Section 56(2)(X) A Treatise--9789390128662

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VISION STATEMENT

Vision Statement

“The Chamber of Tax Consultants (The Chamber) shall be a
powerhouse of knowledge in the field of fiscal laws in the global
economy.”
The Chamber shall contribute to the development of law and the
profession through research, analysis and dissemination of knowledge.
The Chamber shall be a voice which is heard and recognized by
all Government and Regulatory agencies through effective repre-
sentations.
The Chamber shall be pre-eminent in laying down and upholding,
among the professionals, the tradition of excellence in service,
principled conduct and social responsibility.
Unveiled by Shri S.E. Dastur, Senior Advocate on 30th January,
2008.

iii



ABOUT THE CHAMBER OF TAX
CONSULTANTS

The Chamber of Tax Consultants (The Chamber) was established in
the year 1926 and is one of the oldest voluntary non-profit making
professional organisations formed.

The Chamber is into its 95th year and is a dynamic organisation
which has a glorious past and undisputedly ambitious future.
The Chamber has about 4,000 members pan India, which com-
prise Chartered Accountants, Lawyers, Company Secretaries, Cost
­Accountants, Income-tax Practitioners, Students, etc.

The Chamber acts as powerhouse of knowledge in the field of fiscal
law, contributes to the development of law and profession through
research, analysis and dissemination of knowledge. The Chamber
shall be pre-eminent in upholding among the professional, tradition
of excellence in service, principle conduct, and social responsibility.

The Chamber is an institution with a tradition of high integrity,
independence and professionalism. Renowned professionals like
Dr. Y.P. Trivedi, Shri Sohrab E. Dastur, Shri V.H. Patil, Shri S.N.
Inamdar, Shri Narayan Varma and Shri Pradip Kapasi have served
the Chamber’s Presidents.

The Chamber disseminates knowledge by holding Workshops,
S­ eminars, Lecture Meetings, Study Circle and Study Group Meetings,
Outstation Residential Conferences, etc. for the benefit of members
which keep them up-to-date with the latest developments in the
field of Law. Keeping in pace with the technology, the Chamber has
also successfully conducted around a century of webinars in the
“lockdown” period on various professional subjects, especially for
members from distant places. Through its various orientation and
advance courses dedicated to new areas of expertise it empowers
young professionals to build their careers in unconventional ­practice

v

About the Chamber of Tax Consultants

areas. It functions through various 14 effective sub-committees
comprising above 300 core committee members.

‘The Chamber’s Journal’ which is its mouthpiece, is very popular
amongst the professionals and Corporates as well, mainly because
of in-depth analysis on topical issues (theme based). The ­Chamber’s
Journal has found a permanent place in libraries of leading tax
professionals.

In addition, the Chamber also comes out with a quarterly ‘Inter-
national Tax Journal’, a journal for advanced cross border tax
practitioners, and ‘Jignyasa’, ‘Learning today-Leading Tomorrow’,
a quarterly ‘E-Journal’ for students.

The Chamber has always stood up for professionals, people by
making effective representations before the Government and Reg-
ulatory authorities. It has its echoes in Govt. and ministries as well.
Professional’s look upon Chamber as an institution which can take
its voice to the court of law, whenever required.

The Chamber is instrumental in filing Public Interest Litigation
against the Regulatory authorities, it represents pre and post b­ udget
memorandum and making representation on various Tax Allied and
Corporate Laws to the Government and regulatory authorities.

The Chamber organises many events for the knowledge of ­Students.
The Dastur Essay Competition, which is an Annual feature, is
one of such activities where students across India and even from
outside India participate with great enthusiasm. This competition
serves the purpose of developing the habit of developing writing
skills amongst the students who are the future of the profession.
The committee also organises a debate competition and a tax moot
court competition for the students.

The Chamber manages two libraries at prominent places like
A­ ayakar Bhavan and Pratyakshakar Bhavan, Mumbai which are
widely used by the professionals.

