CONTENTS. Chapter-heads I-5 DIVISION ONE TAXATION OF UNDISCLOSED INCOME UNDISCLOSED INCOME - BACKDROP

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1 CONTENTS Chapter-heads I-5 DIVISION ONE TAXATION OF UNDISCLOSED INCOME UNDISCLOSED INCOME - BACKDROP 0.1 Non-reporting/under-reporting of income Scheme of Taxation of sections 68 to 69D 4 1 CASH CREDITS 1.0 Legislative history of section Section 68 not restricted to cash transactions Section 68 makes no distinction between a banking concern and non-banking concern Limited applicability of section 68 to non-resident assessees Conditions to be satisfied for applicability of section Assessee has maintained books Credit of sum of money in the books of assessee Assessee bound to offer satisfactory explanation to AO regarding the credits in his books Section 68 vis-a-vis section 106 of the Evidence Act Addition not mandatory if assessee offers no explanation/offers unsatisfactory explanation Is the AO bound to prove that unexplained credit is from a particular source? Where entry stands on the name of a person other than the assessee Burden of proof on the assessee Explanation that the source of cash credit is intangible additions made 35 I-9

2 CONTENTS I Where creditor declines that he has any transaction with assessee Explanation that credit represents sales proceeds of truck Where summons issued to creditor is returned unserved Explanation that credit represents income from horse racing Confirmatory letters from cash creditors Alternative explanation offered by assessee Inability of assessee to produce creditors Explanation that cash credits were from sale of gold Credit owned up by members of assessee AOP AO not issuing summons to creditor despite assessee s request Obligation to secure presence of creditors before AO Where creditor produced before AO but his name neither disclosed in books nor his debt disclosed in balance sheet Where creditors assessed by AOs and their accounts had been accepted by respective AOs Cash credits explained as money provided by wife Overseas creditor not produced by assessee for examination Where confirmation letters and affidavits of lenders filed with copies of assessment orders in credit allowed of TDS from interest paid to them When assessee held to have discharged onus Explanation that credits in capital account out of fixed deposits proceeds Where creditor deposited money on different dates and thereafter withdrew certain moneys also leaving a debit balance Explanation the credits represent proceeds of NSC and repayment from finance company Addition under section 68 not mandatory but discretionary 57

3 I-11 CONTENTS 1.7 Credits to which section 68 is commonly applied Distinction between sections 68 and Section 68 vis-a-vis section 69D Section 132 vis-a-vis section WHETHER GIFTS TAXABLE AS CASH CREDITS U/S Meaning of gift Gifts as a means of money laundering-converting black money into white Measures to combat money laundering through bogus gifts In respect of gifts received on or after , whether section 68 applicable or section 56(2)(v)/(vi)/(vii) applicable or both are applicable? Section 68 as applicable to gifts received prior to TAXATION OF SHARE APPLICATION MONEY/ SHARE CAPITAL/SHARE PREMIUM 3.1 Share premium received by closely held companies in excess of FMV taxable - New section 56(2)(viib) Closely-held companies (i.e. companies in which public are not substantially interested) Additional onus on closely-held companies regarding share capital received by closely-held cos. from residents Issues arising from new clause (viib) Where assessee-company fails to discharge even initial burden cast by main provisions of section Widely held companies WHETHER CAPITAL GAINS FROM SHARES TAXABLE U/S 68? 4.1 Where credits representing sale of listed shares held to be genuine Off-market deals in shares through brokers who were members of CSE Where credits representing sales proceeds of shares held to be bogus 116

4 CONTENTS I-12 5 TAXATION OF LOANS AND DEPOSITS 5.1 Loans as means of balancing books and explaining unaccounted income Section 68 applicable to both commercial and non-commercial loans No double taxation Loan details in tax audit report - Whether amounts to satisfactory explanation Lenders not traceable Cases where onus held to be discharged Points to be kept in mind while furnishing confirmation for unsecured loans etc DEPOSITS FROM TENANTS 6.1 How to discharge onus u/s 68 in respect of deposits received from tenants FIRMS 7.1 No presumption that firm maintains books based on clause in partnership deed Section 68 - Applicability to credits in firm s books in partner s name First day first year credit in firm s books When credits in firm s books assessable as firm s income under section Whether same amount assessable in firm s hands u/s 68 and also in partner s hands u/s TAXATION OF SUNDRY CREDITORS/TRADE CREDITORS BALANCES AS UNEXPLAINED CREDITS 8.1 Where credit purchases and trading results accepted by AO as genuine, no additions u/s Circulation transactions 135

