TAXABILITY OF GIFTS UNDER THE INCOME TAX ACT, 1961

JOINT STUDY CIRCLE MEET OF TPA & CA, INDORE BR. DT. 15.01.2009
by - CA. Hitesh J. Mehta
Brief Introduction:
Gift is an important subject not only from the law makers and tax consultants but
also for the general public. It is from ancient times one of the most famous
modes of transferring movable as well as immovable property. The legislation
and revenue often flown upon the concept of gift, as in several cases, gifts are
used as a tool for minimizing tax liability.
Gift tax was introduced in India in the year 1958 and continued for more than 40
years but to ensure that there are no leakages of income-tax revenue through the
mechanism of gifts, then Finance Minister proposed to tax the gifts made after
30.09.1998 under the Income-tax Act itself in the hands of the recipients.
However to curb ever growing tax evasion and money laundering, the
amendment has taken effect from 01.09.2004 and impacts Assessment Year
2005-06 onwards till date with the increase in overall exemption limit of gifts from
outsiders to Rs. 50,000/- w.e.f. 01.04.2006 onwards and the amendments
recently made u/s 56 (2) of Income-tax Act w.e.f. 01.10.2009.
Meaning and essential elements of gifts:
In common parlance, gift is the transfer of certain existing movable or immovable
property made voluntarily and without consideration, by the donor to the done
and accepted by or on behalf of done during the lifetime of the donor. Therefore,
the essential elements of a gift are:
1. Donor

2. Donee

3. Subject Matter 4. Transfer

5. Voluntarily and without consideration and 6. Acceptance.

Gift taxable under Income-tax Act:
The Finance (No. 2) Act, 2004 has enacted a special provision in section 56 of
the Income-tax Act to tax monetary gifts received by an individual or an H.U.F.
from unrelated sources by suitably amending the definition of income. Hence
such gifts are taxed as Income from Other Sources in the hands of the donee.
The sections applicable from 01.09.2004 to 31.03.2006 were 56 (2) (v) and
section 2 (24) (xiii),
The sections applicable from 01.04.2006 to 30.09.2009 were 56 (2) (vi) and
section 2 (24) (xiv) and

The sections applicable from 01.10.2009 onwards are 56 (2) (vii) and 2 (24) (xv).
And these provisions are applicable whether the donor or the recipient is a
resident or non-resident.
At present a gift is chargeable to tax under section 56 (2) (vii) if it satisfies
the following conditions:
A. It is received by an individual or a HUF.
B. If it is received on or after 1st October, 2009.
C. The gift falls in any of the following five categories.
D. The gift does not fall in the exempted category.
Five categories:
1. Any sum of money (gift in cash or by cheque or draft):
If aggregate amount of sum of money received by an individual/ HUF from one or
more persons during a previous year (but on or after 1st October, 2009) exceeds
Rs. 50,000/-, the whole of such aggregate value will be chargeable to tax.
2. Immovable property without consideration:
If any immovable property (without any consideration) is received on or after 1st
October, 2009 and the stamp duty value of which exceeds Rs. 50,000/-, stamp
duty value will be chargeable to tax in every such transaction.
3. Immovable property for a consideration which is less than the stamp
value:
If any immovable property is received on or after 1st October, 2009 for a
consideration which is less than the stamp duty value of the property by an
amount exceeding Rs. 50,000/-, then the difference between stamp duty value
and consideration is chargeable to tax in every such transaction.
4. Movable property without consideration:
If aggregate fair market value of movable properties i.e. shares and securities;
jewellery; archaeological collections; drawings; paintings; sculptures; or any
work of art received without consideration during a previous year (but on or after
1st October, 2009) exceeds Rs. 50,000/-, the whole of aggregate fair market
value of movable properties will be chargeable to tax.

5. Movable property for a consideration which is less than the fair market
value:
If movable property i.e. shares and securities; jewellery; archaeological
collections; drawings; paintings; sculptures; or any work of art is received for a
consideration which is less than the aggregate fair market value of the property
by an amount exceeding Rs. 50,000/-, then the difference between aggregate fair
market value and consideration is chargeable to tax.
Jewellery shall have the meaning assigned to it in the Explanation to
section 2 (14)(ii) and includes (a) Ornaments made of gold, silver, platinum or any other precious metals or
alloy containing one or more of such precious metals, whether or not
containing any precious or semi-precious stone, and whether or not
worked or sewn into any wearing apparel;
(b) Precious or semi-precious stones, whether or not set in any furniture,
utensils or other article or worked or sewn into any wearing apparel.
It is pertinent to mention here that the method of arriving at the fair market
value of such movable property has not yet been prescribed by the CBDT
and even afterwards will lead to many controversies.
Exempted Categories:
While calculating the above monetary limit of Rs. 50,000/- in any of the five
categories, any sum of money or property received from the following shall not
be considered:
1. Money / Property from a relative and
for this purpose, the term relative as per explanation to clause (vi) of subsection (2) of section 56, of tax payer X means (i) Spouse of the individual

