Summary: Receiving gifts and benefits in a business context is common, but it’s important to understand their tax implications under Indian law. As per Section 28(iv) of the Income Tax Act, any non-cash benefit or perquisite received due to business or professional activities is taxable as part of business income. For instance, if a supplier gifts a valuable item like a laptop, the recipient must include its value in their taxable income. The rule primarily targets non-cash gifts, meaning monetary gifts are generally excluded. To determine taxability, consider why the gift was given and whether it’s linked to business activities. Key examples include promotional gifts or incentive trips received due to business relations, which are usually taxable. Newer provisions like Section 56(2)(x) and Section 194R also affect the taxation of business gifts. The case of Pr. CIT v. Ravindra Kumar Gupta (2018) illustrates how benefits received in a business capacity, even if non-cash, are considered taxable under Section 28(iv). Similarly, the Mahindra & Mahindra Ltd. case clarified that loan waivers do not qualify as taxable benefits under this section. In summary, businesses should keep detailed records of any gifts received, assess their value, and comply with tax deduction rules to ensure proper reporting and taxation.
In business receiving gifts is quite common as Traveling Tickets/ Booking, and any other mode.
These gifts are taxable in some cases? The tax laws in India are pretty clear on this, and it’s important to understand how these rules work, later you don’t face any difficulty.
Here is complete and simple terms guide that will help you to understand how business this benefit termed as gifts are taxed in India.
1. What Does income Tax Act Say About Gifts?
In income tax laws there is a specific section called Section 28(iv). This section says that if you receive any gift or benefit because of your business or profession, it might be considered part of your income and could be taxed.
Key Points:
- Related to Business: The gift must be associated to your business or work. For example, if you get gift because you achieved a sales target, it could be taxable.
- Non-Cash Gifts: This rule mainly applies to non-cash gifts. If you receive something that’s not money but still has value (like a car or a holiday trip), it might be taxed.
Illustration:
How a Business Gift is Taxed
Let’s say Mr. Rohan is the owner of a small retail business. He has a good relationship with one of his suppliers, ABC Supplies. To appreciate his consistent business, ABC Supplies gives Mr. Rohan a brand-new laptop worth ₹50,000 as a gift.
How is This Taxed?
i. Section 28(iv) – Taxation of Non-Cash Gifts: The Income Tax Act, under Section 28(iv), states that if you receive any benefit or perquisite from your business, and it’s not in the form of money, it can be taxed as part of your business income.
ii. Tax Implications: In this case, the laptop worth ₹50,000 is a non-cash gift that Mr. Rohan received because of his business relationship with ABC Supplies. Since it’s a benefit that arose from his business, the value of the laptop will be added to Mr. Rohan’s business income for that financial year.
iii. Including the Gift in Income: Mr. Rohan must include the value of the laptop (₹50,000) in his income under the head “Profits and Gains of Business or Profession” when filing his tax return. This will increase his taxable income by ₹50,000, and he will need to pay tax on this additional amount according to his applicable income tax slab.
Result:
- Without the Gift: If Mr. Rohan’s taxable business income was ₹5,00,000, he would pay tax on that amount.
- With the Gift Included: Now, with the laptop gift worth ₹50,000, his taxable income becomes ₹5,50,000. He will now pay tax on ₹5,50,000 instead of ₹5,00,000.
This illustration shows how a seemingly simple gift can increase taxable income and the importance of understanding the tax implications under Section 28(iv)
2. How to Know if a Gift is Taxable?
To figure out if a gift is taxable, you need to consider a few things:
- Why Did You Get the Gift?: If you received the gift because of your business activities, it’s likely taxable.
- What Type of Gift Is It?: Non-cash gifts (like a free vacation or a valuable item) are usually the ones that get taxed under Section 28(iv).
Examples of Taxable Gifts:
- Promotional Gifts: If you get promotional items from a supplier because of your business relationship, these could be taxed.
- Incentive Trips: If you win a free trip from a supplier because you bought a lot from them, that trip might be considered taxable.
3. In relation to Non-Cash Benefits?
Non-cash gifts are the main focal point of Section 28(iv). If you receive something valuable that’s not money, like a car or a free holiday, it’s likely taxable.
Case Law Example:
Pr. CIT v. Ravindra Kumar Gupta (2018) 404 ITR 647 (Del)
Facts of the Case:
Ravindra Kumar Gupta, who was a partner in a firm and received certain exclusive benefits that were questioned for taxability u/s. 28(iv) of I.T Act. The key issue was whether the benefits received by Gupta in his capacity as a partner could be considered a “benefit” or “perquisite” arising from his business or profession, making it taxable under this section.
Submission by the Assessee:
The assessee, argued that the benefits he received were in personal nature assets and did not directly relate to his income from the partnership business. He challenged that these benefits were not in cash and did not result from any professional or business transaction, thus falling outside scope of Section 28(iv).
Observation by the I.T Officer:
The ITO observed that benefits received by Gupta were directly connected to his role and earnings as partner in the firm. The ITO argued that these benefits, though not in cash, improved Gupta’s financial position due to his business activities and should therefore be taxed as per Section 28(iv). The ITO considered these benefits as taxable income, arising out of his profession.
