In this blog post, Rashi Chandoke, an Associate with ANA Law Group, Mumbai, and a student, pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about tax deductibility of expense on gifts to clients on birthdays and festive occasions.

Introduction

The Gift Tax Act, 1958, for the first time, defined the term “Gift.” Under this Act, any gift received from a non-blood relative, in the form of cash, cheque or draft worth more than Rs. 25,000 was subjected to tax deductibility. This Act was repealed by the Finance Act, 1998. On its repeal, all kinds of gifts of any amount became tax-free. This became a way of money laundering. To prevent such practice, the gift tax was brought under the head “Income from Other Source” under the Finance Act, 2004. Thus, any gift received above the prescribed threshold limit is subjected to tax deductibility.[1]

Relatives can give some gifts out of love and affection, and some gifts can be used as a marketing tool for business organizations. The latter is known as Corporate Gifts. Business organizations give corporate gifts to its clients, associates, employees, etc. to maintain long term relationship. These gifts are usually given on occasions such as Diwali or New Year or Christmas or even on birthdays.

Tax treatment of gifts received by Individuals/Customer or HUF (Hindu Undivided Family)

Where the gift is received by an individual or an HUF, in the form of cash, without consideration, less than Rs. 50,000, then such amount is not taxable. If the cash given as gift exceeds the threshold limit of Rs.50,000, then such amount would be taxable under Income Tax Act, 1961.[2]

If an immovable property (land, building or both) is gifted for a consideration lower than stamp duty value of the immovable property by an amount exceeding Rs. 50,000, then the difference between stamp duty value and the consideration or purchase price would be taxable in the hands of the buyer. Such amount of consideration has to be paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property. If an immovable property is gifted, without consideration and stamp duty value exceeds Rs. 50,000, then the stamp duty value of such property would be taxable. In the case where the date of an agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, then the stamp duty value on the date of agreement may be taken for the abovementioned purpose.[3]

In case a movable property (such as shares and securities; jewelry; archaeological collections; drawings; paintings; sculptures; any work of art; or bullion) is gifted, without consideration and its aggregate fair market value exceeds Rs. 50,000, then the whole aggregate fair market value would be taxable. In case a movable property is gifted for a consideration less than the aggregate fair market value by more than Rs. 50,000, then the difference between the aggregate fair market value and the consideration would be taxable.[4]

Dealer/Business Associate as Corporate Gift recipient

When business organizations provide with corporate gifts such as cash gifts or vacation trips etc., for achieving specified targets or under other promotional schemes to their dealers or associates, then such incentive may be taxable in the hands of such dealers/business associates as business income.[5]

Employee as recipient of Corporate Gifts

Employees are mostly given corporate gifts on occasions like Diwali, New Years, Christmas, etc., in the form of vouchers, tokens, etc. Such gifts worth up to Rs. 5,000 in a financial year would not be taxable in the hands of the employees. But, if such gifts are worth above Rs. 5,000, then such excess value would be taxable in the hands of the employees.[6]

Shares issued as a gift received by a firm or closely related company

In case, any person gifts any property as shares of a company, not being a company in which public are substantially interested, to any firm or any other similar company not in which public are substantially interested and if such property is gifted:

• Without consideration and if the aggregate fair market value of the property exceed Rs. 50,000, then the whole aggregate fair market value would be taxable.
• With a consideration less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000, then the difference between the aggregate fair market value and the consideration would be taxable.[7]

Shares issued at premium as gift received by a firm or closely held company

In case, any resident person gifts a firm or any company, not in which public are substantially interested, any consideration for issue of shares, which exceeds the face value of such shares, the difference between the aggregate considerations received for such shares and the fair market value would be taxable.[8]

Gifts constituting Foreign Exchange

The Indian tax authorities may subject the recipient regarding the gifts, sent by the NRIs (Non-Resident of India) or PIO (Person from Indian Origin), to provide evidence for identity and financial capacity of the donor and genuineness of the gift. According to the Foreign Exchange Management Act (FEMA), 1999, there is a need for Reserve Bank of India (RBI) approval for the resident donee for holding immovable property outside India gifted by an NRI/PIO. RBI permission is also required for holding foreign movable properties such as shares, securities, etc., gifted by an NRI/PIO.[9]

When an NRI or PIO sends gifts to his/her spouse, minor children or son’s wife, then it will involve clubbing of income and wealth in the hands of the NRI/PIO. Such clubbing would apply only to the first stage of income from the original gift, whereas, the second stage of income arising from investment of the income from the original gift is not clubbed, instead, would become a separate wealth/income of the done. The clubbing of income on gifts to minor children would cease upon the children attaining 18 years of age. The income received by minor children, from any source (including income from gifts from parents) is clubbed with the income of that parent whose total chargeable income is greater.[10]

Exemptions of Gift Tax

The gift tax is exempted if any sum of money or any property is received:

• From any relative; or
• On the occasion of the marriage of the individual; or
• Under a will or by way of inheritance; or
• In contemplation of death of the payer/donor; or
• From any local authority; or
• From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or
• From any trust or institution; or
• By way of the transaction not regarded as a transfer undersection 47 of Income Tax Act, 1961.[11]

