Budget 2010 - SECTION 56 :- DEEMED INCOME BY WAY OF GIFTS OF IMMOVABLE PROPETY - is something missing in budget proposals about inadequate consideration?

[C.A. DEV KUMAR KOTHARI]

Deemed income in respect of immovable property received:

In section 56 clause (vii) was inserted w.e.f. 01.10.2009 to cover immovable property received by any individual and HUF without consideration or received without adequate consideration. The Finance Bill 2010 has proposed to amend this clause to cover only cases of property received without consideration and not to cover cases of property received for some consideration which may not be adequate consideration. On careful reading of the Memorandum Explaining the proposals it appears that in the drafted proposal of section, the scope of exemption is greater than what appears from the Explanatory Memorandum.

Provisions with highlights:

The relevant provision, in so far applicable in relation to such properties received is reproduced below with highlights:

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 :- 

(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,-

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{(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 consi-deration;} - see proposal for amendment

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;

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{{(d) "property" means- { see proposal for amendment}

(i) immovable property being land or building or both;}}  - see proposal for amendment

(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.

Proposal in the Finance Bill 2010:

(i) for sub-clause (b), the following sub-clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of October, 2009, namely:-

"(b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;";}

{{(A) in the opening portion, for the word "means-", the words "means the following capital asset of the assessee, namely:-" shall be substituted and shall be deemed to have been substituted with effect from the 1st day of October, 2009;}}

Relevant part of the Memorandum explaining proposal

Taxation of certain transactions without consideration or for inadequate consideration

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B. 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.

C. In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property. These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.

Analysis:

As per proposed amendment any property received as stock-in-trade in normal course of business will be outside the scope of S. 56 because as per amendment the property should be a capital asset. Therefore, if a trader has purchased any property in course of his business, then the deeming provision shall not apply.

In relation to property received for inadequate consideration it is stated that there is time gap between booking of property and receipt of property on such registration which result in a taxable difference. Therefore, it is proposed to amend clause (vii) of section 56 so as to provide that it will apply to only cases where the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property.

Is anything missing in budget proposals:

As noted above as per memorandum the amendment is in relation to transactions where there is time gap between booking and registration. However, the amended provisions, will stand to mean that the provision will not apply to any case of immovable property which is received for inadequate consideration. Thus suppose a property is purchased for actual consideration or say stated consideration of Rs.one lakh, and the stamp authorities value the property for say Rs. Forty lakh, the case will not be covered deeming provision of income in garb of gift or under consideration of Rs. Thirty nine lakh.

This may not be intention. In case the amendment is intended only to booking of new properties under construction, involving time lag between booking, delivery and possession and registration, then it is desirable to amend the clause in the Finance Bill, 2010. Otherwise, there may be need to amend the law with retrospective effect when people purchases properties of crores of rupees in few thousand and claims that the provision is not applicable to deem the difference as income.

Or

Whether the lacunae is intended to give benefit to some political and bureaucrat friends who may escape tax on undisclosed consideration paid to purchase immovable properties at nominal disclosed consideration.

Larger Question - the deeming provisions appears to be invalid:

Income tax Act is to impose tax on income. The Central Government has power to impose tax on income. However, in garb of 'income', tax is being imposed on capital receipts. Generally a gift of substantial nature given whether it be cash or any property is a capital out go for the person who makes gift, it is not an allowable expenditure. The person who receive gift, receive it as capital because it is not received in consideration of goods or services provided.

The heading of the Chapter and charging provisions, and opening words used in section also say that what is to be included in income from other sources should be income. However particular clauses are inserted to include capital receipts in the scoep of the income under this head.

Therefore, clauses (v), (vi) (vii) and proposed clause (viii) of S. 56(2) are per se invalid piece of legislation, beyond the scope of the Income-tax Act, 1961 (its objects) as well as they are beyond the power to impose tax on income. Merely by including any item in definition of income u/s 2(24) or in section 28 or section 56 such item should nto be allowed to be included in the category of taxable income.