Taxability of gift as Income from Other Sources u/s. 56 [2][vii]

1. The newly proposed section 56 [2][vii] in the Finance Bill, 2009 is no ‘rosagoola’. When the Hon’ble Finance Minister ‘pronounced’ his budget in the Parliament, there was not even a whisper of reference to this section in his speech. And in this silence, lurked a deadly Bengal Tiger called ‘section 56 [2][vii]’.

For all those who thought that the ashes of the Gift Tax Act had become cold, will now find themselves doing some rethinking. The Gift Tax Act is virtually back and this time, with a new cloak and dagger, poised to enter the drawing room of the Income Tax Act in form of this provision.

2. The proposed provisions expand substantially on the present provisions of section 56[2][vi]. As readers are aware, the present provisions in section 56[2] [vi] provide for taxation, under the head “Income from other sources”, ‘any sum of money received without consideration by an individual or a Hindu undivided family, the aggregate value of which exceeds Rs. 50,000’. Such receipts from relatives are however exempt. So, also receipts on occasion of marriage of the individual, receipts under a will or by way of inheritance, receipts in contemplation of death and certain other receipts are also exempt.

3. Therefore, as the present law in section 56 [2][vi] stands, only receipts in ‘money’ form are roped in and not receipts in other forms of properties. For example, a gift of jewellery or immovable property received by an individual even from an unrelated person is not taxable under the present law. This is based on the reasoning that both the words ‘sum’ and ‘money’ imply that the receipt must be in ‘money’ form only. After all, it would be quaint to speak of a ‘sum’ of jewellery or ‘sum’ of lands. The word ‘sum’ thus appeared consistent with money only and not with any other asset. Assessees were therefore canvassing all along before the revenue authorities that only monetary receipts were taxable and not others, which stand the Revenue was not accepting. The trend in the recent decisions of the appellate authorities is however to accept this stand of the assessees as on date.

4. Now, by the Finance Bill 2009, the present provisions in section 56[2][vi] are intended to operate only in respect of sums received before 1st October 2009 and from 1st October 2009, both receipts in money and also certain other property forms are intended to be taxed under the new proposed section 56[2][vii].

The proposed amendment has thus two effects.

Firstly, it should settle the law in the existing provisions of section 56[2][vi] that only monetary receipts are taxable and not non-monetary receipts. Why otherwise, non monetary receipts by way of immovable and movable properties are taxable only if received from 1st October, 2009 onwards ? This amendment should therefore impliedly seal the law that before 1st October, 2009, only monetary receipts were taxable.

Secondly, receipts of certain movable and immovable properties without consideration will be taxable from 1st October, 2009.

5. The matrix of the proposed amendment in section 56 [2][vii] is as under :-

[a] This sub section will apply only to receipts in hands of individuals and Hindu undivided families and not other tax entities. Thus, if recipients are firms or companies, the same are not covered.

[b] This sub-section applies to receipts received from 1st October, 2009 onwards.

[c] The exempted categories in the new section 56[2][vii] are the same as the ones in the present section 56[2][vi] i.e. receipts from relatives, receipts on occasion of marriage of the individual, receipts under a will or by way of inheritance, receipts in contemplation of death, etc.

[d] As regards receipts in money, the new provisions are the same as in the present section 56[2][vi]. Any sum of money, received without consideration, the aggregate of which exceeds Rs. 50,000 will be taxable. There is therefore no change in the law here.

[e] Henceforth, certain immovable and movable properties received without consideration from 1st October, 2009 will become taxable.

The expression ‘property’ has been defined. ‘Immovable property’ would mean ‘land or building or both’. Other properties covered are ‘shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or work of art’. Only receipts of these properties are covered u/s. 56 [2][vii] and receipts of other types of properties would not be taxable under this section.

[f] In case of receipt of immovable properties, the transaction will become chargeable to tax as under :–

• Where the immovable property is received without consideration and its stamp duty value exceeds Rs. 50,000, then the stamp duty value will be taxed.

