Under the India’s domestic tax law, viz., the Income-tax Act, 1961 (“IT Act”), the subject matter is tax on ‘income’, i.e., ‘income-tax’. Even if income-tax is levied on a person distributing the income (like, dividend distribution tax in the earlier tax regime pertaining to dividend, or share buy-back tax under section 115QA of the IT Act levied on the domestic companies), the same retains its character as tax on ‘income’ (to the extent distributed).
As per the provisions of section 4 of the IT Act, income-tax shall
be charged in respect of ‘total income’
for a tax year of every person.
Further, the income-tax shall be charged
in accordance with and subject to the provisions of the
IT Act. The IT Act contains detailed provisions regarding the scope and manner of computation
of ‘total income’.
To begin with, one would need to understand as to what is meant by the
word ‘income’. The word ‘income’ is
defined by section 2(24) of the IT Act. The said definition is an inclusive one and it does not precisely define as to
what exactly is meant by ‘income’. There are various landmark judicial precedents on the point as to what is meant by
‘income’, ‘revenue receipts’ and ‘capital receipts’.
The definition of the word ‘income’ in section 2(24) of the IT Act, being
an inclusive definition, includes
items which are purely in the nature of income, items on which there were
issues as to whether the same constitute income or not and the legislature thought
it appropriate to levy income-tax on the same,
and capital receipts
which the legislature deliberately included in the definition of income. In other words,
wherever the legislature intended to levy income-tax on capital receipts or gains or something which is not in the
nature of income, the legislature expanded
the definition of the word ‘income’ in section 2(24) of the IT Act to deem the
same as income and introduced
separate provisions regarding charge and computation thereof in detail.
One such provision is the
levy of tax in
the hands of recipient of gifts etc.
The law is well settled that gifts received, unless received in the
course of carrying out a salaried
employment or in the course of carrying out a business or profession, are
capital receipts and are
not liable to tax as income.
Proceeding on the basis that a gift received is not liable to tax either as ‘Income from Salaries’, or ‘Income from Business or Profession’, it could be taxed as ‘Income from Other Sources’
under section 56(1) of the IT Act if the same is covered by any
sub-clause of section 2(24) of the IT Act.
Upto September 30, 1998, gifts made were liable to payment of gift-tax in
the hands of the donor as per the provisions of the Gift-tax
Act, 1958 (“GTA”). The charge of gift-tax was subject to the detailed provisions contained in
the GTA which included various exemptions and
deemed gifts. One such provision of deemed gift was contained in section
4(1)(a) of the GTA and it provided
that where property is transferred otherwise for adequate consideration, the amount by
which the value of the property as on the date of the transfer
exceeds the value of
the consideration shall be deemed to be a gift by the transferor.
The reason for giving the above example of the deemed gift here is that
even in the case of transfer of a
property for inadequate consideration, the legislature had sought to levy
gift-tax on the donor and did not
treat the price differential as any income in the hands of the donee. In other words,
the legislature proceeded on the basis that a bargain purchase
(i.e., purchase of a property
for a consideration which is less than fair market value of
the property) does not result
in any income in the hands of
the purchaser or transferee.
Thus, a gift received (including a deemed gift) was not liable to tax as
income in the hands of the donee
(unless the gift received was in the course of carrying on salaried employment
or in the course of carrying on
business or profession) for the reason that it constituted capital receipt in the hands of the donee. The
levy of gift-tax was abolished by the Finance (No. 2) Act w.e.f. October 01, 1998.
A few years down the line, the levy of gift-tax was brought back by the
Finance (No. 2) Act, 2004 with effect from September 01, 2004, in relation to sum of money exceeding
INR 25,000 received without consideration by an individual of a Hindu undivided family. This was brought back not as a gift-tax in the hands of
the donor, but in the form of income-tax in the hands of the donee under section 56(2)(v)
of the IT Act. This was subject
to certain exceptions like sum of money received from any specified relative, on the occasion of the marriage of the individual, under a will or by way of inheritance etc. This was done by expanding the definition of income
by inserting a specific clause (xiii) in section 2(24) of the IT
Act.
While the above provision was first introduced in the year 2004 by
inserting section 56(2)(v), the scope
of the same was expanded over the years multiple times by inserting section 56(2)(vi), 56(2)(vii) and 56(2)(viia), and
the present provision is contained in section 56(2)(x) of the IT Act.