5 I-13 CONTENTS 9 UNEXPLAINED INVESTMENTS 9.0 Section 69 - Constitutionally valid Ingredients of section 69 - Unexplained investments Meaning of investments Word assessee does not include legal heirs Books of account, if any Duty of assessee to offer explanation Photocopies/certified copies of documents admissible in IT proceedings Value of investments deemed to be income Additions on account of discrepancies in closing cash balance - Illustration The word may in section Value of investment made in construction of property Stamp duty value/fmv of house purchased exceeds consideration shown in sale deed Addition in respect of undisclosed gold ornaments u/s Additions for household articles in absence of bills/purchase invoices Additions in no account cases NSCs and FDRs seized from assessee s divorced wife where divorce was by mutual consent When ornaments seized not considered unexplained Whether addition called for on grounds that cash book not updated? Additions in respect of difference in inventory prepared by search party and book stock Additions for unaccounted stock of fabric Additions in respect of imported camera not declared to customs Addition in respect of on money paid to builders Stock additions for excess stock where such additions in sales tax assessments accepted by assessee Gold in jeweller s premises belonging to customers Additions on account of unrecorded purchases Valuation of undisclosed stock for making additions 162

6 CONTENTS I Additions in respect of old AC, TV, VCR and furniture at residence in absence of proof of cost of these items Rough memoranda showing unrecorded sales of jewellery and inflation of purchases Year of taxability of unexplained investments u/s Additions in public issue Sale agreement showing higher consideration than sale deed Additions in respect of DDs purchased Additions based on partner s admission before central excise authorities Jewellery seized already declared in WT returns Excess jewellery found explained as belonging to married daughter left behind Surrender made during survey Additions in stock due to non-recording in books due to accountant s carelessness Additions in respect of purchases since suppliers not traceable - Whether justified Set off of excess stock against unaccounted profit from unaccounted sales Justifiability of addition where stock figure accepted by sales tax deptt Non-maintenance of stock register Inadvertent non-entry or delayed entry in books of withdrawals from bank Additions for suppressed production based on increased electricity consumption Additions for FDRs in relatives name Additions in respect of unaccounted sales Joint savings account with mother Where receipt from party credited in bank account exceeds gross receipts declared in return less TDS UNEXPLAINED INVESTMENTS IN LOTTERY TICKETS 10.1 Lottery ticket investments - Purchase from prize winner instead of lottery ticket dealer 172

7 I-15 CONTENTS 11 ADDITIONS ON BASIS OF STOCK STATEMENTS SUBMITTED TO BANKS 11.0 Pledge v. Hypothecation of stocks to banks - Differences in reliability of stock statements Difference between stock statement given to bank dated 28th March and book stock of 31st March Where part of stock in stock statement belonged to sister concern/partner/principal (consignor) Difference in valuation Difference between stock register and bank stock statements Survey and stock surrender Estimate v. Physical stock difference No difference in quantities, only in values UNEXPLAINED MONEY ETC Ingredients of section 69A Ownership Whether section 110 of the Evidence Act can be invoked to deem possessor to be owner for section 69A purposes? Other valuable article - Meaning of Meaning of expression may Recording in books of account Burden of proof on assessee and not on his legal heirs Addition to be based on AO s satisfaction, not that of some other authority The word income in section 69A Relevant date for valuation of unexplained gold bars No deduction of any expenditure for computing income under section 69A FDRs in the name of untraceable third persons Undisclosed sales Excess cash explained as withdrawal from bank 140 km. away 192

