Income Tax: Everything in the name
“What’s in a name? That which we call a rose by any other name would smell as sweet” – William Shakespeare
It is not true when it comes to income Tax Act-1961. Tax implication of various transactions is determined on the basis of documentation & drafting. More importantly, Nomenclature or name plays an equally important role in taxation.
One such prevailing transaction is with regard to “Relinquishment of rights in the capital assets”. Let me elaborate.
The provisions for taxing capital gain arising on sale of capital assets are different from the normal taxing provision, especially for two reasons:
First the capital gain tax liability arises at the time of “transfer” of capital assets and second it is not dependant at all on receipt of sale consideration.
The word ”transfer” as used in the Income Tax Act-1961 for taxing capital assets transactions has wider connotation and expand beyond the transactions of “sale”.
Definition of “transfer” is given in section 2(47) of the Income Tax Ac. It reads as under:
(47) “transfer”, in relation to a capital asset, includes,—
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
The law for taxation of capital assets affixes the liability at the time of just “transfer” and is not linked to the receipt of “sale consideration”. It means that the transactions would be taxable even thought the consideration is received in subsequent years through Post Dated Cheque (PDC) or even if above transaction is done without any sale consideration. By incorporating the deeming provision in the form of section 50C, transaction without consideration are also liable to be taxed on the basis of its Fair Market Value (FMV) or stamp duty valuation. Even exchange of the property is liable for capital gain taxation even if no cash consideration is involved.
One of the common documents executed in the family for surrendering the rights over the property is “Relinquishment Deed” whereby one or more of the co-owners unconditionally surrenders the right over the property in favor of other family member. Careful reading of the definition of “transfer” would make it clear that the transaction of “gift” is not recognized as transfer. Further, section 47 specially provides certain transactions which are not regarded as “transfer” and clause (iii) thereto excludes the transaction of “gift or will or under an irrevocable trust” from the net of “transfer”.
Interestingly, ultimate outcome in case of “relinquishment” and “gift” is same i.e., the transfer of rights over the property by one to another. Relinquishment is nothing but surrender of rights over the property. So, is the gift. Still, the former is liable for taxation as it is considered as “transfer” whereas the later is outside the scope of “transfer”. Legal professional can argue very well that relinquishment vis a vis gift are synonymous. But, Income Tax Act-1961 clearly & aptly distinguishes it. The word of Albert Einstein – “Hardest thing to understand is Income Tax” hold true all over this planet.
It is worthwhile to mention here that the transaction family arrangement & settlement is not taxable in view of the few judicial pronouncements. However, the relinquishment deed needs to incorporate the fact of such arrangement/ settlement and it may be required to litigate the matter in court to justify its non taxability. Better to document the transaction as “Gift”. To conclude, everything is there in the name – That which we call as gift would be less taxing if we call it as relinquishment.
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