The taxation of property received without consideration or for inadequate consideration is governed by Section 56(2) of the Income Tax Act, 1961. This provision ensures that such transfers, which may otherwise escape taxation, are brought into the tax net under the head ‘Income from Other Sources.’

Scope of Section 56(2)

Section 56(2) applies to individuals and Hindu Undivided Families (HUFs) who receive:

1. Immovable Property: Such as land or buildings.
2. Movable Property: Including shares, securities, jewelry, artworks, and other specified assets.

The taxability arises when the property is received:

• Without consideration (as a gift).
• For inadequate consideration (less than the fair market value or stamp duty value).

Taxability of Property Received Without Consideration

1. Immovable Property:
   • If an immovable property is received without any consideration and its stamp duty value exceeds ₹50,000, the entire stamp duty value is taxable in the hands of the recipient.
2. Movable Property:
   • If the aggregate fair market value (FMV) of movable property received without consideration exceeds ₹50,000, the entire FMV becomes taxable.

Taxability of Property Received for Inadequate Consideration

1. Immovable Property:
   • If the property is received for a consideration less than the stamp duty value by more than ₹50,000, the difference is taxable.
2. Movable Property:
   • If movable property is received for inadequate consideration and the difference between the FMV and consideration exceeds ₹50,000, the excess amount is taxable.

Exemptions Under Section 56(2)

Certain transactions are exempt from taxation under this section:

1. Relatives:
   • Property received from specified relatives, such as spouse, siblings, parents, and lineal ascendants or descendants, is exempt.
2. Occasions:
   • Property received on the occasion of marriage or by way of inheritance or under a will is exempt.
3. Trusts and Institutions:
   • Property received from trusts or institutions registered under Section 12A or 12AA is not taxable.

Examples of Tax Treatment

1. Property Received Without Consideration:
   • Mr. A receives a piece of land as a gift with a stamp duty value of ₹10,00,000. The entire ₹10,00,000 is taxable under Section 56(2).
2. Property Received for Inadequate Consideration:
   • Ms. B purchases jewelry worth ₹5,00,000 (FMV) for ₹2,00,000. The difference of ₹3,00,000 (₹5,00,000 – ₹2,00,000) is taxable, as it exceeds ₹50,000.
3. Exempt Transaction:
   • Mr. C receives a property worth ₹15,00,000 as a gift from his father. This is exempt from tax, as the transfer is from a specified relative.

Judicial Precedents

In CIT vs. K.P. Varghese, the court highlighted the importance of taxing income arising from transactions where the consideration is less than the fair market value, aligning with the intent of Section 56(2).

Compliance Tips for Taxpayers

1. Document Transactions:
   • Maintain proper records, including gift deeds and valuation reports.
2. Verify Exemptions:
   • Ensure the relationship or occasion qualifies for exemption to avoid disputes.
3. Report Income Accurately:
   • Disclose taxable property transactions under ‘Income from Other Sources’ in your income tax return.

Conclusion

Section 56(2) plays a crucial role in preventing tax evasion through undervalued or gratuitous property transfers. Taxpayers must carefully evaluate their transactions and comply with the provisions to avoid penalties and litigation. Proper documentation and awareness of exemptions are key to seamless compliance.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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