-----

Mrs. X

(ii) Brother or sister of the individual

---- Brothers / sisters of Mr. X

(iii) Brother or sister of the spouse of the individual - Brothers / sisters of Mrs. X
(iv) Brother or sister of either of the parents of the individual
-- Brothers / sisters of father / mother of Mr. X
(v) Any lineal ascendant or descendent of the individual
---- Lineal ascendant or descendent of Mr. X

(vi) Any lineal ascendant or descendent of the spouse of the individual

---- Lineal ascendant or descendent of Mrs. X
(vii) Spouse of the person referred to in clauses (ii) to (vi)
---- Spouse of the aforesaid persons
In my opinion, any sum of money received from any relative as above is
exempt only for individuals. Since HUF is not an individual but a group of
persons known as family, the exemption will not be available to it.
2. Money / Property received on the occasion of the marriage of the individual.
Marriage gift may be received from relatives, friends or any other person and the
exemption is available to both i.e., the bride as well as the groom.
Only marriage gift is exempt and gift received on other occasions like birthday,
anniversaries, festival, engagements etc. will however be chargeable to tax.
3. Money / Property received by way of will / inheritance.
4. Money / Property received in contemplation of death of the payer.
5. Money / Property received from a local authority as defined in the explanation
to clause (20) of section 10 i.e.Panchayat, Municipality, Municipal Corporation &
Cantonment Board.
6. Money / Property received from any fund, foundation, university, other
educational institution, hospital, medical institution, any trust or institution referred
to in section 10(23C).
7. Money received from a trust or charitable institution registered under section
12AA.
Some Important Issues:
1. Clubbing Provisions of Income u/s 64 Income from assets (other than house property, which is already covered under
the provisions of clause (i) of section 27) transferred to spouse Sec. 64 (1) (iv);
Income from assets transferred to sons wife Sec. 64 (1) (vi);

Income from assets transferred to a person for the benefit of spouse Sec. 64
(1) (vii); and
Income from assets transferred to a person for the benefit of sons wife Sec. 64
(1) (viii).
2. Blending whether covered?
Where any property having been the separate property of the individual has been
converted after 31.12.1969 into property belonging to the family or thrown into
the common stock of the family, then the individual shall be deemed to have
made a gift of so much of the converted property as the members of the HUF
other than such individual would be entitled to, if a partition of the converted
property had taken place immediately after such conversion. However the
members being relative of that individual will get the benefit of exemption.
But after the applicability of the provisions of section 56 (2), the full value of
property converted will be taxable in the hands of an HUF.
Similarly, when an individual transfers his property of Rs. 10 lacs market value to
his HUF for 6 lacs, then he has to pay capital gains tax as per the provisions of
section 50C and the HUF has to pay income tax on Rs. 4 lacs u/s 56 (2) (vii)
resulting in a double taxation on same deemed income.
Further if the converted / transferred property is subsequently partitioned
amongst the members of the family, the income from such property as is
received by the spouse of the transferor will be taxable in his hands.
3. Relinquishment of Coparcenary Share
Under Hindu law, a coparcener can dispose off his undivided interest in
coparcenary property by a will, but he cannot make a gift of such interest. But a
coparcener may make gift of his undivided interest with the consent of other
coparceners. When a coparcener renunciates his undivided interest in
coparcenary property in favor of his brother and his son, the relinquishment will
be treated as gift.
4. Gift by HUF to Member / Distribution of HUF assets on Partition
In the case of gift by HUF to any of the member, the same will be taxable in the
hands of recipients u/s 56 (2) of the I.T. Act. However the amount spent by an
HUF on the education / marriage of any member or for any other common
purpose, the same will not be treated as income of any particular member.

