Finance Act 2017 has inserted a new clause (x) in section 56(2) w.e.f 1st April 2017 (i.e. applicable from AY 2018-19 related to FY 2017-18) which has considerably widened the scope of provisions taxing deemed gift as income. The applicability of corresponding old deemed gift clauses being section 56(2)(vii) and 56(2)(viia) has been restricted upto AY 2017-18 only.
The new clause (x) envisages to tax the deemed gift of certain defined properties/assets in the hands of every person receiving such property/asset subject to certain exceptions as provided therein. The old provisions were only applicable to some persons & not all persons. Also, earlier in the hands of Firm and a private company, the receipt of only unquoted shares of a private company was covered by deemed gift taxing provisions whereas now it covers all the defined properties/assets.
The Finance Act 2017 has also inserted a new section 50CA which provides that in case of sale of capital asset being unquoted shares, its Fair Market Value (FMV) shall be deemed to be the sale consideration if sale is made at a price less than FMV. As such, if shares are sold at consideration which is less than prescribed FMV, then capital gains shall be computed taking consideration to be the prescribed FMV.
FMV for the purposes of section 56(2)(x) is to be determined as per Rule 11U and Rule 11UA. The Central Board of Direct Taxes (‘CBDT’) has proposed certain changes in the said rules and has come up with draft rules vide a notification dated 5th May, 2017 for public comments.
Said draft Rules also propose to insert new Rule 11UAA for determination of FMV of unquoted shares for the purposes of section 50CA.
For details please refer to section 56(2)(x) and 50CA.
The above may please be kept in mind while entering into any transaction covered by the above provisions. Assessee must be cautious of any tax implication that may arise as per the above provisions.
Transactions covered u/s 56(2)(x) and 50CA must be either done at FMV or it should fall in any of the exclusions provided.