Deeming Provisions under Income Tax Act 1961

1. (under the Income-tax Act, 1961)
- Nihar Jambusaria

2. May 03, 2015 2
INDEX
1. Section 14A
2. Section 43CA
3. Section 50C
4. Section 56

3. Disallowance Under
Section 14A

4. Section 14A
• Inserted by the Finance Act, 2001, w.r.e.f. 1-4-1962.
• It provides for disallowance of expenditure incurred in relation to
income which is not includible in the total income of the assesse.
• The operative part of the Section reads as under :
“(1) For the purposes of computing the total income under this
Chapter, no deduction shall be allowed in respect of expenditure
incurred by the assessee in relation to income which does not form
part of the total income under this Act.”
May 03, 2015 4

5. Section 14A
• The proviso was inserted by the Finance Act, 2002, w.e.f. 11-5-2001.
“Provided that nothing contained in this section shall empower the
Assessing Officer either to reassess under section 147 or pass an
order enhancing the assessment or reducing a refund already made
or otherwise increasing the liability of the assessee under section
154, for any assessment year beginning on or before the 1st day of
April, 2001.”
May 03, 2015 5

6. Section 14A
Subsection (2) and (3) were inserted by the Finance Act, 2006, w.e.f. 1-
4-2007 to provide that AO shall determine the amount of expenditure
incurred in relation to the exempt income in accordance with such
method as may be prescribed by Rules if the AO, having regard to the
accounts of the assessee, is not satisfied with –
• the correctness of the claim of the assessee in respect of such
expenditure in relation to income which does not form part of the
total income, or
• the assesse’s claim that no expenditure has been incurred by him
in relation to income which does not form part of the total income.
May 03, 2015 6

7. Rule 8D - Method for determining amt. of expenditure in
relation to income not includible in total income
(1) Where the AO, having regard to the accounts of the assessee of a
previous year, is not satisfied with
(a) the correctness of the claim of expenditure made by the
assessee; or
(b) the claim made by the assessee that no expenditure has been
incurred
in relation to income which does not form part of the total income he
shall determine the amount of expenditure in relation to such income
in accordance with the provisions of sub-rule (2).
May 03, 2015 7

8. Rule 8D - Method for determining amt. of expenditure in
relation to income not includible in total income
(2) The expenditure in relation to income which does not form part of the
total income shall be the aggregate of following amounts, namely
(i) the amount of expenditure directly relating to income which does
not form part of total income
(ii) where the assessee has incurred expenditure by way of interest
during the previous year which is not directly attributable to any
particular income, computation in accordance with formula:
Interest Expense* Average Tax Free Investment
Average Total Assets
(iii) 0.05% of Average Tax Free Investment
May 03, 2015 8

9. Issues
arising
in
section
14A
1) Constitutional validity of Section 14A and
Rule 8D
2) Establishment of nexus between the exempt
income and related expenditure
3) Investment in subsidiaries
4) No exempt income earned during the
relevant AY
5) Investments held as stock-in-trade
6) Interest income exceeded interest expense
7) Applicability of Section 14A while computing
MAT
8) Misc. issues

10. Constitutional validity of Section 14A & Rule 8D
Godrej & Boyce Mfg. Co. Ltd. [(2010) 328 ITR 81 (Bom HC)]
• Section 14A and Rule 8D are constitutionally valid
• Rule 8D will apply from AY 2008-09. For earlier years, the tax
authority has to apply reasonable method for quantifying section
14A expenditure
• Proximate relationship between expenditure (direct and indirect) is
required to invoke disallowance under section 14A
May 03, 2015 10

11. Constitutional validity of Section 14A & Rule 8D
Godrej & Boyce Mfg. Co. Ltd. [(2010) 328 ITR 81 (Bom HC)]
• Rule 8D cannot be invoked mechanically by the Tax Authority. The
provisions require satisfaction of the Tax Authority having regard to
the accounts of the taxpayer that the claim made by the taxpayer is
not correct. Such satisfaction must be an objective satisfaction
arrived at in good faith and on relevant consideration of all facts and
circumstances. Also, the Tax Authority must record reasons for non-
satisfaction with the claim of the taxpayer [Delhi ITAT upheld this
principle in the case of Jindal Photo Limited – ITA No.4539/Del./2010
dt 7 January 2011]
May 03, 2015 11

12. Establishment of nexus between the exempt
income and related expenditure
Whether the disallowance can be made where the investment in tax-free
securities are made out of only own funds (No loans at all) ?
• Hero Cycles Ltd. - Punjab & Haryana High Court [323 ITR 518]
Section 14A cannot be invoked to disallow interest expenditure, where it is
factually found that no interest bearing funds are utilized for making
investments which give rise to exempt dividend income.
• Similar View - GMR Power Corporation Ltd vs DCIT [TS-720-ITAT-
2013(Bang.)]
Also Held that management of investments requires expertise, upholds Sec
14A disallowance for indirect expenditure worked out @ 0.5%of average
value of investments as per Rule 8D.
May 03, 2015 12

