INCOME/ GIFT

Jan 1, 2012

SECTIONs 2(24)(xiii), 56(2)(v),

TAX IMPLICATIONS ON GIFT S
(2005) 195 CTR (Articles) 128
Any asset received in gift is a capital receipt not liable to tax. Gift s of sum of money to an individual or a Hindu undivided
family other than in specified circumstances has been brought within the tax net from 1st September, 2004. Gift in kind does
not attract any income-tax. Critically examining the relevant provisions and decided cases, the learned author concludes that
the newly inserted provisions would not curb the menace of gift s. It is a half-hearted exercise in futility.
N.M. RANKA
SYNOPSIS

1. Introduction

2. Meaning of gift

3. Essence of a gift

4. Who can challenge the gift

5. Whether donee should be relative of

the donor

6. Burden on the donee

7. New provision

8. Meaning of sum of money

9. Other gift s

10. Treatment by Assessing Officer

11. Treatment on transfer

12. Conclusion

1. Introduction
Over last several years taking of gift s to build up the capital has become a routine affair with the taxpayers. The Government
motivated the taxpayers to get remitted foreign currency under the scheme, with an objective to build up and improve its
foreign funds. Later taxpayers continued to get gift s of foreign currency from outside India to avoid gift -tax. Gift -tax was
also abolished looking to the meagre collection and unnecessary harassment to the taxpayers. To curb the menace of gift s
other than from the relatives, it was proposed by the Finance (No. 2) Bill, 2004, to insert sub-clause (xiii) in section 2(24) of
the Income-tax Act whereby any sum received by an individual or a Hindu undivided family from any person on or after the
1st day of September, 2004, whether in cash or by issue of a cheque or draft or by any other mode or by way of credit;
otherwise than by way of consideration for goods or services shall be deemed as income. Certain exclusions were proposed.
Section 10(39) was proposed to be inserted to exempt from taxation to the extent the aggregate of such income received or
credited during the previous year does not exceed(a) a sum of twenty-five thousand rupees; and (b) a further sum not

