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It is pertinent to note that The Gift Tax Act was repealed with effect from 01/10/1998, however, the provisions of section 56 (2) were inserted by the Amendment Acts with effect from the respective notified dates, could be treated as an Indirect intrusion of an already repealed law.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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