Analysis by the Commissioner of Income Tax :
The CIT carry out a detailed analysis of nature of the benefits and their connection to Gupta’s professional role within the firm. The CIT looked into various judicial precedents to determine whether such benefits could be considered taxable u/s. 28(iv). The analysis centered on argument that any benefit arising out of professional or business activities, whether in cash or kind, is subject to taxation under this section.
Judicial Judgment:
The Delhi High Court ruled in favor of the tax authorities, holding that the benefits received by Ravindra Kumar Gupta were indeed taxable u/s. 28(iv). The court stressed that benefits, even if not in cash, were directly linked to Gupta’s business and professional activities in the firm. The court shatterproof the broad interpretation of Section 28(iv), stating that any benefit, if it arises from business or professional activities, should be included in the taxable income.
Pr. CIT v. Padmavati Jaikrishna (2017) 395 ITR 150 (Guj): The Gujarat High Court held that when a company allotted shares to its director at a significantly lower price than the market value, the difference was taxable under Section 28(iv). This was because the benefit received was directly connected to the professional relationship and constituted a perquisite.
4. New Tax Rules Introduced:
- Section 56(2)(x): Now, gifts received by businesses, even if they are not money, can be taxed.
- Section 194R: This new rule say that if you give a gift as part of your business, you might need to deduct tax before giving it. This makes sure the gift is taxed correctly.
5. What Should You Do ?
- Maintain Records of Gifts: Always keep a record of any gifts you receive, especially if they are related to your business.
- know the Value: Make sure you know how much the gift is worth, as this will help you figure out the tax.
- Follow TDS Rules: If you give gifts in your business, make sure you follow the new tax deduction rules.
6. Awards Received by a Sportsman
Overview:
When a sportsman receives an award in recognition of their achievements, the tax treatment of that award depends on whether the sportsman is a professional or an amateur. The distinction is crucial because it determines how the award is taxed under the Income Tax Act.
Tax Treatment for Professional Sportsmen:
For a professional sportsman, the awards received are considered part of the income derived from their profession. Therefore, such awards are taxed under Section 28(iv) of the Income Tax Act, which includes the value of any benefit or perquisite arising from business or profession.
- Example: If a cricketer wins a cash prize for “Player of the Match” in a professional tournament, this prize is considered as income from his profession and will be taxed accordingly.
Tax Treatment for Non-Professional Sportsmen:
In contrast, if a non-professional or amateur sportsman receives an award, it is generally considered a personal gift. These gifts may be subject to tax under Section 56(2)(x), which covers gifts received without consideration.
- Example: If an amateur marathon runner receives a gift for participating in a charity run, this could be considered a personal gift and taxed under Section 56(2)(x) if it exceeds the exemption limit.
Relevant Case Law:
Pr. CIT v. D. K. Shivakumar (2021) 434 ITR 570 (Kar)
Facts of the Case:
K. Shivakumar, a well-known sportsman, who received a luxury car as an award. The main issue was whether receipt of this luxury car could be considered a “benefit” or “perquisite” occuring from his profession as a sportsman, taxable under Section 28(iv) of the Income Tax Act. The tax authorities challenged that the value of the car should be included in Shivakumar’s taxable income.
Submission by the Assessee:
The assessee, argued that the luxury car was received as an award and not his regular income or professional earnings. He contended that the car was a gift or honor given in appreciation of his sports achievements, therefore it should not be taxed as a perquisite or benefit under Section 28(iv). He said that the car was not directly linked to his professional income.
Observation by the I.T Officer:
The ITO observed that the luxury car is a valuable asset received in connection with his profession, should be treated as a benefit arising from his professional activities. The ITO contended that under Section 28(iv), any benefit or perquisite arising from profession, whether in cash or kind, is taxable.
Analysis by the Commissioner of Income Tax :
The CIT analyzed the nature of the car received by the assessee, focusing on the connection between the award and his profession as a sportsman. The CIT examined previous cases where similar awards or gifts were treated as taxable benefits under Section 28(iv). The analysis centered on whether the car enhanced the assessee’s financial position as a result of his professional achievements, thereby making it taxable.
Judicial Judgment:
The Karnataka High Court upheld the view that the receipt of the luxury car by D. K. Shivakumar was indeed taxable under Section 28(iv). The court ruled that since the car was given in recognition of his professional achievements as a sportsman, it constituted a benefit arising from his profession. Therefore, the value of the car was rightly included in his taxable income. The court emphasized that under Section 28(iv), any asset received in connection with the profession, especially when it has a significant monetary value, should be considered taxable
7. Credit Balance transfer to Capital Reserve Account
Overview:
In the context of corporate accounting, when a credit balance in the books of a firm is transferred to a company’s Capital Reserve Account, its taxability depends on the nature of the transaction that led to the credit balance. If the credit does not arise from a business transaction, it may not be considered as income and hence not taxable under Section 28(iv).
