Section 56(2)(x) of the Income-tax Act, 1961 was introduced with effect from 1 April 2017 as a sweeping anti-abuse provision. Its core objective is to prevent unjustified transfer of wealth under the guise of gifts, undervalued property transactions, or transfers of movable and immovable property for inadequate consideration. The provision is structured in a way that brings into its ambit any person who receives such money or property, thereby ensuring a comprehensive application across individuals, Hindu Undivided Families, firms, companies, associations, or any other entities.
The legislative intent behind enacting this provision was to consolidate and extend earlier anti-abuse measures contained in Section 56(2)(vii), 56(2)(viia), 56(2)(viib), and 56(2)(ix). With Section 56(2)(x), a uniform mechanism was created that applies to all taxpayers, leaving little room for tax arbitrage based on the nature of the recipient.
Applicability of Section 56(2)(x)
Section 56(2)(x) applies to situations where any person receives money, movable property, or immovable property from any person or persons on or after 1 April 2017. Its wide sweep makes it relevant for both individuals and entities.
The law carves out specific categories of transactions and prescribes conditions under which the amount becomes taxable in the hands of the recipient. The applicability can be better understood by categorizing transactions into defined heads based on the nature of property and the consideration involved.
Categories of Transactions under Section 56(2)(x)
Money Received Without Consideration
Where any person receives money without consideration and the aggregate value of such money during a year exceeds fifty thousand rupees, the entire amount becomes taxable. The threshold of fifty thousand is an aggregate limit, meaning that multiple small gifts that cumulatively cross the limit will trigger taxation.
Immovable Property Received Without Consideration
If any immovable property such as land or building is received without consideration and the stamp duty value exceeds fifty thousand rupees, then the entire stamp duty value is deemed as income of the recipient under this section. Unlike money, where aggregation applies, this category operates on the value of a single transaction.
Immovable Property Received for Inadequate Consideration
When immovable property is received for consideration that is lower than its stamp duty value, the difference between stamp duty value and actual consideration becomes taxable if the difference exceeds fifty thousand rupees and the stamp duty value is more than one hundred and ten percent of the consideration.
A special relaxation was introduced through the fourth proviso for residential units first allotted between 12 November 2020 and 30 June 2021. In such cases, if the consideration does not exceed two crore rupees and the difference between stamp duty value and consideration is more than fifty thousand rupees but not more than twenty percent, then the higher threshold of one hundred and twenty percent applies.
Movable Property Received Without Consideration
Movable properties specified in the law, when received without consideration, become taxable if the aggregate fair market value exceeds fifty thousand rupees. The entire fair market value is treated as income under this section.
Movable Property Received for Inadequate Consideration
If movable property is received for a consideration less than its fair market value, the difference becomes taxable provided the difference exceeds fifty thousand rupees.
Definition of Property
The term property assumes critical importance under Section 56(2)(x). It is defined inclusively to cover both immovable and certain categories of movable assets.
The scope of property includes land, building, shares, securities, jewellery, archaeological collections, drawings, paintings, sculptures, works of art, bullion, and from April 1, 2023, virtual digital assets.
The law specifically excludes stock-in-trade, raw materials, and consumables used in business, ensuring that trading transactions and genuine commercial acquisitions do not fall within the mischief of this provision.
Judicial Pronouncements on Property
Over the years, courts and tribunals have clarified what constitutes property for the purposes of Section 56(2)(x).
In the case of PCIT v. Dr. Ranjan Pai (2021), it was held that bonus shares are not covered because they do not involve a transfer of property from one person to another.
In Sudhir Menon HUF v. ACIT (2014), it was clarified that pro-rata allotment of additional shares does not give rise to taxable income under this provision.
On the other hand, in Jigar Jashwantlal Shah v. ACIT (2022), it was held that disproportionate allotment of rights shares, arising out of renunciation of rights by non-relatives, can be taxed under Section 56(2)(x).
These rulings indicate that while routine corporate actions or proportionate allotments may not be taxable, any arrangement that results in unjust enrichment of a shareholder at the cost of others could fall within the purview of this provision.
Definition of Jewellery
Jewellery is specifically defined to include ornaments made of precious metals like gold, silver, or platinum, whether or not studded with precious or semi-precious stones. Jewellery may also include ornaments sewn into apparel.
The definition further extends to unset precious or semi-precious stones, whether they form part of any article or are standalone. This definition ensures that luxury assets, which are often used for wealth transfer, are brought within the ambit of taxation when received without adequate consideration.
