CA Preksha Choraria

Preksha Choraria*What is Gift?

In Layman’s language, gift is transfer of goods or property (movable or immovable) from one person to another without consideration. As per Income Tax Act, Receipt without consideration or Receipt with inadequate consideration, by individuals and Hindu Undivided Family is chargeable to Income Tax. Section of Income Tax Act, deals with Taxation of Gift for Individual and Hindu Undivided Family.

*Is Taxability of Subsidy same as Taxability of Gift?

Subsidy is also a kind of receipt without consideration. Subsidy is aid (help) given by Central or State Government in Cash or in Kind or through Tax reductions or Tax Holidays to persons or group of persons. So should we start taxing all kind of subsidies or help or grant (by whatever name called) given by government as gift u/s 56(2)(vii)???? As it is clear that subsidy can be received by any person (as defined u/s 2(31) of Income Tax Act) and the motive behind its conferment is welfare of society, it cannot be restricted to section 56(2)(vii). Finance Bill, 2015, has expanded the definition of income (u/s 2(24) of Income Tax Act), that is taxable under the Income Tax Act, 1961, by inserting a sub-clause on subsidies, grant, and cash incentive and duty drawback. According to the amendments to the Finance Bill, the income shall include “assistance in form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by the central government or state government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset”. As per various decisions of High court and Supreme Court, Subsidy is taxable only if it a Revenue Receipt i.e Subsidy in form of Capital receipt is not taxable. E.g. Subsidy for purchase of Land will be deducted from the cost of asset (Section 43(1) of Income Tax Act) and will not be taxed. Taxability of Subsidy can be concluded from the ratio of following Court Decisions:

  1. Sahney Steel and Press Works Ltd. v CIT (1997) 228 ITR 253 (SC)
  2. Mepco Industries Ltd. v CIT (2009) 319 ITR 208 (SC)
  3. CIT v Udupi Builders P. Ltd. (2009) 319 ITR 440 (Kar)

*Gift-Capital Receipt or Revenue Receipt?

The general rule under the Income tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted (as specified u/s 10 of Income Tax Act) and all capital receipts are exempt from taxation unless there is a provision to tax it (Capital Gains are taxable u/s45 of Income Tax Act ). Gift, Financial Assistance, Loan etc. are Capital receipts. Receipt without consideration or Receipt with inadequate consideration, by individuals and Hindu Undivided Family is chargeable to Income Tax u/s 56(2)(vii) of Income Tax Act (Specifically Mentioned in the law). But what if gift is received by Person other than individual or Hindu Undivided Family? Will it be taxed? How will be the tax calculated?

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FreeImages.com/Alex Ling

*Taxability of Gift to Persons other than Individual or Hindu Undivided Family (say a company): Can a Director gift to his/her company on its First Anniversary? Can a parent company gift to its subsidiary company on its incorporation? Is this receipt without consideration taxable under Income Tax Act?

Why not!!! A company (Non Living, but enjoying the right of separate legal entity in the eyes of law) and its director are two separate legal entities in the eyes of law. Both of them are covered in the definition of Person u/s 2(31) of Income Tax Act. A Contract entered between the two (company and director) is valid as per Indian Contract Act, 1872. Then surely director can gift his/her company.

E.g. Director of XLtd. gifts Rs.10,00,000 to XLtd. on its first anniversary. Will Rs.10,00,000 be taxable in the hands of XLtd.? Accounting Entry will be-

Cash A/c                                Dr.         10,00,000

To Gift From Directors A/c                        10,00,000

It is not taxable u/s 56(2)(vii) as the recipient is not individual or Hindu Undivided Family. Capital receipt is not taxable unless there is specific provision to tax it. It is apparent that the receipt of cash of Rs.10,00,000 is capital receipt. Thus, Entire Rs.10,00,000 will not be taxable.

E.g. Director of Xltd. Machine worth Rs.10,00,000 to XLtd. on its first anniversary. Will Machine be taxable in the hands of XLtd.? Accounting Entry will be-

Machine A/c                         Dr.         10,00,000

   To Gift From Directors A/c                              10,00,000

It is not taxable u/s 56(2)(vii) as the recipient is not individual or Hindu Undivided Family. Capital receipt is not taxable unless there is specific provision to tax it. It is apparent that the receipt is capital receipt (Capital Asset). Thus, receipt of Machine without consideration is not taxable.

Can we claim depreciation on the machine received as gift? As per Section 43(1) in The Income- Tax Act, 1995″ actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Thus, depreciation can be claimed on assets purchased by the company. There shall be actual cash outlay by the company. Thus, Income Tax Act does not allow dual benefit. No depreciation can be claimed on such asset.

