CBDT Exempts Certain Persons from Section 56(2)(x) and Section 50CA of the Income Tax Act, 1961

The receipt of property without consideration or for inadequate consideration can trigger tax implications under Section 56(2)(x) of the Income Tax Act, 1961. Similarly, where unquoted shares are transferred below their fair market value (FMV), Section 50CA may deem the FMV to be the full value of consideration for capital gains purposes. In this context, the CBDT has notified Rule 11UAC and Rule 11UAD to provide relief to a specified class of persons in defined restructuring situations. From a wider taxation advisory standpoint, this clarification is relevant for businesses, shareholders, and tax teams evaluating unquoted share transfers during restructuring.

Overview of the exemption notified by CBDT

• Section 56(2)(x) taxes the receipt of property without consideration or for inadequate consideration in the hands of the recipient.
• Section 50CA applies where unquoted shares are transferred at a value lower than their FMV and deems FMV to be the full value of consideration for capital gains computation.
• The CBDT has notified Rule 11UAC and Rule 11UAD to exempt a specified class of persons from the applicability of Section 56(2)(x) and Section 50CA, respectively.
• These rules apply in specified cases involving the transfer of unquoted shares under restructuring pursuant to Section 242 of the Companies Act, 2013.
• The amendments apply from Assessment Year 2020–21.

Taxability under Section 56(2)(x) of the Income Tax Act

Section 56(2)(x) provides that where a person receives property, other than immovable property, without consideration or for consideration lower than its FMV, and the value exceeds INR 50,000, the amount may be taxable as “Income from other sources” in the hands of the recipient.

Accordingly, the following amounts become taxable:

• Where property is received without consideration: the entire FMV of the property.
• Where property is received for inadequate consideration: the difference between the FMV and the actual consideration paid.

To carve out relief in eligible restructuring cases, the Finance (No. 2) Act, 2019, inserted clause (XI) to the proviso to Section 56(2)(x), enabling prescribed exemptions for specific classes of persons. Pursuant to this, Rule 11UAC was introduced.

Tax implication under Section 50CA on transfer of unquoted shares

Section 50CA applies where unquoted shares are transferred for consideration lower than their FMV. In such cases, the FMV determined in the prescribed manner is deemed to be the full value of consideration for computing capital gains in the hands of the transferor.

Recognising that this deemed value mechanism could create hardship in genuine restructuring situations, the Finance (No. 2) Act, 2019, also introduced a proviso to Section 50CA. This enabled the prescription of exempt classes of persons and conditions, leading to the introduction of Rule 11UAD.

From a transaction review and direct tax compliance perspective, the distinction between actual consideration and deemed FMV remains particularly important in closely held share transfers.

When do Rule 11UAC and Rule 11UAD apply?

As per Rule 11UAC and Rule 11UAD, Section 56(2)(x) and Section 50CA shall not apply on the transfer of unquoted shares of a company, its subsidiary, and the subsidiary of such subsidiary to shareholders where the following conditions are satisfied:

• The National Company Law Tribunal (NCLT), on an application moved by the Central Government under Section 241 of the Companies Act, 2013, has suspended the Board of Directors of such company and appointed new directors nominated by the Central Government under Section 242 of the Companies Act, 2013; and
• The shares of the company, its subsidiary, and the subsidiary of such subsidiary are received pursuant to a resolution plan approved by the NCLT under Section 242 of the Companies Act, 2013, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

Why this exemption is significant

The introduction of Rule 11UAC and Rule 11UAD provides relief to both the transferor and the transferee from notional tax exposure arising solely because of a difference between FMV and actual consideration in eligible restructuring cases. This is a targeted and practical exemption, particularly for transactions involving unquoted shares where statutory restructuring outcomes may not align with standard valuation benchmarks.

In such cases, a careful assessment of restructuring documentation, valuation position, and surrounding corporate tax services implications becomes essential to determine whether the exemption conditions are satisfied.

Last Updated: 13th July 2020
This article is contributed by:

Janardan Singh
Associate Director, Direct Tax

MBG Corporate Services

Additional Resources

• CBDT prescribed the valuation rule for computing FMV of the undertaking transferred under slump sale
• Direct Tax Alert: Rule notified for computing written down value for the intangible asset comprising goodwill
• Income-tax assessment proceedings
• Case Alert on Taxation
• Corporate income tax: taxability of specified income earned by foreign company in India