Thursday, September 27, 2012


By K P C Rao,
Practicing Company Secretary

As a part of the Finance Bill, 2012, the Finance Minister has proposed to introduce the requirement of a Tax Residency Certificate into the tax provisions making it mandatory for every non-resident to obtain a certificate from the Government of the country in which such person is a resident for evidencing such person's residency in that country. This is one such amendment that was adopted out of the proposals in the Direct Taxes Code Bill. The Finance Bill proposes that the benefits contained in the Double Taxation Avoidance Agreements (DTAAs) signed between India and the respective countries would be denied to a person if a tax residency certificate, containing such particulars as may be prescribed, is not obtained from the Government of the respective country.

Now the government has mandated that from April 1, 2013, that all foreign investors desirous of claiming benefits under the Double Taxation Avoidance Agreements (DTAAs) will have to produce Tax Residency Certificates (TRC) of their base country in which they are located, by amending Section 90 and Section 90A of the Income Tax Act dealing with taxation of foreign investment and tax benefits under DTAAs. Under Section 90 (4) of the Act, as amended by the Finance Act, 2013, it is provided that an assessee, not being a resident, to whom an agreement referred to in sub-section (1) of Section 90 applies, shall not be entitled to claim any relief under a DTAA unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country or specified territory outside India is obtained by him from the government of that country or specified territory.

A similar provision has been inserted in sub-Section (4) of Section 90A of the Act and pursuant thereto, the CBDT notification[1] seeks to insert Rule 21BA and Forms 10FA and 10FB specifying the manner in which the TRC should be obtained. Accordingly, the TRC to be obtained by an assessee for availing of tax benefits shall contain the name of the assessee along with status; whether he/it is an individual or a company; the nationality (in case of individual) and the country wherein the company or firm is registered or incorporated. The TRC should also have the Tax Identification Number (TIN) of the assessee, its residential status for the purposes of tax, the period for which the TRC is applicable and the address of the assessee for that period. Further, the certificate shall be duly verified by the government of the country or the specified territory of which the assessee claims to be a resident for the purposes of tax.

India has so far signed DTAAs with 84 countries. Based on the various DTAAs that India has entered into, the assessee can take the advantage of paying capital gains tax in either of the two nations, wherever the rate of the levy is lower. Thus, the interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting countries to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law.

It is significant to note that in the year 2000 though the extant provisions do not contain any specific requirement for obtaining a Tax Residency Certificate ('TRC') in order to claim benefits under the DTAA,  the CBDT has issued  a Circular in the context of claiming benefits under the DTAA between India and Mauritius  which clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA. Thereafter, the Supreme Court in the year 2003 in its landmark judgment in the case of Azadi Bachao Andolan[2] confirmed the validity of this Circular, holding that the TRC issued by the Mauritian tax Authorities should constitute sufficient evidence for accepting the status of residence for applying the provisions of the India-Mauritius DTAA.

As per the notification issued to this effect by the CBDT, these amendments to the Income Tax Act, 1961, will take effect from April 1, 2013, and apply in relation to assessment year 2013-14 and subsequent years. Let us hope that the proposed changes will not pose any procedural challenges in claiming relief under the DTAAs.


[1] Notification No.39/ F.No.142 /13/2012–SO (TPL)] of CBDT regarding Format of “Certificate of Tax Residency” for DTAA dated 17th Sep, 2012. [To be Published in the Gazette of India Extraordinary, Part II, Section 3, Sub-Section (ii)]
[2] Union of India v. Azadi Bachao Andolan; [2003] 263 ITR 706 (SC)

Sunday, September 23, 2012


By K P C Rao,


Generation of black money and its stashing abroad in tax havens and offshore financial centers’ have dominated discussions and debate in public Fora during the last two years. Members of Parliament, the Supreme Court of India and the public at large have unequivocally expressed concern on the issue, particularly after some reports suggested estimates of such unaccounted wealth being held abroad.

Two issues have been highlighted in this debate. First, several estimates have been floated, often without adequate factual basis on the magnitude of black money generated in the country and the unaccounted wealth stashed aboard. Secondly, a perception has been created that the Government’s response to address this issue has been piecemeal and inadequate. Thereafter, the then Finance Minister Mr. Pranab Mukherjee has presented a ‘White Paper on Black Money’ to the Indian parliament on 16th may, 2012.

