1306767453Taxation of Gifts

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					2011]                                 TAXATION OF GIFTS                               160

[2011]197 TAXMAN 160 (MAG)

                     TAXATION OF GIFTS
                                GIFT-TAX IMPLICATION
            t is customary to receive and give

    I  [[
            gifts   in


                                 Also,   on

            occasions/events, gifts are com-monly
The focus of this write up is on tax
implications related to gifts. For the              *
purpose, relevant provisions and case RAJESH DHAWAN
law have been taken into consideration.
In addition, some queries generally
arising have also been answered in
respect of same.

1. 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 under section 15 read
with section 17 of the Income-tax Act, 1961 or as income from business or
profession under section 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 section 56(2)(v),(vi) and (vii).

Relevant Provisions
2. The relevant provisions are as discussed hereinbelow:
      Section 2(24) - Section 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 section 56(2)(v), (vi) and
            (vii) have been specifically included in section 2(24) in the clauses (xiii),
            (xiv) and (xv) to deem a pure and simple gift as income. Clause (x) of
            section 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’ under section
            2(24) also includes such receipts which by no imagination could have

    The author is a MBA (Finance).
2011]                             TAXATION OF GIFTS                                161

        treated as income. Accordingly, a ‘gift of a personal nature’ is not
        ‘income’, unless it is deemed to be income. A gift of a personal nature
        has been brought to tax by amending the provisions of section 2(24)
        and section 56(2) of the Income-tax Act, 1961 with effect from
        assessment year 2005-06.
   Section 10(3) - Section 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
        departmental 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 reads 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
   Section 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 section 56(2) w.e.f. 1-9-2004.
        Section 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 a 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.
   Section 56(2)(vi) (1-4-2006 to 30-9-2009) - Section 56(2)(vi) has been
        inserted with effect from 1-4-2006 by the Taxation Laws (Amendment)
        Act, 2006. The scope of section 56(2)(v) introduced w.e.f. 1-4-2004 has
        now been expanded by enactment of section 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 a HUF.
2011]                            TAXATION OF GIFTS                               162

   Section 56(2)(vii) (w.e.f. 1-10-2009) - Section 56(2)(vii) covers cases of
        gifts received by an individual or a 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 donor whereas under this provision the
        tax will be payable by the donee.
   Section 56(2)(viia) (w.e.f. 1-6-2010) - The section came into force w.e.f. 1-
        6-2010. The section applies to any firm (including an LLP) and a private
        limited company as well as a 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 exceeds 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 under section 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 rules 11U and 11UA notified by the CBDT by
        Notification No. 23/2010, dated 8-4-2010.
2011]                         TAXATION OF GIFTS                            163

   Exception:-

Relevant Case Laws
3. Some important cases related to the issue are as under:
C. Lakshmi Rajyam v. 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 Mitchell v. 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 within the ambit of salary and as such would not be taxable as
Mahesh Anantrai Pattani v. 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 meritorious 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
2011]                           TAXATION OF GIFTS                                164

and as a token of personal esteem. It was held that the amount was not taxable
as salary.
CIT v. Bhavanagar Bone & Fertiliser Co. Ltd. [1987] 166 ITR 316/32 Taxman
180 (Guj.) - The Gujarat High Court held that in order to attract the provisions of
section 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 section 28(iv) of the Act.
Dilip Kumar Roy v. 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 v. 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.

Some queries and Replies
4. The queries discussed below are of great significance:
Query - Would donation made by a donor attract section 80G deduction?
Answer - Gifts to charities are given special treatment under section 80G of the
Income-tax Act. If a trust or an institution is recognised as such, then in case of
donation     to     such       trust      or     institution,  the     donor     is
entitled to deduction of 50 per cent of such donations under
section 80G.
Donations by a charitable trust are 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.
2011]                           TAXATION OF GIFTS                                165

Query - Whether gift given by transfer would attract capital gain?
Answer - Though gift is a transfer, yet there is no question of liability for capital
gain in case of gifts under section 45, as capital gain pre-supposes
consideration for transfer and in case of gift, it is a transfer for no consideration.
Section 50C will also be not attracted as the same is applicable only to transfers
for inadequate consideration.
Query - Whether gift to employee would attract capital gain?
Answer - As far as an employee is concerned, any perquisite value under
clauses (2) and (3) of section 17 will be salary in the hands of employee. Under
these clauses, under the specified 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 - Whether section 56(2)(vii) will apply to international transactions?
Answer - It is submitted that to international transactions covered by transfer
pricing, particularly to arm’s length price provisions, the provisions of gifts under
section 56(2)(vii) are not applicable.
Query - Whether a family arrangement will attract capital gain?
Answer - The Courts have invariably held that a family arrangement does not
involve a transfer. Not being a transfer, an immovable property allotted to a
member in a family arrangement does not attract provisions of section
56(2)(vii). The allotment does not constitute a transfer and also not a gift. It may
also have many controversies, like allotment of family property to an outsider
and outsider’s property being part of family arrangement, etc.

5. 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.
                                                                         66-T/SEC. 56

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