• Where the immovable property is received for a consideration, which is less than the stamp duty value of such property by an amount exceeding Rs. 50,000, the excess of the stamp duty value over the consideration paid would be taxed.

[g] In case of receipt of movable properties, the transaction will become chargeable to tax as under :–

• Where the movable property is received without consideration and its aggregate fair market value exceeds Rs. 50,000, then the aggregate fair market value will be taxed.

• Where the movable property is received for a consideration, which is less than the aggregate fair market value of such property by an amount exceeding Rs. 50,000, the excess of the aggregate fair value over the consideration paid would be taxed.

• The word ‘aggregate’ suggests that the amount of Rs. 50,000 must be reckoned vis-à-vis all the movable properties bunched together and not vis-à-vis each individual item.

6. The stamp duty value is the value ‘adopted or assessed or assessable’ by the authority of the Central Government or State Government for stamp duty purposes. Where the assessee disputes this stamp duty valuation, the procedure for resolving this dispute is the same as that in the provisions of section 50C [2].

In other words, the assessee has to claim before the Assessing Officer that the stamp duty valuation is higher than the fair market value of the property and is such a case, the Assessing Officer may refer the valuation to the Department’s Valuation Officer.

7. As regarding movable properties, the fair market value is expected to be determined in accordance with method which would be prescribed. It is hoped that new rules, which would be prescribed for determination of the fair market value, would be both unambiguous and benevolent and would not generate wasteful litigation.

8. With the above discussion in mind, let me proceed to discuss with the readers the probable issues that may emanate for this new provision.

9. Readers may note that the definition of income in section 2 [24] has not been amended to include receipts chargeable us 56[2][vii]. This is in sharp contrast to the fact that receipts chargeable under the present provisions of section 56[2][vi] find express mention in 2[24][xiv]. Does this position affect the taxability of receipts u/s 2[24] [vii] ?

According to me, what can be taxed under the Income Tax Act are only receipts constituting income. Once a receipt has character of ‘income’, the fact that it does find mention in the definition of income in section 2 [24] should not matter. Readers may note that the definition is inclusive in type and not exhaustive. The opening words “income includes —” in section 2 [24] clearly puts doubts to rest. The categories of incomes mentioned in the definition are also by and large only illustrative. So, therefore a receipt, which is admittedly in nature of income cannot escape taxation merely on account of the fact that there is no express mention of the same in the definition of ‘income’ u/s 2 [24].

But, if a receipt is not ‘income’ at all in the first place and the Legislature, within its competence, intends to deem it as ‘income’, a view may be taken that the Legislature must either include the receipt in the definition of ‘income’ or expressly ‘deem’ it as ‘income’ in the statute so as to subject it to tax.

Readers may note that what is being sought to be taxed us 56 [2][vii] are receipts of two types. The first is receipt of properties without consideration i.e. like a gift and secondly, properties received for apparently lesser considerations i.e. at a discount.

Contrary to popular belief, I may say that it is not the rule that a gift is always not an income. In respect of gifts, Courts have appraised its taxability from a practical point of view and some lines of distinctions have been set for deciding whether a gift is taxable or not.

If a voluntary payment is made without consideration and is not traceable to any source of income [ like profession, vocation, occupation or office held] which a practical man may regard as a real source of income, but depends entirely on the whims of the donor, then the same cannot fall in the category of income as held by the Bombay High Court in the case of H.H. Maharani of Morvi vs. CIT [1963] 49 ITR 594, {Bom}.

But, voluntary payments received by an assessee even from admirer can be taxable, if the gift can be traced to the office held by the assessee as held by Supreme Court in the case of P. Krishna Menon vs. CIT [1959] 35 ITR 48 {SC}. Here, the assessee was engaged in the vocation of teaching Vedanta philosophy to his disciples and the issue was whether the amount received from one of his disciples as an admirer was taxable in hands of the assessee. The Supreme Court held that the gift is taxable as it arose by virtue of the assessee’s vocation as a teacher.