13. Establishment of nexus between the exempt
income and related expenditure – (interest free loan)
• DCIT vs Subramanya Constructions & Development Co.Ltd. [TS-100-
ITAT-2015 (Bang.)]
Not necessary to draw a one to one nexus between investments and interest
free loans. When the funds had gone out of a common pool and the
assessee had interest free funds in excess of the investments, it could take a
valid plea that such investments were made out of interest free loans.
• Interglobe Enterprises Ltd. v. DCIT (ITA No. 1362 & 1032/DEL /2013)
Assessee had utilized interest free funds for making fresh investments and
that too into its subsidiaries. No disallowance of interest is required to be
made under rule 8D (i) & 8D (ii) as no direct or indirect interest expenditure
has incurred for making investments.
May 03, 2015 13

14. Establishment of nexus between the exempt
income and related expenditure
Position after Godrej & Boyce, decisions following
• Bunge Agribusiness (India) (P) LTD - (2011) 132 ITD 549 (Mumbai)
• Sudhir Genset Ltd (2010) 134 TTJ (Del)(UO) 78
• Digital Electronics LTD (2011) 135 TTJ (Mumbai) 419
• Delite Enterprises (P) LTD. (2011) 135 TTJ (Mumbai) 663
• J.P. Morgan India (P) Ltd. (2011) 46 SOT 250 (Mumbai)
• Yatish trading co. (P) ltd. (2011) 50 DTR (Mumbai)(Trib) 158
• Jindal Photo Ltd. (ITA No. 4539/D/10) AY 2007-08 dated Dec 22, 2010 (Del)
• Multi Commodity Exchange of (India) Limited (ITA No. 1050/M/10) AY 2008-
09 dated August 5, 2011
• Jindal Photo Ltd. (ITA No. 814/D/11) AY 2008-09 dated Sep. 23, 2011 (Del)
May 03, 2015 14

15. Establishment of nexus between the exempt
income and related expenditure
Whether there can be disallowance of interest if mix funds are available
and it can be demonstrated that surplus funds were utilized for making
investment in tax free source?
In favour of Assessee:
• Reliance Utilities & Power Limited ( 313 ITR 340) (Bom HC)
• CIT v. HDFC Bank Limited (ITA No. 330 of 2012) (Bom HC)
• CIT v. Suzlon Energy Ltd (ITA No. 223 of 2013) (Guj. HC)
• International Nederlanden Bank (ITA No. 5098 & 5099 / Mum 2004)
• Punjab State Co-operative and Marketing Fed. Ltd. v. ACIT (ITA No.
579/Chd/2011) (Chandigarh ITAT)
May 03, 2015 15

16. Investment in subsidiaries
Whether there can be disallowance u/s 14A if the investment is made in
subsidiaries for acquiring control interest / strategic investment?
In favour of Assessee:
• Piem Hotels Limited vs. DCIT [TS-162-ITAT-2015(Mum.)
• Interglobe Enterprises Ltd. v. DCIT (ITA No. 1362 &
1032/DEL/2013)
• EIH Associated Hotels Ltd. v. DCIT [2009] 126 TTJ 246 (KOL.)
• CIT vs RPG Transmissions Ltd [2014] 48 taxmann.com 57
May 03, 2015 16

17. No exempt income earned during the relevant AY
Whether there can be disallowance u/s 14A where no income is earned during
the relevant AY?
In favour of Assessee:
Alliance Infrastructure Projects Pvt Ltd v. DCIT [ITA No.220 &1043(Bang)/2013]
CIT v. Shivam Motors P. Ltd. (ITA No. 88/2014, 5 May 2014)
CIT v. Corrtech Energy Pvt. Ltd. (ITA No. 239/2014, 24 March 2014) (Guj)
CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 2014 (P&H)
CIT v. Delite Enterprises (ITA No. 110/2009, 26 February 2009)
Against:
Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Del)
May 03, 2015 17

18. No exempt income earned during the relevant AY
CBDT issued a circular no.05/2014
• Disallowance of expenses under section 14A would be applicable even
where taxpayer has not earned exempt income in that particular year.
• The Circular cited use of the term "includible" in heading to Sec 14A of the
Act and Rule 8D of the Income-tax Rules,1962. Also, Section 14A does not
use the words “income of the year” but “income under the Act”. The
legislative intent was to allow only that expenditure which is relatable to
earning of income.
• Delhi Special Bench decision of Cheminvest Ltd. (supra) and Circular
no. 05/2014 dated 11/02/2014 overruled.
 ACIT v. M. Baskaran [2014] 152 ITD 844.
 CIT vs Holcim India P.Ltd. [TS-640-HC-2014(Del.)]
May 03, 2015 18

