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Taxation of Gift and Income S. 56(2)(vii) & (viia)

Taxation of Gift and Income S. 56(2)(vii) & (viia). Saturday, 11 th December, 2010 ------------ Auditorium, Indore AIFTP. Journey of perseverance. Finance Bill 1997 – S. 56 Clause(v) - A.Y. 2005-06 – 1 st September, 2004 Finance(No.2) Act, 2004 –

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Taxation of Gift and Income S. 56(2)(vii) & (viia)

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  1. Taxation of Gift and Income S. 56(2)(vii) & (viia) Saturday, 11th December, 2010 ------------ Auditorium, Indore AIFTP Pradip N. Kapasi Chartered Accountant

  2. Journey of perseverance • Finance Bill 1997 – S. 56 • Clause(v) - A.Y. 2005-06 – 1st September, 2004 • Finance(No.2) Act, 2004 – • Finance Act, 2007 w.e.f 1.04.2005 ( more exemptions) • Taxation Laws(A) Act, 2006( sunset w.e.f 1.04.2007) • Clause (vi) - A.Y. 2007-08 • Taxation Laws (A) Act, 2006 w.e.f 1.04.2007 • Finance(No.2) Act, 2009 w.e.f 1.10.2009 ( sunset) • Clause (vii) – A.Y. 2010-11 - w.e.f 1.10.2009 • Finance(No.2) Act, 2009 • Finance Act, 2010 • Cl. (viia) – A.Y. 2011-12 –w.e.f 01.06.2010 • Finance Act, 2010 • Simultaneous amendments in s. 2(24) (xv) • Constitutionality to be tested Pradip N. Kapasi Chartered Accountant

  3. Activation of charge • On receipt of specified things • Individual & HUF –cl.(vii) • AOP & BOI & Trust • Firm & Company – cl.(viia) • S.2(18) company & LLP • Without consideration or Inadequate consideration • Taxable in recipient’s hands • Receipts by minor child & clubbing • Each charge independent of other • Taxability in the year of receipt • Threshold exemptions – independent • Residential status • Place of receipt Pradip N. Kapasi Chartered Accountant

  4. Chargeable receipts • Any sum of money - 1.09.2004 • Any property • Immovable property -1.10.2009 • Specified movable property -1.10.2009 • Any shares of a ‘private’ company -1.06.2010 • Scope • Not restricted to gifts • Beyond Residential status & India • Head of Income & computation Pradip N. Kapasi Chartered Accountant

  5. Consideration • Money & Immovable property • without consideration • Movable without or inadequate consideration • Shares without or inadequate consideration • Not defined under Income tax Act • Significance of ‘Money or money’s worth’ • S. 2(d) of Indian Contract Act • Promise; an act or abstinence –any tense • Effect of contract without consideration s.25 • May move from third party • Economic consideration • Cir. No. 419 dt.1.06.1985 • Examples; Admission, Retirement, Ex-gratia, • Personal qualities, Mayavati’s case, Natural love Pradip N. Kapasi Chartered Accountant

  6. FMV & SVA CBDT empowered to prescribe for Movables Prescribed vide Notification No. 23/2010 dt.8.04.2010 IT (Second Amendment) Rules, 2010 W.e.f. 1.10.2009 Retrospective Application or Not Rule 11U & 11UA Price in the open market Invoice value in case of purchase As per Valuer’s Report where value exceeds Rs.50,000Not specified for Bullion Immovable Property –SVA and s.50C Date of receipt to be relevant

  7. Exceptions –cl.(vii) • Receipt from ‘relative’ – Individual - Love and affection • Occasion of marriage • Will or Inheritance • Contemplation of death & ‘ Donatio mortis Causa’ • Local Authority - s.10(20) • S. 10(23C) entity • S. 12AA registered trust or institution ; unregistered • No quantum restriction • Some possible Exceptions • Exemption u/s 10 • Capital receipts • Grants & Subsidies • Insurance claims • Compensation & Damages Pradip N. Kapasi Chartered Accountant

