    • inheritance; or
    • in contemplation of death of the payer or donor, as the case may be; or
    • From any local authority as defined in the Explanation to clause (20) of section 10; or
    • 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
    • From or by any trust or institution registered under section 12A or section 12AA or section 12AB; or
    • 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
    • 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) or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf) of section 47; or
    • 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) or clause (viiac) or clause (viiad) or clause (viiae) or clause (viiaf) of section 47; or
    • From an individual by a trust created or established solely for the benefit of relative of the individual;
    • From such class of persons and subject to such conditions, as may be prescribed.
  5. The Finance Act, 2022 has inserted further exceptions for application of section 56(2)(x) of the Act to give relaxation to the assessee on account of COVID-19 Pandemic which provides that if any sum of money or property received –
    • by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, for any illness related to COVID-19 subject to such conditions, as the Central Government may, by notification in the Official Gazette, specify in this behalf;
    • by a member of the family of a deceased person—
      • from the employer of the deceased person; or
      • from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees,
      • where the cause of death of such person is illness related to COVID-19 and the payment is received within twelve months from the date of death of such person; and subject to such other conditions, as the Central Government may, by notification in the Official Gazette, specify in this
    • For this provision, the meaning of Family in relation to an individual shall have the same meaning as provided under Explanation 1 to clause (5) of section 10 of the Act.
  6. The Finance Act, 2022 has introduced a new proviso which provides that any amount of money or a property is received by any person referred to in sub- section (3) of section 13 of the Act then, the same shall not be covered under the exception provided in section 56(2)(x) of the Act. This proviso shall be applicable with effect from 1st April, 2023.
  7. For the purpose of section 56(2)(x) of the Act, the expressions “assessable”, “fair market value”, “jewellery”, “relative” and “stamp duty value” shall have the same meanings as provided in Explanation to clause (vii) of section 56(2) of the Act. Further, the expression “property” shall have the same meaning as provided in clause (d) of the Explanation to clause (vii) of section 56(2) of the Act and the same shall include virtual digital asset.

Certain important issues for consideration –

⮚ Whether the provisions of section 56(2)(x) of the Act are attracted to the issuance of bonus shares

The similar issue had come up before the Mumbai ITAT in the case of Sudhir Menon HUF vs. ACIT [2014] 148 ITD 260 (Mumbai-Tribunal) wherein the Hon’ble ITAT has held that when the additional shares of a company are allotted on pro rata basis to the shareholders including assessee based on their existing shareholding, then, there is no scope for any property being received on said allotment of shares and, consequently, the provisions of section 56(2)(vii)(c) can not apply to difference in book value and face value of additional shares. It is important to note that provisions of section 56(2)(vii) and 56(2)(x) of the Act are coterminous. Therefore, there is no question of applicability of section 56(2)(x) of the Act to the issuance of bonus shares when the provisions of section 56(2)(vii) of the Act are not attracted for the same as held by the Mumbai ITAT in this case. The ITAT discussed the legislative intent to introduce section 56(2)(vii) of the Act and held that the provisions of section 56(2)(vii) (c) of the Act would not attract to the genuine transactions of issuance of the shares to the existing shareholders.

The Hon’ble Delhi ITAT in the case of DCIT vs. Smt. Mamta Bhandari [ITA 5681/Del/2016] has uphold the above ratio laid down by the Mumbai ITAT

Further, the above proposition has been confirmed by the Hon’ble Mumbai ITAT in the case of ITO vs. Rajeev Ratanlal Tulshyan [2022] 193 ITD 860 (Mumbai – Trib.)