19. Investments held as stock-in-trade
Whether Rule 8D is applicable in case of investments held as stock-in-trade?
In favour of Revenue:
• ITO v. Daga Capital (312 ITR 1)
• Cheminvest Ltd. v. ITO (121 ITD 318)
In favour of Assessee:
• CIT v. Leena Ramchandran (235 CTR 512)
May 03, 2015 19

20. Investments held as stock-in-trade
• CCI Ltd (ITA No. 359/2011, 28 February 2012) (Karnataka HC) –
 Section 14A cannot be applied to disallow expenditure incurred on shares
purchased for trading purposes from interest-free funds merely because
such shares give rise to incidental exempt dividend income.
 However, the issue is highly controversial. On a similar issue, the Delhi HC
(in the case of Maxopp - 203 Taxmann 364) and Karnataka HC (in the
case of Catholic Syrian Bank - 237 CTR 164) have held in favour of the
Revenue.
 These contra rulings do not appear to have been cited or considered by
Karnataka High Court.
May 03, 2015 20

21. Interest income exceeded interest expense
DCIT vs. M/s. Trade Apartment Ltd [ITA No. 1277/Kol./2011]
• No interest expenditure remains after adjusting the interest credited
to the Profit and Loss Account.
• Sec 14A disallowance on interest expense not attracted since
interest income exceeded interest expense.
May 03, 2015 21

22. Applicability of Section 14A while computing
MAT
Whether formula based disallowance under section 14A read with Rule 8D
needs to be added back while computing book profit for determining MAT
liability under section 115JB of the Act?
• Rule 8D cannot be invoked while computing book profit under section 115JB
of the Act, only adjustments permissible u/s section 115JB can be made -
Goetze (India) Ltd [32 SOT 101 (Del)]
• In computing book profits under section 115JA/JB, if actual expenditure to
earn tax-free income not debited in P&L A/c, Section 14A cannot apply -
Quippo Telecom Infrastructure Ltd vs. ACIT (ITA No. 4931/Del/2010)
May 03, 2015 22

23. Applicability of Section 14A while computing
MAT - Contrary Judgement
DCIT v. Sobha Developers (ITA No. 1410/Bang./2013)
There is no prohibition u/s 115JB to employ Sec 14A and Rule 8D for
computing total income. Whatever expenditure are incurred to earn income
which does not form part of the total income under the Act, both direct and
indirect expenditure, have to be disallowed. There is no basis for the argument
u/s. 115JB, it is only direct expenses that are contemplated as capable of being
added to the profits as per P&L account under clause (f) to Expln.1 below
Sec.115JB(2) of the Act. Rule 8D comes into play when there is no other basis
for arriving at the quantum of expenditure.
Similar view - ITO v. RBK Share Broking Pvt. Ltd. [2013] 159 TTJ 16 (Mum.)
and Dabur India Ltd. v. ACIT [2013] 145 ITD 175 (Mum.)
May 03, 2015 23

24. Misc. issues
• Whether while computing interest disallowance, interest earned can be
reduced?
Yes - Morgan Stanley India Securities Pvt. Ltd. [ITA No.5072/Mum/2005]
No - Cranes Software International Ltd. [TS-662-ITAT-2014(Bang.)]
• CIT vs. M/s Abhishek Industries Ltd. [ITA No.320 of 2013 (P&H)]
AO to record satisfaction on the basis of clear and cogent material. AO's
General observations cannot form basis for disallowance u/s 14A.
• ACIT vs. Iqbal M Chagala [ITA No. 877/Mum/2013]
Sec 14A application by AO based on ‘presumption’ that administrative
expenses like telephone / salary would have been incurred for earning
exempt income quashed.
May 03, 2015 24

25. Misc. issues
• Can the appellate authority disallow the expense u/s 14A exceeding
the amount originally proposed by AO?
No - Top Star Mercantile v. ACIT (Bom HC) [334 ITR 374]
Where in assessment order, no finding was recorded by AO with
respect to disallowance of part of expenditure on touchstone of
section 14A, Tribunal was not justified in restoring matter back to AO
observing that AO needed to reconsider issue including that of
disallowance of expenditure on touchstone of section 14A.
May 03, 2015 25

26. Section 43CA

27. Position before the introduction of Section 43CA
• The High Court ruling in the case of Kan Construction and Colonizers (P)
Ltd. - [2012] 20 taxmann.com 381 held that section 50C applies only to
capital assets. Stamp duty valuation provisions u/s 50C of the Act does not
apply to sale of plot of land held as ‘Stock-in-trade’.
• It further ruled that in order to apply the provisions of section 50C of the Act,
the asset should be ‘Capital Asset’ as defined under section 2(14) of the Act
which excludes assets held under ‘Stock-in-trade’.
• Same view was taken in the case of ITO vs Champaben C.Patel (ITA
No.5686/Mum/2012) also.
May 03, 2015 27