In short, where a gift is received as a voluntary payment without any obligation on part of the donor to give the gift and is prompted merely by personal considerations [like love and affection], then the same should not be taxed as income provided that the gift has no nexus with any income earning source of the assessee like vocation, profession, occupation or office.

A property may have been received by the assessee for apparently a lesser consideration because a discount has been given in the price. A discount is merely a reduction in the cost paid and therefore not income. It is a component of the cost and merges in the cost. It has no existence separate from this cost and is therefore not income.

If any gift and discount cannot be taxed as incomes as explained above, then unless there is proper provision in the law ‘deeming’ these elements as ‘incomes’ in the first place, there may be a difficulty in charging them to tax. This is where the absence of mention of section 56 [2][vii] in the definition section of ‘income’ u/s 2 [24] may make a conspicuous difference. It may invite a challenge from the assessees about the very chargeability tax on these elements.

10. Where the property is received either without consideration or for a lesser consideration, the amount charged to tax u/s 56 [2][iv] must become subsequently available to the assessee as ‘cost of acquisition’ of the property for claiming depreciation or for capital gains purposes. This should be the position eventhough the amount has been charged u/s 56 [2][iv] did not involve any physical receipt of money by the assessee and what was charged is only a fictional receipt. After all, the law regarding interpretation of statutes is that once a deeming fiction has been inserted in the statute, then the assumptions in this fiction must be also taken ‘as if factual and real ’ and whatever inferences logically result from these assumptions, the same must also be taken as intended by the Legislature and accepted without demur. [See. CIT vs. Teja Singh 35 ITR 408 {SC.}]

The objective behind the provisions of section 56[2][vii] is obviously to tax the assumed unaccounted money clandestinely paid without mention in the agreements for transfer of properties . Therefore, the assumption should be that such a payment has been made ‘as if factually’ and a natural corollary of this assumption should be that this assumed payment should logically constitute a consideration paid for acquiring the property.

11. One should expect assessees to be more vigilant in their transactions once these new provisions come in to effect. In times of recession, one should expect cash strapped builders, who are laden with unsold stocks of real estate properties, to sell below the reigning market price to dispose of their inventories to create demand. A buyer, under the lure, of acquiring a property cheaply may end up paying tax on the so called unearned income being the difference between the stamp duty valuation and the agreement price. In short, while it is wise to strike while the iron is hot, care must be taken not to burn one’s fingers.

So, the maxim of ‘caveat emptor’ [let the buyer beware] should become the mantra for every assessee before indulging in any property transactions.

12. The new provisions may prove to be a spoilsport for many memorable events in our lives. Gifts received from relatives or on occasion of marriage are of course out of the purview of section 56 [2][vii]. But, jewellery given on events like engagement ceremonies may attract tax. An engagement event is not the same thing as a marriage. It is only an event in contemplation of a marriage and no marriage is solemnized therein. Gifts exchanged between the fiancées like engagement rings and ornaments will become mutually taxable in each other’s hands as income u/s 56 [2][vii] because the fiancées are not legally spouses and the ceremony is also not a marriage ceremony. Therefore, simultaneous with giving of the engagement ring, there would be giving of tax liability to one’s future life partner. So, one can make an auspicious beginning of one’s life partnership by payment of this ‘engagement tax’. As to who should bear the ‘cost’ of this tax may become a contentious issue for discussion between the families involved as the costs of the engagement ceremony are often shared in mutually agreed proportions. If photo albums and video CDs of the engagement ceremonies land in the hands of the taxmen, be sure that the memories of the engagement ceremony may not be so fond.

13. Whether these new provisions will make in roads in to the normal lives of the assessees is any body’s guess at this moment . The travel warning for the assessees should be that there may be a rough and bumpy road ahead with vexed valuations and unprofitable litigations. On the whole, it should create more work for tax professionals in this recession. That should leave us with the only question left to be answered. “Is the budget really “bhalo bhalo” after knowing section 56 [2][vii]? Despite whatever people may think, I will always have fond regards for this Finance Minister, who has served this country well for such a long time.

Author: CA. Anant N. Pai