ISSUE OF SHARES & GIFTS U/s.56 & 68 OF INCOME TAX ACT, 1961& CORRESPONDING TAX AUDIT REPORT

ISSUE OF SHARES & GIFTS U/s.56 & 68 OF INCOME TAX ACT, 1961& CORRESPONDING TAX AUDIT REPORT

                                                       CA Bhalchandra N. Thigale

M.com, M. Phil, FCA, DISA [ICAI]

As per Income Tax Act, receiver (donee) of gift is charged to taxation u/s 56 (2) (vii). The donor of gift is not charged to taxation under this section. However, the below cases is analyzed from the taxation as applicable to donor (Capital Gain taxability) and donee (Gift taxability) under Income Tax Act.

•Property means Capital Assets in the hands of Receiver means if property is Stock in Trade, Raw Material & Consumable Stores for receiver then it will not be taxable.

•Movable property means Shares and Securities, jewellery, Archaeological       collection, Drawings, Paintings, Sculptures any work of art, bullion.  If any movable property other than above is gifted then there is no taxability.

• Exceptions: Gifts received from the following persons / situations are not taxable –

i.                     From Relatives 

ii.                   On the marriage of individual,

iii.                  By will or inheritance

iv.                 In contemplation of Death of payer

v.                   From local authority

vi.                 From Charitable Trust registered u/s 12AA

vii.                From Any Trust, Foundation etc referred u/s 10(23c).

•  Relative Means -

i.                     - Spouse of Individual

ii.                   - Brother & Sister of Individual

iii.                  - Brother & Sister of Spouse of Individual

iv.                 - Brother & Sister of either of the parents of Individual

v.                   - Any Lineal ascendants or descendants of the individual

vi.                 -Any Lineal ascendants or descendants of the spouse of the individual.

Below is a comprehensive list of Donors as per definition of relative under I.Tax Act

List of Male Donors	List of Female Donors
Father	Mother
Brother	Sister
Son	Daughter
Grand Son	Grand Daughter
Husband	Wife
Sister’s Husband	Brother’s Wife
Wife’s Brother	Wife’s Sister
Husband’s Brother	Husband’s Sister
Mother’s Brother	Mother’s Sister
Mother’s Sister Husband	Wife’s brother’s wife
Father’s Brother	Father’s Brother’s Wife
Father’s Sister’s Husband	Father’s Sister
Grand Father	Grand Mother
Daughter’s Husband	Son’s Wife
Spouse Father	Spouse Mother
Spouse Grand Father	Spouse Grand Mother

• Gifts received by Individuals and HUF [Sec.56 (2) (vii)]

1. Applicability: Individuals and HUF.

2. Taxability: The following amounts received by an Individuals or HUF from any person(s) (subject to exceptions) is taxable as Income from other Sources –

-Any Lineal ascendants or descendants of the spouse of the individual.

Item Received	Nature	Amount Taxable under “Income from Other Sources” (Donee)	Donor
(a)Any sum of Money/Property	Without consideration, the aggregate Fair Market  value of which ≤ Rs. 50,000	1.Sec.56(2)(vii) Not Applicable 2.Income = NIL 3.COA= Previous owner’s Cost 4.Holding Period= Previous owner’s period	-No Capital Gain u/s 47(iii) -No Transfer
(aa)Any sum of money	Without consideration, the aggregate value of which exceeds Rs. 50,000	Whole of aggregate value of such sum.	Same as Above
(b)Immovable Property	(i)Without Consideration & Stamp Duty Value of property >  Rs. 50000	1.Stamp Duty Value of such property 2.COA=SDV 3.Holding Period= Previous owner’s period	Same as Above
	(ii)Inadequate consideration, and difference between Consideration & Stamp Duty Value exceeds Rs. 50000 AY14-15	1. Stamp Duty Value – Consideration 2.At the time of further sale COA=SDV 3.Holding Period= From the date of Acquisition	1.•Sec.50C applicable for Capital Assets •Capital Gain= SDV-COA 2.Section 43CA applicable if Land and Building is not Capital Asset
(c)Other than Immovable Property	(i)Without consideration & aggregate Fair Market Value > Rs.50,000	1.Fair Market Value of such property 2.COA=FMV 3. Holding Period= Previous owner’s period	-No Capital Gain u/s 47(iii) -No Transfer
	(ii)Inadequate Consideration, and difference between consideration & Fair Market Value exceeds Rs. 50,000	1.Fair Market Value- Consideration 2.COA=FMV 3. Holding Period= From the date of Acquisition	Capital Gain=   Sales Price  ­ COA

• Gifts received by Firms and Closely Held Companies [Sec.56 (2) (viia)]

Applicable if:

1.  Shares belong to a closely held company.

2.  Donor is any person.

Without Consideration:  if Fair Market value is more than Rs.50000/-:

For Donor:  No Capital Gain because u/s 47(iii) it is not consider as transfer.

