Blog # 22. S.56(2)(vii) : Property Acquired

Assessing officers in case of property being acquired by an assesse, for a cost less than the stamp valuation have started issuing show cause notices, in order to add such difference u/s 56(2)(vii) of the Act. (Stamp Valuation - Consideration). However, in order to understand the provisions, the same are reproduced as under for your ready reference :-

““(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, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such 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 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 ^38c ;

      (c)  "jewellery" shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2 ;

     (d)  "property" ^38d [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; ^38e [*** ]

  (viii)  any work of art; ^38f[ or]

^38f [(ix )  bullion; ]

      (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;]””

The legislature has clearly used the words “received” in the context of provisions of S.56(2)(vii) and not acquired. The Hon’ble Supreme Court in the case of CIT v. Dharamdas Hargovandas reported in [1961] 42 ITR 427 (SC) has observed that the words ‘is received’ are not terms of art and their meaning must receive colour from the context in which they are used.

In order to understand the context in which the word “receives” has been used in the provisions of S.56(2)(vii), I would like to draw your attention towards the brief history of the provisions of S.56(2)(vii), its insertion in to the Act and intentions.

The Hon’ble Finance Minister in its Budget Speech for F.Y 2004-05 inserted S.56(v) of the Act. S.56(v) of the Act as introduced are as under for your ready reference :-

“ (v )  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 1st day of September, 2004, 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.

                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 persons referred to in clauses (ii ) to (vi).”

The relevant part of the Hon’ble Finance Ministers Speech is reproduced as under :-

“102. Hon’ble Members are aware that I abolished the gift tax in 1997. That decision remains, but a 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. Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasion like marriage will continue to be totally exempt

Perusal of the same it can be seen that the purpose of inserting S.56(v) of the Act, was to tax purported gifts from unrelated persons, above the threshold limit of Rs.25,000. {Purport: appear to be or do something, especially falsely}.

Thereafter, the provisions were amended, vide Taxation Laws (Amendment) Act, 2006, w.e.f. 1-4-2007 and clause vi was inserted in place of Clause (iv) of the Act, the same read as under :-

“[(vi)  where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006, the whole of the aggregate value 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 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;”

Upon reading, it can be seen that the provisions were amended so as to increase the threshold limit to Rs.50,000/- from Rs.25,000/-. However, the purpose of brining in the clause itself was clear on the part of the Legislature that it was done so as to tax purported gifts from unrelated persons and thus legislature consciously used the words “receives” instead of “obtains”. The words “obtained” as well as “received” are not defined under the Income Tax Act, 1961. However, both being the verbs differ on a conceptual level so far as its use in interpretation is concerned. Obtain means to get hold of; to gain possession of, to procure; to acquire, Whereas the word “receive” means to take something that is given or to be given something just like to receive Gifts. 

Thereafter, the provisions were again amended, and clause vii was insterted Vide Finance Act, 2010 so as to further increase the tax base in case of gifts of immovable property and S.56(2)(vii) was inserted. The relevant Amended provisions are as under for your ready reference:-

“(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, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such 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 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 ^38c ;

      (c)  "jewellery" shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2 ;

     (d)  "property" ^38d [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; ^38e [*** ]

  (viii)  any work of art; ^38f[ or]

^38f [(ix )  bullion; ]

      (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;]”

Thereafter, the provisions of S.56(2)(vii) was amended vide Finance Act 2013, w.e.f 01/04/2014 so as to tax the purported gifts received for inadequate considerations. However in case when an assesse acquirs a property, the same cannot be claimed to have been received the properties and thus provisions of S.56(vii)(b) of the Act are not at all applicable to the facts of the case.

Let us examine this view from a slightly different angle. The transfer of property (capital assets) by way of gifts are not taxable because the same are not treated as transfers by virtue of S.47(iii) of the Act. The relevant provisions of the Act are as under for your ready reference :-

“47. (iii)  any transfer of a capital asset under a gift or will or an irrevocable trust :

Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines issued by the Central Government in this behalf;”

In order to tax such receipts ie. by way of gifts the legislature has introduced S.56(2)(vii) and the recipient of such gift is taxed. It is further well settled that the same income cannot be taxed twice. Thus, when an assesse acquires a property the amount of income ie. such difference, will be taxed in the hands of the seller by way of S.50C of the Act under the head capital gain if the seller has treated such property as a capital asset or if the asset has been treated as a stock in trade then the same shall be taxed by way of S.43CA of the Act.

Accordingly, if the assessing officer treats the difference as income in the hands of an acquirer of property, then the same shall amount to taxing the same income twice ie. in the hands of a seller as well in the hands of purchaser.

Disclaimer : The opinions expressed in this article are completely mine. I assume no liability or responsibility for any errors or omissions in the contents contained herein neither does it give any guarantee of completeness or accuracy. The information and data contained herein may be used at your sole risk after ensuring its accuracy, correctness or completeness.