CA Gautam NayakConference on Developments in Accounting, Auditing &

TaxationDTPA Chartered Accountants’ SC-EIRC & BCAS

21st April 2012

Section 56(2)(vii)

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Receipts – s.56(2)(vii)Applicable not only to gifts but to all types of receipts without

consideration/for less than FMV Whether applicable to loans?

Chandrakant H. Shah v. ITO 121 TTJ 145 (Mum) – interest free loan without repayment stipulation obtained from sister concerns for purchase of flat from one of them – loans to be examined in context of s.68

Whether acceptance essential?

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Receipts – s.56(2)(vii)Receipt in capacity as owner

Both beneficial and legal title

“The word receipt of income refers to the first occasion when the recipient gets the money under his own control” – Keshav Mills Ltd. v. CIT 23 ITR 230 (SC)

Point of time of receiptS.122 & 123 of Transfer of Property Act Immovable Property – possession or conveyance or registration?Movable Property - deliveryShares – demat/physical – Vasudev Ramachandra Shelat v. Pranalal

Jayananda Thakar 45 Comp. Cases 43 (SC) Mere investment in joint names does not constitute delivery

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Persons Covered – s.56(2)(vii)Applicable only to individual or HUF – not applicable to

AOP/BOI, firm, company, artificial juridical personTrustees of a trust – whether covered?

Marsons Beneficiary Trust 188 ITR 224 (Bom) – specific trustShri Krishna Bandar Trust 201 ITR 989 (Cal) – discretionary trustShardaben Bhagubhai Mafatlal Trust 247 ITR 1 (Bom) – public charitable trust

Applicable to minors alsoApplicable to residents as well as non-residentsTo residents, wherever received – to non-residents, if received

in India (subject to DTAA relief)

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Items Covered – s.56(2)(vii)Without consideration:

Any sum of money, aggregate value of which exceeds Rs.50,000Any immovable property, the stamp duty value of which exceeds

Rs.50,000Any property, other than immovable property, aggregate fair market

value of which exceeds Rs.50,000For consideration less than aggregate fair market value:

Any property, other than immovable property, by amount exceeding Rs.50,000

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Definition of “Property”Means following capital asset of assessee:

Immovable property, being land or building or both;Shares and securities; Jewellery;Archaeological collections;Drawings;Paintings;Sculptures;Any work of art; orBullion.

Capital asset of recipient – not of donor stock in trade/personal effects received without consideration not

coveredAgricultural land not covered

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MoneyThe medium of exchange authorised by a Govt. as part of its

currency; Assets that can be easily converted to cash (Black’s Law Dictionary)

“Money” includes a cheque, postal order, demand draft, telegraphic transfer or money order – s.2(b) of Prize Chits & Money Circulation Schemes (Banning) Act, 1978

Whether money:Foreign CurrencyBank/company fixed deposit?Negotiable instruments – e.g. bill of exchangeDebts/Loans

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Immovable PropertyLand or Building or both

Joint OwnershipRights in Immovable Property

Tenancy Rights Flat under constructionLeasehold Rights

Agricultural Land (which is not capital asset) not covered

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Shares & SecuritiesEquity as well as preference sharesListed as well as unlistedSecurities – s.2(h) of Securities Contracts (Regulation) Act, 1956

- “securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or

other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative; (ib) units or any other instrument issued by any collective

investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

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Shares & Securities (id) units or any other such instrument issued to the investors

under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central

Government to be securities; and (iii) rights or interest in securities;

Mutual Fund units also securitiesStock options also securities

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JewelleryJewellery - expln. to s.2(14) – includes

Ornaments made of gold, silver, platinum or precious metals, whether or not containing precious/semi-precious stones & whether or not worked/sewn into wearing apparel

Precious/Semi-precious stones, whether or not set in any furniture, utensil or other article or worked/sewn into wearing apparel

Whether jewellery:Silver utensilsGold watch

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Archaelogical Collection/ Work of ArtArchaeology –

The scientific study of material remains (as fossil relics, artifacts and monuments) of past human life and activities; remains of the culture of a people – Merriam Webster Online Dictionary

the study of human history and prehistory through the excavation of sites and the analysis of artifacts and other physical remains – Oxford Dictionary

Work of Art – a creative product with strong imaginative or aesthetic appeal – Oxford

DictionaryA product of one of the fine arts; esp. a painting or sculpture of high

artistic quality; something giving high aesthetic satisfaction to the viewer or listener – Merriam Webster Online Dictionary

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Archaelogical Collection/ Work of ArtArtistic work –

Any visual representation, such as a painting, drawing, map, photograph, sculpture, engraving or architectural plan – Black’s Law Dictionary

Whether archaeological collection/work of art?Stamp collectionCoin collectionAntique Furniture

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BullionWith effect from 1st June 2010Meaning

An uncoined solid mass of gold or silver (Black’s Law Dictionary)gold or silver considered as so much metal; metal in the mass

(Merriam-Webster Online Dictionary)a metal (esp. gold or silver) in bulk before coining, or valued by weight

(Oxford English Dictionary )Bars or Ingots of precious metals covered Whether following covered?