For Donee:  FMV is income from other Sources u/s 56(2) (viia).

At the time of further sale COA will be FMV and for calculation of holding period previous owner period will be counted for donee.

Inadequate Consideration:  if the difference of consideration and FMV is greater than Rs.50000/- then difference amount will be taxable for receiver.

For Donor: Capital Gain will be Sale price – COA.

For Donee: Difference of FMV and Consideration is income from other Sources u/s 56(2) (viia). At the time of further sale COA will be FMV and holding period will be counted from the date of acquisition of Shares.

Exception: if Shares are received in nature of 47(via), 47(vic), 47(vicb), 47(vid), 47(vii)) (i.e. amalgamation, merger, demerger. reorganization etc.)

“Fair Market Value” of a property, being Shares of a Company (not being a Company in which Public are substantially interested), shall be determined as per the prescribed method of valuation. [Notification No. 52/2012 dt.29.11.2012].

• Premium on Issue of Shares, by Closely held Company [Sec.56 (2) (viib)]

1. Situation: A Company (not being a Company in which the Public are substantially interested), receives Consideration for Issue of Shares exceeding the Face Value of such shares (i.e. Issue at Premium).

2. Subscriber: Any person being Resident

3. Taxable Amount: The aggregate Consideration received as exceeds the FMV of Shares.

4. Exceptions: The above provision shall not apply where the consideration for issue of shares is received by a Venture Capital Undertaking from a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund [as defined in Sec. 10(23FB)] or by a Company from a class of a person as may be notified by the Central Government.

5. Fair Market Value of the shares shall be higher of the following –

 (a) Value determined in accordance with the prescribed method, or

 (b) Value 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.

•VALUATION RULE:Movable or Immovable properties shall be valued as follows:

Immoveable Property: SDV of the property but if date of agreement for fixing the consideration and date of registration are not same than date of agreement will be considered for SDV (Applicable from A.Y.2014-15).

Movable Property: FMV will be as follows:

→Jewellery, Archaeological collection, Drawings, Paintings, Sculptures any work of art, bullion:

a. Purchased from registered Dealer (under VAT): Invoice Value will be FMV.

b. In any Other Cases: Value of Property is less than Rs.50000/- than at which rate it can be sold in the open market will be FMV. And if value of property exceed Rs.50000/- than assessee has an option for FMV either it can be sold value or he can take report of registered valuer.

→ Quoted Shares and Securities: a. If Transaction is done through RSE than transaction value recorded in stock exchange

b. If Transaction is not done through RSE than the lowest price quoted on any RSE in India for such share and securities as on the date of valuation and if transaction is not done on the valuation date  regarding such shares and securities than the lowest price will be taken immediately preceding the valuation date.

→ Unquoted or Unlisted Shares & Securities:

-Unquoted Equity Shares:       Net worth * paid up value of one share

                                           Total Amount of paid up Equity Share Capital

Net Worth: Assets – Liabilities.

Assets:

Include: Book Value of all Assets i.e. Fixed Assets, Current Assets, Investments. It does not include: Advance Tax, TDS & TCS, Dr Balance of P & L A/c, Miscellaneous Expenditure, and Discount on issue of Debenture not written off.

Liabilities:

Include: book value of all liabilities i.e. Preference Share Capital, Debenture, Loans (Secured & Unsecured),Current Liabilities ,Ascertained Provisions, Depreciation Reserve, Dividend on Equity & Preference Share (declared before Transfer),Current Provision for Income Tax-Advance Tax –TDS & TCS, Arrears of Divided on Preference Shares even if shown under contingent liabilities. It does not include: Equity Share Capital, Provision for unascertained liabilities, Contingent Liabilities (except arrear of dividend of Pref. shares), Reserve & surplus

Or

Value determined by merchant banker or accountant

- Other Unquoted or Unlisted Shares & Securities: at which rate can be sold in market or a report from merchant banker or C.A

·        SECTION 68: CASH CREDITS :

Section 68 provides that:

-         where any sum is found credited in the books of an assessee maintained for any previous year,

-         and the assessee offers no explanation about the nature and source thereof,

-         or the explanation offered by him, in the opinion of Assessing Officer, is not satisfactory,

-         the sum so credited shall be charged to income tax as theincome of the assessee of that previous year.

The Supreme Court in case of Lovely Exports (P) Ltd. held that there is no onus on the company to prove the source of money in hands of shareholder or the person making payment of share application money. If company identifies the person from whom money has been received, then section 68 cannot be involved in the hands of company.

