TAXABILITY OF GIFTS UNDER THE INCOME TAX ACT, 1961 JOINT STUDY CIRCLE MEET OF TPA & CA,

INDORE BR. DT. 15.01.2010 by - CA. Hitesh J. Mehta M.Com,LL.B., F.C.A., DISA(ICA) Brief Introduction: Gift is an important subject not only from the law makers and tax consultants but also for the general public. It is from ancient times one of the most famous modes of transferring movable as well as immovable property. The legislation and revenue often flown upon the concept of gift, as in several cases, gifts are used as a tool for minimizing tax liability. Gift tax was introduced in India in the year 1958 and continued for more than 40 years but to ensure that there are no leakages of income-tax revenue through the mechanism of gifts, then Finance Minister proposed to tax the gifts made after 30.09.1998 under the Income-tax Act itself in the hands of the recipients. However to curb ever growing tax evasion and money laundering, the amendment has taken effect from 01.09.2004 and impacts Assessment Year 2005-06 onwards till date with the increase in overall exemption limit of gifts from outsiders to Rs. 50,000/- w.e.f. 01.04.2006 onwards and the amendments recently made u/s 56 (2) of Income-tax Act w.e.f. 01.10.2009. Meaning and essential elements of gifts: In common parlance, gift is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by the donor to the donee and accepted by or on behalf of donee during the lifetime of the donor. Therefore, the essential elements of a gift are: 1. Donor 2. Donee 3. Subject Matter 4. Transfer

5. Voluntarily and without consideration and 6. Acceptance. Gift taxable under Income-tax Act: The Finance (No. 2) Act, 2004 has enacted a special provision in section 56 of the Income-tax Act to tax monetary gifts received by an individual or an H.U.F. from unrelated sources by suitably amending the definition of income. Hence such gifts are taxed as Income from Other Sources in the hands of the donee. The sections applicable from 01.09.2004 to 31.03.2006 were 56 (2) (v) and section 2 (24) (xiii),

The sections applicable from 01.04.2006 to 30.09.2009 were 56 (2) (vi) and section 2 (24) (xiv) and The sections applicable from 01.10.2009 onwards are 56 (2) (vii) and 2 (24) (xv). And these provisions are applicable whether the donor or the recipient is a resident or non-resident. At present a gift is chargeable to tax under section 56 (2) (vii) if it satisfies the following conditions: A. It is received by an individual or a HUF. B. If it is received on or after 1st October, 2009. C. The gift falls in any of the following five categories. D. The gift does not fall in the exempted category. Five categories: 1. Any sum of money (gift in cash or by cheque or draft): If aggregate amount of sum of money received by an individual/ HUF from one or more persons during a previous year (but on or after 1st October, 2009) exceeds Rs. 50,000/-, the whole of such aggregate value will be chargeable to tax. 2. Immovable property without consideration: If any immovable property (without any consideration) is received on or after 1st October, 2009 and the stamp duty value of which exceeds Rs. 50,000/-, stamp duty value will be chargeable to tax in every such transaction. 3. Immovable property for a consideration which is less than the stamp value: If any immovable property is received on or after 1st October, 2009 for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000/-, then the difference between stamp duty value and consideration is chargeable to tax in every such transaction. 4. Movable property without consideration: If aggregate fair market value of movable properties i.e. shares and securities; jewellery; archaeological collections; drawings; paintings; sculptures; or any work of art received without consideration during a previous year (but on or after

1st October, 2009) exceeds Rs. 50,000/-, the whole of aggregate fair market value of movable properties will be chargeable to tax. 5. Movable property for a consideration which is less than the fair market value: If movable property i.e. shares and securities; jewellery; archaeological collections; drawings; paintings; sculptures; or any work of art is received for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000/-, then the difference between aggregate fair market value and consideration is chargeable to tax. Jewellery shall have the meaning assigned to it in the Explanation to section 2 (14)(ii) and includes (a) Ornaments made of gold, silver, platinum or any other precious metals or alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) Precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel. It is pertinent to mention here that the method of arriving at the fair market value of such movable property has not yet been prescribed by the CBDT and even afterwards will lead to many controversies. Exempted Categories: While calculating the above monetary limit of Rs. 50,000/- in any of the five categories, any sum of money or property received from the following shall not be considered: 1. Money / Property from a relative and for this purpose, the term relative as per explanation to clause (vi) of subsection (2) of section 56, of tax payer X means (i) Spouse of the individual (ii) Brother or sister of the individual ----Mrs. X