28. Section 43CA – w.e.f 1st April, 2014
(1) Where the consideration received or accruing as a result of the transfer by
an assessee of an asset (other than a capital asset), being land or
building or both, is less than the value adopted or assessed or assessable
by any authority of a State Government for the purpose of payment of stamp
duty in respect of such transfer, the value so adopted or assessed or
assessable shall, for the purposes of computing profits and gains from
transfer of such asset, be deemed to be the full value of the consideration
received or accruing as a result of such transfer.
(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall,
so far as may be, apply in relation to determination of the value adopted or
assessed or assessable under sub-section (1).
May 03, 2015 28

29. Section 43CA – w.e.f 1st April, 2014
(3) Where the date of agreement fixing the value of consideration for transfer of
the asset and the date of registration of such transfer of asset are not the
same, the value referred to in sub-section (1) may be taken as the value
assessable by any authority of a State Government for the purpose of
payment of stamp duty in respect of such transfer on the date of the
agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the
amount of consideration or a part thereof has been received by any mode
other than cash on or before the date of agreement for transfer of the asset.
May 03, 2015 29

30. Take a note
• The effect of taxation on the basis of valuation as per this
section is lying with the seller or transferor.
• Section 43CA is restricted to the transfer of an asset (other than
capital asset) being land or building or both only.
• The income generated from the treatment of this section is to be
assessed under section 28 as income from business.
• On the transfer of an asset (other than capital asset), if the
consideration is less than the stamp valuation authority, then such
stamp value will be treated as full value of consideration.
• An option of adopting the value as on the date of agreement
available.May 03, 2015 30

31. Take a note
• Under this section the word ‘transfer’ cannot be enumerated as
defined under section 2(47) of the Act. It may have to be construed in
accordance with the provision of transfer of property Act, 1882.
• Section 43CA cannot be applied where the builder merely sells the
right in the property without entering into sale through the registered
conveyance deed.
• Tax deductible sum for the purpose of TDS u/s 194IA shall be the
actual consideration paid/payable and not the value replaced by
Section 43CA
May 03, 2015 31

32. Issues
• Currently, there is controversy on scope of ‘land’ and ‘building’ u/s. 50C
whether it includes items like TDR, grant of development rights, long term
tenancy/leasehold rights, etc. Same will extend to 43CA also.
• Whether once the income is deemed in section 43CA, can it be deferred
over a period of project, based on percentage of completion method. As per
the accounting standard of ICAI and proposed accounting standard in
income tax Act, the income from real estate can be offered to tax on
percentage completion method (also known as work in progress method).
• Whether 43CA can apply to slump sale?
• Whether bearer cheque will be considered in mode other than cash?
May 03, 2015 32

33. Section 50C

34. Section 50C - Applicability
Section 50C is applicable if the following conditions are satisfied –
 Condition 1: There is a transfer of a capital asset being land or
building or both. The assets may be long-term capital asset or short
term capital asset. It may be depreciable or non-depreciable asset.
 Condition 2: The sale consideration is less then value adopted (or
assessed) by any authority of a State Government for the purpose of
payment of stamp duty (hereinafter referred to as “Stamp duty
Authority”) in respect of such transfer.
May 03, 2015 34

35. CONSEQUENCES IF THE ABOVE CONDITION
ARE SATISFIED
Situations
1. Where the assessee
accepts the value adopted
by Stamp duty authority.
2. Where the assessee
claims that value adopted
by Stamp duty authority is
more than the fair market
value (but he has not
disputed such valuation in
stamp duty proceeding.)
Full value of consideration for the
purpose of Section 48
1. Value adopted by Stamp duty authority is
taken as full value of consideration.
2. Fair market value determined by the
Department Valuation Officer (if it is less
than the stamp duty valuation) is taken as
full value of consideration. Stamp duty
valuation (if the fair market value
determined by the DVO is more than the
stamp duty value) is taken as full value of
consideration.
May 03, 2015 35

36. Take a note
• The effect of taxation on the basis of valuation as per this section is
lying with the seller or transferor.
• An option of adopting the value as on the date of agreement is not
available.
• Provisions of section 50C would also apply in case of capital gain from
depreciable assets. - Smita Conductors Ltd v. DCIT [2015] 152 ITD 417
• This section specifically applies for the capital asset land or building or both
held as capital asset either in Investment account or in Fixed Asset by the
Assessee.
• Tax deductible sum for the purpose of TDS u/s 194IA shall be the actual
consideration paid/payable and not the value replaced by Section 43CA.
May 03, 2015 36

