March 8, 2010 :

Query :

After the Finance Bill, 2010 now what is the position of gifts received in cash, in terms of immovable properties and movable properties ?

Reply :

Section 56(2) of the Income Tax Act, 1961 inter alia deals with receipts without considerations. Since most of such receipts tantamount to gifts, the provisions are popularly named as those of gifts and deemed gifts. Till 30 09 2009 only sum of money received without consideration was treated as income in the hands of the recipient  being either an individual or a HUF. By the Finance No.2 Act, 2009 with effect from 01 10 2009 the provisions were so much expanded that even they included cases of  immovable properties received without consideration or for inadequate consideration as compared to stamp valuation. The expanded provisions also include receipts of specified movable properties either without consideration or for inadequate consideration as compared to fair market value.

Pertinent to mention that even under expanded provisions, gifts from specified relatives and under specified exceptions continue  to be beyond tax net.

Provisions as contained in section 50C taxing sales of land or building or both operative since 01 04 2002 affecting the vendors of such properties continue.

In the Finance Bill, 2010 the provision relating to inadequate consideration in transactions of immovable properties is proposed to be deleted. With the result that if an individual or HUF receives immovable property without consideration, the stamp valuation thereof would be taxed as income provided the stamp valuation exceeds Rs.50000/-. But if the consideration is there but inadequate, there would not be any taxation in the hands of the purchaser. However, as stated herein before the seller would continue to be taxed on capital gains on the basis of stamp valuation or sale price whichever is higher. Buyer will not be affected in view of the proposal in the Finance Bill, 2010.

Receipts without consideration or with inadequate consideration with reference to fair market value of specified movable  properties namely  shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any  work of art continue to be taxable in the hands of recipient individual or HUF. A new category namely “bullion” has been now added to the specified movable properties by the Finance Bill, 2010  w.e.f. 01 10 2010.

Bullion would include gold, silver, platinum, or palladium, in the form of bars or ingots. Some central banks use bullion for settlement of international debt, and some investors purchase bullion as a hedge against inflation.

  The fair market value should exceed aggregate stated consideration of movable properties by Rs.50000/- to become taxable.

 To remove hardship in respect of business transactions, the Finance Bill, 2010 has proposed that the receipts of immovable and movable properties only as capital asset would be covered by section 56(2).

Further following receipts without consideration are also not income :

i. Gifts received on the occasion of marriage of an individual;

i. under a Will or by way of inheritance;

ii. in contemplation of death of payer;

iii. from local authority as defined in Explanation to section 10(20);

iv. educational or medical institution or fund etc. referred to u/s. 10(23C);

v. trust or institution registered u/s. 12AA.

Further, so far section 56(2) of the Income Tax Act treats receipts without consideration  as income if the recipient is an individual or HUF. Other categories of assesses including a company and a firm have been kept out of the taxing purview.

 Finance Bill, 2010 makes a starting point to tax a firm and a company in a specified situation. The Finance Bill, 2010 proposes to tax a firm or a closely held company when it receives shares of a closely held company either without consideration or at a consideration at less than the fair market value. The provisions will not apply if such shares are received in the course of amalgamations, mergers, demergers and re-organisations. When afterwards such company or firm transfers such shares the valuation whereof either fully or partly subject to income tax, then at the time of subsequent transfer of such shares, the cost of acquisition would be the fair market value which was earlier taken into consideration for taxation u/s. 56(2).  It is pertinent to mention here that as far as this category is concerned, the Act does not distinguish between receipt as capital asset and receipt as stock in trade.