certain Important provisions under the income-tax act,

1961

S.No

Particulars

1 Section 56(2)(viia)

2 Section 56(2)(viib)

3 Section 43CA

4 Section 50C

5 Questions and Answers

Scope

SECTION 56(2)(viia)

ICAI Recommendations

Object of the Amendment The Finance Act 2010 amended section 56(2) of the Income-tax Act, 1961

(Act) by inserting a new clause (viia) to section 56(2). The amendment was effective from 1 June 2010.

The Memorandum explaining the provisions of the Finance Bill, 2010 explains the reason and objective behind introduction of clause (viia) of section 56(2) in the following terms:

“These are anti-abuse provisions which are currently applicable only if an individual or HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision.

Object of Amendment In order to prevent the practice of transferring unlisted shares at price much below their fair market value, it is proposed to amend section 56 to also include within its ambit transaction undertaken in shares of a company (not being a company in which the public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which the public are substantially interested).”

[(viia) 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 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 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);]

Section 5 6 (2)(viia)

Analysis 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.

Analysis ‘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.

‘Firm’ includes LLP. [Section 2(23)(i) of the Act].

‘Closely held company’ - Section 2(18) defines ‘company in which public are substantially interested’ (i.e. widely-held companies).

‘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”.

Applicability However, 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.

Certain transactions are exempted from the application of this provision-

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

ApplicabilitySection Transaction47(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.

Comparison of section 56(2)(viia) read with section 56(2)(vii)(c)

Points of comparison Taxability in the hands ofindividuals/HUFs undersection 56(2)(vii)(c)

Taxability in the hands of closelyheld companies/firms under section56(2)(viia)

Introduced by Finance (No. 2) Act, 2009 Finance Act, 2010

Effective from 1-10-2009 1-6-2010

Shares covered Shares of both listed andunlisted companies

Shares of only unlisted companies

Whether receipt of othersecurities taxable?

Yes No

Whether shares received mustbe the capital asset of therecipient assessee?

Yes No such requirement. This is probablybecause no one would hold unlistedshares as stock-in-trade

Allotment of ‘additional shares’ Recent ruling of the Mumbai Income Tax Appellate Authority in the case

of Sudhir Menon (HUF) [ITAT No. 4887/Mum/2013] on whether allotment of ‘additional’ shares, on the basis of existing shareholding and at a value less than the fair value , results in taxation under the Gift Tax under the Act.

The ITAT analysed the tax implications under the following categories – Where the allotment is on a proportionate basis; and Where the allotment is on a disproportionate basis.

The ITAT ruled that as regards ‘proportionate’ allotment there should be no adverse tax implications 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.

Allotment 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.

SECTION 56(2)(viib)

ICAI Recommendations

[(viia) 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.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 prescribed48a; 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, licences, 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 48b[Explanation] to clause (23FB) of section 10;]

Section 5 6 (2)(viib)

Analysis 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 apremium and receives consideration which is in excess of FMV of shares.If section is triggered - amount in excess of the FMV of the shares isassessed as income from other sources. FMV for the purpose of thissection is higher of:

► Normative value as may be prescribed or ► FMV substantiated to the satisfaction of Assessing Officer (ie value

with respect to assets including intangible assests as of the date of issue).

Analysis 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

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.

ExclusionsIssue of shares by WHCIssue of shares to NRIssue by Venture Capital Units to Venture Capital

Company / Venture Capital FundIssue of shares to class of persons notified by

Central GovernmentIssue of shares at par

Transactions or Situation NOT likely to be impacted Transactions involving transfer / receipt of existing shares - buyback,

forfeiture, capital reduction, 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.

Issues

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 cashconsideration but there is a transaction of asset purchase which isconsummated 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.

Applicability of Section 56(2)(viib) to issuance of shares by theamalgamated company where appointed date of merger is prior1 April 2012 though record date / date of issuance is after 1 April 2012

One view, likely to be indicated by the tax department is that, for the purpose of S.56(2)(viib), what is relevant is the effective date, on the ground that amalgamation is given effect to only in the year in which High Court order is received.

Another view is that S.56(2)(viib) needs to be evaluated with reference to the appointed date on the ground that there is vesting of property on the appointed date. The commitment to issue shares is a binding obligation with effect from the appointed date.

Better view is that section will not apply to amalgamations where appointed date is prior to 1 April 2012.

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.

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.

Section 43CA

ICAI Recommendations

The High Court ruling in the case of Kan Construction and Colonizers (P) Ltd.[TS-252-HC-2012-ALL] held that stamp duty valuation provisions u/s 50C of the Act do not apply to sale of plot of land held as ‘Stock-in-trade’.

Section 50C applies only to capital assets 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 as ‘Stock-in-trade’.

Pre Amendment

(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).

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.

Contd..

W.e.f AY 2014-15, 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 consideration will be taxable.

This will lead to double taxation of the same income in the hands of two different person i.e. section 43CA or section 50C and be taxed as IFOS under section 56(2)(vii) of the Act. Like it will be taxed in the hands of transferor and under section 56 in the hands of transferee.

Taxability in case of receipt of immovable property for inadequate consideration [S. 56(2)(vii)(b)](w.e.f. 1st April 2014)

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 as mode other than cash

Issues

Section 50C

ICAI Recommendations

Section 50C is applicable if the following conditions are satisfied –

Condition 1: There is a transfer of 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.

Section 50C - Applicability

CONSEQUENCES IF THE ABOVE CONDITION ARE SATISFIED

Different situations Full value of consideration for the purpose of capital gains

Where the assessee accepts the value adopted by Stamp duty authority.

Value adopted by Stamp duty authority is taken as full value of consideration.

Contd..Different situations Full value of consideration for the

purpose of capital gains.

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.)

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 Department Valuation Officer is more than the stamp duty valuation) is taken as full value of consideration.

Issues

Applicability of section 50C in case of transfer of lease hold rights

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 – Atul G. Puranik [TS-197-ITAT-2011(Mum)]

However, in case of Hari Om Gupta [TS–207-ITAT-2014(LKW)] it was held that 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

Issues

Applicability of section 50C in case of Assets hold for Stock in trade

Section 50C is applicable only in respect of capital asset, being land and/ or building, and held as not stock-in-trade. Champaben C Patel [TS-92-ITAT-2014(Mum)]

However, it is pertinent to note that w.e.f.1st April, 2014 any transfer of assets other than capital asset, being land and building, the provisions of section 43CA would apply.

Issues

Whether addition u/s. 50C in the hands of the seller, means that the buyer has paid “on-money” and addition u/s. 69 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.

- Harley Street Pharmaceuticals Ltd. 38 SOT 486 (Ahd.);- Sangam Tower 130 TTJ 104 (Jp.)

Issues Contd..

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?

As held in ACIT vs N. Meenakshi (2009) 125 TTJ 856 (Chennai), penalty cannot be levied in such a case, as there is no ‘concealment or furnishing of inaccurate particulars’.

Issues Contd..

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. - Gyan Chand Batra v/s. ITO - [2010] 133 TTJ 482(JP)

Issues Contd..

Prior to Oct 2009, Section 50C was attracted only when property was 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 is not "registered" for stamp duty purposes - Shri Gurdip Singh Sidhu TS-69-ITAT-2012(ASR)

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 has violated the Sec 50C(2). Further, AO not required to provide opportunity to assessee before invoking provisions of Sec. 50C – TV Nagasena [TS-383-ITAT-2012(Bang)]

Issues Contd..

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