For more information, please visit the Chamber’s website
www.ctconline.org.

vi

MESSAGE BY EDITOR

This piece of professional work carried out by dedicated and
enthusiastic authors is going to remain on the desks of all of us,
the tax practitioners, for a long time to come. Tax literature has
explained the difference between a capital receipt and income
pictorially as the difference between a tree and the fruit of a tree.
When someone gives you a gift of a sum of money or property, what
you get is akin to getting a “tree” and hence a capital receipt. When
that sum of money or property is employed commercially, it bears
“fruits” in the form of income by way of interest, rent, royalty etc.

Section 56(2)(v) introduced a deeming fiction in the Income-tax
Act, 1961 for the first time in the year 2004 whereby a gift was
deemed to be income. This provision has got amended time and
again and today, section 56(2)(x), its present avatar, engages
significant time and attention of all tax payers and tax practitioners,
while planning and structuring any commercial transaction. The
provisions are tricky, deceitful, ambiguous at many places and
challenging. The authors have done a great task of analyzing the
present provisions, identifying real life situations where these can
pose hurdles and providing interpretation that is based on sound
principles of interpretation of taxing statutes.

The beauty of this book is that it is a compilation of chapters
written by three different authors, each one of whom have a
­different mind-set and a different professional background and
­experience. Reading chapter by chapter I was reminded of the
story of seven blindfolded people standing near an elephant and
each one describing the animal from a different perspective. The
only difference between that story and this book is that there all
seven were ultimately wrong while here, each of the authors was

vii

Message by Editor

right, because each of the view point was supported by some au-
thority or the other. As an editor, I have tried my best to reconcile
the differences as much as possible, though, I have left the dif-
ferent view points at some places for the reader to appreciate the
complexity of the topic.
While the task allotted to me by the Chamber was to edit the
manuscript, I confess, that reading the manuscript and entering into
discussions with the authors turned out to be a feast of knowledge
for all of us, which I shall cherish for many years.
Happy reading!
Yogesh Thar

viii

FROM THE DESK OF THE
PRESIDENT AND THE CHAIRMAN

The Gift-tax Act, 1958 was enacted to tax various gifts. The consti-
tutional validity of the said Act was upheld by the Supreme Court
in the case of D.H. Nazareth. The said Act was enacted to curb
evasion of the Income-tax and also Estate Duty. Under the said
Act, the donor of Gift was charged to tax. However, the Estate Duty
Act, 1953 was abolished in 1985. A prime reason for the abolition
of the Estate Duty Act was that it had high administration cost for
collection of estate duty as compared to the actual estate duty col-
lected. Law was also criticised since it had disrupted the financial
economy of Indian families. Subsequently, in 1998 the Gift-tax Act
was also abolished. Neither donor nor donee was required to pay
tax on gifts. This was a big change in the tax regime vis-à-vis gifts.

However, with the abolition of gift-tax, it was perceived that it has
led to the transfer movable and immovable property and income
freely for no or inadequate consideration, resulting in tax avoid-
ance. Accordingly, to curb incidence of tax avoidance, anti-abuse
provisions, taxing gift  was re-introduced by the Finance (No. 2)
Act, 2004, with effect from 1 April 2005. It was introduced with the
prime objective to curb bogus capital-building and money-launder-
ing. However, tax incidence was now moved in the hands of the
recipient. Provisions have been introduced under the residuary
head of income - Income from Other Sources.

Since introduction, the law has been amended several times and
its ambit kept on expanding. Initially, provisions applied only to
individual & HUF. But subsequently, it was applied to non-indivi­
dual also. Provisions of sub-section (2)(x) of section 56 attempts
to capture and tax the notional value derived by the recipient when
an asset is acquired or received at a price below the fair market

ix

From the desk of The President and The Chairman

value or money without consideration. The intention of the provision
seems to apply to the transactions where undisclosed/unaccounted
income of a person is brought in his hand by way of purported gifts.

The new set of provisions tries to tax not only gifts but several
capital receipts. No doubt certain exemptions are provided. But in
several cases, these provisions in association with other provisions
of the Income-tax Act has lead to taxation in the hands of recipient
as well as payer. Further, various genuine capital receipts have
been subject to taxation. Because of the complexities involved in
the provisions of section 56(2)(x), the Research and Publication
Committee thought of coming out with the publication for the benefit
of professionals.