Gold/silver coinsGold watchesSilver utensils

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Without ConsiderationBoth immovable property & movable propertyDefinition of Consideration - S.2(d) of Indian Contract Act

When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

Consideration under Indian Contract Act It should be moved at the desire of the promisor It may be moved from promisee or any other person It may be an act, abstinence or forbearance or a return promise It may be past, present or future It need not be adequate It must be real and not illusory It must be something which the promisor is not already bound to do It must not be illegal, immoral or opposed to public policy

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Without ConsiderationConsideration flowing from third party permissbleNatural love and affection – not considerationAmounts received under personal accident policy?Compensation in disaster/accident? Exemption u/s.10(10BC)Damages /Compensation for sub-standard goods/deficient service?Compensation on cancellation of contract for purchase of property

Mrs. Yogesh Aurora v. ITO 2009 TIOL 511 ITAT (Bang)Amounts received for personal inconvenience?Amounts received with obligations – e.g. amounts settled in trust?

Shardaben Jayantilal Mulji v. Commissioner of Wealth Tax 106 ITR 667 (Bom) Keshub Mahindra v. CGT 70 ITR 1 (Bom) - “consideration” must be construed

according to defn in s.2(d) of Contract Act – modified by Gift Tax Act in 2 respects Firstly, inadequacy of consideration amounts to gift though valid contract under

Contract Act Secondly, defn has been modified by use of “In money or in money’s worth”

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Without ConsiderationPromise of marriage – valid consideration under Contract Act – not

consideration in money or money’s worth – I Chatterji v. CGT 185 ITR 610 (Bom)

Amount received by legal heir for not contesting the will of the deceased – valid consideration for s.56(2)(v) – Purvez A. Poonawalla v. ITO 138 TTJ (Mum) 673

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For Consideration less than FMVAny property other than immovable propertyImmovable property – originally intended to be covered, now not

coveredNot same as inadequate consideration – applicability of SC decision

in K.P. Varghese 131 ITR 597 (SC)Saving in expenditure – whether can constitute income?

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Exemptions – s.56(2)(vii)Gifts from relative

“Relative” definedInconsistency – nephew/uncleRelative vis-à-vis HUF

HUF is also relative of member – Vineetkumar Raghavjibhai Bhalodia v. ITO 43A BCAJ 23 (Rajkot) – Aug 2011

Finance Bill 2012 amendment – member of HUF is relative of HUF

For minors, relationship with minors to be seen ACIT v. Lucky Pamnani 135 TTJ (Mum) 607

On occasion of marriage of individual Prior to marriage (engagement, etc) not exempt Naming ceremony, thread ceremony, etc. not exempt

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Exemptions – s.56(2)(vii)Under will or by way of inheritanceIn contemplation of death of payer/donorFrom local authorityFrom trust covered by s.10(23C)From trust registered u/s.12AA

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Exemptions – s.56(2)(vii)No specific exemption for assets received in following cases –

whether taxable?Under family settlementOn partition of HUFOn dissolution of trustOn settlement in trustAllotment of shares on exercise of optionsGrant of stock options

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Limits – s.56(2)(vii)4 separate limits for 4 classes of receipts

Entire amount taxable if limits exceeded – not just excess over limitsRs.50,000 for sums of money

Aggregate during the yearRs.50,000 for each immovable property

Not aggregate of all properties during the yearFor property other than immovable property

Rs.50,000 for receipts without considerationRs.50,000 for receipts for consideration less than FMVAggregate of all such properties (irrespective of type)

Separate limits under clauses (vi) and (vii) prior to and after 1.10.2009

Whether separate limits for minor and parent?

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Disallowance of Expenditure in Relation to Exempt Income

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Section 14A – Recent DecisionsCIT v. Walfort Share & Stock Brokers P. Ltd. 326 ITR 1 (SC)

Loss on Dividend Stripping In many cases, the nature of expenses incurred may be relatable partly

to the exempt income and partly to taxable incomeMandate of s.14A is clear – to curb the practice of claiming deduction

of expenses incurred in relation to exempt income against taxable income and at same time avail tax incentive by way of exempt income without any apportionment of expenses incurred in relation to exempt income

The theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened u/s14A

Pay-back or return of investment is not an expenditureTo attract s.14A, there has to be proximate cause for disallowancePay-back is not proximate cause – s.14A not applicable