Consequently, section 2(24) of the Act has also been amended
to include in the income
‘any sum of money or value of property referred
to in section 56(2)(x)’. It is relevant to note
that while initially vide section 56(2)(v) of the IT Act, the levy was made
only with reference to the sum of
money, now, under section 56(2)(x) of the IT Act, it stands extended to immovable properties and certain movable properties.
Section 56(2)(x) of the IT Act, as it stands
presently, provides that where any person receives
any sum of money, immovable property or movable property without
consideration or for a consideration
which is less than stamp duty value or fair market value, then, subject to
other provisions contained in section 56(2)(x)
of the IT Act, a certain amount
will become taxable
as income in the hands of the recipient under the head ‘Income
from Other Sources’.
A question arises that in case a person receives
a sum of money which
is not a case of “without consideration” (i.e., it is not a case
that no consideration flows from the recipient to the other person),
whether a taxability under section 56(2)(x) of the IT Act can arise in
the hands of the
person who receives
the sum of money if the consideration given by such recipient to the other
person is not commensurate with the sum of money
received.
To amplify it further, if Mr. X receives INR 500,000 from Mr. Y in
consideration of something (which is not
the subject matter of charge under the head Income from Salaries or Capital Gains or Income from Business of Profession, or as ‘income’
or ‘revenue receipt’
taxable under the head Income from Other Sources under
section 56(1) of the IT Act), then, whether the sum of money of INR 500,000 received by Mr. X will be beyond the
scope of section 56(2)(x) of the IT
Act simply for the reason that it is not a case of sum of money received
without consideration? Or, whether the tax authorities can examine the appropriateness, adequacy
or arms’ length nature of the same, and in case they reach to a conclusion that the value of what
is given up by Mr. X is say INR 300,000, can they tax the excess
sum of money received (i.e.,
INR 500,000 minus INR 300,000) in the hands of Mr. X as income under
section 56(2)(x) of the IT Act?
For addressing this issue, let us first have a look at the words used in
section 56(2)(x) of the IT Act which
read as follows:
“Where a person receives, in any previous
year, from any person or persons on or after the 1st day of April, 2017,—
(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,-
(A) without consideration, the stamp duty value
of which exceeds
fifty thousand rupees,
the stamp duty value of such property;
(B) for a consideration, the stamp duty value of such property as exceeds such consideration, ….
(c) any property, other
than immovable property,-
(A) without consideration, the aggregate
fair market value of which exceeds fifty thousand rupees,
the whole of the aggregate fair market
value of such property;
(B) 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…”
It would appear from the above that sub-clause (a) of section 56(2)(x) of
the IT Act (which deals with receipt
of “sum of money”) is worded
differently from sub-clause (b) (which deals
with “immovable property”)
and sub-clause (c) (which deals with “any
property, other than immovable
property”).
It is relevant to note that while the expression ‘property’ has a very
wide meaning, for the purposes of section 56(2)(x)
of the IT Act, it has been assigned a specific meaning
as follows:
“property’
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;
(viii)
any
work of art; or
(ix)
bullion;”
Thus, in view of the above-referred specific
definition of the expression “property”, the “sum of money” is not considered as property for the purposes
of section 56(2)(x)
of the IT Act. In any case,
the “sum of money” has been dealt with specifically by sub-clause (a) of section
56(2)(x) of the IT Act.
Accordingly, the scope of sub-clause (a) of section 56(2)(x) of the IT
Act is required to be examined only
on the basis of the language used therein without considering the language used in
sub-clause (b) and (c) thereof which deal
with ‘property’.
Sub-clause (a) of section 56(2)(x) of the IT Act dealing with “sum of
money” covers only the cases where
the sum of money is received without consideration. In a case wherein the sum of money is received
‘for consideration’, the aspect whether
the consideration paid is adequate
or inadequate, is not covered by section 56(2)(x) of the IT Act for the
recipient of “sum of money”.
A few examples of such cases may be where the sum of money
is received as compensation, or where the sum of money is received
from ex-spouse in consideration of ‘agreement to live apart’ etc.
Having said so, the taxpayers should be mindful of not using this as a
‘device’ to transfer the money.
The bonafide of a transaction, commercial justification, practical relevance, etc. should
necessarily be kept in mind supported
by suitable documentation.
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