Authors in this publication have done in depth analysis of the
provisions of section 56(2)(x). The Chamber of Tax Consultants is
thankful to the authors for their support and enthusiasm in sharing
their knowledge. The Chamber is also thankful to Shri Yogesh Thar
for mentoring the authors and editing the book. We also ­acknowledge
the contribution of Mr. Paras S. Savla, the immediate Past Chairman
of the Committee who initiated this publication. We are sure that
readers will find this publication very useful in u­ nderstanding the
intricacies of section 56(2)(x) and will be a useful reference material.

VIPUL K. CHOKSI PARAS K. SAVLA

PRESIDENT CHAIRMAN

2019-20 2019-20

x

ABOUT THE AUTHORS

Abhitan Mehta is a practicing Chartered Accountant and has also
done LLB. He did his Articleship from Price Waterhouse Coopers
Post Qualification. He has worked in M/s. Bansi S. Mehta & Co.
under the guidance of Shri Bansi Mehta and Shri Yogesh Thar.
Presently, he is associated with Bhavna Doshi Associates LLP
and is working under the mentorship of Shri Gautam Doshi. He
garnered experience in a wide range of areas covering Mergers and
Acquisitions, IBC Takeover Bid, Succession Planning, International
Taxation, Accounting and Corporate Laws. Mr. Mehta is presently
serving as Vice-Chairman of Direct Tax Committee of Chamber of
Tax Consultants.

Dr. C.P. Ramaswami, graduated in science from Presidency College,
Madras in 1971 and in law from Law College, Madras in 1974. He
enrolled in 1974 and practised for 2 years. Thereafter he joined IRS
in 1976, wherein he served Income Tax Department in Bangalore,
Bombay, Hyderabad, Vijayawada and Jaipur in Investigation, ITAT,
CIT(A) and Administration. He has received many awards and
accolades. Mr. Rawaswami did Ph.D on Tax Treaties from BITS
PILANI in 2002-2005. He took VRS in 2004 and since July 2004
practising tax lawyer. He has been appearing before several High
Courts and Tribunal Benches.

Devendra H. Jain is an Advocate, Bombay High Court practicing
in the field of Direct and Indirect Taxes, and Corporate and Allied
Laws such as the Benami Law, IBC, RERA, succession laws
etc. He is the founder of the law firm - DHJ Legal and has been
into the litigation and advisory practice for nearly two decades.
He appears before various judicial and quasi-judicial fora like the
Supreme Court, High Court and various Tribunals. He had secured

xi

About the Authors

All India Ranks at all three levels of CA exam and prior to setting
up of his law firm, he was practicing as a Chartered Accountant.
He regularly delivers lectures on direct tax laws at various seminars
and conferences across India, contributes articles for professional
journals and has co-authored books for various publications.
Dharan V. Gandhi (B.Com. CA, LL.B.) is a practising Advocate and
a member of the Bar Council of Maharashtra and Goa. He special-
ises in direct tax litigation and appears regularly before the Hon’ble
Bombay High Court and Income Tax Appellate Tribunal. He has
successfully argued income tax cases for several clients and MNCs
before various forums. He has also briefed and assisted counsels
for various matters. He was part of Team representing Chamber
of Tax Consultants in Petition challenging ICDS before the Hon’ble
Delhi High Court and in Petition challenging CBDT Central Action
Plan giving incentives to CIT(A) before the Hon’ble Bombay High
Court. He is a regular contributor in professional journals and
publications, a regular speaker on various issues of direct tax and
has also presented papers at conferences and study courses. On
academic front, he has secured 7th  Rank on an all India basis in
the CA Final Examinations and 38th  Rank on an all India basis in
the CA PCC Examination. Further, he has a unique distinction of
scoring 100/100 in Accounts at CA PCC Examination.