Definition of Stamp Duty Value
Stamp duty value refers to the value adopted or assessed or assessable by the stamp valuation authority for the purpose of payment of stamp duty in respect of immovable property. This definition ensures consistency in valuation and prevents under-reporting of consideration in property transactions.
The concept of assessable value implies that even where no actual valuation has been made by the authority, the value which the authority would have adopted if the transaction was referred to it can be considered. This deeming provision prevents avoidance by non-registration of transfers.
Agreement and Registration Dates
There are instances where the date of agreement and the date of registration differ. In such cases, if part of the consideration has been paid through banking channels before the date of agreement, then the stamp duty value on the date of agreement is considered. Otherwise, the value as on the date of registration is taken. This provides relief to genuine buyers and sellers from fluctuations in property valuations between agreement and registration.
Reference to Valuation Officer
The law allows the Assessing Officer to refer the matter to a Valuation Officer where the assessee claims that the stamp duty value exceeds the fair market value of the property. If the Valuation Officer determines a value lower than the stamp duty value, such lower value is adopted. If the Valuation Officer’s value is higher, the original stamp duty value continues to apply.
This mechanism ensures that taxpayers are not unfairly taxed on inflated stamp duty values, while also maintaining a safeguard against manipulation of consideration.
Definition of Fair Market Value
For movable properties, fair market value is determined in accordance with Rule 11UA(1). The rule provides distinct methods depending on the type of asset, such as jewellery, archaeological collections, works of art, quoted shares, or unquoted shares. The methodology aims to ensure uniformity in valuation and prevent disputes regarding estimation of market value.
Exclusions from Section 56(2)(x)
While the section is wide in scope, there are exclusions notified under Rule 11UAC. These include certain transactions where taxation under Section 56(2)(x) would be inappropriate or duplicative. The exclusions cover transactions such as business reorganisations, amalgamations, or other arrangements specifically notified by the government.
Valuation Rules and Determination under Section 56(2)(x)
The operation of Section 56(2)(x) cannot be understood in isolation from the rules of valuation. Since the section applies when property is received without consideration or for inadequate consideration, the determination of fair market value and stamp duty value is central to its application.
The legislature has provided specific valuation mechanisms in Rule 11UA and related provisions to ensure uniformity and certainty. These rules cover jewellery, artistic works, shares, securities, and other movable properties, while stamp duty value principles guide immovable properties.
Fair Market Value and its Importance
Fair market value is the benchmark against which consideration paid is compared. Where there is no consideration, fair market value represents the amount brought to charge under this section. Where there is inadequate consideration, the difference between fair market value and consideration represents the taxable component. The objective is to tax the real enrichment in the hands of the recipient, ensuring that transfers are not disguised as gifts or undervalued arrangements.
Valuation of Jewellery, Artistic Works, and Archaeological Collections
Rule 11UA prescribes different methods for valuing specified movable properties. Jewellery, archaeological collections, and works of art are valued at their open market value on the date of receipt. If these are purchased from a registered dealer, the invoice value is accepted as fair market value. Where such items are received otherwise than by purchase and their value exceeds fifty thousand rupees, the valuation must be supported by a report from a registered valuer.
A registered dealer for these purposes is one registered under the Central Sales Tax Act or relevant State value added tax laws. The involvement of a registered valuer ensures objectivity and prevents manipulation in the reporting of values.
Valuation of Quoted Shares and Securities
Quoted shares and securities are easier to value since they are frequently traded on recognised stock exchanges. The fair market value is determined based on the quoted price on the exchange.
Where a transaction is carried out through the stock exchange, the actual transaction value is taken. Where the transfer is not through the exchange but the security is traded on the valuation date, the lowest price on that date is adopted. If there is no trading on the valuation date, the lowest price on the immediately preceding trading day is taken.
The rules define quoted securities as those listed and frequently traded on a recognised stock exchange. Recognised stock exchange has the same meaning as in the Securities Contracts (Regulation) Act, 1956.
Valuation of Unquoted Shares and Securities
Unquoted shares and securities pose greater challenges due to the absence of ready market prices. The law distinguishes between unquoted equity shares and other unquoted securities.
Unquoted Equity Shares
The valuation of unquoted equity shares is carried out using the book value method as prescribed in Rule 11UA. The formula uses the book value of assets and liabilities appearing in the balance sheet of the issuing company to arrive at the net asset value per share. The methodology attempts to capture the intrinsic worth of the shares by considering the company’s net assets.
