Gift - Tax Implication

Rajesh Dhawan

 

·        Introduction:-

It is always a pleasure to give gift and more pleasure to receive it. ‘Gift’ means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth. Thus, a gift does not have the character of income. Accordingly, in the hands of donee, ordinarily a gift does not come within the definition of “income” for income tax purposes. However, a gift may constitute a perquisite or a benefit and may be assessed to income tax as salary U/s. 15 r/w.s. 17 of the Income tax Act, 1961 or as income from business or profession u/s 28(iv) of the Act. Such a gift has to be distinguished from a personal gift which is not covered by these provisions. The taxability of the personal gifts is governed by the provisions of sec. 56(2) (v), (vi) and (vii) of the Act. 

·        Relevant Sections:-

Ø      Section 2(24):-

Sec. 2(24) of the Act defines “income” for the purposes of the Act. The definition of “income” is inclusive, and not exhaustive. Apart from “income” in the normal sense, it also includes receipts in the nature of gifts and donations. Gifts referred to in sec. 56(2) (v), (vi) and (vii) have been specifically included in sec. 2(24) in the clauses (xiii), (xiv) and (xv) to deem a pure and simple gift as income. Clause (x) of sec. 2(24) also includes any sum received by the employer from his employees as contribution to any provident fund etc. for the welfare of such employees as income. Thus the definition of income U/s. 2(24) also includes such receipts which by no imagination could have been treated as income. Accordingly, a “gift of a personal nature” is not “income” unless it is deemed to be income. A “gift a personal nature has been brought to tax by amending the provisions of sec. 2(24) and sec. 56(2) of the Income-tax Act, 1961 with effect from A.Y. 2005-06.

Ø      Section 10(3):-

Sec. 10(3) of the Income Tax Act, 1961 provided exemption from income tax in respect of casual and non-recurring receipts. By the Finance Act, 1972 the exemption was restricted to Rs. 1,000/-. In view of the said amendment a question arose as to whether a gift in excess of Rs.1,000/- would be subjected to income tax. Vide department Circular No. 158 dated 27-12-1974 it has been clarified that a gift of purely personal nature will not be chargeable to income-tax. The relevant paragraph 2 of the said Circular read as under:

“2 Receipts which are of casual and non-recurring nature will be liable to income-tax only if they can properly be characterised as “income” either in its general connotation or within the extended meaning given to the term by the Income-tax Act. Hence, gifts of a purely personal nature will not be chargeable to income-tax , except when they can be regarded as an addition to the salary or when they arise from the exercise of a profession or vocation.”

Ø      Sec. 56 (2) (v) (1-9-2004 to 31-3-2006):-

Concept of taxation of gifts received by an individual or HUF was introduced in the Income tax Act by amendment of sec. 56(2) w.e.f. 1-9-2004.

Sec. 56(2)(v) brings within the tax net any money received without consideration in excess of Rs. 25,000 on or after 1-9-2004 from their parties. The section provides that any sum of money exceeding Rs. 25,000 received without consideration by an Individual or HUF from any person on or after 1-9-2004 will be treated as income from the other sources. It may be noticed that if the amount received is less than Rs. 25,000 it will not be taxable. However, if the amount received is more than Rs. 25,000 the entire amount will be taxable.

Ø      Sec. 56 (2) (vi) (1-4-2006 to 30-9-2009):-

Sec. 56(2) (vi) has been inserted with effect from 1-4-2006 by the Taxation Laws (Amendment) Act, 2006. The scope of sec. 56(2)(v) introduced w.e.f. 1-4-2004 has now been expended by enactment of sec. 56(2)(vi). Under this section it is provided that receipts from one or more persons aggregating to more than Rs. 50,000, in any financial year, without consideration, will be treated as income of an individual or HUF.

Ø      Sec. 56(2) (vii) (w.e.f. 1-10-2009):-

Sec. 56(2)(vii) covers cases of gifts received by an individual or HUF from non-relatives in cash or kind. In other words, the provisions akin to the erstwhile Gift tax Act, 1958 are being introduced in this section. The only difference is that under the Gift Tax Act, tax was payable by the domor whereas under this provision the tax will be payable by the donee.

Ø      Sec. 56(2) (viia) (w.e.f. 1-06-2010):-

The section came into force w.e.f. 1-6-2010. The section applies to any Firm (including LLP) and a private limited company as well as non-listed public company. Under this section, if a specified assessee receives any share of a private or public unlisted company (closely held company) from any person, without consideration, and the fair market value of which exceed Rs. 50,000 in the financial year, the whole of the aggregate fair market value of such shares shall be considered as income from other sources of the recipient. If the specified assessee purchases such shares of a closely held company from any person at a price which is less than the fair market value of such shares, and if the difference between the fair market value of such shares, and if the difference between the fair market value and the purchase price is more than Rs. 50,000 in any financial year, such difference will be considered as income of the specified assessee under this section. This section is applicable even if such shares of such closely held company are acquired as stock-in-trade or as capital asset. Therefore, if any amount is treated as income u/s. 56 (2)(viia), the same will be added to the cost of the shares of the closely held company received by the specified assessee for the purpose of computation of capital gains. It appears that the benefit will not be available if the shares are treated as stock-in-trade. In this case, fair market value of the share of a closely held company will have to be determined as provided in Rule 11U and 11UA notified by CBDT by Notification No. 23/2010 dated 8-4-2010.  