8 CONTENTS I Cash representing advance against sale of land - No addition Cash belonging to relatives Withdrawn from bank on 9 Nov. but entered in cash book on 12 Nov Withdrawals cover cash deposits but there is a time lag Jewellery disclosed in wealth tax return Cash explained as belonging to an organisation Unexplained primary gold and US dollars found by ED during raid Huge cash found by CBI at a raid on a Govt. servant - Illegal gratification explained as loans from money lenders Income from sale of trees Cash found by CBI at his premise explained by politician as belonging to his party Acquittal under section 124 of Bombay Police Act - Whether discharges onus under section 69A Ornaments said to be belonging to customers lying with assessee for periods as long as 1-15 years Amount recovered from possession of another person Agreement for sale of property - Consideration received repaid on cancellation Contents of bank locker jointly in name of assessee and her mother Money belongs to Pvt. Co. of which assessee and husband the only directors Whether additions can be made based on photostat copy of slip found by CBI Totalling mistake in return of income Contents of locker in name of assessee s son Savings made by wife out of money given household expenses AMOUNT OF INVESTMENTS, ETC. NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT 13.1 Ingredients of section 69B Section 69B vis-à-vis sections 69 and 69A Applicability of section 69B to investment in assets/articles not owned by assessee 200

9 I-17 CONTENTS 13.4 Additions u/s 69B in respect of excess stock found during survey Shares purchased at a price lower than quoted price and even its fair value Stock pledged with bank disposed of during enquiry without informing AO Applicability of section 50C for taxing undisclosed investments Sale bills predating purchase bills - Whether liable for tax under section 69B UNEXPLAINED EXPENDITURE 14.1 Ingredients of section 69C AMOUNT BORROWED OR REPAID ON HUNDI 15.1 Ingredients of section 69D Distinction between section 69D and sections 269SS and 269T Otherwise than through an account payee cheque - Meaning of Direct deposit in bank account of payee - Whether violation of section 69D? Hundi Transactions between sister concerns - Whether attracts section 69D FLAT 30% TAX ON UNDISCLOSED INCOME 16.1 Taxation of income under sections 68 to 69D at flat 30% w.e.f. A.Y Rationale behind new section 115BBE Amnesty scheme/legal money laundering scheme? ESTIMATE BY VALUATION OFFICER IN CERTAIN CASES 17.1 Provisions of section 142A 214

10 CONTENTS I-18 DIVISION TWO TAXATION OF MONEY GIFTS RECEIVED BY INDIVIDUAL/HUF 18 BACKDROP OF DONEE-BASED TAXATION OF GIFTS 18.1 Donor based gift-tax under the Gift-tax Act, Donee-based gift-tax introduced by the Finance (No. 2) Act, Amendments by TLA, 2006 to plug loopholes Finance (No. 2) Act, Concept of donee-based taxation extended to gifts in kind Amendments made by the Finance Act, Amendments made by Finance Act, 2012, w.r.e.f Summary OBJECTS OF TAXATION OF MONETARY GIFTS 19.1 Objects of donee-based taxation of monetary gifts as explained by ITAT Contradictory views of ITAT in Mayawati s case Objects (as explained by CBDT) TAXABILITY OF MONEY GIFTS 20.1 Conditions for taxability of cash gifts received (for previous year and subsequent previous years) Peculiar situation for assessment year Whether sums of money gifts received by a politician within the threshold limits of ` 50,000 [under section 56(2)(vi)/ under section 56(2)(vii)] or ` 25,000 [under section 56(2)(v)] be taxed as profits and gains from business or profession under section 28? RECEIPT OF SUM/SUMS OF MONEY 21.1 Meaning of sum of money used in section 56(2)(vii)(a) 233