xii

MANAGING COUNCIL
2019-20

Managing Council

President Hon. Jt. Secretary
Vipul K. Choksi Ketan L. Vajani

Vice-President Hon. Jt. Secretary
Anish M. Thacker Haresh P. Kenia

Hon. Treasurer Imm. Past President
Parag S. Ved Hinesh R. Doshi

Ashok L. Sharma Members
Bhadresh K. Doshi Nilesh S. Vikamsey
Devendra H. Jain Pranav P. Kapadia
Heneel K. Patel Paras K. Savla
Hitesh R. Shah Paresh P. Shah
K. Gopal Rajesh L. Shah
Kishor D. Vanjara Rahul K. Hakani
Mehul R. Sheth Rajesh P. Shah
Mahendra B. Sanghvi Varsha R Galvankar
Maitri P. Savla Vipul Joshi
Yatin K. Desai

xiii



RESEARCH & PUBLICATION
COMMITTEE 2019-20

Research & Publications Committee

Chairman Advisor
Paras K. Savla Jayant Gokhale

Vice-Chairperson Office Bearer
Namrata R. Dedhia Haresh Kenia

Ex-Officio Immediate Past Chairman
Vipul K. Choksi Paras S. Savla
Anish M. Thacker

Convenors Managing Council Member
Mallika Devendra  Bhadresh Doshi

Sujoy Mehta

Past President
Dr. K. Shivaram

Aalok Mehta Members
Ajit Kumar Jain Kiran Nisar
Amit Purohit Kushal Parikh
Amrit Porwal Mitesh Katira
Anup Shah Neelam Jadhav
Divyesh Jain  Ninad Karpe
Sagar Maru

xv

Research & Publication Committee 2019-20

Himanshu Mandavia Sagar Mehta
Jagruti Sheth Sudeep Manek
Jiger Saiya Tushar Desai
Jitender Singh Vinita Krishnan
Kartik Badiani Vyomesh Pathak
Kinjal Shah Zubin Billimoria

xvi

SECTION 56(2)(x) - A TREATISE

Index PAGE
Vision Statement
About The Chamber of Tax Consultants iii
Message by Editor v
From the desk of The President and The Chairman vii
About the Authors ix
Managing Council 2019-20 xi
Research & Publication Committee 2019-20 xiii
xv
Chapter 1
Legislative history of section 56(2)(x) 1
– Dharan Gandhi
18
Chapter 2
Basic scope of section 56(2)(x) 25
– Dharan Gandhi

Chapter 3
Interpretation of words ‘Receive’ & ‘Consideration’
– C.P. Ramaswami

xvii

Section 56(2)(x) - A Treatise PAGE

Chapter 4 50
Place of receipt 72
– Dharan Gandhi 95
123
Chapter 5 177
Scope of the term ‘Property’ 198
– Dharan Gandhi
221
Chapter 6
Taxation in case of restructuring
– Abhitan Mehta

Chapter 7
Exemptions from the applicability of section 56(2)(x)
– Dharan Gandhi

Chapter 8
Applicability of section 56(2)(x) to private trusts
– Abhitan Mehta

Chapter 9
Other connected provisions [Sections 2(24), 49, 50C,
50CA, 56(2)(viib), 68 & GAAR]
– Dharan Gandhi

Chapter 10
Implications of Rules 11U and 11UA
– Devendra Jain

xviii

Section 56(2)(x) - A Treatise

APPENDICES PAGE

Appendix 1 247
Relevant sections of the Income-tax Act, 1961 251
2(24) - Definition of the term Income 256
49 - Cost of capital asset with reference to certain 258
modes of acquisition 258
50C - Special provision for full value of consideration 269
in certain cases 270
50CA - Special provision for full value of consideration
for transfer of share other than quoted share 278
56 - Income from other sources 280
68 - Cash credits/unexplained credits 285
Chapter X-A - General Anti-Avoidance Rule - Sections
95 to 102 285
287
Appendix 2 289

Relevant rules of the Income-tax Rules, 1962
11U - Meaning of expressions used in determination
of fair market value
11UA - Determination of fair market value
11UAA - Determination of fair market value for share
other than quoted share
11UAC - Prescribed class of persons for the purpose
of clause (XI) of proviso to clause (x) of sub-section
(2) of section 56
11UAD - Prescribed class of persons for the purpose
of section 50CA
List of Cases

xix