29.1 Over the past few years, provisions have been introduced in the Income-tax Act to tax receipts of sums of money and certain other properties which were received without consideration or for insufficient consideration. These provisions were introduced to counter laundering of black money. There is a threshold of Rs. 50,000. Exemption is provided for amounts or properties received from relatives, on marriage, under a will, etc.
The position presently is that individuals and HUFs are taxed in such situations on receipt of sums of money, immovable property, jewellery, bullion, art, shares and securities, etc., without consideration or for insufficient consideration. Further, firms and private companies are taxed on receipt of shares of another private company without consideration or at a value lesser than the fair market value.
29.2 The fair market value of immovable property, shares and other assets is as prescribed in the Rules.
29.3 The Finance Bill 2017 proposes make the following changes:
29.3.1 The provisions now target all persons. This will hence now include public listed companies, AOPs and BOIs apart from individuals, HUFs firms and companies which were already covered under the existing provisions.
29.3.2 Further, any person will be liable to tax on receipt of sum of money, immovable property and other specified properties mentioned above. Therefore, while firms and private companies are presently liable to tax only in respect of shares; now firms, companies, and other persons would be liable to tax on receipt of all specified properties.
29.3.3 A few examples of transactions that will now get covered are:
A partner contributing immovable property in the firm as his capital. The normal provision is that whatever value is recorded in the accounts of the firm, is the sale value. If the partners record the transaction at say cost of property, there will be no tax. However the firm will be liable to tax on the difference between fair value and what is recorded in the accounts.;
A public listed company receiving any of the specified properties without consideration or for insufficient consideration;
An AOP receiving immovable property from one of the members for a value which is lesser than that prescribed as per the provision; etc.
29.3.4 Some transactions such as receipt from a relative or charitable trust are exempt from this section. Following further exemptions have been provided:
Receipts by charitable trusts and institutions;
Receipt of assets on partition of HUF;
Receipt of shares on certain corporate mergers and demergers which are exempt from tax under Section 47.
29.4 It may be noted that only specified “capital assets” are covered by this provision. Stock-in-trade is not covered.
Further, the provision applies to specified properties. All properties are not covered by this provision. For example, receipt of “share in a LLP”, intellectual property and knowhow are not covered by this provision.
29.5 While the provisions are meant to tax transfers between persons, the practical fallout is that genuine transactions not involving laundering of black money also get covered. Further, the provisions act as barriers limiting the price at which properties are transferred between two non-related entities. Therefore, all persons should now be careful while transferring any properties covered by this provision.