11 I-19 CONTENTS 21.2 Meaning of the word receives used in section 56(2)(vii) Whether receipt of gift of Indian Millennium Deposit Certificates issued by SBI along with gift deeds is receipt of sum of money without consideration? Modes of receipt of sum of money Date of receipt of gifts of money through cheque/dd SUM OF MONEY RECEIVED WITHOUT CONSIDERATION 22.1 Consideration The phrase Receives... any sum of money, without consideration used in section 56(2)(vii)(a) Is interest-free loan received by individual/huf liable to be treated as sum of money received without consideration? Lottery prize - Whether amount or property received without consideration? Money prizes won in contest - Whether sums of money received without consideration? Whether money can be laundered by corrupt civil servants, etc., by showing amounts as gifts under section 56(2)(vii)(a)? Amount received in lieu of giving up right to contest will HOW TO COMPUTE THE LIMIT OF ` 50, Limit of ` 50,000 for cash gifts Clubbing of gifts of money received by a minor from nonrelatives EXEMPT GIFTS FOR DONEES BEING INDIVIDUALS/HUFs 24.1 Cases in which gift is not taxable under section 56(2)(vii) Money or property received from a relative [clause (a) of the second proviso] Relative, connotation of Money or property gifted by member of HUF to HUF A Money or property gifted by HUF to its members 255

12 CONTENTS I Sum of money or property received by minor from his relative Sum of money or property received on the occasion of the marriage [clause (b) of the second proviso] Sum of money or property received under a will or by way of inheritance [clause (c) of the second proviso] Sum of money or property received in contemplation of the death of the payer or donor [clause (d) of the second proviso] Sum of money or property received from a local authority [clause (e) of the second proviso] Sum of money or property received from charitable entity referred to in section 10(23C) [clause (f) of the second proviso] Sum of money or property received from any fund or trust or institution registered under section 12AA [clause (g) of the second proviso] ANY PERSON OR PERSONS 25.1 Gifts may be received from any person or persons Any person or persons only limited by the exceptions in the second proviso Whether Government is a person? WHETHER INCOME/PROPERTY DISCLOSED UNDER CLAUSE (v)/(vi)/(vii) OF SECTION 56(2) ARE KNOWN SOURCES OF INCOME IN DISPROPORTIONATE ASSETS CASE 26.1 Supreme Court s interpretation of known sources of income 269 DIVISION THREE TAXATION OF GIFTS OF IMMOVABLE PROPERTY RECEIVED BY AN INDIVIDUAL/HUF 27 IMMOVABLE PROPERTY - SCOPE OF THIS TERM 27.1 Immovable property 273

13 I-21 CONTENTS Immovable property includes only immovable property which is capital asset of the recipient Gift received of rural agricultural land is exempt Gift received is exempt if immovable property is the stock-intrade of the recipient OBJECTS OF DONEE-BASED TAXATION OF GIFTS OF IMMOVABLE PROPERTY 28.1 Objects of section 56(2)(vii) - Anti-abuse provisions CONDITIONS FOR TAXABILITY OF GIFTS RECEIVED OF IMMOVABLE PROPERTIES 29.1 Conditions for taxability of immovable property received by Individual/HUF RECEIVED WITHOUT CONSIDERATION 30.1 Receipts of immovable property covered by section 56(2)(vii)(b) Consideration Whether immovable property received as winnings of a lottery prize can be said to be received without consideration IMMOVABLE PROPERTY RECEIVED FOR INADEQUATE CONSIDERATION 31.1 Immovable property received for inadequate consideration not taxable Implication of the retrospective amendment by the Finance Act, DATE OF RECEIPT OF IMMOVABLE PROPERTY 32.1 Date of receipt of immovable property 283

14 CONTENTS I VALUATION OF THE IMMOVABLE PROPERTY RECEIVED 33.1 Valuation provisions Stamp duty value HOW TO COMPUTE THE LIMIT OF ` 50,000? 34.1 Limit to be applied to each transaction of receipt Computation of limit for previous year Computation of limit for previous year and subsequent previous years Limit for immovable property is independent limit Clubbing of gifts of money received by a minor from nonrelatives COMPUTATION OF CAPITAL GAINS ON TRANSFER OF IMMOVABLE PROPERTY TAXED AS GIFT 35.1 Cost of acquisition of immovable property taxed as gift Holding period for determining whether capital gains are short-term or long-term Importance of maintaining records 293 DIVISION FOUR TAXATION OF GIFTS OF MOVABLE PROPERTY RECEIVED BY AN INDIVIDUAL/HUF 36 PROPERTY (OTHER THAN IMMOVABLE PROPERTY) (i.e. MOVABLE PROPERTY) 36.1 Property other than immovable property Shares and securities Government security Artistic work Jewellery Bullion 302