  8. Capital asset • Application for ‘capital asset’ only • Qua assessee - Business of recipient • ‘Capital Asset’ and s. 2(14) • Personal effect • Agricultural land • Right or interest in capital asset • Stock-in-trade of immovable property • Application of s.28 • Application of DLF Universal’s case Pradip N. Kapasi Chartered Accountant

  9. Any sum of money • Meaning • Cash • Cash equivalents • IOU • Third party debts • Waiver of claim • Without consideration only • Aggregate value > Rs. 50000 • Whole of aggregate value of ‘such’ sum • W.e.f. 1.09.2004 Pradip N. Kapasi Chartered Accountant

  10. Any immovable property • Ambiguously defined – Land & Building • TOPA and GCA , Chapter XXC • Without consideration only • Stamp duty value • Central Government included • Right/duty to refer to DVO • Power to refer to DVO u/s 142A • SVA value exceeding Rs. 50,000 • SVA value to be taxed • Threshold limit per property • Year of receipt • Position for stock-in-trade and Donee • W.e.f. 1.10.2009 Pradip N. Kapasi Chartered Accountant

  11. Property other than Immovable-I • Movables • Shares & securities, Jewellery • Arch. Collection, Sculptures • Drawings, Paintings, Work of art • Bullion ( w.e.f. 1.06.2010) • Without or inadequate consideration • Diff. bet. FMV & consideration • Ref. to DVO – whether possible Pradip N. Kapasi Chartered Accountant

  12. Property other than Immovable-II • No consideration cases • Where aggregate FMV> Rs. 50,000 • The whole of aggregate FMV taxable • Inadequate consideration cases • Where aggregate difference > Rs. 50,000 • Difference to be taxable • Both threshold operate separately • Year of receipt • w.e.f. 1.10.2009/1.06.2010 Pradip N. Kapasi Chartered Accountant

  13. Receipt of shares -I • Receipt of shares of a non s. 2(18) company • By ‘firm’ and ‘company’ recipients • s. 2(18) company excluded • LLP included • With/out consideration > Rs. 50,000, whole • FMV as per Rule 11UA • Substantive not clarificatory • Shares • Preference shares included – CD not included • Rights not included - Shares of subsidiaries Pradip N. Kapasi Chartered Accountant

  14. Receipt of shares-II • Exclusion for transfers s. 47(via),(vic),(vicb),(vid),(vii) • Amalgamation, demerger, co-op. bank succession • No exclusions • Similar to s. 56(2)(vii) – Relative, etc. • For stock-in-trade • For shares of foreign companies • For other exempted transfers • For deemed transfers • Adjustment in purchase cost • W.e.f. 01.06.2010 Pradip N. Kapasi Chartered Accountant

  15. Substitution of COA, s. 49(4) • COA in hands of recepient • ‘Subjected to tax’ u/s 56(2)(vii) & (viia) • Value that is ‘taken into account’ • COA in cases where FMV < Rs. 50,000 • S. 49(4) and s. 49(1) • Period of holding and s. 2(42A) Pradip N. Kapasi Chartered Accountant

  16. Relatives • Persons covered • Not covered • Rules of the game • Payee’s relative • Converse not always true • Amendment expanded scope • Incomplete Two way applicability • Female Ascendants & Descendents Pradip N. Kapasi Chartered Accountant

  17. Remaining issues • Capital receipt • Refundable receipt • Chandrakant H. Shah, 121 TTJ 145 (Mum) • Receipt on refund • Distribution on receipts • Business receipts • Gross or net • Not liable tax • Gifts in kind • Non goods items • Deemed gifts • On credit by payer • Deductions admissible Pradip N. Kapasi Chartered Accountant

  18. Are these receipts taxable ? Pradip N. Kapasi Chartered Accountant Refundable Without right of disposition/transfer By a Private Trust/Trustees On partition of HUF/ Self impression Bonus/Right entitlement/Right/CD ESOP/ESOS FDR/KVP/NSC/IOU/Debt Rights in Land & Building

  19. Thank You Pradip N. Kapasi Chartered Accountant

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