The views expressed herein are personal to the writer and do not necessarily represent the views of the Bar Association.

Dr.  Raj K. Agarwal & Dr.  Rakesh Gupta

S. 56(2)(vii)(b): Controversies Arising After Amendment By FA 2013

Dr. (CA) Raj K. Agarwal & Dr. Rakesh Gupta, Advocate

S. 56(2)(vii)(b), as substituted by the Finance Act 2013, provides that if immovable property is transferred for a consideration which is less than the stamp duty value, the difference is assessable as income in the transferee’s hands. The authors have carefully studied this provision and raised several thought-proving questions as to its implications in the hands of the transferor and the transferee

 

Finance Act, 2013 has substituted clause (b) of section 56(2)(vii) w.e.f. 1.4.2014 providing, inter alia, that where an individual or Hindu Undivided Family receives, in any previous year, from any person or persons 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 consideration

 

shall be chargeable to income tax under the head “Income from Other Sources”.

 


 

In case assessee being Individual or HUF has acquired the immovable property as trading asset, the enhanced value of such asset cannot be accounted for in the books of accounts by the assessee, as no such provision corresponding to section 49(4) has been brought under the head ‘Profit & gains of business or profession’

Prior to the above substitution, the provision of clause (b) was introduced u/s 56(2)(vii) w.e.f 1st Oct, 2009 laying down that in a case when any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds Rs. 50000/-, the stamp duty value of such property was taxable in the hands of the transferee individual or HUF under this section as “Income from other sources”. Finance Act, 2013 has thus extended the scope of this section, inter alia, covering the cases when any immovable property is received by an individual or HUF for inadequate consideration.

 

1. Transferor of the property covered u/s 50C/43CA, Individual/HUF Transferee covered by new clause (b) of section 56(2)(vii)

 

As per the provision of section 50C, which was introduced under the Income Tax Act by Finance Act 2002 w.e.f. 1.04.2003, if land or building is transferred for a value less than the stamp duty value or circle rate of the property and the property is in the nature of capital asset, the difference is taxed in the hands of the transferor as deemed Capital Gain. Finance Act, 2013 has, by way of introduction of new section 43CA on the lines of section 50C, has sought to cover such immovable property in the nature of trading asset also. Both sections 50C and 43CA are applicable to seller/transferor of such immovable property. The amendment u/s 56(2)(vii)(b) has however sought to cover the buyer/ transferee of such immovable property on the lines of section 50C/ 43CA.

 

The underlying assumption in both the situations seems to be that the actual consideration passed on the transfer of immovable property can not be less than circle rate/ Stamp duty Value and in case the apparent consideration shown in the transaction is less than the stamp duty value, the deeming fiction as envisaged u/s 50C/43CA or u/s 56(2)(vii)(b) qua transferor & transferee shall come into force.

 

Finance Act, 2009 had introduced similar fiction qua the transferee individual or HUF u/s 56(2) but the same was withdrawn by Finance Act, 2010 with retrospective effect. No worthwhile explanation as to the rationale behind withdrawal of such provision earlier and now reintroducing the same by Finance Act, 2013 has come forward from the side of Government. Memorandum explaining the provisions of Finance Act, 2013 is silent on this aspect.

 

2. Section 56(2)(vii)(b) applicable in the case of Individual & HUF only

 

It is important to note that provision of section 56(2)(vii) applicable in case of transferee of immovable property covers only Individual or HUF, whereas provisions of section 50C/43CA applicable to the transferor of the property cover all the assessees. It implies that if the transferee of property is a person other than individual or HUF i.e. a Company, Firm, LLP etc., provision of section 56(2)(vii) shall not be applicable. Thus, if an immovable property is purchased by a person other than an individual or HUF for a consideration which is less than Stamp Duty Value / Circle Rate, there will not be any implication or attraction of the provision of this section. There is however nothing explicit as to why only individual and HUF have been brought into the ambit of this section and as to why other persons have been left out. The only broad rationale one can gesticulate & comprehend is that the origin of the provision of section 56(2)(vii) relates to the introduction of the concept of gift/ deemed gift into the income Tax Act after the abolition of Gift Tax Act and since the gift tax used to affect largely to individual and HUF, the applicability of this provision has also been restricted to individual and HUF only.

 

3. Cost of acquisition to the buyer?

 

A question arises as to what would be the cost of acquisition to the buyer/ transferee in a case when he has paid tax under this section on the excess of stamp duty valuation over the actual consideration paid by him.