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Section 14A – Recent DecisionsCIT v. Hero Cycles Ltd. 323 ITR 518 (P & H)

Manufacturing company earning dividend income (AY 2004-05)Claim that no expenditure incurred for earning dividendsFinding of Tribunal that no nexus between interest paid and

investment in sharesNot correct to say that some expenditure is always incurred directly or

indirectly for earning exempt incomeDisallowance u/s.14A requires finding of incurring of expenditureWhere found that no expenditure incurred, disallowance cannot stand

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Section 14A – Recent DecisionsGodrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81 (Bom)

Earning dividend income and income from mutual fundsEffect of s.14A is to widen theory of apportionment of incomeEven in case of composite and indivisible business, which results in

earning of taxable and non-taxable income, necessary to apportion expenditure incurred

Expenditure incurred refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for

Object of sub-section (2) is to provide uniformity of method where AO not satisfied with correctness of claim of assessee in respect of such expenditure in relation to exempt income

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Section 14A – Recent DecisionsGodrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81(Bom)……

Even in absence of sub-section(2), reasonable method would have to be followed consistent with circumstances of case having regard to all relevant facts & circumstances

Sub-section(2) to settle disputes by adopting uniform method of determination

AO cannot apply method of rule 8D without determining the correctness of claim of the assessee, having regard to the accounts

Objective satisfaction has to be arrived atSafeguard for fair and reasonable exercise of power, conditioned by

requirement of objective satisfaction, must be scrupulously observed

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Section 14A – Recent DecisionsGodrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81(Bom)……

Objective satisfaction contemplates notice to assessee, opportunity to place on record all relevant facts including accounts, and recording of reasons by AO

Dividends and income from mutual funds do not form part of total income – expenditure in relation to earning such income cannot be allowed u/s.14A

In order to determine quantum of disallowance, proximate relationship between expenditure and relevant income

Cases of individual hardship are not valid ground for striking down constitutional validity

So long as measure has nexus with object sought to be achieved, passes constitutional muster

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Section 14A – Recent DecisionsGodrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 328 ITR 81(Bom)……

Affidavit-in-reply filed by Dept. – rule 8D(2)(ii) – only interest on borrowed funds to be apportioned – excludes any interest directly attributable to any particular income or receipt (for plant/machinery, etc)

Rule 8D(2)(iii) – linked to quantum of investment – similar to PMS feesRule 8D operates prospectively from A.Y.2008-09 Even in absence of rule 8D, reasonable method of apportionment

would have to be followed

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Section 14A – Recent DecisionsCCI Limited v. JCIT (Karn)

Assessee was distributor of state lotteries and a trader of shares and securities

Assessee had sold 63% of the shares purchased and had offered the sale to tax as business income

On the remaining unsold 37% , dividend receivedHeld by the High Court that

the assessee had not retained shares with the intention of earning dividend income

dividend income was incidental to business of sale of shares, which remain unsold by the assessee

it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions

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S.14A - IssuesCan disallowance u/s.14A read with rule 8D exceed amount of

expenditure claimed as deduction? Gillette Group India Pvt. Ltd. v. ACIT (ITA No.267/Del/2012) dtd 23.3.2012,

Search Enviro Ltd. v. ACIT (ITA No.3464/Mum/2011 dtd 2.3.2012)Can disallowance u/s.14A exceed amount of exempt income?Can AO adopt any method other than that adopted by assessee or

rule 8D?Approach at time of assessmentWhether s.14A disallowance is to be added to book profits for MAT?

Goetze India Ltd. v. CIT 32 SOT 101 (Del) Applicability of rule 8D in case of share of profit from partnership

firm If interest earned on capital and interest paid If remuneration and share of profit earned

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S.14A - IssuesShares & Mutual Fund Units

Investments made out of commercial expediencyWhether debt funds (growth option) units can be said to give rise to

exempt income?Whether equity funds (growth option) held for less than a year can be

said to give rise to exempt income?Whether any part of expenditure claimed in business accounts by sole

proprietor can be disallowed on account of personal investment in shares not forming part of balance sheet?

Whether interest disallowed can be added to cost of acquisition in computing capital gains?