This method ensures that recipients of shares in closely held companies are taxed based on the actual underlying value, preventing situations where shares are transferred at nominal prices to related parties or favoured individuals.
Other Unquoted Securities
Other unquoted securities, such as preference shares or debentures, are valued based on principles prescribed in the rules, which may include valuation by a merchant banker or a chartered accountant using recognised methodologies like discounted cash flow. The emphasis is on adopting an objective valuation method that reflects the real worth of the securities.
Determination of Stamp Duty Value for Immovable Properties
For immovable properties, stamp duty value serves as the reference benchmark. Stamp duty value is defined as the value adopted or assessed or assessable by the stamp valuation authority for purposes of stamp duty.
Even if no actual assessment has been made, the value that would have been adopted by the authority if referred is considered. This definition ensures that properties cannot be transferred at undervalued amounts to escape taxation, since stamp duty values are usually closer to market values.
Difference in Agreement and Registration Dates
Practical complexities arise when there is a gap between the agreement date and registration date of a property transaction. Property values may change during this period, leading to higher stamp duty values on registration.
To address this, the law provides that where part of the consideration has been paid by account payee cheque, demand draft, electronic clearing system, or other prescribed banking channels before the date of the agreement, then the stamp duty value as on the agreement date will be adopted. In other cases, the stamp duty value as on the registration date applies.
This provision offers fairness to genuine buyers who may have fixed the price and made payments earlier, thereby shielding them from subsequent increases in stamp duty valuations.
Reference to Valuation Officer
The Assessing Officer has the discretion to refer the valuation of a property to a Valuation Officer if the assessee claims that the stamp duty value exceeds the fair market value. If the Valuation Officer determines a lower value, such lower value is adopted. If the Valuation Officer’s value is higher than the stamp duty value, the stamp duty value prevails.
This mechanism provides a safeguard to taxpayers against arbitrary application of inflated stamp duty values, while also protecting revenue interests by ensuring that values are independently examined where needed.
Practical Scenarios in Valuation
Example: Gift of Jewellery
If an individual receives jewellery from a friend with a market value of eight lakh rupees, the entire value becomes taxable under Section 56(2)(x) since it exceeds fifty thousand rupees. A valuation report from a registered valuer would establish the fair market value on the date of transfer.
Example: Purchase of Flat below Stamp Duty Value
Suppose a person buys a flat for fifty lakh rupees while the stamp duty value is fifty seven lakh rupees. If the difference of seven lakh exceeds fifty thousand and also represents more than ten percent of the consideration, the difference becomes taxable in the hands of the buyer. However, if partial payment was made through banking channels before the agreement date when the stamp duty value was lower, that earlier value can be considered.
Example: Allotment of Unquoted Shares
Consider a situation where a company issues shares at one hundred rupees per share to an individual, while the net asset value determined under Rule 11UA is one hundred and fifty rupees per share. The difference of fifty rupees per share would become taxable under Section 56(2)(x) in the hands of the recipient.
Role of Judicial Interpretations
Courts have played an important role in clarifying the manner of valuation and applicability of these provisions. Decisions have emphasised that valuation rules must be applied strictly in accordance with statutory prescriptions, leaving no room for arbitrary estimations by revenue authorities.
For example, in disputes relating to immovable properties, it has been held that where the assessee demonstrates genuine hardship due to inflated stamp duty values, the reference to a Valuation Officer should be liberally granted. Similarly, in cases of share valuation, courts have directed that methods prescribed under Rule 11UA must be adhered to without substituting alternative calculations unless permitted by law.
Special Considerations for Virtual Digital Assets
With effect from 1 April 2023, virtual digital assets were included within the scope of property under Section 56(2)(x). This inclusion raises questions regarding valuation since such assets may not have conventional market references.
The government has clarified that fair market value will be determined as per methods notified, which may involve reference to prices on recognised exchanges or independent valuations. This ensures that transfers of cryptocurrencies, tokens, or other digital assets without or for inadequate consideration are brought within the fold of Section 56(2)(x).
Compliance Challenges
While the valuation rules bring certainty, practical difficulties continue to arise. Taxpayers may face challenges in obtaining reliable valuation reports, especially for assets like works of art or unquoted securities where subjective judgments can vary.