Detailed Explanation:
When a company transfers the credit balance from the Profit and Loss Appropriation Account to the Capital Reserve Account, this transaction may or may not attract tax depending on the source of the credit balance. If the credit balance is not related to any business transaction or benefit arising from the company’s operations, it may not be considered as income.
- Example: If a company receives a non-business related credit, such as a refund or a prior-period adjustment that does not have any direct business benefit, and then transfers this amount to the Capital Reserve Account, this amount is not taxable under Section 28(iv).
Relevant Case Law:
CIT v. Mahindra & Mahindra Ltd. (2018) 404 ITR 1 (SC)
Page Contents
Facts of the Case:
Mahindra & Mahindra Ltd. had received a loan waiver from a creditor, the issue was whether this waiver could be considered a taxable benefit u/s. 28(iv) of the I.T Act. The loan waiver was given in the course of a business arrangement, and the question was whether it constituted a “benefit” or “perquisite” arising from business or profession, it is taxable.
Submission by the Assessee:
The assessee, Mahindra & Mahindra Ltd., argued that the waiver of the loan could not be treated as income under Section 28(iv) because the amount was neither in cash nor in kind and did not represent any benefit or perquisite arising from the business or profession. The assessee contended that the loan waiver did not enhance their income or profit directly from the business.
Observation by the I.T offcier:
The ITO observed that the loan waiver effectively increased the company’s financial position by relieving them of a liability. The ITO argued that this relief should be considered a benefit or perquisite under Section 28(iv) and therefore should be taxed as income.
Analysis by the Commissioner of Income Tax :
The CIT reviewed the ITO’s stance and considered whether the loan waiver could be seen as a benefit arising from business transactions. The CIT analyzed past judgments and the legislative intent behind Section 28(iv). The focus was on determining if the waiver resulted in a direct or indirect benefit to the business or profession, thus making it taxable.
Judicial Judgment:
The Supreme Court held that the waiver of a loan by a creditor does not amount to a “benefit” or “perquisite” under Section 28(iv) and therefore, cannot be taxed. The court emphasized that for a benefit to be taxable under this section, it must arise from the business or profession, and the loan waiver did not fulfill this criterion. The Supreme Court clarified that since the waiver was not related to any benefit arising from the business or profession, it should not be included as taxable income
Some more case laws as referred
- PCIT v. Rishabh Buildwell Pvt. Ltd. (2021) 126 taxmann.com 59 (Delhi – HC) – The High Court ruled that the waiver of a liability in a commercial transaction does not constitute a benefit or perquisite taxable under Section 28(iv).
- R. Imbavalli v. ITO (2004) – Taxation of foreign trips granted in appreciation of business done under Section 28(iv).
- David Dhawan v. CIT (2005) – Treatment of benefits received in the course of professional work under Section 28(iv).
- CIT v. Bhavnagar Bone and Fertilizer Co. Ltd. (1987) – Transfer of credit balance to a capital reserve account, not taxable under Section 28(iv).
- CIT v. Essar Teleholdings Ltd. (2018) 401 ITR 445 (SC) – In this case, the Supreme Court held that the receipt of shares at a price lower than the fair market value does not constitute income under Section 28(iv) as the transaction was on capital account.
- DCIT v. Sh. Hari Ram Gupta (2017) 84 taxmann.com 151 (Chandigarh – Trib) – The Tribunal ruled that the waiver of interest on a loan is not taxable under Section 28(iv) as it was not a benefit or perquisite arising from business.
- PCIT v. Electroplast Engineers Pvt. Ltd. (2020) 116 taxmann.com 750 (Delhi – HC) – The Delhi High Court held that the reduction in liability on the purchase of fixed assets cannot be treated as income under Section 28(iv) as it does not arise from business operations.
- PCIT v. Rishabh Buildwell Pvt. Ltd. (2021) 126 taxmann.com 59 (Delhi – HC) – The High Court ruled that the waiver of a liability in a commercial transaction does not constitute a benefit or perquisite taxable under Section 28(iv).
- CIT v. Pramod Mittal (2019) 414 ITR 1 (Delhi – HC) – In this case, the court held that the settlement of liabilities by a third party without consideration does not fall under Section 28(iv) as it is not a benefit arising from business.
Key takes away:
- Business-related Gifts: If you receive a gift while conducting your business or profession, it can be considered as part of your taxable income under “profits and gains of business or profession” because it’s treated as a benefit arising from your business activities.
- Non-Monetary Gifts: Only non-monetary gifts (like a car, a trip, or something similar) are taxable under this section. Cash gifts are not included under this rule.
- Gifts Based on Personal Qualities: If the gift is given purely out of personal respect or admiration, unrelated to any business activity, it is usually not considered taxable under this section.
- Professional Gifts: Gifts received by professionals (like doctors, lawyers, or artists) due to their professional work are typically taxable, as they are seen as arising from the profession.
Conclusion:
If you receive a gift as part of your business or profession, it might be considered taxable income, especially if it’s something other than money. However, if the gift is given purely out of personal admiration and not connected to your business, it usually isn’t taxed under this rule. The main point is whether the gift is related to your business activities or personal.
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