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Recent Issues

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Indexed CostIn case of inheritance, gift, etc., indexation from which

year – year of receipt or year of acquisition by previous ownerIndex for the first year in which the asset was held by the

assessee CIT v. Manjula J. Shah 16 taxmann.com 42 (Bom)Arun Shungloo Trust v. CIT 205 Taxman 456 (Del)Term “held by the assessee” defined in expln 1(i)(b) to

s.2(42A) – there shall be included the period for which the asset was held by the previous owner

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S.54EC ExemptionInvestment of up to Rs.50 lakh per financial year in bonds

of NHAI/RECWhether exemption of capital gains to extent of Rs.50

lakh per year or to extent of investment of Rs.50 lakh per year

Situation where asset transferred after 1st October – whether exemption of up to Rs.1 crore available Aspi Ginwala v ACIT 20 taxmann.com 75 (Ahd)Contrary view in ACIT v. Raj Kumar Jain & Sons HUF 19

taxmann.com 27 (Jp)

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Section 50CSubstitution of stamp duty valuation for sale considerationApplicable to land or building or bothWhether applicable to:

Tenancy rights Kishori Sharad Gaitonde v. ITO 41B BCAJ (Feb 2010) 28 (Mum)

Leasehold rights Atul G. Puranik v. ITO 132 ITD 499 (Mum) DCIT v. Tejinder Singh ITA No. ITA No.1459/Kol/2011 dated 29.2.2012

Development rights Arif Akhatar Hussain v. ITO 140 TTJ (Mum) 413 ITO v. Chiranjeev Lal Khanna 132 ITD 474 (Mum)

Flat under construction ITO v. Yasin Moosa Godil - ITA No. 2519/Ahd/2009 dated 13.4.2012

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Slump Sale – s.50BSlump Sale – computation of capital gains in case of

negative net worth: Consideration – amount received or amount received plus

negative net worth Net worth – zero or negativeZuari Industries Ltd. v. ACIT 105 ITD 569 (Bom) – net worth

to be taken as zero Dy. CIT v. Summit Securities Ltd. 19 taxmann.com 102

(Mum)(SB) - one cannot ignore part of the liabilities from the net worth because the full value of consideration is determined by considering the effect of all the liabilities – negative net worth to be taken

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Reduction of CapitalWhether reduction of capital results in capital gains

Kartikeya v. Sarabhai 228 ITR 163 (SC) - right of the preference shareholder to the dividend on his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital – amounts to transfer

Bennett Coleman & Co. Ltd. v. Addl. CIT 12 ITR (Trib) 97 (Mum)(SB) – reduction without any payment – no consideration - only the number of shares had been reduced, net worth and rights vis-à-vis other shareholders and company remains same - at best only notional loss – capital loss not allowable

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Rectifications & Arrears

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CPC ProcessingCPC at Bengaluru currently processing most returnsConcurrent Jurisdiction of CPC with AOAll e filed returns processed by CPC – returns where

mismatch of TDS sent to AOs for processingIn case of returns processed by CPC, rectification

application to be made to CPC online

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Rectification Requests – Common ErrorsAssessees don’t write the communication reference number

of the CPC order which is sought to be rectified, in the specified format in online rectification screen (“Submit your rectification request screen”) while applying for online rectification

For example, communication reference number should be filled in the below format:- 1st time rectification (For example AY 10-11, ITR 2) CPC/1011/I2/1000008976- I2 in the above reference number should be inferred as English alphabet (I) and 2 indicates the ITR Form type.- Re-Rectification (For example AY 10-11,ITR 2):CPC/1011/I2/1000008988

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Rectification Requests – Common ErrorsAssessees need to mention the order date of CPC which is

sought to be rectified, in online rectification screen (“Submit your rectification request screen”) while applying for online rectification.

Assessees mention the row number of “Aggregate Tax Liability” and “Total Tax Liability” of CPC order instead of computed values of “Aggregate Income Tax Liability” and “Total Tax Credit Allowed” while applying for online rectification. Assessees are requested to mention the computed values of “Aggregate Income Tax Liability” and “Total Tax Credit Allowed” as per CPC order in online rectification screen (“Submit your rectification request screen”) while applying for online rectification

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Rectification Requests – Common ErrorsThe amount against “Aggregate Income Tax Liability” and

“Total Tax Credit Allowed” should be entered without comma (,) in online rectification screen (“Submit your rectification request screen”)

Assessees don’t select the correct AY to which the rectification pertains. Assessees are requested to select the AY to which the rectification pertains from drop down in Assessment Year Tab

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Disposal of Rectification Applications without Redressal - ReasonsMany assessees do not carry out the corrections

mentioned in rectification request in the xml for rectification leading to non rectification of the case. Assessees need to correct the xml also

Assessees having paid demand are filing for rectification to get a nil demand rectification order – not necessary – details of payment automatically updated by CPC

Rectification applications where total income is changed from returned total income will be rejected – revised return needs to be filed

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Arrears of Demand – Intimation & Adjustment Earlier, CPC would send intimations adjusting earlier

demands against refunds without advance intimationOf late, sending intimation of arrears of demand u/s.245

as per its recordsArrears of Demand uploaded on CPC system by AOsShould have been uploaded only after verificationNecessary to get arrears removed from CPC system to

prevent adjustment by CPC – AOs to be approachedIf refund adjusted, refund for year of incorrect demand

to be sought from AO

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