Income Tax Law vs. Gift amongst Family Members

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Income Tax Law vs. Gift amongst Family Members

 

Query 1]

I have received a sum of Rs. 12,00,000/- from my brother in lieu of my share in our family property. Is this amount taxable? How to show this amount in my return for the Financial Year 2022-23?  [VMK Menon- taxtalknew@gmail.com

Opinion:

  1. The documentation and drafting of the documents plays an important role in determining the tax liability of any person. It is always advisable to visit the tax provision before executing any documents.
  2. The taxation of the amount received by you from your brother in lieu of relinquishing or transferring your share in the family property depends upon the nature of the documentation done for the transactions.
  3. Normally, relinquishment of the right in the property for some consideration tantamount to “transfer” under the Income Tax Law and attracts capital gain tax.
  4. In your case, if the document executed indicates that you have received Rs. 12 Lakh against transfer of a share in the property in favour of your brother, then you may be liable for capital gain tax. However, if the two independent documents of gifts are executed by you in respect of the transaction then the transaction may not be liable for capital gain tax.

 

Query 2]

My father expired when I was 14 years old. My uncle has taken care of myself and the family. Myself, My wife and mother have now settled in Australia since last 11 years. This Diwali, I want to transfer an amount of Rs. 1 Cr to the account of my uncle as a gift. Kindly guide if this amount would be taxable in the hands of my uncle or it will be totally tax free? I am NRI since last 5 years and I am not having any Indian Income and so not filing any income tax returns in India. Further, I also want to give my share in our ancestral property in favour of my uncle. Whether it will have any tax issues on both the gifts? I am getting two different sets of opinions on the applicability of income tax. Please guide.

  1. Gift is one of the most popular modes of conveying love and affection. The gift tax in India was abolished long back. However, the concept of taxing gifts is almost reintroduced by adding section 56(2)(x) in the Income Tax Act-1961 which provides for its taxation in the hands of the recipient (donee) as “Income from other Source” if the aggregate amount during the year exceeds Rs. 50,000/-.
    However, there are some exceptions. 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 in the hands of the recipient.

  1. The persons who can be considered as “Relatives” for above are also specified in the section itself. It says that the following categories of persons are considered as “Relative” of the individual receiving the gift:
    (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 exist 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. In reality, the word “Relative” cannot operate singularly (Income Tax Act excluded). However, for the purpose of section 56(2)(x), the “relative” has to be viewed from the angle of “Recipient”.

  1. As far as the gift is concerned, every transaction has to be viewed from the angel of the recipient. It often happens that A is the relative of B but B is not the relative of A. Though the persons involved are the same, the amount is not taxable in the first case and taxable in the second case. One may surprisingly conclude that relatives 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 words “or given by ” in section 56(2)(x) could have made the outcome logical. However, the absence of these 3 words is making all the difference.
  2. In your specific case, you want to give the amount to your uncle i.e., the recipient will be your uncle. If one goes through the definition of the relative, one will be surprised to know that uncle is not your relative. [If you receive the gift from your uncle then it will be reckoned as the gift from the relative as the same will be covered by 2(iv) above. However, the reverse is not true].
  3. 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 statute. There are numerous provisions in the Income Tax Act-1961 where one will find an outcome which may not be in accordance with the intention of the legislature.
  4. In your specific case, gifts by you to your uncle (whether amount or immoveable property) will result in income tax liability in the hands of your uncle. However, if your mother gifts the amount to your uncle then the amount will not attract any income tax & the transaction will be tax neutral.

 

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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
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