The Hindu Business Line : Fits and starts in gift tax

THE Finance Minister, Mr P. Chidambaram, said in Parliament that tax evasion is on the rise. Every time somebody is caught with unaccounted income or wealth, the standard explanation is that it is either a credit or a gift from somebody. Gift is known to be a source for large-scale tax evasion, and, it was to plug this loophole that, way back in 1957, the then Finance Minister introduced the Gift Act along with the Wealth Tax Act and the Expenditure Tax Act. More than revenue generation, the idea was to secure an integrated tax return covering income, wealth and gifts.

The Gift Tax Act was abolished on the grounds that its revenue potential was low. However, the fact remains that the gifts route is being used to camouflage assessable income. Mr Chidambaram, in para 102 of his 2004 Budget speech, observed thus:

"... Members are aware that I abolished gift tax in 1997. That decision remains, but a loophole requires to be plugged to prevent money laundering. Accordingly, purported gifts from unrelated persons, above the threshold limit of Rs 25,000, will now be taxed as income. Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasions such as marriage will continue to be totally exempt."

Section 2 (24) of the Income-Act, 1961 has been amended to widen the definition of income. Explaining the amendment, the Memorandum has this to say:

"Modification of the definition of income to include receipts in cash or credit otherwise than for consideration: It is proposed to insert a new sub-clause in the definition of income so as to provide that any sum received on or after the September 1, 2004, by an individual or a Hindu undivided family from any person, in cash or by way of credit, otherwise than by way of consideration of goods and services shall be included within the definition of income under Section 2(24) of the Income-tax Act.

"It is also proposed to provide a general threshold limit of Rs 25,000. In addition to this, in the case of an individual's marriage, the aggregate of gifts received up to Rs 1,00,000 will not be charged to tax.

"However, in order to avoid hardships in genuine cases, it is also proposed to exclude certain sums from the scope of the new definition of income under Section 2(24). The sums which shall not be included in the income are: a) the sum received by, or credited in the account of (i) any individual from a relative out of natural love and affection, or (ii) any individual or Hindu undivided family under a will or by way of inheritance, or (iii) any employee or the dependant of the deceased employee from an employer, by the employee, or (b) any sum received in contemplation of death of an individual or karta or member of a Hindu undivided family or (c) any income referred to in Section 10 of the Income-Tax Act or any their income which is exempt or not included in the total income under the Act, or (d) any sum received on account of transfers referred to in Section 47 under this Act... "

Courts have ruled that gifts showing only personal esteem cannot be taxed as income (Balamuralikrishna — 171 ITR 447) and (Dr B. M. Sundaravadanam — 148 ITR 333).

The Supreme Court had itself held that personal gifts cannot be taxed without proving that they were remuneration for services rendered (Mahesh Anantha Rai Pattan (41 ITR 481) and Parmi Setti Seetha Rama Amma (57 ITR 532)). Political leaders receiving purses from admirers were held not taxable as income (CIT vs Rajamanickam — 149 ITR 85).

Mr Chidambaram's is not the first attempt at taxing gifts as income. Experts have often recommended a donee-based Gift Tax Act and the V. P. Singh Government had introduced such a measure in 1989. When gift tax was abolished in 1998, a suitable amendment to Section 2(24) of the I-T Act was attempted; but it was given up. There is so much of politics at play. It would be nice if the proposed amendment became law.

(The author is a former Chief Commissioner of Income-Tax.)