This Paper highlights the different facets of black money and its complex relationship with policy and administrative regime in the country. It also reflects upon the policy options and strategies that the Government has been pursuing in the context of recent initiatives, or need to take up in the near future, to address the issue of black money and corruption in public life.

According to this paper:  Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner. This could be for two possible reasons. The first is that the money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption, all of which are punishable under the legal framework of the state. The second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to pay the dues to the public exchequer in one form or other. In this case, the activities undertaken by the perpetrator could be legitimate and otherwise permissible under the law of the land but s/he has failed to report the income so generated, comply with the tax requirements, or pay the dues to the public exchequer, leading to the generation of this wealth.”

A comparison of the two ways in which black money is generated is fundamental to understanding the problem and devising the appropriate policy mix with which it can be controlled and prevented by the public authorities. At the very outset, it becomes clear that the first category is one where a strongly intolerant attitude with adequate participation of all state arms can produce results. Therefore, as accountants it is important for us to understand the intricacies of the transactions in the second category where the issue becomes far more complex and may require modifying, reforming, and redesigning major policies to promote compliance with laws, regulations, and taxes and deter the active economic agents of society from generating, hoarding, and illicitly transferring abroad such unaccounted wealth.


There can be two different ‘modus operandi, involved in the generation of black money. The first is the crude approach of not declaring or reporting the whole of the income or the activities leading to it. This is the likely approach in all cases of criminal, illegal, and impermissible activities. The sophistications in such an approach mostly get introduced subsequently for the purpose of laundering the money so generated with the objective of making it accountable and converting it into legitimate reported wealth that can be openly possessed and used.

The same approach of not declaring or reporting activities and the income generated there from may also be followed in cases of failure to comply with regulatory obligations or tax evasion on income from legitimate activities. However, complete evasion or non-compliance may make such incomes vulnerable to detection by authorities and lead to consequent adverse outcomes for the generator. Thus a more sophisticated approach for generation of this kind of black money is often preferred, involving manipulation of financial records and accounting.

The best way of classifying and understanding the various ways and means adopted by taxpayers for the generation of black money would be the financial statement approach, elaborating different means by which the accounts prepared for reporting and presenting before the authorities are manipulated to misrepresent and under disclose income, thereby generating unaccounted, undeclared, and unreported income that amounts to black money.


Some of these manipulations are explained below:

(a)  Out of Book Transactions

This is one of the simplest and most widely adopted methods of tax evasion and generation of black money. Transactions that may result in taxation of receipts or income are not entered in the books of account by the taxpayer. The taxpayer either does not maintain books of account or maintains two sets or records partial receipts only. This mode is generally prevalent among the small grocery shops, unskilled or semi-skilled service providers, etc.

(b)  Parallel Books of Accounts

This is a practice usually adopted by those who are obliged under the law or due to business needs to maintain books of account. In order to evade reporting activities or the income generated from them, they may resort to maintaining two sets of books of account – one for their own consumption with the objective of managing their business and the other one for the regulatory and tax authorities such as the Income Tax Department, Sales Tax Department, and Excise and Customs Department. The second set of books of account, which is maintained for the purpose of satisfying the legal and regulatory obligations of reporting to different authorities, may be manipulated by omitting receipts or falsely inflating expenses, for the purpose of evading taxes or other regulatory requirements.

(c)  Manipulation of Books of Account

When books of accounts are required to be maintained by taxpayers under different laws, like the Companies Act 1956, the Banking Regulation Act, and the Income Tax Act, it may become difficult for these taxpayers to indulge in out of books transactions or to maintain parallel books of accounts. Such parties may resort to manipulation of the books of accounts to evade taxes.

(d)  Manipulation of Sales/Receipts

A taxpayer is required to pay taxes on profit or income which is the difference between sale proceeds or receipts and expenditure. Thus manipulation of sales or receipts is the easiest method of tax evasion. Other innovative means may include diversion of sales to associated enterprises, which may become more important if such enterprises are located in different tax jurisdictions and thereby may also give rise to issues related to international taxation and transfer pricing.

In case of use of a dummy / associated entity, there can be a plethora of possible arrangements entered into by such entities to aid generation of black money. In its simplest form, the associate entity may not report its activities or income at all. The main entity may show sales to such a dummy / associate entity at a lower price, thereby reducing its reported profits.