For immovable properties, frequent upward revisions of stamp duty values by state authorities may lead to notional taxation even when actual transaction values are genuine. These challenges underscore the importance of proper documentation, professional valuation reports, and timely reference to Valuation Officers in appropriate cases.
Exemptions and Exceptions under Section 56(2)(x)
Although Section 56(2)(x) is a wide-reaching provision intended to prevent disguised transfers and artificial arrangements, the legislature has carved out certain exemptions. These exemptions ensure that genuine transfers motivated by personal, social, religious, or business reasons are not unfairly taxed. The exemptions are set out both within the main section itself and in the rules notified under Rule 11UAC.
Understanding these exemptions is critical, because they strike a balance between preventing abuse and preserving legitimate transactions. The exemptions can broadly be classified into personal gifts, transactions in business reorganisation, and other specific cases notified by the central government.
Gifts from Relatives
One of the most significant exemptions under Section 56(2)(x) relates to gifts received from relatives. Any sum of money or property received from a relative is not chargeable to income under this provision.
The term relative is defined inclusively and varies depending on whether the recipient is an individual or a Hindu Undivided Family.
For Individuals
In the case of an individual, relative means:
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse
- Brother or sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individual
- Any lineal ascendant or descendant of the spouse
- Spouse of the persons referred to in the points above
This wide definition covers a large number of family relations, ensuring that personal transfers within the family are not subject to unnecessary taxation.
For Hindu Undivided Families
In the case of an HUF, any member of the family is treated as a relative. Thus, gifts from members to the HUF or vice versa are exempt from Section 56(2)(x).
Judicial Views
Courts have clarified the interpretation of relatives in various cases. For example, it has been held that cousin brothers or sisters do not fall within the definition, since the law provides an exhaustive list. Similarly, live-in partners or relationships not legally recognised are not covered. The judicial approach has been to interpret the term strictly in line with the statutory definition.
Gifts Received on the Occasion of Marriage
Another important exemption is for any gifts received on the occasion of marriage of an individual. These gifts may be in money or property and are fully exempt, without any monetary limit.
This exemption recognises the cultural and social significance of marriage in India, where families and friends often bestow substantial gifts. However, the exemption is specific to the individual getting married, and not to relatives or family members. For instance, gifts received by the parents of the bride or groom are not exempt under this clause.
Courts have clarified that the term occasion of marriage must be interpreted reasonably. In one case, gifts received long after the marriage ceremony were held to be outside the exemption. The emphasis is on a direct nexus with the marriage event.
Gifts Under a Will or by Way of Inheritance
Section 56(2)(x) also exempts any money or property received under a will or by way of inheritance. This exemption upholds the principle that inheritance is not income but a transfer of existing wealth from one generation to another.
This exemption covers both testamentary succession (through wills) and intestate succession (where a person dies without a will and property passes under personal laws). The exemption applies irrespective of the relationship between the deceased and the recipient, as long as the transfer is by way of inheritance or testamentary bequest.
Gifts in Contemplation of Death
Transfers made in contemplation of death of the donor are also excluded. This principle, borrowed from succession law, applies where a person facing imminent death makes a gift of property with the intention that it shall take effect only if death occurs. If the donor survives, the gift does not take effect.
Though rare in practice, this exemption ensures that such transfers are not treated as income. The rationale is that these transfers are more in the nature of succession rather than ordinary gifts.
Transfers from Certain Institutions and Funds
Section 56(2)(x) exempts money or property received from certain institutions, funds, or trusts. These include:
- Any trust or institution registered under section 12A or section 12AA or approved under section 10(23C).
- Any fund, foundation, university, educational institution, hospital, or other medical institution covered under specified clauses of section 10.
The exemption recognises that these institutions are engaged in charitable or not-for-profit activities and transfers from them are not intended for tax avoidance.
Gifts from Local Authorities and Government
Any sum of money or property received from the central government, state government, or any local authority is exempt from Section 56(2)(x). This ensures that statutory grants, subsidies, or allotments by the government are not subjected to unintended taxation.
Gifts Received by Trusts and Institutions
Trusts and institutions established for charitable or religious purposes often receive donations in cash or kind. These are exempt from Section 56(2)(x) provided the trust or institution is duly registered or approved under the relevant provisions of the Act.
For instance, a charitable trust registered under section 12A receiving donations of land or jewellery is not required to pay tax under Section 56(2)(x). However, such receipts are still subject to other compliance requirements such as application of income and audit conditions.