Thus, taxability of Capital receipts in the form of gift received by Persons other than individuals and Hindu Undivided Family is still out of the purview of Income Tax Act!!!!

Note: The views expressed in the Article may not match with the views of others. Before accepting & applying, take the expert opinion.

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Tags : Gift (84) gift in kind (32) section 56 (106) Tax on Gift (43)

0 responses to “Gift Receipt without Consideration to Persons other than Individuals & HUF”

  1. B. Viswanatha Reddy says:

    A society registered under societies registration Act, though formed for providing accomodation as choultry for the needy, is not doing any such activity now, as the public are not showing interest to stay in dormitary hall now a days. This society is not registered under sec 12AA of the Income tax Act. The choultry is now lying vacant for the past several years. it is occupied now & then by only a few needy people who stay in the town for attending on their relatives who are admitted in the nearby Govt.area hospital. It is occupied hardly for about 15 to 30 days in a year.
    The vacant site infront of the choultry is let out. There is also interest income on the original deposits as well as the deposits of lease rent receipts accumulated over a period of time. This is being accumulated to meet the renovation of 60-70 years old choultry and also to start a small medical hospital to serve the poor & needy. As the income exceeds the taxable limits, please let us know the ITR form to be used and the status in which the return is to be filed. Is it taxable as AOP or Individual at normal rates?
    None of the members of the society are beneficiaries of the income of the society, though some of them are assessees on file with taxable income.
    Please clarify at your earliest

  2. Shiva says:

    (1 Can a Resident Indian can gift money to his brother who is settled in US ?
    (2) If so, what is the procedure and clearances to be obtained?
    (3) wht is the tax liability in India?
    (4) what is the tax liability in US?

  3. K.Govindan says:

    The legal validity and the taxability of gifts received by companies from other companies has been considered by the Hon’ble ITAT,Delhi in the case of DCIT-3(2) vs KDA Enterprises and it has been held that gifts which are not covered by sec 56(2) (viia) and (viib) received by companies or any other person other than individuals and HUFS are not taxable either under normal provisions or book profit computation treating them as a capital receipt.
    However in the given case the gift is proposed to be made by a Director to his company. Therefore this can be distinquished from the facts of the above case and hence the director is required to make his intent and the objective on clear terms on what basis this gift is made by him to the company.The issue is still debatable since Revenue may invoke sec 28(iv) and assess the same as benefit or perquisite whether convertible into money or nor arising from business or exercise of a profession and treating the same as revenue receipt at the hands of the company.

    • Choraria Preksha says:

      Thank you K.Govindan sir for the ITAT decision to support my views. The issue is debatable and going by the intent of director it is one time gift on occasion of company’s first anniversary thereby it can be assessed as capital receipt in the hands of company.

  4. CA Harshit Kabra says:

    I agree with you.The above mentioned article mostly relates to 56(2)(vii)
    I mean 56(2)(viia) specifically provides for the taxability for other income taxable.
    Reply

  5. Amit Verma says:

    If a son sends money to his parents. Will it be taxable in the hands of parents..??

  6. Neelan says:

    instead of recording as cash gift, if we record as unsecured loan what will be tax impact n co law provisions?

    • Choraria Preksha says:

      If we treat it as unsecured loan then we even need to pay adequate interest on the same. It may attract sections like 68, 69A relating to unexplained cash credit or unexplained money!!!

  7. CS Pradeep tuli says:

    This is Avery useful piece of information for professionals. Please continue to provide such practical inputs.

  8. NARENDRA BAGADE says:

    Gift Receipt without Consideration to Persons other than Individuals & HUF

  9. Oscar says:

    How will company record gift in its book of account ? Whether in cash or in kind ? And what would be the MAT impact on such gift that should be kept in mind.

    • Preksha Choraria says:

      It will enhance book profits and cash balance of company but gift in kind I.e machine would either not appear in books or will appear at nominal value say of Rs.1. MAT provisions need to be checked.

  10. CA Chandravijay Shah says:

    Agreed. However, if a Company receives Shares of an Unlisted Company either without consideration or for an inadequate consideration, it will be subject to tax as per Provisions of section 56(2)(viia).

    • Preksha Choraria says:

      I agree with you.The above mentioned article mostly relates to 56(2)(vii)
      I mean 56(2)(viia) specifically provides for the taxability.

  11. tarun says:

    plz sedn mu new informatin

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