     Exception:-

·        Relevant Case Studies:-

C. Lakshmi Rajyam Vs. CIT [(1960) 40-ITR-340 (Mad)]

The Madras High Court held that where the payment made to an employee was purely voluntary and gratuitous and was purely a testimonial gift for his past services, that is a gift of money represented as a mark of esteem or acknowledgement of his services the amount will not be liable to tax as income from salary.

Devid Mitchel Vs. CIT [(1956) 30-ITR-701 (Cal)]

The Calcutta High Court held that a voluntary payment in appreciation of services rendered otherwise than as an employee would not come with in the ambit of salary and as such would not be taxable as income.

Mahesh Anantrai Pattani Vs. CIT [(1961) 41-ITR-481 (SC)]

Wherein the employer Maharaja had clarified that the amount of Rs. 5 lakhs paid to the assessee ex-employee was paid as a gift in consideration of loyal and meritorius services rendered by the assessee. The Supreme Court held that the amount was paid to the assessee not in token of appreciation for his services but as a personal gift for the personal qualities of the assessee and as a token of personal esteem. It was held that the amount was not taxable as salary.

CIT Vs. Bhavanagar Bone & Fertiliser Co. Ltd. [(1987) 166-ITR-316 (Guj.)]

The Gujarat High Court held that in order to attract the provisions of sec. 28(iv), there must be a nexus between the business of the assessee and the benefit which the assessee has derived. In this case the Gujarat High court held that the amount of Rs. 382,905/-, which was received by the assessee company had no connection or nexus with the business of the assessee company and therefore it didn’t represent value of any benefits or perquisite arising from the business of the assessee company. The Court therefore held that the said amount was not includible in the total income of the assessee company under sec. 28(iv) of the Act.

Dilip Kumar Roy Vs. CIT [(1974) 94-ITR-1 (Bom.)]

The assessee was a disciple of late Sri Aurobindo, and his main activities were singing bhajans and writing philosophical books. He received voluntary contributions from certain persons in order to enable him to build a temple and the contributions aggregated to Rs. 1 Lakh. The affidavit filed by the contributors disclosed that the contributions were sent out of ‘personal esteem and veneration’ that they had for the assessee. The Bombay High Court held that since the affidavits clearly established that the contributions were personal gifts, the department was not justified in taxing the amount as the income of the assessee.

CIT Vs. Tata Sons (P) Ltd. [(1978) 111-ITR-290 (Bom.)]

The managing agents contributed a sum of Rs. 1,00,000 to the managed company for the construction of a canteen for its workers. The amount so paid was allowed as deduction as being paid out of business exigency.

·        Query and Reply:-

Query No.1:- Donation made by donor would attract 80G deduction?

Answer:-  Gifts to charities are given special treatment under sec. 80G of the Income Tax Act. If a trust or institution is recognised as such, the donation to such trusts or institution, the donor is entitled deduction of 50% of such donations U/s. 80G. The trust or institution must be recognised as such trust by the Tax Authorities by issue of 80 certificate.

Donations by a charitable trust is a valid donations by it, if it is for the purpose of and in the course of fulfilment of any of the objects of the charitable trust, donation to trusts having similar objects would be for fulfilment of its objects provided it is out of the current year’s income.

Query No.2:- Whether gift done by transferor would attract capital gain?

Answer:- Though gift is a transfer, there is no question of liability for capital gain in case of gifts U/s. 45, as capital gain pre-supposes consideration for transfer and in case of gift, it is a transfer for no consideration. Sec. 50C will also be not attracted as the same is applicable only to transfers for inadequate consideration.

Query No.3:- Whether gift to employee would attract capital gain?

Answer:-  As far as employee is concerned any perquisite value under clauses (2) and (3) of sec. 17 will be salary in the hands of employee. Under these clauses, under the scpecified circumstances the benefit conferred on the employee by the employer is treated as perquisite taxable as income from salary in the hands of the employee.

Query No.4:- Whether sec. 56 (2)(vii) will apply to international transactions?

Answer:- It is submitted that to international transactions covered by transfer pricing particulalry, to arm’s length price provisions, the provision of Gifts  U/s. 56(2)(vii) are not applicable.

Query No.5:- Whether family arrangement will attract capital gain?

Answer:- Court have invariably held, that, a family arrangement does not involve a transfer. Not being a transfer, an immovable property alloted to a member in a family arrangement does not attract provisions of Sec.56 (2)(vii) as such allotment does not constitute a transfer and as such not a gift. It also have many controversies, like, allotment of family property to an outsider. Outsiders property being part of family arrangement, etc. 

·        Conclusion:-

It is customary to receive and give gifts in India. Also on many occasions/events, gifts are commonly exchanged among friends and relatives. It is important to note that such gifts received could have tax implications in the hands of the recipient; therefore, one needs to exercise caution so that he is not caught unawares.