The Hindu Business Line : Check on money laundering thru gifts — New income definition clause may complicate law, say tax experts

MONEY laundering through the medium of gifts is being sought to be curbed by the Union Finance Minister through the proposed insertion of a new provision, Section 2(24)(xiii), in Section 2 (clause 24) in the Income Tax Act. Hence, if you receive a gift from a non-relative on or after September 1, 2004, you may have to pay a tax on it.

But according to tax experts, going by the wording of the new provision, even a credit (loan, deposit or advance) and any other sum received by an individual or a HUF, "otherwise by way of consideration of goods and services, shall be considered as income, if it is received from a non-relative or if it does not fall within the prescribed exceptions."

The exceptions are amounts received by way of will or inheritance or in contemplation of death etc. It is felt that the insertion of another new Section, besides Section 10(39) and amendment of Section 56(2) for the purpose of charging tax on such gifts was unnecessary and make the law more complex.

Stating that the provision has been badly worded, and needs urgent reconsideration, tax experts feel this may result in unintended hardship for taxpayers taking loans for business or other purposes.

Appreciating Mr Chidambaram's attempt through the said amendment to prevent revenue leakage through misuse of the abolition of gift tax way back in 1998, Mr N.P. Jain, tax lawyer and guest faculty at West Bengal NUJS (National University of Juridical Sciences), said, "A plain reading of the provision reveals that its mischief will encompass any sum received on or after September 1, 2004, from any person by an individual or HUF, whether in cash or through cheque or a draft or any other mode or by way of a credit, and subjected to tax under Section 56(2)."

Pointing out that loans are a kind of refundable capital receipt, Mr Jain said gifts are essentially a capital receipt, as admitted by the Government itself through a CBDT circular way back in 1974, which states, "gifts of purely personal nature are not chargeable to income tax," and that one is only required to prove the identity, creditworthiness and financial capacity of the donor of the gift, as established by various court decisions.

He said the Delhi High Court, in a recent decision, has held that "merely because a gift has been received from a non-relative, it cannot be added as income of the recipient u/s 68, if the genuineness of the gifts had been established."

Mr Nirmal K. Poddar, senior Supreme Court lawyer and tax consultant, picked on the words "any sum... " and said the wording any sum of money will target any transaction, whether in the form of money, or in kind, such as shares, bonds, fixed deposit receipts etc.

Pointing out that "gifts in kind" would not be outside the scope of this amendment, Mr Jain said the Finance Minister was obviously seeking to plug loopholes with regard to bogus gifts, but "Section 68 of the existing Income Tax Act already takes care of such bogus gifts, as the Assessing Officer (AO) is empowered to treat the same as cash credit, if any sum is credited in the books of account is not explained to his satisfaction." What is actually needed is proper utilisation of existing powers of the AO and making proper enquiries in such cases.

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