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Gift from non-relatives: cash or kind?


It should always be taken that non-genuine gifts are vulnerable not only from the point of view of tax but also from the more rigorous law relating to money-laundering.

I am herewith sending an extract from an article on the subject in Bombay Chartered Accountant, while commenting on the amendment clearly suggesting as under:

"Since the new provision is made applicable to sum of money, the same will not apply to gift in kind. The new provision will apply only to an individual or a HUF as the recipient of such money. However, the status of the payer is not relevant.

The payer could be resident or non-resident. The place of receipt is also not relevant. Therefore, gift of money received by a resident individual outside India from an unrelated non-resident (who is not a specified relative) will also be covered by the new provision unless of course the same is covered in any of the other specific exceptions. It seems that exception of receipt from specified relative will apply only in case of individuals. Therefore, gift of money received by a HUF from the relative of a member of the HUF is not covered in any of the exceptions and therefore, one has to be a little careful in such cases". I may also point out that the original proposal was to amend Section 2. It also read "any sum received". See also Explanatory Notes which refers to "in cash or by way of credit". The Act brought in Section 56(2)(v). Hence the words are "sum of money" and not "any sum". We have to give some reasonable meaning to this change of wording.

The answer given earlier in The Hindu of July 4, 2005 related to the queries suggesting tax planning by converting cash into bonds prior to gifts from non-relatives to avoid tax. It was in this context, it was pointed out that "sum of money" may be more broadly understood especially in such cases, where the bonds are purchased immediately prior to the gifts. It was also indicated that judicial notice could be taken of the wide-spread practice of laundering unaccounted income as gifts, especially foreign gifts, the source of which is wrongly understood as beyond the jurisdiction of the assessing officer. What is important in such a case is the genuineness of such gifts and it is in this context, it was considered necessary to sound a note of warning in treating the language of the statute as a lacuna.

In view of the feeling that it is a lacuna, gifts of bonds are planned. Gifts being voluntary in nature could hardly be a matter of tax planning. Such gifts will certainly be subject to probe.

It is necessary that a gift should be genuine even if it be from relatives, and it should always be taken that non-genuine gifts are vulnerable not only from tax point of view, but also from the more rigorous law relating to money-laundering. The history of the legislation at the draft and final stages does not really throw light on this aspect of the matter.

The provision, no doubt, is clumsily worded. The unsatisfactory manner in which the provision is drafted is not only because of the expression "sum of money", but also in making a Hindu Undivided Family liable for the gifts from non-relatives, but without a definition of relatives of the Hindu Undivided Family.

Should it mean that the relatives of all members of the family making gifts to the HUF will be accepted as relatives?

It is a situation difficult to comprehend, and at any rate, most unusual as Hindu Law does not envisage such gifts from relatives of members of the family or for that matter any gift except gifts received by its members as their individual property as in the case of stridhana.

Such gifts are theoretically possible, but then the definition of relatives in the Explanation refers only to relatives of individuals.

S. RAJARATNAM

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