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The Centre has changed the definition of ‘income’ under the Income-Tax law to ward off litigation on a Budget proposal on taxation of property passed on as gifts. The gifting route was hitherto used to escape the tax net, but this Budget sought to plug this loophole by bringing to tax, at the hands of the recipients, all property received as gifts. The change in the definition of ‘income’ would settle doubts raised in certain quarters about the Income-Tax Department’s legal authority to tax as “income from other sources” the value of immovable or movable property received for an inadequate consideration or as gifts, say tax experts. The latest move to cover value of property (received as gifts) under the definition of ‘income’ was part of the amendments moved by the Finance Minister, Mr Pranab Mukherjee, to the Finance Bill, 2009 in the Lok Sabha on Monday. It was contended by some tax experts that such transactions were in the nature of ‘capital’ receipts and that it could be challenged in courts that there was no ‘income’ element to them and, therefore, should not be taxed.


However, by bringing in a specific change in definition of income to cover such situations, the Centre has made sure that the room for legal challenge was minimised. Henceforth, property received as gifts from non-relatives will be treated as income and be subjected to Income-Tax accordingly. Thus, if a person in the 30 per cent tax bracket receives an immovable property from a non-relative without paying any consideration (gift) and the stamp value of the property is say Rs 1 crore, then the recipient may be required to pay as much as Rs 33 lakh as Income-Tax.


Another amendment brought about on Monday related to taxation of subsequent transfer or sale of the property received as gifts by the recipient. There was an issue on what would be the “cost of acquisition” on the property received as gift when subsequently sold. The “cost of acquisition” is important for computation of capital gain. The Centre has now brought clarity on this issue by spelling out the methodology for arriving at “cost of acquisition”. It has now been specified that the amount treated as value of the property (either for stamp duty purposes or fair market value) under Section 56(2) would be taken as the “cost of acquisition”. By specifying the cost of acquisition, there will be certainty with regard to computation of capital gain. In the absence of clear guidelines on the methodology for computation of cost of acquisition, a reasonable doubt would have been created with regard to chargeability of capital gains tax for such subsequent transfers.

To illustrate ABOVE, let us consider an immovable property (with fair market value of Rs 1 crore) received as a gift by an individual ‘A’. According to the Budget proposal, Rs 1 crore would be added to the total income of ‘A’ as ‘income from other sources’ for tax purposes. Now when the same property is subsequently sold by the recepient for say Rs 2 crore, the cost of acquisition for the recepient would be Rs 1 crore and not the cost incurred by the initial donor of the immovable property. Therefore, only Rs 1 crore would be subjected to capital gains tax.

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June 2024