15 I-23 CONTENTS 36.6 Gold coins - Whether bullion or jewellery? Summary OBJECTS OF DONEE-BASED TAXATION OF GIFTS OF PROPERTY 37.1 Objects of section 56(2)(vii) - Anti-abuse provisions CONDITIONS FOR TAXABILITY OF MOVABLE PROPERTY RECEIVED BY INDIVIDUAL/HUF 38.1 Conditions for taxability of movable property received by Individual/HUF Amount taxable RECEIVED WITHOUT CONSIDERATION/ FOR INADEQUATE CONSIDERATION 39.1 Movable property received without consideration Movable property received for consideration less than fair market value Movable property received for consideration not determinable or not quantifiable DATE OF RECEIPT OF SHARES AND SECURITIES, JEWELLERY, ETC The phrase Receives..any property, other than immovable property used in section 56(2)(vii)(c) Date of receipt of shares and securities Date of receipt of jewellery, artistic work and bullion DETERMINATION OF FAIR MARKET VALUE 41.1 Fair market value Effective date of rules 11U and 11UA 316

16 CONTENTS I TAXATION OF SHARES AND SECURITIES RECEIVED 42.1 Scope of the term shares and securities Supreme Court s interpretation of the definition in section 2(h) of the Securities Contracts (Regulation) Act, Whether allotment of bonus shares by a company to its shareholders will attract tax in shareholder s hands under section 56(2)(vii)(c)? Whether allotment of rights shares by a company will attract tax in shareholder s hands under section 56(2)(vii)(c)? Fair market value of shares and securities received Determination of FMV of quoted shares and securities Determination of FMV of unquoted equity shares and securities Determination of FMV of unquoted shares and securities other than equity shares Determination of FMV of unquoted preference shares VALUATION OF JEWELLERY 43.1 Determination of FMV of jewellery Interpretation of requirements Registered dealer Registered valuer Valuation date Invoice value - Whether inclusive of VAT or exclusive of VAT? What if assessee does not have/obtain relevant documents as above - Invoice/valuation report? VALUATION OF ARTISTIC WORK 44.1 Determination of FMV of artistic work Interpretation of requirements Registered dealer 346

17 I-25 CONTENTS 44.4 Registered valuer Valuation date Invoice value - Whether inclusive of VAT or exclusive of VAT? What if assessee does not have relevant documents mentioned above such as invoice of registered dealer/valuation report? VALUATION OF BULLION 45.1 Determination of FMV of bullion HOW TO COMPUTE THE LIMIT OF ` 50, Computation of limit of ` 50,000 for movable property Computation of limit of ` 50,000 for previous year Computation of limit of ` 50,000 for previous year Computation of limit of ` 50,000 for previous year and subsequent previous years Limits for movable property are independent limits Clubbing of gifts received by a minor from non-relatives COMPUTATION OF CAPITAL GAINS ON TRANSFER OF MOVABLE PROPERTY TAXED AS GIFT 47.1 Cost of acquisition of movable property taxed as gift Holding period for determining whether capital gains are short-term or long-term Importance of maintaining records GIFTS OF MOVABLE PROPERTY NOT TAXABLE IF STOCK-IN-TRADE OF RECIPIENT S BUSINESS 48.1 Gifts of movable property received not taxable in the hands of recipient if it is stock-in-trade of recipient s business Can a dealer in shares claim that unlisted shares received are his stock in trade? 358