 

The legislature has provided sub-section (4) to section 49 prescribing cost of acquisition with reference to certain modes of acquisition. It states that where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under clause (vii) or clause (viia) of sub section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia).

 

It means that in case the buyer of the property has acquired the property as capital asset, the legislature has prescribed the provision for cost step-up available to the buyer/ transferee for the purpose of calculating capital gain at a later date when such property is sold / transferred by such person. Provision such as sub-section (4) to section 49 would mean that cost step-up shall be available to the person only for the purpose of calculating capital gain when such property is transferred at a later date as capital asset. Since provision of section 49(4) cannot be extended to section 32, assessee cannot account for such asset at higher value in the books of accounts and cannot claim depreciation on the enhanced value of the asset.

 

Further, in case assessee being Individual or HUF has acquired the immovable property as trading asset, the enhanced value of such asset cannot be accounted for in the books of accounts by the assessee, as no such provision corresponding to section 49(4) has been brought under the head ‘Profit & gains of business or profession.’ It would mean that if an Individual or HUF being in the business of real estate, buys the land or building at less than stamp duty value and therefore being subject to rigor of newly inserted clause (b) of section 56(2)(vii), pays tax on the difference of stamp duty value and the actual consideration yet such individual or HUF would not be able to take advantage of the cost step up despite the fact such individual or HUF has paid the tax with reference to stamp duty value.

 

4. Whether omission or legislative intent?

 

Such amount is deemed to be income of the Individual or HUF assessee as provided under this section viz. section 56(2)(vii)(b). If an analogy & comparison of this situation with the deeming provision of section 69 for unexplained investments and section 69C for unexplained expenditure is made, it seems that the legislature has intended with a conscious mind, to not to prescribe the cost step up in case of trading asset on the lines of section 49(4)

As discussed above, the benefit of cost step-up has been granted by the legislature for a situation where the asset is a capital asset for the purpose of calculating capital gains on its subsequent sales but the benefit of the cost step-up has not been granted to an Individual or HUF when the asset is acquired by them as trading asset. In case the asset acquired is in the nature of trading asset, the deduction shall be allowed for an amount being the actual consideration paid by the assessee even when tax has been paid by him on enhanced value in accordance with the provision of section 56(2)(vii).

 

A question may arise as to whether this is a lapse on the part of the legislature and a provision of cost step up for trading asset corresponding to provision of section 49(4) has missed to be introduced in the statute or such omission is deliberate omission.

 

As discussed earlier, the underlying assumption behind section 56(2)(vii) seems to be that the actual consideration for a property cannot be less than its circle rate/ stamp duty value and in case the apparent consideration paid is less than the stamp duty value, the difference amount appears to have been paid in cash out side the books of accounts by the transferee. Such amount is deemed to be income of the Individual or HUF assessee as provided under this section viz. section 56(2)(vii)(b). If an analogy & comparison of this situation with the deeming provision of section 69 for unexplained investments and section 69C for unexplained expenditure is made, it seems that the legislature has intended with a conscious mind, to not to prescribe the cost step up in case of trading asset on the lines of section 49(4).

 

This is so because under the proviso to section 69C, the unexplained expenditure which is deemed to be the income of the assessee u/s 69C is not allowed as a deduction under any head of income. While in the case of unexplained investments u/s 69, there is no such restrictive provision, meaning thereby that if unexplained investment is deemed to be the income of the assessee u/s 69, such investment is allowed as deduction as cost of acquisition of the asset. It implies that the legislative intent is not to allow deemed income in the nature of revenue expenditure as deduction but to allow deemed income in the nature of capital expenditure as deduction. It seems that the same principle and analogy has been embedded in the case of provision of deemed income u/s 56(2)(vii).

 

However, this controversy is of limited applicability as the provision of section 56(2)(vii) is applicable only to individual and HUF and the cases when individual/HUF acquire immovable property as trading asset are not very common. Generally, immovable property as trading asset are acquired by the business entities such as firm/companies and provisions of section 56(2)(vii) are not applicable on such persons.

 

As a measure of tax planning, one may thus opt to do business of real estate in the form of business entities other than proprietorship.

