The Law In S. 56(2) On Taxation Of Gifts Encourages Cash Transactions
Beni M. Chatterji, Senior Advocate
The author, an eminent Senior Advocate, argues with conviction that the law on taxation of gifts in s. 56(2) of the Income-tax Act, 1961 is a big irritant that actually compels honest taxpayers to pay in cash to avoid its draconian consequences. He explains how even genuine transactions fall foul of this ill-drafted provision
Chorus from all quarters has started pouring in for simplification of the Income Tax Act as the budget day is drawing close. But in my opinion Indian Income Tax laws are most simple in the World, unless they are made complicated by the executing officers. Most of the issues under Income Tax Act are settled by various courts of law, therefore, any kind of tinkering with basic structure of Income Tax Act might lead to quantum jump in litigation, but few irritants of Income Tax Act need to be resolved.
One such irritant is concerning the provisions of taxing gift or something like a gift, indirectly, under section 56 (2) (V) (VI) (VII-a), which mandates the recipient of Gift more than the value of the amount stipulated therein to pay tax on the same. This creates a very funny situation, as a poor patient, who requires immediate help for major ailment and has been assisted by some benefactor, will have to pay tax on such assistance. As it is a common knowledge that the treatments like heart surgery, cancer ailment or kidney failure will cost much more than the exempt amount. Imagine a person who can’t afford his treatment, will have to pay tax under compulsion, even if someone pays for his treatment out of generosity. Similarly, poor brilliant students will also have to meet the same fate if they are helped monetarily to fulfill their dream of pursuing higher studies in India or abroad.
It is pertinent to note that The Gift Tax Act was repealed with effect from 01/10/1998, however, the provisions of section 56 (2) were inserted by the Amendment Acts with effect from the respective notified dates, could be treated as an Indirect intrusion of an already repealed law.
In my opinion, the aforesaid or like situations do circumstantially compel the concerned persons to transact in cash.
The present Government is very forward looking, visionary and action oriented, therefore it can be expected that it will look into these and related issues.
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On the one hand I agree with the author as the needy peoples who are suffering with chronic ailments shall be helped monitarily and he may get necessary treatment.On the other it will be a measure to bring in black money into their file by taking fake fake gifts.
any payment by charitable trust or by any person through banking channel directly to the hospital/educational institution need to be excluded for beneficiaries whose income is otherwise below taxable limit. Trustees n their relatives Excluded for payment by trusts.
The provisions of sec.56 though introduced to rope in gifts to non – related parties are likely to hit needy and genuine persons who try to make their both ends meet in case of severe unforeseen eventualities by approaching charitable trusts and institutions conducting projects approved u/s 35AC very hard. A saving clause can be introduced so as to exclude monies received from such institutions by account payee cheques or paid by such institutions directly to the hospitals to meet the cost of the treatment.
Is it an article or an observation ?? Disappointing hair splitting
very true: prudent tax men are required at the helm of finance ministry to see contradictory moves to amend tax laws. give in one hand and take in another. May good governance look into tax matters like this.
VIEWS EXPRESSED ARE VERY TRUE AND COMMENTS ARE ALSO TRUE. BUT SUIABLE AMENDMENT PROPOSAL MAY BE SENT TO FINMIN ABT DIRECT PAYMENTS TO ORGANISATION WITH PROOF OF INCOME BY BENEFICIARY. AND WHAT ABT OTHER PROVISIONS OF THAT SECTION WHERE PROPERTY IS TRFD AT A LOWER CONSIDERATION THAN THE CIRCLE RATE. MANY TIMES CIRCLE RATE IS HIGHER THAN ACTURAL CONSIDERATION
i agree with the author. when gift Act is repealed how your tax law can have a sec which is irrelevant indeed, after all sooner or later either hon HC or SC would remove the section by doctrine of severability if govt fails to rectify their serious errors in their law making exercises, beneficient legislation need to be protected under doctrine of fairness well articulated by hon SC in Govt n ors v India tabacco(2005) 7 SCC… see sirs.. in (1816) 2 Price 386, 146, ER 130)…even courts in early 18th century were very reasonable when so how so called 21st century governance is hitting the earth! very sad. i second the articulation of the author and that need be published for benefit of one and all for their opinions too!
To prevent money laundering it could be provided that any donation paid by a/c payee cheque could be exempt without limit upto a certain limit and any amount over this limit could be taxed at flat rate of 25% to be paid by the donor.
With due regards to learned advocate, my experience indicates that such welfare measures are misused by the RICH and MONEYED PERSONS to circumvent the provisions of law and money laundering purposes.However, a suitable amendment can be provided in section 56 of ITACT 1961 to restrict the allowance of such gifts and make them non taxable subject to certain monetary limits and financial position and status of the DONOR and the DONEE.
PUBLISH THE COMMENTS AS IT IS or DONOT PUBLISH.
With Due Respect, I agree with your suggestion but I think it is not practical. if government of India introduce any provision for this issue then it will create confusion and It will become a Tax planning tool to convert Black Money in to White.
i do agree with your comments sir
Fully agreed with the view expressed. Hope the voice will reach to the Finance Minister and required relief will be provided.
CA Goutam Baid
Jodhpur