37. Example : Sale of Building by Mr. X to Mr. Y
• Sales consideration – 50L
• SDV on the date of agreement – 80L (payment received of ₹10L on that date)
• SDV on the date of transfer – 90L
May 03, 2015 37
Mr. X Sales consideration
U/s 43CA
Sales consideration
U/s 50C
Stock-in-trade 80L -
Capital Asset - 90L
Mr. Y Purchase Price
Stock-in-trade 50L*
Capital Asset (Non-depreciable Asset) 80L* - Sec 49(4)
Capital Asset (Depreciable Asset) 50L*
The provisions of Section 56(2)(vii)(b) would be attracted. The difference between the SDV
and the actual consideration shall be taxable u/s 56(2)(vii)(b) i.e. 30L (80L-50L).

38. Issues
arising
in
section
50C
1) Applicability of section 50C in case of
transfer of lease hold rights
2) Stamp duty value for the purpose of Section
54F
3) Deeming fiction of Sec 50C inapplicable to
charitable trust taxation u/s 11
4) Implications on Section 69/69B
5) Penalty u/s 271(1)(c)
6) Sec 50C not applicable to unregistered sale
deeds prior to Oct’2009
7) Misc.

39. Applicability of section 50C in case of transfer of
lease hold rights
Favourable
• Atul G. Puranik [TS-197-ITAT-2011(Mum)]
Provisions of section 50C would not apply in case of transfer of ‘lease
rights’ in land. The deeming provisions of section 50C would apply
only in case of transfer of land and building and not in case of transfer
of lease hold rights in land or building.
Against
• Hari Om Gupta [TS–207-ITAT-2014(LKW)]
Transfer of Lease Hold Rights for 99 years on land amounts to
transfer of “Capital Asset” and thus it would attract the provisions of
section 50C.May 03, 2015 39

40. Stamp duty value for the purpose of Section 54F
Against
• Gyan Chand Batra v/s. ITO - [2010] 133 TTJ 482(JP)
Deeming provisions as mentioned in section 50C will not be
applicable to section 54F so far as meaning of ‘full value of
consideration’ is concerned, as deeming provision mentioned in
section 50C is for specific asset and for purpose of section 48. The
words ‘full value of consideration’ as mentioned in other provisions of
the Act are not governed by the meaning of ‘full value of
consideration’ as contained in section 50C. The natural meaning of
full value of consideration refers to consideration specified in the sale
deed.
May 03, 2015 40

41. Stamp duty value for the purpose of Section 54F
Favourable
• Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)
Where the stamp duty value U/s 50C has been adopted as the full
value of consideration, the reinvestment made in acquiring a
residential property, which is in excess of the actual net sale
consideration , be considered for the purpose of computation of
exemption U/s 54F, irrespective of the source of funds for such
investment.
May 03, 2015 41

42. Deeming fiction of Sec 50C inapplicable to
charitable trust taxation u/s 11
• The Upper India Chamber of Comm. [TS-735-ITAT-2014(LKW)]
Deeming fiction created by virtue of section 50C in determining
capital gain cannot be extended to section 11(1A). Section 11(1A)
has to be applied for definite or limited purpose for which it is
created.
Sec 11(1A) being specific section governing taxability of capital gains
for trusts and a complete code in itself, shall prevail over Sec 50C
which is a general section and does not start with a non-obstante
clause.
May 03, 2015 42

43. Whether addition u/s. 50C in the hands of the seller, means that
the buyer has paid “on-money” and addition u/s. 69/69B for
unexplained investment shall be made in the hands of the buyer?
• Section 50C creates a deeming fiction and provides that the guideline value
shall be treated as the full value of consideration in the hands of the seller
No presumption can be made against the buyer that he paid “on-money”.
Unless the AO has evidences against the buyer that he has paid “on-
money”, no addition can be made in his hands.
• Favorable:
 ACIT v. Rakesh Narang [TS-68-ITAT-2015(DEL)]
 DCIT v. Vallabhbhai [2012] 27 taxmann.com 306 (Ahd.)
 DCIT v. Virjibhai Kalyanbhai Kukadia [2013] 151 TTJ 219(Ahd.)
 Harley Street Pharmaceuticals Ltd. [2010] 38 SOT 486 (Ahd.)
 Sangam Tower v. ITO [2009] 130 TTJ 104 (JP)
May 03, 2015 43

44. Penalty u/s. 271(1)(c)
Whether addition u/s. 50C would necessarily mean that assessee has
“concealed” the income or “furnished inaccurate particulars thereof” and
therefore penalty u/s. 271(1)(c) should be levied?
• Where in respect of sale of a property, matter was referred to DVO who
determined sale consideration at a higher amount, that by itself would not
amount to furnishing inaccurate particulars of income so as to levy penalty
under section 271(1)(c).
Favorable:
 CIT v. Fortune Hotels and Estates (P.) Ltd. [2014] 52 taxmann.com 330
(Bombay HC)
 ACIT vs N. Meenakshi (2009) 125 TTJ 856 (Chennai)
May 03, 2015 44

