Budget 2010-: Gifts, deemed gifts and deemed under-valuations incorporating proposals

 

Feb 28, 2010

Section 56(2) of the Income Tax Act, 1961 inter alia

deals with receipts without considerations. 

Since most of such receipts tantamount to gifts, the

provisions are popularly named as those of gifts and 

deemed gifts. Till 30 09 2009 only sum of money 

received without consideration was treated as income

in the hands of the recipient  being either an individual or a HUF.

By the Finance No.2 Act, 2009 with effect from 01 10 2009

the provisions were so much expanded that even they included

cases of  immovable properties received without consideration or

for inadequate consideration as compared to stamp valuation.

The expanded provisions also include receipts of specified movable

properties either without consideration or for inadequate 

consideration as compared to fair market value.

Pertinent to mention that even under expanded provisions, gifts 

from specified relatives and under specified exceptions

continued to be beyond tax net.

Provisions as contained in section 50C taxing sales of land or

building or both operative since 01 04 2002 affecting the

vendors of such properties continue.

In the above background, now while framing the Finance Bill, 2010

it seems that the Government has realized the negative effects on

genuine transactions of purchases of immovable properties and

therefore, now the wiser counsel has prevailed.

Therefore, the provision relating to inadequate consideration

in transactions of immovable properties is proposed to be 

deleted. With the result that if an individual or HUF receives

immovable property without consideration, the stamp

valuation thereof would be taxed as income provided the

stamp valuation exceeds Rs.50000/-. 

But if the consideration is there but inadequate,

there would not be any taxation in the hands of the purchaser.

However, as stated herein before the seller would continue to

be taxed on capital gains on the basis of stampvaluation 

or sale price  whichever is higher. 

Buyer will not be affected in view of the 

proposal in the Finance Bill, 2010.

Provisions as inserted by the Finance (No. 2) Act, 2009 

also cover receipts, either by way of purchase or otherwise,  

of specified movable  properties namely  shares and securities,

jewellery, archaeological collections, drawings, paintings, sculptures, 

any  work of art. 

Now by the Finance Bill, 2010 a new item has been 

added w.e.f. 01 06 2010 and that is “bullion”. Bullion 

would include gold, silver, platinum, or palladium, in the 

form of bars or ingots. Some central banks use bullion for 

settlement of international debt, and some investors 

purchase bullion as a hedge against inflation.

In respect of such movable properties it is provided that

if  the aggregate fair market value of such movable 

properties received during the year without consideration 

exceeds Rs.50000/-, then such value is income in the hands

of recipient being an individual or HUF.

In a case one receives such properties at a price but the price

is less than the aggregate fair market value of such properties

and if such difference exceeds Rs.50000/- during a year then

such difference is an income in the hands of recipient. 

For purposes of determination of fair market value,

a method would be prescribed. 

Although, the provisions have become effective

from 01 10 2009, the method has yet not been prescribed. 

Till the time method is prescribed, one may take a 

view that in the absence of prescribed method,

theprovisions have not become effective.

These provisions concerning immovable and

movable properties as enacted by the Finance (No. 2) Act, 2009

were enacted in such a manner that even a purchaser of such

movable properties in normal course of his business would have

got affected if the purchase was found to be at less than the

prescribed fair market value. To remove such hardship, now

by the Finance Bill, 2010 it is proposed that these provisions

with regard to a property would apply only when in the hands

of the recipient individual or HUF such property is a capital

asset and not as stock in trade.

Further, so far section 56(2) of the Income Tax Act treats receipts

without consideration  as income if the recipient is an individual or HUF. 

Other categories of assesses including a company and a firm have

been kept out of the taxing purview.

Although in my considered view, such entities

cannot receive gift under the general law as well as

under theprovisions of the Income Tax Act.

A gift necessarily involves a contract because the gift to

be valid and complete has to be accepted by the donee to

be valid and complete.Section 25 of the Indian Contract Act, 1872 

lays down a very basic law that a contract without 

consideration is void ab initio.

Relevant exception for the contract to be valid

without consideration is for an agreement in writing,

registered under the provisions of the Registration Act, 1908

and such an agreement is on account of natural love and affection.

The section does not affect to the gift actually made by the donor to the donee.

A claim of gift by a company cannot sustain as natural love

and affection is not possible towards an artificial person.

Further, as far as gift of the property is concerned

section 122 of the Transfer of the Property Act, 1882 

requires that transfer of property by way of gift must be 

accepted by the donee and inter alia such acceptance must

be made during life time of the donor and before the donee dies. 

Theprovisions using the words like death of donee are logically

in the context of an individual and not in the context of an

artificial person. In such a view of the matter,

it is not possible for a company to claim gift and 

therefore receipts of sums of money withoutconsideration

may not escape taxation in the hands of a company under 

other provisions of the Income Tax Act, 1961.

However, if the company receives specified movable 

properties at a price less than fair market value,

the new provisions inserted by Finance No. 2 Act, 2009

concerning deemed undervaluation of properties would

not cover such company and therefore taxation u/s. 56(2)

would not be attracted. The same analogy is applicable to a firm.

Finance Bill, 2010 makes a starting point to tax a firm

and a company in a specified situation. 

The Finance Bill, 2010 proposes to tax a firm or a closely held 

 company when it receives shares of a closely held company

either without consideration or at a consideration at less

than the fair market value. 

The provisions will not apply if such shares are 

received in the course of amalgamations, mergers, 

demergers and re-organisations.

When afterwards such company or firm transfers

such shares thevaluation whereof either fully or

partly subject to income tax, then at the time of

subsequent transfer of such shares, the cost of

acquisition would be thefair market value which was

earlier taken into consideration for taxation u/s. 56(2).

Provisions of section 56(2) that receipts without

consideration inter alia from following relatives are not income:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the person referred to in clauses (ii) to (vi).

Section 56(2) provides that gifts received from non
relatives are income but no where in the Income Tax Act
 it is provided that gifts received from relatives are
not income and therefore tax free. 

Therefore, it is not
a case that section 56(2) places the gift from relatives
 beyond taxing provisions.

If gifts are received from
specified relatives, the recipient will have to prove
genuineness of such gift with reference to identity of
the donor, capacity of the donor, source of funds of the donor, etc.

Gifts received from non relatives are generally taxable.

However, there are certain exceptions under which gifts
received from non relatives are also not taxable.

Gifts received on the occasion of marriage of an individual
 even from non relatives are not an income. In this context,
 one would be entitled to take a view that the words

“on the occasion of marriage” would have wider
 connotation than on the date of marriage.

Further following receipts without consideration are also not income :


i. under a Will or by way of inheritance;

ii. in contemplation of death of payer;

iii. from local authority as defined in Explanation to section 10(20);

iv. educational or medical institution or fund etc. referred to u/s. 10(23C);

v. trust or institution registered u/s. 12AA.

A gift is said to be made in contemplation of death when the donor is
ill and he expects to die shortly out of such illness and delivers to
 another possession of the movable property to be kept by another
 person as gift in case a donor dies of that illness.

A gift in contemplation of death can be made of any movable
 property which the donor could dispose off under a Will.

It is possible for the donor to resume such a gift before he dies.
Further in a case where donor recovers from the illness during which
 he made the gift then such a gift will not take effect.

Further if the donor survives the person to whom such gift was
 made then also such gift does not take place.

If such property instead of being given away in
 contemplation of death is made subject matter of
 the Will then the bequest under a Will would require
executor’s assent to perfect the title of the legatee
 and will be subject to probate, when applicable.

Gifts in contemplation of death
 can be made only of a movable property.

Author: CA. Tarun Ghia,