⮚ The amendment introduced to section 56(2)(x)(b)(B) of the Act through the Finance Act, 2020 with effect from 01.04.2021 excluded the transaction out of the purview of section 56(2)(x) of the Act if the difference between the stamp duty value and actual consideration of the property is not more than 10% of the total consideration. Whether this amendment should be applied prospectively or retrospectively –

The identical amendment has been introduced vide Finance Act, 2018 by inserting third proviso to sub-section (1) of section 50C of the Act which provides that from assessment year 2019-20 this section will not apply if the stamp duty valuation does not exceed 5% of the consideration received or accruing as a result of the transfer of capital asset. Subsequently Finance Act 2020 increased the limit to 10%. The question arose before the Hon’ble Mumbai ITAT in the case of Maria Fernandes Cheryl vs. ITO ITA No. 4850/Mum/2019 order dated 5.01.2021 that whether the said proviso applies prospectively or retrospectively. The Hon’ble ITAT held that since the said proviso is beneficial to the assessee, the same should be applied retrospectively. The relevant observation of the ITAT is as under:

“Once legislature very graciously accepts, by introducing the legal amendments in question, that there were lacunas in the provisions of Section 50C in the sense that even in the cases of genuine variations between the stated consideration and the stamp duty valuation, anti-avoidance provisions under section 50C could be pressed into service, and thus remedied the law, there is no escape from holding that these amendments are effective with effect from the date on which the related provision, i.e., Section 50C, itself was introduced. These amendments are thus held to be retrospective in effect. In our considered view, therefore, the provisions of the third proviso to Section 50C(1), as they stand now, must be held to be effective with effect from 1st April 2003. We order accordingly.”

The similar issue has also been dealt by Mumbai ITAT in the case of Joseph Mudaliar vs. CIT [2021] 191 ITD 719 (Mumbai – Trib.)[14-09-2021]

wherein it has been held that section 50C and section 56(2)(vii)(b)(ii) are identical provisions. The only difference is section 50C is applicable to the seller of an immovable property, whereas, the later provision is applicable to the buyer of the property. Therefore, a benefit given to a seller of the property in respect of marginal variation cannot be denied to the buyer of the property, since, they stand on the same footing. There cannot be two different fair market value in respect of the very same property, i.e. one at the hands of the seller and the other at the hands of the buyer. Thus, if the difference in valuation between the value determined by the stamp duty authority and the declared sale consideration is less than 10%, no addition can be made under section 56(2)(vii)(b)(ii) of the Act in view of the third proviso to section 50C and 56(2)(x) of the Act. The ITAT further, held that amendment made in section 50C(1) by inserting third proviso by Finance Act, 2018, with effect from 01.04.2019 is curative in nature and thus, the same would apply retrospectively.

Considering the same analogy, the amendment proposed in section 56(2)(x) of the Act vide Finance Act, 2020 to section 56(2)(x)(b)(B) shall have retrospective effect from 1st April, 2017.

⮚ Whether section 56(2)(x) of the Act isattracted to buy back of shares-

The Hon’ble Mumbai ITAT has decided this issue in the case of Vora Financial Services (P.) Ltd. vs. ACIT [ITA 532/Mum/2018]/[2018] 171 ITD646 (Mumbai) wherein it has been held that the

provisions of section 56(2)(via) of the Act should be attracted 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 present case, the assessee has purchased its own shares under buyback scheme and the same has been extinguished by reducing the capital. Hence, the tests of “becoming property” and also “shares of any other company” fail in this case. Therefore, the tax authorities are not justified in invoking the provisions of sec. 56(2)(viia) for buyback of own shares. To arrive at this conclusion, the ITAT referred to the memorandum explaining the provisions of Finance Bill, 2010 wherein the object behind the insertion of section 56(2)(vii) of the Act is provided as under:

“The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property so as to provide that section 56(2)(vii) will have application to the “property” which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.”

It is important to note that even the intention for introduction of section 56(2)(x) of the Act is to avoid tax evasion and money laundering. Therefore, the genuine transaction entered by the assessee cannot be taxed under the said section. Considering the ratio laid down by Mumbai ITAT in the case of Vora Financial Services (P.) Ltd. (supra), the provisions of section 56(2)(x) of the Act should not be attracted to the buy-back of the shares.