exceeding one hundred thousand rupees in the case of an individual on the occasion of his marriage. In the case of the Hindu
undivided family total exemption would be restricted to twenty-five thousand rupees only.
The Finance (No. 2) Act, 2004, was enacted in a different manner. Clause (v) was added by the Finance (No. 2) Act, 2004, in
section 56(2) with effect from 1st April, 2005, i.e., from the assessment year 2005-06. The effect of the amendment is that any
sum exceeding Rs. 25,000 received after 1st September, 2004, by an individual or an Hindu undivided family from any person
is deemed to be the income of such individual or Hindu undivided family as "income from other sources" excluding amounts
received from the specified persons, in the specified manner and on the specified occasions. Sub-clause (xiii) has been inserted
in section 2(24) to deem it as income. With these amendments, genuine gift s of certain nature became liable to income-tax,
which earlier were considered as capital receipt.
2. Meaning of gift
The Income-tax Act, 1961, nowhere defines the expression " Gift ". The Gift -tax Act, since abolished, contained extended
meaning of gift and also included concept of deemed gift to make it wider. The Supreme Court in CIT vs. Sirehmal Nawalakha
(2001) 169 CTR (SC) 493 : (2001) 251 ITR 108 (SC) held that the general law did not stand abrogated by section 4 of the Gift
-tax Act, and the requirement of complying with the provisions of the Transfer of Property Act and the Registration Act had to
be fulfilled, in order that there could be a valid gift . It also observed that even in respect of the transactions referred to in
section 4 of the Gift -tax Act, there has to be a transfer of property. As such we have to look at the general law, i.e., the
Transfer of Property Act.
Section 122 of the Transfer of Property Act defines gift , as the transfer of certain existing movable or immovable property
made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or
on behalf of the donee. Section 123 of the said Act requires that for the purpose of making a gift of movable property, the
transfer may be effected either by a registered instrument or by delivery. In case the transfer is made by deliverysuch
delivery may be made in the same way as goods sold may be delivered. For the purpose of making a gift of immovable
property, the transfer must be effected by a registered instrument signed by or on behalf of the donor and attested by at least
two witnesses. The stamp duty payable shall be specified percentage on its fair market value apart from the registration fee.
3. Essence of a gift
The essence of a gift is that it is a gratuitous transfer. Blackstone says : " Gift s are always gratuitous, grants are upon some
consideration or equivalent". The word "voluntarily" in the section is used in its popular sense denoting the exercise of
unfettered will and not in its technical sense of 'without consideration'. The principles laid down in the Indian Contract Act,
1872, relating to free consent would apply in determining whether a gift is voluntary. This follows from section 4 of the
Transfer of Property Act. In Subhas Chandra vs. Ganga Prasad AIR 1967 SC 878 , the Supreme Court recognised this when it
observed that it was well settled that the law as to undue influence was the same in the case of a gift inter vivos as in the case
of a contract. On behalf of the donor, the essential ingredient is that he should voluntarily and without consideration transfer
the property to the donee, and the giving away implies a complete divesting of the ownership in the property by the donor.
Person has been defined under section 2(31) of the Act. It includes (i) an individual, (ii) a Hindu undivided family, (iii) a
company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority,
and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. Every such person can make a
gift in accordance with law.
The company is a juristic person on incorporation. It can act through the board of directors and in accordance with the powers
contained in the memorandum and articles of association. The company and its shareholders are different persons. The
shareholders of a public limited company do not, by reason only of their shareholding, have any interest in the business of the
company. Equally, the fact that two public companies have common directors does not mean that the one company has any
interest in the business of the other as held by the Supreme Court in Alembic Glass Industries Ltd. vs. Collector of Central
Excise & Customs (2002) 112 Company Cases 379 (SC) .
The Supreme Court in Mrs. Bacha F. Guzdar vs. CIT (1955) 27 ITR 1 (SC) held that a shareholder who buys shares does not
buy any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true
position of a shareholder in a company is that on buying shares he becomes entitled to participate in the profits of the company
if and when the company declares, subject to the articles of association, that the profits or any portion thereof should be
distributed by way of dividends among the shareholders. He has a further right to participate in the assets of the company
which would be left over after winding up. A company is a 'person' and can make a gift after observing the formalities, if any,
under the Companies Act.
The donee can be a person as defined under section 2(31) of the Act. Hence, a donee can be an individual or Hindu undivided

