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CBDT exempts class of persons from applicability of Section 56(2)(x) and 50CA of the Income Tax Act, 1961

July 13, 2020

Summary

  • The receipt of a property by a person without consideration or inadequate consideration is liable to tax in the hands of the recipient under Section 56(2)(x) of the Income Tax Act, 1961 (ITA). The Central Board of Direct Taxes (CBDT) notified Rule 11UAC in the Income Tax Rules, 1962 (ITR) providing exemption to certain class of persons from the applicability of Section 56(2)(x) of the ITA.
  • Further, in case of transfer of unquoted shares of a company, the Fair Market Value (FMV) of such shares determined in the prescribed manner shall be deemed to be the full value of the consideration (if consideration is lower than the FMV) for determination of capital gain as per the Section 50CA of the ITA. The CBDT has notified Rule 11UAD in the ITR, providing exemption to certain class of persons from the applicability of Section 50CA of the ITA.
  • As per Rule 11UAC of the ITR, Section 56(2)(x) of the ITA and as per Rule 11UAD of the ITR, Section 50CA of the ITA shall not apply on the transfer of unquoted shares in case of restructuring under Section 242 of the Companies Act, 2013.
  • These Rules shall be applicable from the Assessment Year 2020-21.

Discussion

  • As per Section 56(2)(x) of the ITA, on receipt of any property (other than immovable property) without consideration or consideration less than the FMV of the property, where FMV of such property exceeds fifty thousand rupees, the following is taxable as "Income from other sources" in the hands of the recipient:a. FMV of the property on receipt of the property without consideration; b. The difference between FMV and consideration paid for the property on receipt of the property for consideration less than FMV.
  • The Finance (No. 2) Act, 2019, has introduced clause (XI) to the proviso to Section 56(2)(x) of the ITA to prescribe the transaction undertaken by certain classes of persons to which Section 56(2)(x) of the ITA shall not be applicable. Accordingly, the CBDT has now notified new Rule 11UAC in the ITR providing exemption to certain class of persons from the applicability of Section 56(2)(x) of the ITA.
  • Further, as per Section 50CA of the ITA, if the consideration for the transfer of unquoted shares is less than the FMV of such unquoted shares, the FMV is deemed to be the sale consideration for computing capital gains income in the hand of the transferor of the unquoted shares.
  • The Finance (No. 2) Act, 2019, has introduced a proviso to Section 50CA of the ITA to provide that Section 50CA of the ITA shall not apply to any consideration received as a result of a transfer by such class of persons and subject to such conditions as may be prescribed. Accordingly, the CBDT has now notified new Rule 11UAD in the ITR, providing exemption to certain class of persons from the applicability of Section 50CA of the ITA.
  • As per Rule 11UAC of the ITR, Section 56(2)(x) of the ITA and as per Rule 11UAD of the ITR, Section 50CA of the ITA shall not apply on the transfer of unquoted shares of a company and its subsidiary and the subsidiary of such subsidiary to the shareholders, where:a. 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 has appointed new directors nominated by the Central Government under Section 242 of the Companies Act, 2013; andb. Share of company and its subsidiary and the subsidiary of such subsidiary has been 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.
  • These amendments in Rules shall be applicable from the Assessment Year 2020-21.

The introduction of Rule 11UAC and Rule 11UAD of the ITR brings relief to both transferor and transferee from the notional tax due to difference in FMV and actual consideration on transfer of unquoted shares in case of restructuring under Section 242 of the Companies Act, 2013.

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

Janardan Singh Associate Director, Direct Tax

MBG Corporate Services

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