“This is a question too difficult for a mathematician. It should be asked of a philosopher” (when asked about completing his income tax form)” ― Albert Einstein
There is no such thing as logical or reasonable while interpreting the taxing provision. Every word counts when it comes to the interpretation of the tax statue. There are numerous provisions in the Income Tax Act-1961 where one will find outcome which may not in accordance with the intention of the legislature.
One such issue is in the taxation of Gift. Gift is not only a tool for conveying love and affection but also one of the most popular & commonly used tool for tax planning. By gifting the property or assets to other persons, subsequent incomes also get diverted. It has become all the more popular after abolition Gift Tax Act long back. However, the concept of taxing gift is almost reintroduced in new form by adding section 56(2)(vii)[Now, 56(2)(x)] in the Income Tax Act-1961 which make it taxable as “Income from other Source” if the aggregate amount during the year exceeds Rs. 50,000/-. Amount received is not taxable if it is received in any of the following 4 situation:
(a) On the occasion of the marriage of an Individual
(b) Under a will or by way of inheritance
(c) In contemplation of death of the payer.
(d) From Relative
First three situations referred above are specific and related to any one particular event or occasion. The fourth one is wider in scope & implication. Gift received from any person other than “Relative” is taxable hands of recipient. Now, who are considered as “Relatives” for the purpose of above provision is also specified in the section itself. It says that the following categories of persons are considered as “Relative” of the individual receiving the
(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 person referred to in clauses (ii) to (vi).
Though the meaning of the word “Relative” in section 56(2)(x) appears to be simple, it is not so. In regular usage, “Relative” is considered as a cohesive term which means that one cannot exists without the other. For example, if Ram & Shyam are brothers it means that Ram is a brother of Shyam and Shyam is a brother of Ram. It cannot be that Ram is the brother of Shyam & Shyam is not the brother of Ram. The word “Relative” cannot operate singularly (Income Tax Act excluded).
For the purpose of section 56(2)(x), the “relative” has to be viewed from the angel of “recipient”. Let us have a look at another real life example. A person is giving a gift to sister’s son. For the purpose of section 56(2)(x), we have to view the transactions from the angel of the recipient (i.e., Son of sister or Bhanja).
In this case, the gift is received by recipient from Brother of Mother (Mama) & for recipient (Bhanja), the person giving the gift is relative as it is covered in clause (iv) referred above & resultantly nothing would not be taxable. Now, if suppose the reverse happens. The sister’s son (Bhanja) offers the gift to the mother’s brother (Mama). Now, the recipient is the Brother of mother of the donor. In this case, we have to view the transactions again from the angel of the recipient and you will find that the donor (Bhanja) is not the relative of the recipient (Mama) & so the gift received would be taxable in the hands of the recipient.
Though the persons involved are same in both the illustrations given above, the amount is not taxable first case and taxable in the second case. The transaction has to be viewed from the angel of recipient i.e., donee for each& every gift. One may surprisingly conclude that relative could be one sided business as far as tax treatment under section 56(2)(x) is concerned. The word used in section 56(2)(x) is “receives from” . Adding just three word “or given by” in section 56(2)(x) could have made the outcome logical. However, absence of these 3 words is making all the difference. True, every word counts in the tax statue.
CA. Naresh Jakhotia