45. Sec 50C not applicable to unregistered sale
deeds prior to Oct’2009
• Shri Gurdip Singh Sidhu TS-69-ITAT-2012(ASR)
Prior to Oct 2009, Section 50C was attracted only when property transferred
through registered sale deed and not merely through a sale agreement.
Amendment to Section 50C is not retrospective. Thus, Transfers after
October 2009 would attract Section 50C even if sale deed not "registered"
for stamp duty purposes.
• CIT vs. R.Sugantha Ravindran TS-90-HC-2013 (MAD)
Deeming provision of Sec 50C not applicable to unregistered sale deeds
prior to October 2009. CBDT Circular no. 5/2010 clarifies that the
introduction of the words "or assessable" u/s 50C has prospective
application.
May 03, 2015 45

46. Misc.
• TV Nagasena [TS-383-ITAT-2012(Bang)]
AO is required to make a reference to Valuation Officer if assessee objects
to the adoption of stamp duty valuation u/s 50C. AO’s action in not making
reference to Valuation Officer violates the Sec 50C(2).
• Rupakula Srinivas v. ITO [2015] 67 SOT 58 (Hyderabad - Trib.)
AO is empowered to reopen assessment if understatement of sale
consideration by assessee in terms of section 50C is prima facie
established.
May 03, 2015 46

47. Section 56(2)(vii)

48. Section 56(2)(vii) - Gifts received by Individual
& HUF
• Gifts not taxable if received -
 From Relatives
 On the marriage of individual,
 By will or inheritance,
 In contemplation of Death of payer
 From local authority
 From Charitable Trust registered u/s 12AA
 From Any Trust, Foundation etc referred u/s 10(23c)
• Cash
If aggregate value is less than 50,000 ₹ than nothing will be taxable. If value
exceeds 50,000 ₹, the whole amount will be taxable.
May 03, 2015 48

49. 56(2)(vii)(b) - Immovable Property - Without
Consideration
FMV≤50,000 FMV>50,000
Donor Donee Donor Donee
Not
considered
as transfer
u/s 47(iii) –
No Capital
Gain
56(2)(vii) is not
applicable. Cost of
Acquisition (COA) will
be previous owner’s
Cost as per Sec
49(1). Holding period
of previous owner
period will be counted
for donee.
Not
considered
as transfer
u/s 47(iii) –
No Capital
Gain
SDV is income from
other Sources u/s
56(2)(vii).
COA will be SDV.
Holding period will be
counted from
acquisition of property
by donee.
May 03, 2015 49

50. 56(2)(vii)(b) - Immovable Property - Inadequate
Consideration
FMV≤50,000 FMV>50,000
Donor Donee Donor Donee
Not
considere
d as
transfer
u/s 47(iii)
– No
Capital
Gain
56(2)(vii) is not
applicable. COA
will be previous
owner’s Cost as
per Sec
49(1). Holding
period of previous
owner period will
be counted for
done.
Sec 50C will be applicable if
Land & Building is capital
Assets for Donor and Sale
Consideration for Donor will be
SDV. Capital Gain will be SDV
less COA.
Sec 43CA will be applicable if
Land & Building is not a capital
Assets for Donor and Sale
Consideration for Donor will be
SDV. Income from PGBP will
be SDV less COA.
Difference of SDV
and Consideration is
income from other
Sources u/s
56(2)(vii). At the time
of further sale COA
will be SDV and
holding period will be
counted from
acquisition of
property.
May 03, 2015 50

51. 56(2)(vii)(c) - Movable Property Without Consideration
FMV≤50,000 FMV>50,000
Donor Donee Donor Donee
Not
considered
as transfer
u/s 47(iii) –
No Capital
Gain
56(2)(vii) is not applicable.
COA will be previous
owner’s Cost as per Sec
49(1). Holding period of
previous owner period will
be counted for done.
Not
considered
as transfer
u/s 47(iii) –
No Capital
Gain
Fair Market Value (FMV)
shall be income from other
Sources u/s 56(2)(vii). COA
will be FMV. Holding period
will be counted from the
date of acquisition of
property by donee.
Inadequate Consideration: if the difference of consideration and FMV is greater
than Rs.50000/- than differential amount will be taxable for receiver and the
treatment shall be the same as mentioned above.
May 03, 2015 51