family or a company or other person. The donee should accept the gift in person or through its representative. A donee can be
minor and may accept by himself or through his/her guardian. A gift can be made in favour of an unborn child as a co-donee.
The Supreme Court in F.M. Devaru Ganapati Bhat vs. Prabhakar Ganapathi Bhat AIR 2004 SC 2665 held : "There is no ban
on the transfer of interest in favour of an unborn person. Section 20 permits an interest being created for the benefit of an
unborn person who acquires interest upon his birth. No provision has been brought to notice of Court which stipulates that full
interest in a property cannot be created in favour of unborn person. In the present case, the donor gift ed the property in favour
of the appellant, then living, and also stipulated that if other male children are later born to her brother, they shall be joint
holders with the appellant. Such a stipulation is not hit by section 13 of the Act. Creation of such a right is permissible under
section 20 of the Act. The respondent, thus, became entitled to the property on his birth".
The gift of movable property shall be complete on delivery. It need not be in writing. However, there must be sufficient
evidence of delivery and acceptance. Hence, it is desirable to take a receipt or to make a declaration of gift duly signed by the
donor and donee and notarised by a Notary Public and attested by two witnesses. The shares are movable asset and can be
transferred by delivery. Application for transfer should be placed before the company immediately along with supporting
record and the share scripts. If there is delay in the process of registration but there is no defect in the application and the
application is submitted in accordance with the statutory provisions, the date of transfer shall be considered as date of
application and not when registered in the names of the donee with the company as held by the Kerala High Court in CIT vs.
Smt. S. Parvathavarthini Ammal (1996) 131 CTR (Ker) 433 : (1996) 219 ITR 661 (Ker) . The High Court also placed reliance
on the decision of Supreme Court in Vasudev Ramchandra Shelat vs. Pran Lal Jayanand Thakur AIR 1974 SC 1728 . Some of
the observations are extracted hereunder from page 668 of the reporting :
"As far as the requirements of transfer are concerned, in paragraph 9 of the said judgment, substantial requirements are
succinctly reproduced placing on record the different facets of the situation as provided by sections 122 and 123 of the Transfer
of Property Act. It is emphasised by way of a declaration of law that the substantial requirements are :
(1) The donor must transfer property which is the subject-matter of the gift , voluntarily and without consideration; and
(2) The donee must accept it during the lifetime of the donor or while the donor's competence to give exists.
It is also observed by reference to the provisions of section 123 of the Transfer of Property Act that the mode of transfer lays
down that the transfer may be effected either by a registered instrument signed by the donor and attested by at least two
witnesses or by delivery. It is emphasised that no special mode of delivery is specified, but the delivery may be made in such a
way as the goods sold are delivered.
Therefore, the position appears to be crystal clear that a registered document is not a must and even so the gift could be
properly understood as effective if the delivery of the subject-matter of the gift is understandable".
The Rajasthan High Court in CIT vs. Smt. Suraj Bai (1972) 84 ITR 774 (Raj) held : " Gift s of shares of companies are
complete for the purpose of the Gift -tax Act on the date of delivery of the share certificates along with transfer deeds to the
donees, though the dates of registration of shares in the names of the donees in the register of the company is done later. The
gift is complete when the beneficial interest in the shares is transferred from the donor to the donee."
4. Who can challenge the gift
Once all the formalities for making a gift valid contained under the Transfer of Property Act are fulfilled, its validity can be
challenged only by a person having interest or title or right in the subject of gift . In case of gift of shares by a company, the
gift can be challenged only by the shareholders and not by the Income-tax Department. However, if the gift is made after
fulfilling/performing the requirements under the Companies Act, the shareholders would be unsuccessful. Such gift would not
be void but may be voidable on successful challenge by the shareholders. If the shareholders succeed in their challenge, the
property would continue with the donor and would be assessable in the hands of the donor-company. The Rajasthan High
Court in CIT vs. Moti Lal Ramswaroop (1970) 76 ITR 43 (Raj) observed : "It must also be kept in mind that whether the act is
void or voidable, it is only persons having some rights in the property affected by that act who can come in a Court of law to
seek an appropriate relief by declaring the act void or voidable. Under a void gift there is no passing of title from the donor to
the donee, while under a voidable gift , there is such passing of title, but that title is defeasible under certain circumstances
under appropriate proceedings brought in by the person interested in the property which has been gift ed". Same view has been
expressed by the Delhi High Court in CIT vs. Bharat Prasad Anshu Kumar (2001) 249 ITR 755 (Del) . It held that the gift by
the Karta of Hindu undivided family to his minor son is voidable and not void as held by the apex Court in CWT vs. K.N.
Shanmugha Sundaram (1998) 149 CTR (SC) 306 : (1998) 232 ITR 354 (SC).
5. Whether donee should be relative of the donor
The Jodhpur Bench of the Tribunal in Dy. CIT vs. Ramdeo Kumar Chitlangia (2004) 89 TTJ (Jd) 346 approved the