18 CONTENTS I How to determine whether the recipient individual/huf is a trader in shares or shares are held by him as a capital asset? 359 DIVISION FIVE TAXATION OF GIFTS OF SHARES IN UNLISTED COMPANY RECEIVED BY A CLOSELY HELD COMPANY/FIRM 49 DONEE-BASED TAXATION OF GIFTS OF UNLISTED SHARES IN THE HANDS OF FIRMS/LLPs/COMPANIES - BACKDROP 49.1 Rationale for enacting clause 56(2)(viia) CONDITIONS FOR TAXABILITY OF GIFT OF UNLISTED SHARES RECEIVED BY A CLOSELY HELD COMPANY 50.1 Conditions for taxability of unlisted shares received by closely held company/firm/llp Firm Closely held company (i.e. company in which public are not substantially interested) Comparison of section 56(2)(viia) read with section 56(2)(vii)(c) TRANSACTIONS EXEMPT FROM TAXABILITY UNDER SECTION 56(2)(viia) 51.1 Exempt transactions Receipt of shares by the amalgamated foreign company in a transaction covered by section 47(via) Receipt of shares by the resulting foreign company in a transaction covered by section 47(vic) Receipt of shares in a transaction covered by section 47(vica) Receipt of shares in a scheme of demerger - Section 47(vid) Receipt of shares in a scheme of amalgamation - Section 47(vii) RECEIPT OF SHARES 52.1 Receives, in any previous year,.... any property being shares. - Meaning of this phrase in section 56(2)(viia) 373

19 I-27 CONTENTS 53 DETERMINATION OF FAIR MARKET VALUE OF PREFERENCE SHARES 53.1 Fair market value of unquoted preference shares Determination of FMV of unquoted preference shares DETERMINATION OF FAIR MARKET VALUE OF UNQUOTED EQUITY SHARES 54.1 FMV of unquoted equity shares Balance sheet as on valuation date Book value Book value of assets Amount paid as advance tax under the Income-tax Act Fictitious assets Book value of liabilities The paid-up capital in respect of equity shares [Clause (i) of rule 11UA(c)(b)] The amount set apart for payment of dividends on preference shares and equity shares [Clause (ii) of rule 11UA(c)(b)] Reserves, by whatever name called, other than those set apart towards depreciation [Clause (iii) of rule 11UA(c)(b)] A Position under Revised Schedule VI as regards Debenture Redemption Reserve and Loan Redemption Reserve Credit balance of the profit and loss account [Clause (iv) of rule 11UA(c)(b)] Any amount representing provision for taxation [Clause (v) of rule 11UA(c)(b)] Any amount representing provisions made for meeting liabilities, other than ascertained liabilities [Clause (vi) of rule 11UA(c)(b)] Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares [Clause (vii) of rule 11UA(c)(b)] 395

20 CONTENTS I RECEIPT OF UNLISTED BONUS SHARES BY A CLOSELY HELD COMPANY/FIRM - WHETHER TAXABLE UNDER SECTION 56(2)(viia)? 55.1 Whether receipt of unlisted bonus shares by a closely held company/firm is receipt of such shares without consideration? Whether receipt of unlisted bonus shares by a closely held company/firm is receipt of such shares without adequate consideration? RECEIPT OF UNLISTED RIGHTS SHARES BY A CLOSELY HELD COMPANY/FIRM - WHETHER TAXABLE UNDER SECTION 56(2)(viia)? 56.1 Whether allotment of rights shares by a company will attract tax in shareholder s hands under section 56(2)(viia)? TRANSFER OF SHARES RECEIVED AND TAXED AS GIFTS UNDER SECTION 56(2)(viia)? 57.1 Cost of acquisition of property taxed as gift 401 APPENDICES APPENDIX 1 : CIRCULAR NO. 5/2005, DATED (RELE- VANT EXTRACTS) 405 APPENDIX 2 : EXPLANATORY MEMORANDUM TO FINANCE BILL, APPENDIX 3 : RELEVANT SECTIONS OF INCOME-TAX ACT, APPENDIX 4 : RELEVANT RULES OF INCOME-TAX RULES, APPENDIX 5 : RELEVANT SECTION OF WEALTH-TAX ACT, APPENDIX 6 : RELEVANT RULES OF WEALTH-TAX RULES, APPENDIX 7 : EXPLANATORY MEMORANDUM TO FINANCE BILL,