⮚ In a case where Mr A entered into an agreement on 31.03.2017 to purchase the immovable property from Mr.B for total consideration of Rs. 1cr and the registration of the same was done on subsequent date, whether the provision inserted in section 56(2)(x)(b)(B) through the Finance Act, 2018 with effect from 01.04.2019 imposing the taxes on difference between stamp duty value and consideration would be applied to the present transaction which is entered in the A.Y. 2017-18

The Hon’ble Mumbai ITAT in the case of Rajib Rathindra Saha vs. ITO [ITA 7352/Mum/2019], [2022] 139 taxmann.com 211 (Mumbai – Trib.) / [2022] 95 ITR(T) 216 (Mumbai – Trib.) [21-02- 2022], has considered this issue in light of the provisions of section 56(2)(vii)(b)(ii) as amended by Finance Act, 2013 came into operation with effect from 01.04.2014. In this case, the assessee had purchased a flat on 16.04.2010 for total consideration of Rs.68,45,550/- for which earnest money was paid on 31.03.2013. The stamp duty for execution of the agreement was paid by the assessee on 18-3-2013 and the agreement was registered on 02.04.2014 and on the date of registration, the stamp duty value of the property was Rs. 87,02,007/. The AO, during the assessment proceedings for the A.Y. 2014-15, held that as the agreement was executed in the year under appeal, the provisions of section 56(2)(vii)(b)(ii) of the Act as amended by the Finance Act 2013 with effect from 01.04.2014 would be applicable.

Thus, the AO made the addition of the difference between the consideration paid by the assessee and stamp duty value i.e. Rs.18,53,457/-. The issue travelled before the ITAT. Before ITAT, the assessee contended that since the assessee had paid stamp duty on 18.03.2013 and had executed the agreement on 31.03.2013 i.e. in the period relevant to the Assessment Year 2013-14. Therefore, the amended provisions of section 56(2)(vii)(b)(ii) of the Act would not apply. Merely for the reason that the agreement was registered on 02.04.2014 i.e. during the year under consideration, the amended provisions would not get attracted. The ITAT observed that the sub-clause (b) to section 56(2)(vii) was amended by the Finance Act, 2013 w.e.f. 01.04.2014 i.e. from Assessment Year 2014-15. As per the amended provisions, where an individual or HUF receives in any previous year any immovable property for a consideration which is less than stamp duty value of such property, the AO can made addition of the difference between the stamp duty value and the consideration paid.

Prior to amendment by the Finance Act, 2013 there was no such provision under section 56(2)(vii)(b) of the Act to make addition in respect of consideration less than the stamp duty value. The scope of section 56(2)(vii) has been enlarged after amendment w.e.f. 01.04.2014. Since, in the present case, the agreement was executed on 31.03.2013 i.e. in the A.Y. 2013-14, the provisions of section 56(2) (vii)(b) of the Act as applicable to the A.Y. 2013- 14 would apply. The registration of agreement on the subsequent date would not alter the situation. The registration of agreement is a compliance of a legal requirement under the Registration Act, 1908. Thus, in the facts of case, the authorities below erred in invoking the provisions of section 56(2)(vii)(b)(ii) of the Act as amended by the Finance Act, 2013.

Now, in the given case, an agreement was entered on 31.03.2017 i.e. in the A.Y. 2017-18. As per the provision inserted in section 56(2)(x)(b) (B) of the Act through the Finance Act, 2018, if the consideration of immovable property is less than the stamp duty value then, the difference of the same shall be chargeable to tax under section 56(2)(x) of the Act.

The said amendment is applicable with effect from 01.04.2019 i.e. from the A.Y. 2019-20. If the ratio of the above decision of Mumbai ITAT is applied to this situation, then, it is to be concluded that as the agreement for purchase of immovable property is entered in the A.Y. 2017-18, the provisions applicable for such year has to be applied to this transaction and the amendment made with effect from 01.04.2019 i.e. from A.Y. 2019-20 will not have any impact on the same.

Conclusion:

Section 56(2)(x) of the Act is a special deeming provision which can be attracted only in respect of those transactions which resulted into the tax evasion and rolling of unaccounted income. The legislature never intended to tax the transactions under section 56(2)(x) of the Act which entered in the normal course of business or trade, the profits of which are taxable under specific head of income. Thus, the provisions of section 56(2)(x) will not have any application to the genuine transactions which fall under the legal parameters of the said section.

Comments are closed.