The Hindu Business Line : To tax all money receipts is taxing

By making receipt of any sums beyond Rs 25,000 by an individual or a Hindu Undivided Family taxable, the Finance Act aims to bring within the net amounts which are not genuine gifts but money so camouflaged to avoid tax. However, the provision covers even genuine gifts and money received from a charitable trust for medical treatment. This is unfair and the Finance Bill 2005 must rectify the situation to cover only money received from unrelated persons, says H. P. Ranina.

THE FINANCE (No.2) Act, 2004, which was passed without discussion or debate in Parliament, has made one provision for taxing any sum of money received, as income of a recipient who is an individual or a Hindu Undivided Family.

The payer of such a sum of money can be any person as defined in Section 2(31) of the Income-Tax Act, 1961 which includes an association of persons, body of individuals, companies, partnership firms, etc.

The new Section 56(2)(v) applies to any sum exceeding Rs 25,000 received by an individual or a Hindu Undivided Family on or after September 1, 2004. So long as the sum does not exceed Rs 25,000, no amount would be taxable under this new provision. However, if it is even Rs 25,001, the entire amount, and not just that over Rs 25,000, is treated as income taxable under the head "Income from other sources".

The exception to this provision is where the sum is received from a relative as defined in the Explanation thereto, or an amount is received on the occasion of marriage of the individual, under a will, by way of inheritance, or in contemplation of the death of the payer of such sum.

The purported object of this provision is to bring within the tax net amounts which are not genuine gifts but money camouflaged as gifts in order to avoid tax. However, the manner in which the provision is worded is wide enough to cover even genuine gifts received by an individual given in the normal course, say, by a charitable trust.

Trustees of charitable trusts are enjoined to give away amounts to charity under the terms of their trust deed.

In fact, under Section 11 of the Act, 85 per cent of the income earned by charitable trusts is required to be spent in the same financial year or the immediately succeeding financial year. By bringing in Section 56(2)(v), the recipient of any financial help or medical assistance in excess of Rs 25,000 would become liable to tax as none of the exceptions listed in the proviso would apply.

The important point to note is that though the word "person" is used in singular, it could be construed in the plural to include more than one person who gives a sum of money.

Therefore, if a patient who has to undertake medical treatment in or outside India applies for monetary assistance to charitable trusts/institutions and collects sums of money from various institutions aggregating to more than Rs 25,000, the total assistance received during the financial year would become liable to tax as income of the patient.

Tax would have to be paid at normal rates applicable to individuals. Of course, if a student receives from various trusts/institutions less than Rs 1 lakh, he would not be required to pay tax in view of the rebate he would get under Section 88-D, unless he has other income which would be added to the receipts from charitable trusts.

In view of the rising costs of hospitalisation and a depreciating rupee, the normal requirement of funds is Rs 10-15 lakh for medical treatment abroad.

For indigent patients, such an amount cannot be contributed by the family and the only source of funding would then be in the form of assistance received from charitable trusts/institutions.

Therefore, the fact that medical assistance would become liable to tax simply because it exceeds Rs 25,000 in a financial year is an unacceptable proposition primarily because these are genuine gifts from charitable trusts which are enjoined to provide medical assistance to the poor and needy.

It would be obnoxious to tax the amounts received from charitable trusts/institutions for meeting the medical needs.

Mercifully, scholarships to cover the cost of education are exempt under Section 10(16) of the I-T Act. However, monetary awards given after completion of education in recognition of merit would be taxable if the amount exceeds Rs 25,000 in the aggregate.

In fact, the new law has been framed to leave a loophole. What is not treated as income is the value of any article/goods/securities in the form of gold/jewellery/land and other movable and immovable properties received by the recipient.

The value of such assets would escape tax with effect from September 1, 2004 because it can be argued that Section 56(2)(v) has been introduced specifically to bring to tax only sums of money and that Parliament took a conscious decision not to tax the value of any article/goods received as a gift.

Before September 1, 2004, the Assessing Officer in many cases took the stand that gifts in cash or kind or money's worth were not genuine in nature. Hence, they were treated as the income of the recipient.

However, from September 1, this stand of the tax department would not legally be acceptable because it would be argued by the assessee that Section 56(2)(v) specifically treats as income only sums of money.

Therefore, value of assets received is by implication not treated as income. Whether this argument stands the test of judicial scrutiny remains to be seen but it would take several years before the Supreme Court gives its verdict on this subject.

The general principle of law is that income is taxable even if it is received in money's worth. Income, profits and gains may be realised in the form of money's worth as well as money, in kind as well as in cash. The forms which money's worth or the equivalent of cash may assume are beyond enumeration.

As Lord Halsbury LC observed in Tennant v Smith — 1892 AC 150, 156 (HL) — profits include anything "capable of being turned into money from its own nature".

This is the general law, apart from the fact that even certain things which are not capable of being turned into money from their own nature — for example, rent-free accommodation to an employee or any benefit (even though not convertible into money) obtained from a company by a director or by other specified persons — have by statute been artificially deemed to be income.

Where realisation consists in money's worth, the market value of the money's worth in the accounting year must be ascertained and brought into computation for the purpose of determining the year's profits.

Though in such a case the assessee may be bound by his own valuation in his books of accounts, the Department is in no case bound to accept the assessee's figure and is free to fix its own estimate of the value.

If the assessee has not made any valuation, it would be open to the Department to estimate the real value.

By including under Section 56(2)(v) only sums of money as income, a view could be taken that this provision supersedes the aforesaid general principle of law and value of assets received cannot be treated as income. Litigation on this controversial issue will start shortly.

It is, therefore, imperative that Section 56(2)(v) should be amended by the Finance Bill, 2005 with effect from April 1, 2005 to provide that any gifts received from charitable trusts/institutions are totally exempt from tax in the hands of the recipient.

At the same time, to give teeth to the new provision, Section 56(2)(v) should include value of any assets received from an unrelated person except where assets are received from charitable trusts/ institutions.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in.)