---- Brothers / sisters of Mr. X

(iii) Brother or sister of the spouse of the individual - Brothers / sisters of Mrs. X (iv) Brother or sister of either of the parents of the individual -- Brothers / sisters of father / mother of Mr. X

(v) Any lineal ascendant or descendent of the individual ---- Lineal ascendant or descendent of Mr. X (vi) Any lineal ascendant or descendent of the spouse of the individual ---- Lineal ascendant or descendent of Mrs. X (vii) Spouse of the person referred to in clauses (ii) to (vi) ---- Spouse of the aforesaid persons In my opinion, any sum of money received from any relative as above is exempt only for individuals. Since HUF is not an individual but a group of persons known as family, the exemption will not be available to it. 2. Money / Property received on the occasion of the marriage of the individual. Marriage gift may be received from relatives, friends or any other person and the exemption is available to both i.e., the bride as well as the groom. The gift is exempt on the occasion of marriage and not on the day of marriage, hence gift received on tilak, tika and similar religious function prior to marriage day will also exempt from tax. Only marriage gift is exempt and gift received on other occasions like birthday, anniversaries, festival, engagements etc. will however be chargeable to tax. 3. Money / Property received by way of will / inheritance. 4. Money / Property received in contemplation of death of the payer. 5. Money / Property received from a local authority as defined in the explanation to clause (20) of section 10 i.e.Panchayat, Municipality, Municipal Corporation & Cantonment Board. 6. Money / Property received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in section 10(23C). 7. Money received from a trust or charitable institution registered under section 12AA.

Some Important Issues: 1. Clubbing Provisions of Income u/s 64 Income from assets (other than house property, which is already covered under the provisions of clause (i) of section 27) transferred to spouse Sec. 64 (1) (iv); Income from assets transferred to sons wife Sec. 64 (1) (vi); Income from assets transferred to a person for the benefit of spouse Sec. 64 (1) (vii); and Income from assets transferred to a person for the benefit of sons wife Sec. 64 (1) (viii). 2. Blending whether covered? Where any property having been the separate property of the individual has been converted after 31.12.1969 into property belonging to the family or thrown into the common stock of the family, then the individual shall be deemed to have made a gift of so much of the converted property as the members of the HUF other than such individual would be entitled to, if a partition of the converted property had taken place immediately after such conversion. However the members being relative of that individual will get the benefit of exemption. But after the applicability of the provisions of section 56 (2), the full value of property converted will be taxable in the hands of an HUF. Similarly, when an individual transfers his property of Rs. 10 lacs market value to his HUF for 6 lacs, then he has to pay capital gains tax as per the provisions of section 50C and the HUF has to pay income tax on Rs. 4 lacs u/s 56 (2) (vii) resulting in a double taxation on same deemed income. Further if the converted / transferred property is subsequently partitioned amongst the members of the family, the income from such property as is received by the spouse of the transferor will be taxable in his hands. 3. Relinquishment of Coparcenary Share Under Hindu law, a coparcener can dispose off his undivided interest in coparcenary property by a will, but he cannot make a gift of such interest. But a coparcener may make gift of his undivided interest with the consent of other coparceners. When a coparcener renunciates his undivided interest in coparcenary property in favor of his brother and his son, the relinquishment will be treated as gift.