Case Study

DCIT vs. KDA Enterprises Pvt. Ltd. [ITA No. 2662/M/2013]

• The KDA Enterprises Pvt. Ltd. (“Taxpayer”) had a business of investment. There were four companies (“Donors”) which were the shareholders of The Reliance Industries Ltd. (RIL). The donors gave instructions to RIL to pay the dividend to the taxpayer. The taxpayer received the dividend from RIL as the gift from the donors. Such amount was transferred to the capital reserve account of the taxpayer’s books of accounts.
• The taxpayers and the donors had passed respective board resolutions for such gift transactions, and such transaction was also allowed by the MoA (Memorandum of Association) and AoA (Article of Association) of both the taxpayers and the donors. The gift so received was considered as non-taxable by the taxpayer as it was in the nature of capital receipt.
• The Tax Authority contested this by stating that the entire scheme was a way to evade taxes and included the amount of gift in the Taxpayer’s total income and taxed the same as “income from other sources.” Aggrieved by this, the taxpayer filed an appeal before the First Appellate Authority, which gave the order in favor of the taxpayer. Thereafter, the Tax Authority filed an appeal before the Tribunal.
• The Tribunal gave the following views:
• This transaction of the gift is valid under the Transfer of Property Act, 1882, (TPA) as there is a voluntary transfer of a movable property without consideration. Further, the provisions of the TPA allow a body corporate to transfer any property under a gift.
• The three essentials of a valid gift transaction, i.e., the delivery of the gift, the intent of the Donors to gift and the acceptance by the donee were duly satisfied in this case.
• A body corporate is competent to make and receive gifts, wherein, natural love and affection are not necessary requirements. The only requirement for a company to make gifts is to have the requisite authorization in the MoA and AoA, which was satisfied in this case. The provisions of the Income Tax Act, the TPA, and the repealed Gift Tax Act, do recognize the possibility of the gift transaction between corporate entities.
• A receipt would be taxable under the Income Tax Act, only if it is like “income” or otherwise provided in the Act. Any other receipt that is not like income is not taxable under the Income Tax Act.
• A gift transaction is not like salary or income. The Taxpayer is also not engaged in the business of receiving gifts from corporate bodies, to consider such gift transaction as income from the business. The gift has no relation to a capital asset for considering it to be a capital gain for the Taxpayer.
• Though, there is a provision for taxing gifts received by a body corporate; the provision is restricted to receipt of shares of an unlisted company without or with inadequate consideration. It does not cover the capital receipt nature.
• The provisions of the Income Tax Act for taxing unexplained cash credits are applicable only where a taxpayer either provides with no explanation or its explanation is unsatisfactory as to the identity, capacity of the donors and the genuineness of the transaction. In this case, there was no doubt on the identity, capacity of the Donors or the source of dividends. The gift transaction, in this case, was backed by the board resolutions of the taxpayer and the donors, affidavits for making/receipt of gifts and authorization by the respective MoA and AoA of the parties to the transaction.
• There was no common shareholding between the taxpayer and the donors, and therefore, provisions to tax the receipt as deemed dividend cannot be invoked.
• While considering the provisions of Minimum Alternate Tax (MAT), the Tribunal cited a Supreme Court decision that the Tax Authority has to accept the authenticity of the books of account of a company, prepared as per the provisions of the Companies Act, scrutinized and certified by the statutory auditors, approved by the shareholders and filed with the Registrar of Companies. The Tax Authority has limited power to make adjustments to the book profit so computed.[12]
• In this case, the gift received, was not credited to the Profit & Loss account and therefore, no adjustment was required while determining book profits for the purpose of MAT computation. The books of account of the taxpayer were inconsistent with the provisions of the Companies Act; the amount received as gifts cannot be added to the book profits computed for the purpose of MAT.

Footnotes:

[1] Jitendra P.S. Solanki, “Gift Tax – Who Pays and Who is Exempted?”, 25^th April 2014; available at: http://www.yourpocketmoney.com/2014/04/gifts-tax-pay-exempted.html

[2] Section 56 (2) (vii) (a) of the Income Tax Act, 1961

[3] Section 56(2) (vii) (b) of the Income Tax Act, 1961

[4] Section 56(2)(vii)(c) of the Income Tax Act, 1961

[5] Mr. K.H. Vishwanathan, “Corporate Gifts – Beware of Tax Implications,” 20^th November 2012; available at: http://taxguru.in/income-tax/corporate-gifts-beware-tax-implications.html

[6] Supra note 5

[7] Section 56(2)(viia) of the Income Tax Act, 1961

[8] Section 56(2)(viib) of the Income Tax Act, 1961

[9] Infra note 11

[10] Public Private Partnership of Ministry of Overseas Indian Affairs and Confederation of Indian Industry, “Guide Book for Overseas Indians on Taxation and Other Important Matters,” pg. 20; available at: https://www.mea.gov.in/images/pdf/OIFCPublication2009GuidebookonTaxationforOI.pdf

[11] Proviso to Section 56(2) (vii) of the Income Tax Act, 1961

[12] Apollo Tyres Ltd v. CIT [2002] 255 ITR 273 (SC)