In the case of partition of assets of HUF amongst the members, if a member

receives cash or assets of value less than the value of the assets to which he
was entitled and the other member or members receive cash or assets of value
more than the value to which he or they were entitled according to his or their
share/shares, the transaction will be held to be gift. However there will not be any
liability on HUF as the transaction is not regarded as transfer u/s 47 (i).
5. Firm to Partner on dissolution of Partnership Firm
In many cases of dissolution of partnership firm, gift may be involved. When the
distribution of assets between the partners is unequal and a partner receives
cash or assets of value less than the value of the assets to which he was entitled
and the other partner or partners receive cash or assets of value more than the
value to which he or they were entitled according to his or their share/shares, the
transaction will be held to be gift.
6. Esops w.e.f. 01.04.2009 as per the Provisions of Finance (No. 2) Act, 2009
When Esops were received by an employee normally based on the performance
or the terms and conditions of service, first of all the difference of market value &
price paid will be taxable as perquisites in his hands u/s 17 (2) (vi). And
whenever the capital gain arises from the transfer of Esops, then it will be taxable
u/s 49 (2AA) of the Income-tax Act without attracting the provisions of section 56
of the Act.
7. Subsequent transfer by donee
For arriving at the capital gains on account of subsequent sale by the donee,
notional cost of acquisition i.e. the value which has been taken into account for
the purpose of section 56 (2) (vii) will be considered as inserted by Sub-section
(4) in section 49 of the Act w.e.f. 01.10.2009.
But if the donee being a businessman / developer transfers the capital assets as
a stock in trade of the business, the benefit of the notional cost of acquisition
seems to be doubtful in view of the express provision of section 43C (2) which
states theat the cost of such assets shall be the cost of acquisition to the
transferror or the donor.
8. Ascendants and descendents
In my opinion only the male members of an individual can be the lineal
ascendants and descendents and accordingly the followings persons will be the
lineal ascendants / descendents so far as the meaning of relative u/s 56 (2) (v) of
the Income-tax Act is concerned.

1. Spouse 2. Father 3. Mother 4. Son 5. Sons wife

6. Sons son 7. Sons sons wife 8. Great Grandson 9. Great Grandsons wife
10. Grand Father 11. Grand Mother 12. Great Grand father 13. Great Grand
mother
14. Brother / Sister 15. Spouse of Brother / Sister (Bhabhi / Jiyajee)
16. Spouses father / mother (Sas / Sasur) 17. Spouses brother / sister (Devar /
Jeth / Nanad/ Sala/ Sali) 18. Spouse of spouses brother / sister (Devarani /
Jethani / Nandoi/ Salhej / Sadhu) 19. Grand father/ mother of spouse
20. Mothers brother / sister and their spouse (Mama / Mami/ Masi / Mausa)
21. Fathers brother / sister and their spouse (Chacha / Chachi/ Tau/ Tai/ Bhua /
Fufa)
However many members consider following persons also as lineal ascendants
and descendents but since the terms are not defined in the Act, it may be a
matter of controversy.
1. Sons daughter 2. Sons daughters husband
3. Daughter 4. Daughters husband 5. Daughters son 6. Daughters sons wife
7. Daughters daughter 8. Daughters daughters husband
9. Mothers father/mother (Nana/Nani)
9. Genuine purchases from third party / Disputing the guideline value & market
value.
Though there may be a great hardship in genuine cases of purchases from
outsiders but still in view of express provisions of the Act, the same will also be
covered. However the constitutional validity of the provisions can be challenged.
Further where the stamp duty value of immovable property as referred to in
Section 56 (2) (vii) (b) is disputed by the assessee on grounds mentioned in subsection (2) of section 50C, the A.O. may refer the valuation of such property to a
Valuation Officer, and the provisions of section 50C and sub-section (15) of
section 155 shall, as far as may be, apply in relation to the stamp duty value of
such property as they apply for valuation of capital assets under those sections.
And even if the assessee is not satisfied with the valuation of D.V.O., then he
should have his own valuation done from an approved registered valuer and
challenge the matter to the appropriate higher authorities.

10. Receipt under decree of court?

If any property is received through an order of court i.e under decree or award,
then whether it will be taxable u/s 56 (2) of the Act or not ? The answer is not
clear and gives rise to the controversies.
11. Exempted gifts whether covered by section 68?
In view of the express provisions of section 56 (2) of the Act exempting certain
receipts being exempted gifts from the purview of tax, to my mind the same will
not be covered by the provisions of section 68.
12. Taxable gifts Power to examine?
Though all gifts from non-relatives will be deemed as income but still the A.O.
has power to summon the parties and examine the creditworthiness,
genuineness and the real motive behind the gifts.
13. Gift under Transfer of Property Act.
Gift of immovable property must be made by way of a Gift Deed in writing, which
is executed by the donor, attested by two or more witnesses and the deed must
be registered under the Registration Act, which attracts stamp duty of 8 %. Thus,
any gift of immovable property which is not registered would be invalid.