4. Gift by HUF to Member / Distribution of HUF assets on Partition In the case of gift by HUF to any of the member, the same will be taxable in the hands of recipients u/s 56 (2) of the I.T. Act. However the amount spent by an HUF on the education / marriage of any member or for any other common purpose, the same will not be treated as income of any particular member. In the case of partition of assets of HUF amongst the members, if a member receives cash or assets of value less than the value of the assets to which he was entitled and the other member or members receive cash or assets of value more than the value to which he or they were entitled according to his or their share/shares, the transaction will be held to be gift. However there will not be any liability on HUF as the transaction is not regarded as transfer u/s 47 (i). 5. Firm to Partner on dissolution of Partnership Firm In many cases of dissolution of partnership firm, gift may be involved. When the distribution of assets between the partners is unequal and a partner receives cash or assets of value less than the value of the assets to which he was entitled and the other partner or partners receive cash or assets of value more than the value to which he or they were entitled according to his or their share/shares, the transaction will be held to be gift. 6. Esops w.e.f. 01.04.2009 as per the Provisions of Finance (No. 2) Act, 2009 When Esops were received by an employee normally based on the performance or the terms and conditions of service, first of all the difference of market value & price paid will be taxable as perquisites in his hands u/s 17 (2) (vi). And whenever the capital gain arises from the transfer of Esops, then it will be taxable u/s 49 (2AA) of the Income-tax Act without attracting the provisions of section 56 of the Act. 7. Subsequent transfer by donee For arriving at the capital gains on account of subsequent sale by the donee, notional cost of acquisition i.e. the value which has been taken into account for the purpose of section 56 (2) (vii) will be considered as inserted by Sub-section (4) in section 49 of the Act w.e.f. 01.10.2009. But if the donee being a businessman / developer transfers the capital assets as a stock in trade of the business, the benefit of the notional cost of acquisition seems to be doubtful in view of the express provision of section 43C (2) which states that the cost of such assets shall be the cost of acquisition to the transferor or the donor.

8. Ascendants and descendents In my opinion only the male members of an individual can be the lineal ascendants and descendents and accordingly the followings persons will be the lineal ascendants / descendents so far as the meaning of relative u/s 56 (2) (v) of the Income-tax Act is concerned. 1. Spouse 2. Father 3. Mother 4. Son 5. Sons wife 6. Sons son 7. Sons sons wife 8. Great Grandson 9. Great Grandsons wife 10. Grand Father 11. Grand Mother 12. Great Grand father 13. Great Grand mother 14. Brother / Sister 15. Spouse of Brother / Sister (Bhabhi / Jiyajee) 16. Spouses father / mother (Sas / Sasur) 17. Spouses brother / sister (Devar / Jeth / Nanad/ Sala/ Sali) 18. Spouse of spouses brother / sister (Devarani / Jethani / Nandoi/ Salhej / Sadhu) 19. Grand father/ mother of spouse 20. Mothers brother / sister and their spouse (Mama / Mami/ Masi / Mausa) 21. Fathers brother / sister and their spouse (Chacha / Chachi/ Tau/ Tai/ Bhua / Fufa) However many members consider following persons also as lineal ascendants and descendents but since the terms are not defined in the Act, it may be a matter of controversy. 1. Sons daughter 2. Sons daughters husband 3. Daughter 4. Daughters husband 5. Daughters son 6. Daughters sons wife 7. Daughters daughter 8. Daughters daughters husband 9. Mothers father/mother (Nana/Nani) 9. Genuine purchases from third party / Disputing the guideline value & market value. Though there may be a great hardship in genuine cases of purchases from outsiders but still in view of express provisions of the Act, the same will also be covered. However the constitutional validity of the provisions can be challenged. Further where the stamp duty value of immovable property as referred to in Section 56 (2) (vii) (b) is disputed by the assessee on grounds mentioned in sub-

section (2) of section 50C, the A.O. may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property as they apply for valuation of capital assets under those sections. And even if the assessee is not satisfied with the valuation of D.V.O., then he should have his own valuation done from an approved registered valuer and challenge the matter to the appropriate higher authorities. 10. Receipt under decree of court? If any property is received through an order of court i.e under decree or award, then whether it will be taxable u/s 56 (2) of the Act? To my mind, it will be out of the purview of Section 56 (2). 11. Exempted gifts whether covered by section 68? Despite of the express provisions of section 56 (2) of the Act exempting certain receipts being exempted gifts from the purview of tax, but still the A.O. has power to examine the creditworthiness, genuineness and the real motive behind the gifts. 12. Taxable gifts Power to examine? Though all gifts from non-relatives will be deemed as income but still the A.O. has power to summon the parties and examine the creditworthiness, genuineness and the real motive behind the gifts. 13. Gift under Transfer of Property Act. Gift of immovable property must be made by way of a Gift Deed in writing, which is executed by the donor, attested by two or more witnesses and the deed must be registered under the Registration Act, which attracts stamp duty of 8 %. Thus, any gift of immovable property which is not registered would be invalid under the transfer of property act. But under the Incometax Act, handing over of possession is more important than the registration. ---------------------------------------------------- ***** -----------------------------------------------