DEEMED INCOME OF INDIVIDUALS AND HUF- Changes effective from 01.10.2009 - Deserving case for challenge as ultravirse the Indian Constitution

[C.A. DEV KUMAR KOTHARI]

Gifts and deemed gifts (bargain benefits) in kind also made taxable

Section 56 - amendment in this regard which are effective from 01.10.09 are applicable only to individual and HUF.

Full gift and part purchase and part gift (which is really bargain benefit or discount) both are covered.

Receipt as gift from a non relative, or Purchase from a non relative  of any specified movable property or immovable property below market value /Stamp value, will be considered as resulting into income to the extent  market value is  in excess of consideration paid. 

Gifts and purchases from relatives, as defined, will not be subject to new provisions.

Exempted limit of Rs. 50K is applicable in each category - cash, immovable property, and movable property.

 Exceptions are provided as in old section.

From the Finance (No.2) Act 2009

Amendment of section 56.

26. In section 56 of the Income-tax Act, in sub-section (2),—

New clause:

'(vii) 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,—

(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,—

(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;

(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 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 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.

  Explanation.—For the purposes of this clause,—

 (a) "assessable" shall have the meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C;

 (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 sub-clause (ii) of clause (14) of section 2;

(d) "property" means—

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

 (ii) shares and securities;

 (iii) jewellery;

 (iv) archaeological collections;

 (v) drawings;

(vi) paintings;

(vii) sculptures; or

(viii) any work of art;

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

(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;

 

Property in kind:

Immovable property means only land and/ or building any other items will not be covered. This is vide item (i) in clause (d) of the Explanation.

Movable property:

In case of movable property all movable properties are not covered but only specified properties as laid down in the section vide items (ii) - (viii) in clause (d) of the Explanation that is shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures and  any work of art.

When deemed as income:

Where any immovable property or any other specified property is received without any consideration and the stamp duty value (in case of immovable property)/ fair market value (in case of any other specified property) of such property exceeds Rs.50,000, the entire stamp duty value or fair market value (as the case maybe) of such property would be taxable as income from other sources.

b) Where immovable property or any other specified property is received for a consideration and such consideration is less than the stamp duty value / fair market value, as the case may be by an amount exceeding Rs.50,000, the excess of  stamp duty value/ fair market value over  the consideration paid by buyer  would be taxable as income from other sources in hands of buyer if the buyer is individual or HUF.

Cases in which provisions will not be applicable

The exceptions are similar to those before 01.10.09 hence not discussed in this write-up

Date of receipt is relevant:

Property received before  1st October, 2009 will not be covered:

Where property is received or purchased under any agreement or instrument or otherwise  prior to 01.10.2009 then , In opinion of author the amended  provision shall not apply. This is because the words used which lays conditions for applicability of provisions reads as follows:

"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,

Therefore, what is relevant is the date when property is received by way of possession with intended transfer of ownership and transfer of legal title is not relevant. For example, suppose a person has purchased a flat under installment payment scheme. Allotment is made and possession is received before 01.10.09 say on 01.01.2007. The last installment will be paid  on 01.12. 2011 and thereafter the vendor shall execute the sale deed. In this case the buyer has purchased flat taking advantage of credit facility extended by vendor. The flat was received on 01. 10.2007 therefore in this case the provision shall not apply, even if registration of property may take place after 30.09.2009.

Similarly suppose a painting was sold in auction and delivered to the buyer Mr. B on 01.07.2009 though full payment was not made and the seller allowed three months credit fro balance consideration. In this case also specified movable property was received before 01.10.09 and therefore, the new provisions will not apply.

Fair market value:

Some provisions have been made regarding stamp valuation for immovable property, in the section itself and some provisions shall be prescribed by way of Rules.

Provisions are not constitutionally valid:

In view of author the provisions are not valid. These provision treat capital receipts as income. The Central Government has power to impose tax on income and not on capital receipts. In case there is a case of introduction of income in guise of capital receipt, then there are other provisions to treat such income as income and not capital receipt. Merely by amending definitions of income or providing fictions to deem anything as income the Central Government is not empowered to impose tax on such items. 

Provisions are inconsistent with the scheme of the Act:

The clause is inconstant with heading, of sub-chapter, opening words of sub-section (2) etc. . The relevant part reads as follows:

F.—Income from other sources

Income from other sources.

56.  (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—

Thus on reading of the provisions it is clear that what can be taxed is 'income', and not any items of receipt. Therefore, first of all sub clauses (v), (vi) and (vii) of sub-sections are incontinent with the main object of the I.T. Act, then inconsistent with opening words of Sub-section (20) of section 56 and above that they are not within the power of the Central Government to impose tax on capital receipt by branding capital receipts as income.

In view of author if a person has received a sum of money or property apparently as gift but in reality which is purchased out of undisclosed  money, then the A.O. can treat such investment or expenditure as income. But where the gift is really a capital receipt, the same cannot be taxed as income by merely adding entries in the definitions of income. The author is of considered opinion that  the following clauses of section 2(24) deserves to be challenged as unconstitutional:

Clause (iia)- voluntary contributions....

Clause (x)- any sum received from employees towards specified funds for employees.

Clauses (xiii), (xiv) and (xv) relating to gifts or bargain benefits deemed as income.