 

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org
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35 Responses to “S. 56(2)(vii)(b): Controversies Arising After Amendment By Finance Act 2013”

  1. alok jain says:

    This a very good and a complete analysis of Sec 56(2)(vii)(b) in line with 50C and 43CA

    • Nitesh Kumar says:

      If an individual transfer some share to an other individual without consideration as a gift, cost of shares near about 5 lakhs. then what will be amount chargeable under sec 56 (2) (vii)….

  2. Sanjeev Grover says:

    A very exhaustive and thought provoking coverage.

  3. d sarkar says:

    Very important points. But sadly expression is not proper and leaves a reader bored after a few paragraphs. The complex sentence formations have made the explanation and logic hazy.

  4. B.N.Agrawal says:

    Very hard working reward.

  5. ASHOK MEHTA says:

    You made a very good effort. However the issue as why the provision like section 50C(2) is not provided. How can there be a blanket assumption of payment in cash without considering the facts of each property. The stamp duty rate and circle rate are wrong in valuation. This system applies the same rate for a sea facing and a gutter facing flat. You have not dealt with this point. You have done a fantastic analysis I only am pointing at a additional issue.

  6. CA Ajit Shah says:

    Sir, Compliments for good article which covers all the doubt in mind. Keep it up good things

  7. srinivas says:

    Thanks for the nice educative article

  8. Bhadresh Doshi says:

    Clause (d) of Explanation to Section 56(2)(vii) defines the ‘property’. As per this definition, ‘property’ means the following capital asset of the assessee………

    Therefore, for the recipient it should be the capital asset. Therefore, if the individual or HUF acquires the property for inadequate consideration but as a trading asset then the taxability as per 56(2)(vii)(b) does not apply at all.

    • Chetan Bharath says:

      56(2)(vii) defines “property” to include only capital assets which is applicable only for 56(2)(viic). Where as 56(2)(viib) is applicable directly to “immovable property” which is not defined. Hence, immovable property would cover all land/building irrespective of capital asset/trading asset/agricultural land etc.. ALL will be covered

  9. Amit Mundhra says:

    A great article with very detailed analysis of the provisons of seciton 56. Great Work.

  10. ketanvyas1975 says:

    yes. Bhadresh has raised a very significant point.

  11. gopal nathani says:

    From the reading of section 56 it appears that it has no application to stock in trade receipts. and that is why there could be no cost step up provision. property is defined is express terms in the section itself meaning capital asset of the type mentioned therein and that does not include stock in trade. capital asset itself by its definition u/s 2 (14) exclude stock in trade.

  12. piyush goyal says:

    Sir, thanks for such a nice article, i also have some doubts in my mind:

    1.If buyer purchesd any immovable property as capital asset and consideration paid is less than the stamp duty then in which value the asset will be shown in B/s if it is to be shown in stamp value then wat about the liability side what will we show????

    2.If we show capital asset in stamp value it means we agreed that we have paid amount in excess of consideration which also lead to the situation where AO can say that we have unaccounted/unexplained cash credit and also imposed panelties.

    Please clear my doubt and spare me if i have asked a silly thing

    Thanks.

  13. kanwal Juneja says:

    Sir, u have high lighted the latest complicated section in simple words for which we r grateful. But the points raised by Mr Nathani and mr Goyal if answered will further clear the section.
    With regard

  14. kanwal Juneja says:

    Sir, u have high lighted the latest complicated section in simple words for which we r grateful. But the points raised by Mr Nathani and mr Goyal if answered will further clear the section.
    With regards.

  15. mohit garg says:

    1. piyush goyal nice question , but sec. 50c is applicable when we calculate capital gain , in b/s actual value will be disclosed its immaterial how much stamp duty value…………….

    2. as per sec 2(14) stock not included in capital assets so 50c and 56 will not apply

  16. Bipeen G. Mundada says:

    Sir (s), Nice Analysis in very simple and understanding words at right time.
    If some light cud have been thrown on way out part, it wud have been more interesting.

    Also if you can share views on interpretation whether Property includes Capital Asset in view of the definition given in clause (d). The view is also elaborated by Bhadresh Doshi (June 20, 2013 at 4:48 pm) in comments on this article.

  17. NILANGSHU SEN says:

    this is good analysis of the amendment. There was a dictum that let there be 100 victims be relesed than one innocent is vitmised..now the new trend of legislation shows the other way…

  18. C.Sathish says:

    Sir, you made good analysis of the section. Really good effort. Thanks.