52. Allotment of ‘additional shares’
• Sudhir Menon (HUF) [2014] 162 TTJ 425 (Mumbai - Trib.)
• Held
• The ITAT analyzed the tax implications under the following categories –
 Where the allotment is on a proportionate basis; and
 Where the allotment is on a disproportionate basis.
• In the first category, there was no scope for any property being received on
said allotment of shares as it is similar to the issue of bonus shares whereby
a share is split and the total value, post issue of additional shares in the
hands of the shareholder remains the same.
May 03, 2015 52

53. Case Laws
• Provisions of section 56(2)(vii)(c) did not apply to difference in book
value and face value of additional shares.
• However, in the case of ‘disproportionate’ issue of additional shares
provisions of section 56(2)(vii)(c) will apply.
• This decision may also help firm or closely held companies to
mitigate the tax liability under section 56(2)(viia) of the Act on receipt
of shares of a closely held company.
May 03, 2015 53

54. Section 56(2)(viia)

55. Section 56(2)(viia) reads as under…
where a firm or a company not being a company in which the public are
substantially interested, receives, in any previous year, from any person or
persons, on or after the 1st day of June, 2010, any property, being shares of
a company not being a company in which the public are substantially
interested,—
(i) without consideration, the aggregate fair market value of which exceeds
50,000 ₹, 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 50,000 ₹, the aggregate fair market value
of such property as exceeds such consideration.
May 03, 2015 55

56. Section 56(2)(viia) reads as under…
…..
Provided that this clause shall not apply to any such property received by way
of a transaction not regarded as transfer under clause (via) or clause (vic) or
clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation.—For the purposes of this clause, "fair market value" of a property,
being shares of a company not being a company in which the public are
substantially interested, shall have the meaning assigned to it in the
Explanation to clause (vii).
May 03, 2015 56

57. Take a note
• Transfer of shares of a company without consideration or inadequate
consideration would attract the provisions of section 56(2)(viia), if the
recipient is a firm or a company.
• If such shares are received without consideration, the aggregate fair
market value on the date of transfer would be taxed as the income of the
recipient firm or company, if it exceeds Rs 50,000.
• If such shares received for inadequate consideration , the difference
between the aggregate fair market value and the consideration would be
taxed as the income of the recipient firm or company, if such difference
exceeds Rs 50,000.
May 03, 2015 57

58. Take a note
• ‘Fair market value’ of a property, being shares of a closely held company,
shall have the meaning assigned to it in Explanation to section 56(2)(vii).
Thus, FMV of shares of a closely held company shall mean FMV determined
in accordance with rules 11U and 11UA.
• ‘Receive’ - As per the Advanced Law Lexicon dictionary, the term “receive”
has been defined as “To receive means to get by a transfer, as, to receive a
gift, to receive a letter, or to receive money and involves an actual receipt”.
• The provisions of section 56(2)(viia) would not apply in the case of transfer
of shares –
 Of a company in which the public are substantially interested; or
 To a company in which the public are substantially interested.
May 03, 2015 58

59. Take a note
• Certain transactions are exempted from the application of this provision-
May 03, 2015 59
Section Transaction
47(via) Transfer of shares held in an Indian company, in a scheme of amalgamation, by the
amalgamating foreign company to an amalgamated foreign company.
47(vic) Transfer of shares held in an Indian company, in a scheme of demerger, by the
demerged foreign company to a resulting foreign company.
47(vicb) Transfer by a shareholder, in a business reorganisation, of shares held in the
predecessor co-operative bank, in consideration of the allotment of shares in the
successor co-operative bank.
47(vid) Transfer or issue of shares by the resulting company, in a scheme of demerger, to
the shareholders of the demerged company in consideration of demerger of the
undertaking
47(vii) Transfer by a shareholder, in a scheme of amalgamation, of shares in the
amalgamating company in consideration of allotment to him of shares in the
amalgamated Indian company.

60. Comparison of section 56(2)(viia) & 56(2)(vii)(c)
Points of comparison Taxability in the hands of
individuals/HUFs under
section 56(2)(vii)(c)
Taxability in the hands of
closely
held companies/firms under
section 56(2)(viia)
Effective from 1-10-2009 1-6-2010
Shares covered Shares of both listed and
unlisted companies
Shares of only unlisted
companies
Whether receipt of other
securities taxable?
Yes No
Whether shares received must
be the capital asset of the
recipient assessee?
Yes No such requirement. This is
probably because no one
would hold unlisted shares
as stock-in-trade
May 03, 2015 60

61. Section 56(2)(viib)

62. Section 56(2)(viib) reads as under…
Where a company, not being a company in which the public are substantially
interested, receives, in any previous year, from any person being a resident,
any consideration for issue of shares that exceeds the face value of such
shares, the aggregate consideration received for such shares as exceeds the
fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of
shares is received—
(i) by a venture capital undertaking from a venture capital company or a
venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the
Central Government in this behalf.
May 03, 2015 62