More complex scenarios can emerge if the dummy/ associated entity is situated in a low tax jurisdiction having very low tax rates. Thus the profit of the Indian entity will be transferred to the low tax jurisdiction and money will be accumulated by the taxpayer in the books of accounts of the entity in the low tax jurisdiction.

(e)  Under-reporting of Production

Manipulation of production figure is another means of artificially reducing tax liability. It may be resorted to for the purpose of evading central excise, sales tax, or income tax.

(f)   Manipulation of Expenses

Since the income on which taxes are payable is arrived at after deducting the expenses of the business from the receipts, manipulation of expenses is a commonly adopted method of tax evasion. The expenses may be manipulated under different heads and result in under-reporting of income.

It may involve inflation of expenses, sometimes by obtaining bogus or inflated invoices from the so called ‘bill masters’, who make bogus vouchers and charge nominal commission for this facility.

Any number of more sophisticated versions of manipulation of expenses can also be resorted to by those intending to generate black money. Sometimes it can also involve ‘hawala’ operators, who operate shell entities in the form of proprietorship firms, partnership firms, companies, and trusts. These operators may accept cheques for payments claimed as expense and return cash after charging some commission.

There have been instances of claims of bogus expenses to foreign entities. The payments can be shown to foreign entities in the form of advertisement and marketing expenses or commission for purchases or sales. The funds may be remitted to the account of the foreign taxpayer and the money can either be withdrawn in cash or remitted back to India in the form of non-taxable receipts. Such money may also be accumulated in the form of unaccounted assets of the Indian taxpayer abroad.

(g)  Other Manipulations of Accounts

Besides inflation of purchase / raw material cost, expenses like labour charges, entertainment expenses, and commission can be inflated or falsely booked to reduce profits. In these cases, bogus bills may be prepared to show inflated expenses in the books.

(h)  Manipulation by Way of International Transactions through Associate Enterprises

Another way of manipulating accounted profits and taxes payable thereon may involve using associated enterprises in low tax jurisdictions through which goods or other material may be passed on to the concern. Inter corporate transactions between these associate enterprises belonging to the same group or owned and controlled by the same set of parties may be arranged and manipulated in a way that leads to evasion of taxes. This can often be achieved by arrangements that shift taxable income to the low tax jurisdictions or tax havens, and may lead to accumulation of black money earned from within India to another country.

(i)    Manipulation of Capital

The statement of affairs or balance sheet of the taxpayer contains details of assets, liabilities, and capital. The capital of the taxpayer is the accumulated wealth which is invested in the form of assets or as working capital of the business. Manipulation of capital can be one of the ways of laundering and introduction of black money in books of accounts.

(j)    Manipulation of Closing Stock

 Suppression of closing stock both in terms of quality and value is one of the most common methods of understating profit. More sophisticated versions of such practice may include omission of goods in transit paid for and debited to purchases, or omission of goods sent to the customer for approval. A more common approach is undervaluation of inventory (stock of unsold goods), which means that while the expenses are being accounted for in the books, the value being added is not accounted for, thereby artificially reducing the profits.

(k)  Manipulation of Capital Expenses

Over-invoicing plant and equipment or any capital asset is an approach adopted to claim higher depreciation and thereby reduce the profit of the business. As already stated, increase in capital can also be a means of enabling the businessman to borrow more funds from banks or raise capital from the market. It has been seen that such measures are sometimes resorted to at the time of bringing out a capital issue. At the same time, under-invoiced investments, indicating entry of undeclared wealth, may imply introduction of black money.

(l)   Generation of Black money in Some Vulnerable Sections of the Economy

While the source of generation of black money may lie in any sphere of economic activity, there are certain sectors of the economy or activities, which are more vulnerable to this menace. These include real estate, the bullion and jewellery market, financial markets, public procurement, non-profit organizations, external trade, international transactions involving tax havens, and the informal service sector.

(m)            Land and Real Estate Transactions

Due to rising prices of real estate, the tax incidence applicable on real estate transactions in the form of stamp duty and capital gains tax can create incentives for tax evasion through under-reporting of transaction price. This can lead to both generation and investment of black money. The buyer has the option of investing his black money by paying cash in addition to the documented sale consideration. This also leads to generation of black money in the hands of the recipient. A more sophisticated form occasionally resorted to consists of cash for the purchase of transferable development rights (TDR)[1].