genuineness of the gift when the donor was a non-resident and Punjabi whereas the donee was Maheshwari and of
Sriganganagar. However, the identify, capacity and friendship was established. It observed that for making gift , it is not
necessary that there should be some blood relation or gift should be made only to relatives and not to friends. The Tribunal,
Chandigarh Bench in the case of R.K. Syal vs. Asstt. CIT (2000) 66 TTJ (Chd) 656 held that the assessee having produced the
affidavits of NRI donors affirming the gift s, addition of amounts representing the gift s could not be made only on the ground
that there was no occasion or relationship for making the gift .
The Tribunal, Rajkot Bench in the case of Asstt. CIT vs. Radhey Shyam Bansal (2000) 68 TTJ (Rajkot) 136, held that the gift
received by the assessee from a foreign party out of love and affection could not be treated as income of the assessee when the
genuineness of the gift could not be doubted, identity of the donor was established and his capacity to make the gift is not
questionable.
In the case of CIT vs. Mrs. Sunita Vachani (1990) 84 CTR (Del) 18 : (1990) 184 ITR 121 (Del), the Delhi High Court held that
even though it may be surprising as to how large sums of money are received by a family in India by way of gift s from
strangers from abroad but unless there is something more tangible than suspicion, it will be difficult to regard the moneys
received in India from abroad as representing the income of the assessee in India. The Delhi High Court in CIT vs. R.S. Sibal
(2004) 187 CTR (Del) 291 : (2004) 269 ITR 429 (Del) observed "failure on the part of the assessee to establish his relationship
with the donors and admittedly, there is no blood relationship between the donor and the donee, gift cannot be doubted when
the donor have stated in their declarations that they had gift ed the amounts on account of their love and affection for the
donor". In ultimate analysis, relationship is not a prerequisite for a genuine gift .
6. Burden on the donee
Three things are usually examined for holding a gift to be genuine (1) identity of the donor; (2) capacity of the donor; (3)
genuineness of the transaction. There have been cases where first two requirements have been fulfilled but there is no
relationship between the donor and the donee, no motive as to why gift was made by the donor to the donee and one failed to
prove the genuineness. In such cases, such amount used to be assessed as income under section 68 of the Act, resulting in long
drawn litigation and multiplicity of proceedings.
The Delhi High Court in Sajan Das & Sons vs. CIT (2003) 181 CTR (Del) 581 : (2003) 264 ITR 435 (Del) held that a mere
identification of the donor and showing the movement of the gift amount through banking channels was not sufficient to prove
the genuineness of the gift . Since the claim of gift was made by the assessee, the onus lay on him not only to establish the
identity of the person making the gift but also his capacity to make a gift and that it had actually been received as a gift from
the donor. Having regard to the inquiries conducted by the Assessing Officer from the bank, with which the assessee was
admittedly confronted and bearing in mind the fact that admittedly, the donor was not related to the assessee, the findings
recorded by the Tribunal were pure findings of fact warranting no interference. The appeal was liable to be dismissed. Much
stress was laid by the Hon'ble Court on the relationship.
Recently, the Punjab & Haryana High Court in the case of CIT vs. Jawahar Lal Oswal (2004) 190 CTR (P&H) 56 : (2004) 267
ITR 308 (P&H) found gift s of US Dollars 2 lacs each from two non-relatives. The Delhi High Court in the case of R.S. Sibal
(supra) observed : "There is no quarrel with the proposition that a mere identification of the donor and movement of the gift
amount through banking channels is not sufficient to prove the genuineness of the gift and since the claim of the amount
having been received as a gift is made by the assessee, onus lies on him not only to establish the identity of the donor but his
capacity to make such a gift ". On failure to prove the three requirements, the gift can be held as non-genuine, a made-up story
and assessed as unexplained income of the donee.
7. New provision
Section 56(2)(v) inserted with effect from 1st April, 2005, reads as under:
"(v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a
Hindu undivided family from any person on or after the 1st day of September, 2004, the whole of such sum :
Provided that this clause shall not apply to any sum of money received
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer.