63. Section 56(2)(viib) reads as under…
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be
prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the
Assessing Officer, based on the value, on the date of issue of shares, of
its assets, including intangible assets being goodwill, know-how, patents,
copyrights, trademarks, licenses, franchises or any other business or
commercial rights of similar nature,
whichever is higher;
(b) "venture capital company", "venture capital fund" and "venture capital
undertaking" shall have the meanings respectively assigned to them in clause
(a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10.
May 03, 2015 63

64. Take a note
• S.56(2)(viib) brings to charge consideration received by a company
which is not a Widely Held Company (WHC) towards issue of shares
in excess of Fair Market Value (FMV) of its shares.
• Section is an anti – abuse provision (SAAR) aimed at arresting
circulation of unaccounted money in the economy.
• Section is triggered when CHC issues shares (including preference
shares) to a resident at a premium and receives consideration which
is in excess of FMV of shares.
• If section is triggered - amount in excess of the FMV of the shares is
assessed as income from other sources.
May 03, 2015 64

65. Take a note
• FMV for the purpose of this section is higher of:
 Normative value as may be prescribed or
 FMV substantiated to the satisfaction of AO (i.e. value with respect
to assets including intangible assets as of the date of issue).
• Status of relevance is person to whom shares are issued and not
from whom consideration is physically received. Hence, section
would not apply when shares are issued to a NR but consideration is
received from a Resident.
• Resident includes Not Ordinary Resident (NOR). Section applies
equally to Residents and NOR.
May 03, 2015 65

66. Take a note
• Initial onus of proving fairness of values would be on the taxpayer.
However, once reasonable clarification is provided, onus of adducing
evidence and proof shifts back on the tax officer.
• Valuation for the purpose of S.56(2)(viib) would need to be done on
the date of issue of share. It may not be proper for the company to
rely merely on the last audited balance sheet date.
• Consideration could be monetary or non monetary. Section does not
put any restriction on nature of consideration.
May 03, 2015 66

67. Exclusions
• Issue of shares by WHC
• Issue of shares to NR
• Issue by Venture Capital Units to Venture Capital Company / Venture
Capital Fund
• Issue of shares to class of persons notified by Central Government
• Issue of shares at par
May 03, 2015 67

68. Transactions or Situation NOT likely to be
impacted
• Transactions involving transfer / receipt of existing shares - buyback,
forfeiture, capital réduction, liquidation etc.
• Transactions where issuing company does not receive any
consideration - bonus issue, consolidation / subdivision of existing
shares etc.
• Transactions where consideration received is admittedly less than
FMV - rights issue, ESOPs etc.
• Sweat shares if documentation supports that fair value of
consideration is not higher compared to fair value of shares issued.
• Issue and conversion of CCDs / Bonds / CCPS etc.
May 03, 2015 68

69. • Year of taxability - Consideration received in year one but actual
allotment happens in subsequent year/s. Is the assessment triggered in
the year of receipt of consideration or in the year of issue of shares?
 S. 56(2)(viib) is triggered in the year of issue of shares and date of receipt
of share application money is not relevant.
• Implications of S.56(2)(viib) when shares are issued for cash
consideration but there is a transaction of asset purchase which is
consummated on a contemporaneous basis
 Transaction of sale needs to be contra distinguished from a transaction of
exchange. In a bonafide sale transaction, the amount agreed to be paid
and agreed to be received between parties constitutes value of the
consideration as between parties.S.56(2)(viib) needs to be evaluated
based on this proposition.
May 03, 2015 69

70. • CHC allots shares at premium during the year but acquires listing
status at the end of the year and thus becomes a WHC as per section
2(18). Would section 56(2)(viib) still apply as the company was a CHC
at the time of allotment?.
 S.2(18)(b)(A) confers WHC status to a company if its shares are listed on
Recognized Stock Exchange (RSE) as on last day of previous year.
 Once shares of company are listed on RSEs at end of the year, a
company would be WHC for whole of the financial year.
 Once company, by force of statutory provision, is regarded as WHC for
whole of the financial year, section does not get triggered.
 Hence, reference to date of issue or date of receipt of consideration loses
its significance.
May 03, 2015 70

71. • Impact of S.56(2)(viib) in hands of a CHC (being a foreign company)
issuing shares to residents.
 No impact as income cannot be regarded as accruing or arising in India or
deemed to be accruing or arising in India.
 Also, when remittance is made from India, there would be no tax trigger
as receipt would be outside of India.
• Would different considerations apply for transaction covered by
S.47(xiii)/ (iv) such that shares may be issued by CHC but the seller is
eligible for exemption under the provisions of S.47?
 Since share issue is part of a business restructuring which is tax
neutralized under any provisions of the Act does not provide any immunity
from applicability of S.56(2)(viib) which needs independent evaluation.
May 03, 2015 71

72. May 03, 2015 72