As mentioned in the last article, it is not only pure gifts which are taxable as income from other sources, but also the value of certain transactions that are deemed to be gifts by law. These transactions are in the nature of receipt of any specified assets, other than immovable property, for consideration less than the aggregate fair market value by an amount exceeding Rs 50,000. In other words, if you receive any of the specified assets for less than their fair market value and the difference between the fair market value of such assets and the price at which you acquired the assets exceeds Rs 50,000, such difference is taxable as your income.
Of course, in this case also, as in the case of gifts, if the asset is received from a specified category of relative, the deemed gift would not be taxable.
Limits for separate categories
This limit of Rs 50,000 is over and above the limit of Rs 50,000 for gifts in cash, gifts of immovable property, and receipt of any of the specified assets (other than immovable property) without consideration. Therefore, in a financial year, if you receive gifts in cash of Rs 40,000, a gift of an immovable property having stamp duty valuation of Rs 50,000, a gift of jewellery of Rs 45,000 and buy a work of art with a market value of Rs 75,000 for Rs 25,000, you will not be liable to pay any tax on these transactions. This is because the limit of Rs 50,000 has not been exceeded for each of these transactions, each of which has separate limits of Rs 50,000.
However, if you were to buy a work of art, whose fair market value is Rs 75,000 for Rs 25,000 as well as a sculpture whose fair market value is Rs 80,000 for Rs 40,000 within the same financial year, the entire difference between the fair market value and your cost, aggregating to Rs 90,000 for both these items together, would be taxable, since there is one consolidated limit of Rs 50,000 for the aggregate of such movable specified assets received for less than the fair market valuation.
Immovable property out of ambit
Fortunately, the deemed gift provisions do not apply to cases of immovable property received for less than the fair market value. Initially, the law proposed to tax such items as well, but the law was amended before it came into force, and such items are not taxable. If this had not been the position, it would have been most unfair and have affected a large number of people. Imagine a situation where you agreed to acquire a property under construction for Rs 1 crore, and the value of the property appreciated to Rs 1.5 crore over two years when you obtained possession. The appreciation of Rs 0.5 crore would have been taxed as your income, if it were not for the amendment deleting this provision.
Consideration doesn’t just mean money
The consideration need not necessarily be in money or money’s worth as was required under the earlier Gift Tax Act. Even an act of forbearance or an agreement to do or not to do something would constitute valid consideration. Of course, the difficulty would be to figure out as to how the provisions for deemed gifts would apply in such cases. A view is possible that in such cases, the provisions for deemed gifts do not apply at all.
How does one determine the fair market value?
Rules have been prescribed for this purpose, which apply not only to deemed gifts, but also to pure gifts. The different methods have been prescribed for different kinds of assets. For jewellery, if the jewellery is purchased from a registered dealer (a dealer who is registered under sales tax or VAT laws) on the valuation date, the invoice value is the fair market value. This is a good provision in the absence of which any discount received by you on purchase of jewellery could have been taxed as your income. In cases other than purchase, a report of a registered valuer is required to determine the fair market value.
In the cases of paintings, sculptures, works of art and archaeological collections, among other things, the valuation is done similarly. If the work of art is purchased from a registered dealer, the invoice value is taken as the fair market value, and in other cases, a report of a registered valuer is required. Therefore, if you buy a painting directly from an artist and not through an art gallery, though you may save on VAT, you may end up spending for a registered valuer’s fees, as you would need a report of a registered valuer to support the fair market value. Besides, while the concept of registered valuers for valuation of immovable property and jewellery is well established, there are very few valuers who carry out valuation of art. You may, therefore, find it difficult to obtain such a report.
In case of quoted shares and securities, the stock exchange quotation would be the fair market value. For unquoted equity shares, the valuation has to be on the basis of the book value of the shares as per the balance sheet as on the date of gift. From a practical perspective, this is difficult, as the company would obviously not prepare a balance sheet on an interim date just because one shareholder has sold some of his shares to another person. In such cases, where the shares are acquired on a date for which the balance sheet is not available, there is no specific provision. One would need to adopt some via media, such as taking the earlier balance sheet and later balance sheet and dividing the profit for the year on a prorated basis till the date of the transfer of shares, to compute the estimated book value as on the date of transfer. For other unquoted securities, a report of a merchant banker or a chartered accountant is required for determination of the fair market value.
All in all, the provisions for taxation of deemed gifts and for valuation of gifts and deemed gifts do not seem to have taken into account practical reality and could result in hardship in many cases.
Illustration by Shyamal Banerjee/Mint
Gautam Nayak is a chartered accountant.
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