Explanation .For the purposes of this clause, "relative" means

(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 persons referred to in clauses (ii) to (vi)."
The effect of the amendment is that any sum exceeding Rs. 25,000 received after 1st September, 2004, by an individual or
Hindu undivided family from any person is deemed to be the income of such individual or Hindu undivided family as "income
from other sources".
The following are not to be deemed to be income from other sources : (i) amounts received from a relative; (ii) amounts
received by an individual on the occasion of the marriage; (iii) amounts received under a will or by way of inheritance; (iv)
amount received in contemplation of death of an individual or Karta or member of a Hindu undivided family.
8. Meaning of sum of money
The sum of money includes not only cash but also cheque, draft, fixed deposit receipt, national savings certificate, etc. The gift
of a fixed deposit receipt or a national savings certificate would be liable to tax as income, since it represents a sum of money
though it is not cash. 'Money' will not include shares or stocks, though redeemable by money or saleable for money Shelmer
Gilb, In re Eq. Rep 202.
The Supreme Court in H.H. Sri Rama Verma vs. CIT (1991) 95 CTR (SC) 26 : (1991) 187 ITR 308 (SC) observed : "The use of
the expression "any sum" paid under section 80G(2)(a) contemplates payment of an amount of money. One of the dictionary
meanings of the expression "sum" means any indefinite amount of money. The context in which the expression 'sums paid by
the assessee' has been used makes the legislative intent clear that it refers to the amount of money paid by the assessee as
donation." The plain meaning of the words used in the section does not contemplate donations in kind. Donations may be made
by supplying goods of various kinds including building, vehicle or any other tangible property but such donations, though
convertible in terms of money, do not fall within the scope of section 80G(2)(a) entitling an assessee to deduction. Donation of
shares of a company does not amount to payment of any sum or amount though the shares, on their sale, may be converted into
money. But the donation so made does not fall within the ambit of the aforesaid section."
The Orissa High Court in CIT vs. Aloo Supply Co. (1980) 121 ITR 680 (Ori) in the context of statutory limit under section
40A(3) of the Act observed : The word "sum" has no statutory definition and must have the common parlance meaning. While
legislating, Parliament tries to convey its intention through express words. It is one of the well settled rules of interpretation
that where a word used in a statute carries more than one meaning, that meaning which makes the provision workable and is
nearest to the legislative intention, has to be adopted. The word "sum" in section 40A(3), second proviso, of the Income-tax
Act, 1961, is used only to indicate an amount of money.
9. Other gift s
It is permissible to make a gift of any movable or immovable property or asset. The newly inserted provisions would bring in
the tax-net, sum of money exceeding the specified amount received by way of gift by an individual or a Hindu undivided
family. Gift of money in favour of entities other than an individual or a Hindu undivided family from any person on or after the
1st day of September, 2004 cannot be considered as income from other sources under section 56(2)(v) read with section
2(24)(xiii) of the Act. The new provision would bring in taxability only in the hands of an individual or a Hindu undivided
family and not in respect of other entities under section 2(31) of the Act. Gift s of property or asset, other than sum of money,
would not attract any tax in the hands of any person including an individual or a Hindu undivided family. Gift s in kind do not
attract tax.

10. Treatment by Assessing Officer

Any cash credit remaining unexplained to the satisfaction of the Assessing Officer may be charged to income-tax as the
income of the assessee under section 68 of the Act. If an assessee is found to be the owner of any money, bullion, jewellery or
other valuable article or thing and fails to offer satisfactory explanation for its source of acquisition, the value of such
unexplained asset may be deemed to be the income of the assessee under section 69A of the Act. On account of the deeming
provisions, as stated hereinabove, burden to prove is on the assessee and on his failure, it may be considered as unexplained
cash credit/investment and assessed as income from undisclosed sources. Therefore, mere cover or device or colour would not
immune the assessee. Gift should not only be valid but should be genuine, to avoid tax liability under the Act. It is desirable to
adduce sufficient evidence other than mere furnishing of a gift declaration/deed.
11. Treatment on transfer
The cost in the hands of the donee would be the cost of the donor, i.e., the previous owner. Section 49(ii) provides for cost
where the capital asset becomes the property of the assessee under a gift . It lays down that the cost of acquisition of the
assessee shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost, any
improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. Section 2(42A) defines
the short-term capital asset. Explanation 1(b) stipulates that in determining the period, for which, any capital asset is held by
the assessee, there shall be included the period for the asset as held by the previous owner referred to in section 49(1) of the
Act. Thus, a period of holding of the donor shall be deemed as period of holding by the donee. If the period of holding of the
donor and the period of holding of the donee is beyond 12 months, transfer of shares received in gift from the donee, shall be
considered as a long-term capital asset. After working out the cost in the hands of the donor, the donee shall be entitled to
computation of capital gain after indexation.
12. Conclusion
Newly inserted provisions apply only in respect of gift of "sum of money" in the hands of an "individual" or a "Hindu
undivided family". Gift in kind does not attract any income-tax. The newly inserted provisions would not curb the menace of
gift s. It is a half-hearted exercise in futility.
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