Transactions Covered by Business Reorganisation
Certain transactions undertaken in the course of business reorganisation are excluded through notifications under Rule 11UAC. These include:
- Amalgamation of companies under section 2(1B).
- Demerger under section 2(19AA).
- Business reorganisations of co-operative banks.
- Conversion of companies into limited liability partnerships under specific provisions.
The rationale is that such transactions are genuine commercial restructurings and should not attract provisions meant for gifts or personal transfers.
Exemption for Transactions Not Regarded as Transfer
In some cases, property transfers are not regarded as transfers under section 47. For example, transfer of capital assets in a scheme of amalgamation, transfer between holding and subsidiary companies, or transfer on partition of an HUF. Such transactions are outside the ambit of Section 56(2)(x) since they are governed by other specific provisions.
Specific Notifications under Rule 11UAC
The government has issued notifications from time to time to exclude certain transactions from Section 56(2)(x). Some of these are:
- Transfer of shares pursuant to resolution plans approved by the National Company Law Tribunal.
- Transfer of shares in cases of insolvency under the Insolvency and Bankruptcy Code.
- Conversion of urban co-operative banks into banking companies.
These notifications reflect the policy intent to prevent disruption of genuine commercial or regulatory-driven transfers.
Practical Issues in Applying Exemptions
Despite the detailed list of exemptions, practical issues often arise. For instance, proving that a gift is received on the occasion of marriage requires proper evidence such as wedding invitations, photographs, or affidavits. Similarly, inheritance exemptions require production of wills, probate, or succession certificates.
In the case of gifts from relatives, disputes sometimes arise regarding whether a particular relation qualifies under the definition. Strict documentation and disclosure are therefore essential to substantiate exemptions.
Illustrative Scenarios
Scenario 1: Gift from Brother
An individual receives fifty lakh rupees from his brother. Since brother is included within the definition of relative, the exemption applies and the amount is not taxable under Section 56(2)(x).
Scenario 2: Property Received on Marriage
A bride receives jewellery worth twenty lakh rupees from family friends on her marriage. These gifts are fully exempt since they are received on the occasion of marriage. However, if her parents receive gifts on the same occasion, those would not qualify for the exemption.
Scenario 3: Inheritance through Will
A person inherits a flat from his uncle through a registered will. Even though uncle is not included in the definition of relative, the exemption applies because the transfer is by way of inheritance.
Scenario 4: Transfer in Amalgamation
A company receives assets from another company pursuant to an amalgamation sanctioned by the tribunal. This is excluded from Section 56(2)(x) by virtue of Rule 11UAC and is not taxable in the hands of the transferee.
Conclusion
Section 56(2)(x) represents one of the most significant anti-abuse provisions in the scheme of the Income-tax Act. By bringing to tax receipts of money and property without or for inadequate consideration, it plugs a major gap that could otherwise enable transfer of wealth without incidence of taxation. At the same time, the provision operates with detailed valuation rules, exemptions, and safeguards to strike a balance between protecting the revenue and preserving legitimate social, cultural, and commercial transfers.
The detailed framework for valuation under Rule 11UA ensures that the chargeability of such receipts is not left to subjective interpretation but is governed by uniform methods for jewellery, works of art, shares, securities, and immovable property. The linkage to stamp duty value for immovable properties brings certainty, though it also creates practical hardships in some cases where notional taxation arises. Judicial guidance in this area has helped clarify that the prescribed methods must be followed strictly, leaving limited discretion to the authorities.
Equally important are the exemptions built into the provision. By excluding receipts from relatives, gifts on the occasion of marriage, inheritances, transfers under a will, and transactions arising from business reorganisations, the law recognises the legitimacy of such transfers. Notifications under Rule 11UAC further ensure that genuine restructuring exercises and transactions mandated under insolvency or regulatory frameworks are not caught within the net of Section 56(2)(x).
The provision is, however, not free from challenges. Frequent revisions of stamp duty values, difficulties in obtaining reliable valuations for unquoted securities and works of art, and disputes over the scope of the term relative continue to create compliance complexities. With the inclusion of virtual digital assets, newer issues relating to valuation and volatility are likely to emerge, necessitating further guidance.
Overall, Section 56(2)(x) has evolved into a comprehensive anti-abuse measure with wide coverage, yet tempered by targeted exemptions and safeguards. For taxpayers, careful documentation, reliance on professional valuations, and awareness of available exemptions remain essential to ensure proper compliance and to avoid unintended tax exposures.