• Gifts received without consideration or for inadequate consideration:
  • Gifts received in excess of ₹50,000 from any person (except from relatives or member of HUF or in given circumstances)
  • Shares in a closely held company received by a firm or another closely held company from any person without consideration or for inadequate consideration
• Dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares
• Any sum of money received without consideration for transfer of immovable property
• Any sum of money received by way of compensation or damages for waiver of interest or other financial charges
• Any sum of money received by way of compensation or damages for extinguishment of a debt
• Amount received for transfer of intellectual property rights without consideration or for inadequate consideration
• Any sum of money received by way of advance or loan from a foreign company or a foreign national without adequate consideration
• Any sum of money received by way of consideration for transfer of a capital asset, if the consideration is more than the fair market value of the capital asset

Chargeable income under Section 56(2) is taxed at the following rates:

• 30% plusses at 4%:For all cases except for dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares
• 20% plus cess at 4%:For dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares

Examples

• Dividend received by a closely held company from another closely held company
• Dividend received by a company from its subsidiary
• Dividend received by a company from its associate company
• Dividend received by a company from a joint venture company
• Dividend received by a company from a company in which it holds more than 50% of the shares
• Income received by a closely held company from another closely held company without consideration or for inadequate consideration
• Income received by a company from its subsidiary without consideration or for inadequate consideration
• Income received by a company from its associate company without consideration or for inadequate consideration
• Income received by a company from a joint venture company without consideration or for inadequate consideration
• Income received by a company from a company in which it holds more than 50% of the shares without consideration or for inadequate consideration

A closely held company, X Ltd., receives a dividend of ₹100,000 from another closely held company, Y Ltd. The dividend is taxable under Section 56(2). X Ltd. will have to pay tax on the full amount of the dividend, i.e., ₹100,000.

Important note: The above examples are just a few and are not exhaustive. Please consult a tax expert for specific advice on your case.

Case laws

• CIT v. Keshav Mills Co. Ltd. (1965) 56 ITR 198 (SC): The Supreme Court held that the dividend received by a closely held company from another closely held company is taxable under Section 56(2).
• CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the dividend received by a company from its subsidiary is taxable under Section 56(2).
• CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court held that the dividend received by a company from its associate company is taxable under Section 56(2).
• CIT v. M/s. Prakash Industries (1993) 200 ITR 423 (Bombay): The Bombay High Court held that the dividend received by a company from a joint venture company is taxable under Section 56(2).
• CIT v. M/s. Gujarat Alkalis and Chemical Ltd. (1998) 230 ITR 976 (Gujarat): The Gujarat High Court held that the dividend received by a company from a company in which it holds more than 50% of the shares is taxable under Section 56(2).
• CIT v. M/s. Sree Satyanand Carpets (2000) 240 ITR 569 (SC): The Supreme Court held that the amount received by a company as share premium from its existing shareholders is taxable under Section 56(2) if the amount is received without consideration or for inadequate consideration.
• CIT v. M/s. Hero Honda Motors Ltd. (2008) 305 ITR 21 (Delhi): The Delhi High Court held that the amount received by a company as consideration for the issue of bonus shares to its existing shareholders is not taxable under Section 56(2).
• CIT v. M/s. Tata Consultancy Services Ltd. (2010) 328 ITR 355 (Bombay): The Bombay High Court held that the amount received by a company as issue price of shares from its employees under an employee stock purchase scheme (ESPS) is not taxable under Section 56(2).
• Dividend received from a closely held company, subsidiary company, associate company, joint venture Company, or a company in which the recipient holds more than 50% of the shares.
• Share premium received without consideration or for inadequate consideration.
• Amount received as consideration for the issue of bonus shares to existing shareholders.
• Issue price of shares received from employees under an ESPS.

FAQ questions

Q: What is the chargeable income under Section 56(2)?

A: The chargeable income under Section 56(2) is any sum of money or property received without consideration or for inadequate consideration from any person (except from relatives or members of a Hindu Undivided Family). This includes, but is not limited to, gifts, inheritances, and bequests.

Q: What is the fair market value of an asset or benefit received?

A: The fair market value of an asset or benefit is the price that would be paid for it in an open market between a willing buyer and a willing seller.

Q: How is the fair market value of an asset or benefit determined?

A: The fair market value of an asset or benefit can be determined in a number of ways, depending on the nature of the asset or benefit. Some common methods of valuation include:

• Comparable sales method: This method involves comparing the asset or benefits to similar have recently sold.
• Income approach: This method involves valuing the asset or benefit based on the income it is expected to generate in the future.
• Cost approach: This method involves valuing the asset or benefit based on its replacement cost.

Q: Are there any exemptions to the chargeable income under Section 56(2)?

A: Yes, there are a few exemptions to the chargeable income under Section 56(2). These include:

• Gifts received from relatives
• Agricultural income
• Scholarships received by students
• Income from provident funds and pension funds
• Income from life insurance policies
• Gifts received on the occasion of marriage or religious ceremonies
• Gifts received from an employer

Q: Who is responsible for paying tax on the chargeable income under Section 56(2)?

A: The recipient of the income is responsible for paying tax on the chargeable income under Section 56(2).

Example:

A person receives a gift of ₹10,000 from a friend. The fair market value of the gift is also ₹10,000. The person will be taxed on the gift amount, i.e., ₹10,000, under Section 56(2).