Section 56(2)(x) and Section 50CA:  In an attempt to plug the loopholes, it has resulted in double taxation for the same income.

 

Presently section 56(2)(x) of the Income Tax Act, 1961 provides for the taxation of receipt of specified assets for inadequate or without consideration in the hands of any person if the receipt is made without consideration or for inadequate consideration in excess of Rs. 50,000/-. Section 56(2)(x) is applicable in the hands of the purchaser.

There is another provision in the form of section 50CA which is applicable to the seller. It is almost similar to section 50C and it provides that  that where consideration for transfer of share of a company (other than quoted share) is less than the fair market value of such share determined in accordance with the prescribed manner then  the fair market value shall be deemed to be the full value of consideration under the head ‘capital gains’.

Both section 56(2)(x) as well section 50CA are anti-abuse provisions. Aim of both the section is to tax the amount on the basis of its fair market value. Unfortunate part, in an attempt to plug the loopholes, it has resulted in double taxation for the same income.

For example, if fair market value of a shares is Rs. 50/- and it is sold at Rs. 20/-.

In such case, buyer will be liable to pay tax on the difference of Rs. 30/- under section 56(2)(x) whereas seller will also be liable for taxation under section 50CA as full value consideration will be treated as Rs. 50/- and not Rs. 20/-.

Central Board of Direct Taxes (CBDT) has recently released amended Rule 11UA for valuation of unquoted equity shares for the purposes of Section 56 as well as for the purpose of section 50CA of the Income-tax Act, 1961.

Amended Rule 11UA as effective from 1 April, 2017 provides for the manner of computing FMV. It is identical to FMV to be used for transactions covered under S.56(2). It provides that FMV of unquoted equity shares as on the valuation date shall be equal to

= (A+B+C+D-L) x (PV /PE)

whereas

1. PV means the paid-up value of equity shares
2. PE means the total amount of paid-up equity share capital as shown in the balance sheet
3.  A is book value of all assets other than jewellery, artistic work, shares, securities and immovable property, as reduced by any amount of income tax paid, if any, as reduced by the amount of tax claimed as refund, if any, under the ITL.

-CA Naresh Jakhotia