  19. Dr. Rakesh gupta says:

    Respected shri mehta sahab, would you pl see section 56(2)(vii)? Provisions of section 50C(2) have already been incorporated in section 56. Thus your concern has been taken care of by legislature.-Dr. Rakesh Gupta & Dr. Raj

  20. Dr. Rakesh gupta says:

    Respected shri bhadresh doshi sahab, in clause (d) , there is no mention of the words capital asset. Hence to say that section 56 would apply to the case of transfer of capital asset only, with great respect, in our view may not be correct-Dr. Rakesh Gupta & Dr. Raj k. agarwal

  21. Dr. Rakesh gupta says:

    Respected shri Nathani sahab, there is no use of expression ” capital asset ” in section 56(2)(vii) Explanation (d) which defines the word “property”. Hence, in our respectful view, section would cover all property-whether capital or trading-Dr. Rakesh Gupta & Dr. Raj K.Agarwal

  22. Dr. Rakesh gupta says:

    Dear shri piyush goyal, there is no requirement or need to incorporate the stamp duty value in books of accounts. Effect will be taken while preparing computation of income and return of income.- Dr. Rakesh Gupta & Dr. Raj K. Agarwal

  23. gopal nathani says:

    lets do a reverse. clause vii(c) reads property, other than immovable property. property definition under explanation include only immovable property of the character of capital asset. so what goes under clause vii(b) is what is forming part of such definition which does not include trading asset. had it been otherwise then there was no need to include immovable property in the property definition. the definition cater to both clause vii (b) and Vii(c). moreover a trading asset transaction has no hitting u/s 56. rgds

  24. gyan poddar says:

    Ah! once again thanks for such good interpretation and analysis of the such issue

  25. vijay k tangade says:

    thanks for very good article about section 56(2)(vii) and other .I suggest to author and website plz upload you article in pdf format to keep in our records which is useful to professional persons in his life

  26. rkdhandia says:

    Sir,
    In case of an Individual or HUF who receive any immovable property (i) without consideration , the stamp duty value which exceeds Rs 50,000 (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 consideration wil become income under income from other sources. Thus the buyer will also be liable to pay tax on difference between the stamp duty and actual payment made by him
    However, there is proviso that where the date of fixing the amount of consideration and date of registration is not same then the stamp duty value as on the date of agreement will be taken. Provided that the consideration referred to therein or part of thereof has been paid by any mode other than cash on or before the date of agreement.
    Here the relief is given to buyer only but there is no relief to seller and in this case also the seller has to take stamp duty value for computation even had had entered into agreement earlier and reced payment through cheque.
    Pl clarify this point.
    Thanks

  27. ASHISH says:

    sir,
    I want to ask you that what is the taxability when a women will make a cash gift to a huf where her husband is karta

  28. Rajendra says:

    My father gave me Rs 5 lac in cash just before his death last month (which comes under current FY). Is the cash from mother taxable? What documents are required to claim exemption for this income in the IT return?

  29. Rajendra says:

    My father gave me Rs 15 lac in cash just before his death in current FY, which I have already invested in buying some assets. I know that cash gift from father is not taxable under section 56(2)(vii). What documents are required to claim tax exemption for this gift while filing my IT return?

  30. Rajesh Agrawal says:

    Sir- pls guide me as on Feb-2012 i had booked one flat of 2BHK at indore and builder’s given ALLOTMENT LETTER to me, builder is private ltd. co. and I had paid initial booking amount through cheque in Feb & and part amount through LIC housing finance co. in Mar-12 and then paid >96% balance agreeement value in Sep -2012.when I went to builder’s office for registery of flat as now flat at is finishing stage, builder want CAPITAL GAIN @33.33% US 43CA from us. and not ready to do registry if i am not making payment of capital gain.

    Hence in this situation pls guide me on below points-
    A. Capital gain is arrising to me & builder sepratly.
    B. On what amount and of flat agreement value or current registry value.
    C. Pls give Section name in which Capital gain is not arrising to me.

  31. DIPAK RANJAN BHATTACHARYYA says:

    Dear Sirs,
    Where Capital Gain Tax has been paid on the value mentioned under Section 50C(1) by the saler of an immovable asset, whether income from other sources under Section 56(2)(vii)(b) will still be taxable in the hands of the buyer of the same immovable property(which means double taqxation on the same accretion of value) ?
    Section 56. (1) sates that Income under the head “Income from other sources” is chargeble, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

    Regards.

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