Proviso to section 68 has been added by Finance Act, 2012 which over-rules the Supreme Court judgment in Lovely Exports (P) Ltd. and provides as under:

-         if in case of a closely held company

-         any sum is found credited in its books of account as share application money, share capital, share premium or any such amount by whatever name called

-         and the person being a resident in whose name such credit is recorded in the books of account do not offer to the Assessing Officer an explanation about the nature and source of the sum so credited; or

-         the explanation given by the resident to the Assessing Officer is found to be unsatisfactory by the Assessing Officer.

-         then, it shall be deemed that the explanation offered by the assessee company about the sum so credited is not satisfactory.

-         and consequently sum credited in books of company as share application money, share capital, share premium, etc. shall be deemed as income of the company as unexplained credit under section 68.

-         The crux of amendment is that the closely held company receiving share application money/ share capital/ share premium/ any such amount has to prove the source of funds in the hands of shareholder/ person giving the share application money/ share capital/ share premium/ any such amount.

The Finance Act, 2012 has placed onus of proof on the closely held company receiving the share application money/ share capital/ share premium/ any such amount to prove that such money which is invested in the company belongs to the person who has given the money to the company. Otherwise, the money so received shall be taxable in hands of company as unexplained cash credit under section 68.

Notes:

(i)                  Proviso to section 68 introduced by Finance Act, 2012 is not applicable to money received from non-residents since money received from non-residents is regulated by FEMA and rules of RBI.

(ii)                Proviso to section 68 introduced by Finance Act, 2012 is not applicable to money received from Venture Capital Company and Venture Capital Fund since they are regulated by SEBI.

Further section 115BBE has been introduced by Finance Act, 2012 which provides as under:

(1)   Where the total income of an assessee includes any income referred to in section 68, section69, section 69A, section 69B, section69C or section 69D, the income-tax payable shall be the aggregate of –

(a)    the amount of income-tax calculated on income referred to in section 68, section69, section 69A, section 69B, section69C or section 69D, at the rate of thirty per cent; and

(b)   normal tax rate on the balance income.

(2)   Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub section (1).

Ø  Tax Audit Report Changed Accordingly as Follows :

28

Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia), if yes, please furnish the details of the same.

:

Yes

Name of the person from which shares received

PAN of the person

Name of the company from which shares received

CIN of the company

No. of shares received

Amount of consideration paid

Fair market value of shares

Nil

29

Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same.

:

Yes

Name of the person from which consideration received for issue of shares

PAN of the person

No. of shares

Amount of consideration received

Fair market value of the shares

Nil

Some Illustrations:

1] Illustration– Transfer of Shares for Inadequate Consideration

Mr. B transferred 500 shares of Reliance Industries Ltd to M/s. B Co. (P) Ltd. On 10.10.2013 for Rs. 3,00,000 when the Market Price was Rs. 5,00,000. The Indexed Cost of Acquisition of Shares for Mr. B was computed at Rs. 4,45,000. The transfer was not subjected to Securities Transaction Tax. Determine the Income chargeable to Tax in the hands of Mr. B and M/s. B Co. (P) Ltd because of the above said transaction.

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2]  Illustration – Taxability of Gifts u/s 56

Discuss the Taxability or otherwise of the following transactions u/d 56(2) of the Income Tax Act –

JD Private Limited issued 50,000 Equity Shares of Face Value of Rs. 10 per Square at a Premium of Rs. 60 per share. The Fair Market Value of the Shares as per prescribed rule is Rs. 50 per Share.

3]  Illustration:

Mr. Harish entered into an agreement to sell a building and land appurtenant thereto to Mr. Kushal on 1.1.2013 for Rs. 50 Lakh. Mr. Kushal made an advance payment through cheque of Rs. 5 Lakh on 1.1.2013. The stamp duty value on the date of agreement was Rs. 58 Lakh. Mr. Harish purchased this property on 1.1.2011 for Rs. 10 Lakh.

Mr. Kushal makes the balance payment of Rs. 45 lakhs on 30.6.2013 and gets the property registered in his name on that date when the duty value has been increased to Rs. 70 Lakhs. Possession of the property was also handed over to him on 30.6.2013.

Mr. Kushal sold the property on 31.12.2013 for Rs. 100 lakhs.

Examine the taxability of the transaction in the hands of Mr. Harish and Mr. Kushal, if:

(i)                  Both Mr. Harish and Mr. Kushal treat is as capital asset.

(ii)                Both Mr. Harish and Mr. Kushal treat is as stock in trade.

(iii)               Mr. Harish treats it as capital asset but Mr. Kushal treats it as stock in trade.

(iv)              Mr. Harish treats it as stock in trade but Mr. Kushal treats it as capital asset.