*What is Gift?
In Layman’s language, gift is
transfer of goods or property (movable or immovable) from one person to another
without consideration. As per Income Tax Act, Receipt without consideration or
Receipt with inadequate consideration, by individuals and Hindu Undivided
Family is chargeable to Income Tax. Section 56(2)(vii) of Income Tax Act, deals
with Taxation of Gift for Individual and Hindu Undivided Family.
*Is Taxability of Subsidy same as
Taxability of Gift?
Subsidy is also a kind of receipt without
consideration. Subsidy is aid (help) given by Central or State Government in Cash
or in Kind or through Tax reductions or Tax Holidays to persons or group of
persons. So should we start taxing all kind of subsidies or help or grant (by
whatever name called) given by government as gift u/s 56(2)(vii)???? As it is
clear that subsidy can be received by any person (as defined u/s 2(31) of
Income Tax Act) and the motive behind its conferment is welfare of society, it
cannot be restricted to section 56(2)(vii). Finance Bill, 2015, has expanded
the definition of income (u/s 2(24) of Income Tax Act), that is taxable under
the Income Tax Act, 1961, by inserting a sub-clause on subsidies, grant, and cash
incentive and duty drawback. According to the amendments to the Finance Bill,
the income shall include “assistance in form of a subsidy or grant or cash
incentive or duty drawback or waiver or concession or reimbursement by the
central government or state government or any authority or body or agency in
cash or kind to the assessee other than the subsidy or grant or reimbursement
which is taken into account for determination of the actual cost of the asset”.
As per various decisions of High court and Supreme Court, Subsidy is
taxable only if it a Revenue Receipt i.e Subsidy in form of Capital receipt is
not taxable. E.g. Subsidy for purchase of Land will be deducted from
the cost of asset (Section 43(1) of Income Tax Act) and will not be taxed.
Taxability of Subsidy can be concluded from the ratio of following Court
Decisions:
1. Sahney Steel and Press Works Ltd. v
CIT (1997) 228 ITR 253 (SC)
2. Mepco Industries Ltd. v CIT (2009)
319 ITR 208 (SC)
3. CIT v Udupi Builders P. Ltd. (2009)
319 ITR 440 (Kar)
*Gift-Capital Receipt or Revenue
Receipt?
The general rule under the Income
tax Act is that, all revenue receipt are taxable unless a receipt is
specifically exempted (as specified u/s 10 of Income Tax Act) and all capital
receipts are exempt from taxation unless there is a provision to tax it (Capital
Gains are taxable u/s45 of Income Tax Act ). Gift, Financial Assistance, Loan
etc. are Capital receipts. Receipt without consideration or Receipt with
inadequate consideration, by individuals and Hindu Undivided Family is
chargeable to Income Tax u/s 56(2)(vii) of Income Tax Act (Specifically
Mentioned in the law). But what if gift is received by Person other than
individual or Hindu Undivided Family? Will it be taxed? How will be the tax calculated?
*Taxability of Gift to Persons other
than Individual or Hindu Undivided Family (say a company): Can a Director gift to his/her
company on its First Anniversary? Can a parent company gift to its subsidiary
company on its incorporation? Is this receipt without consideration taxable
under Income Tax Act?
Why not!!! A company (Non Living,
but enjoying the right of separate legal entity in the eyes of law) and its
director are two separate legal entities in the eyes of law. Both of them are
covered in the definition of Person u/s 2(31) of Income Tax Act. A Contract
entered between the two (company and director) is valid as per Indian Contract
Act, 1872. Then surely director can gift his/her company.
E.g. Director of XLtd. gifts
Rs.10,00,000 to XLtd. on its first anniversary. Will Rs.10,00,000 be taxable in
the hands of XLtd.? Accounting Entry will be-
Cash
A/c
Dr. 10,00,000
To Gift From Directors
A/c
10,00,000
It is not taxable u/s 56(2)(vii) as
the recipient is not individual or Hindu Undivided Family. Capital receipt is
not taxable unless there is specific provision to tax it. It is apparent that
the receipt of cash of Rs.10,00,000 is capital receipt. Thus, Entire
Rs.10,00,000 will not be taxable.
E.g. Director of Xltd. Machine worth
Rs.10,00,000 to XLtd. on its first anniversary. Will Machine be taxable in the
hands of XLtd.? Accounting Entry will be-
Machine
A/c
Dr. 10,00,000
To Gift From Directors
A/c
10,00,000
It is not taxable u/s 56(2)(vii) as
the recipient is not individual or Hindu Undivided Family. Capital receipt is
not taxable unless there is specific provision to tax it. It is apparent that
the receipt is capital receipt (Capital Asset). Thus, receipt of Machine
without consideration is not taxable.
Can we claim depreciation on the
machine received as gift? As per Section 43(1) in The Income- Tax Act, 1995″
actual cost” means the actual cost of the assets to the assessee, reduced by
that portion of the cost thereof, if any, as has been met directly or
indirectly by any other person or authority. Thus, depreciation can be claimed
on assets purchased by the company. There shall be actual cash outlay by the
company. Thus, Income Tax Act does not allow dual benefit. No depreciation can
be claimed on such asset.
Thus, taxability of Capital receipts
in the form of gift received by Persons other than individuals and Hindu
Undivided Family is still out of the purview of Income Tax Act!!!!
Note: The views expressed in the
Article may not match with the views of others. Before accepting &
applying, take the expert opinion.
- See more at:
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