(n)  Bullion and Jewellery Transactions

 Cash sales in the gold and jewellery trade are quite common and serve two purposes. The purchase allows the buyer the option of converting black money into gold and bullion, while it gives the trader the option of keeping his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price.

(o)  Financial Market Transactions

 Financial market transactions can involve black money in different forms. Initial public offers (IPOs) offering equity shares to the public at large are also vulnerable to various manipulations that can generate black money for the promoters or operators. Rigging of markets by the market operators is one such means. This may involve use of shell companies and more sophisticated versions of such manipulation may involve offshore companies or investors in foreign tax jurisdictions who invest in shares offered by the IPO and through manipulated trading escalate their price artificially, only to offload them later at the cost of ordinary investors.

(p)  Public Procurement

Public procurement has grown phenomenally over the years – in volume, scale, and variety as well as complexity. It often includes sophisticated and hi-tech items, complex works, and a wide range of services. An OECD (Organisation for Economic Cooperation and Development) estimate puts the figure for public procurement in India at 30 per cent of the GDP whereas a WTO (World Trade Organisation) estimate puts this figure at 20 per cent of the GDP[2]. The Competition Commission of India had estimated in a paper that the annual public sector procurement in India would be of the order of Rs. 8 lakh crore while a rough estimation of direct government procurement is between Rs. 2.5 and 3 lakh crore. This puts the total public procurement figure for India at around Rs. 10 to 11 lakh crore per year.[3]
(q)  Non-profit Sector

Taxation laws allow certain privileges and incentives for promoting charitable activities. Misuse of such benefits and manipulations through entities claimed to be constituted for nonprofit motive are among possible sources of generation of black money. Such misuse has also been highlighted by the Financial Action Task Force (FATF), an intergovernmental body which develops and promotes policies to protect the global financial system against money laundering and financing of terrorism.

A Non-profit Organisation (NPO) Sector Assessment Committee constituted under the Ministry of Finance has reviewed the existing control and legal mechanisms for the NPO sector and suggested various measures for improvement.

(r)   Informal Sector and Cash Economy

The issue of black money is related to the magnitude of cash transactions in the informal economy. The demand for currency is determined by a number of factors such as income, price levels, and opportunity cost of holding currency. Factors like dependence on agriculture, existence of a large informal sector, and insufficient banking infrastructure with large un-banked and under-banked areas contribute to the large cash economy in India.

(s)   External trade and Transfer Pricing

More than 60 per cent[4] of global trade is carried out between associated enterprises of multinational enterprises (MNEs). Since allocation of costs and overheads and fixing of price of product/services are highly subjective, MNEs enjoy considerable discretion in allocating costs and prices to particular products/services and geographical jurisdictions. Such discretion enables them to transfer profit/income to no tax or low tax jurisdictions. Differing tax rates in different tax jurisdictions can create perverse incentives for corporations to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates as a means of minimising their tax liability. For example, a foreign parent company could use internal ‘transfer prices’ for overstating the value of goods and services that it exports to its foreign affiliate in order to shift taxable income from the operations of the affiliate in a high tax jurisdiction to its operations in a low-tax jurisdiction. Similarly, the foreign affiliate might understate the value of goods and services that it exports to the parent company in order to shift taxable income from its high tax jurisdiction to the low tax jurisdiction of its parent. Both of these strategies would shift the company’s profits to the low tax jurisdiction and, in so doing; reduce its worldwide tax payments. In this context transfer pricing has emerged as the biggest tool for generation and transfer of black money. In recent years, after the 9/11 incident in the USA due to intense scrutiny of banking transactions, enhanced security checks at airports and ports, and relaxation of exchange controls, transfer of money through hawala has reduced significantly but now transfer pricing is now being extensively used to transfer income/profit and avoid taxes at will across countries. Also, with the relaxation of exchange controls and liberalisation of banking channels, the popularity of the hawala system for legitimate transfers has reduced substantially. The increasing pressure on financial operators and banks to report cash transactions has also helped in curbing hawala transactions. Tax evasion through transfer pricing is largely invisible to the public and difficult and expensive for tax officers to detect. Christianaid5 estimates that developing countries may be losing over US$160billion of tax revenues a year, primarily through transfer pricing strategies.

The illicit money transferred outside India may come back to India through various methods such as hawala, mispricing, foreign direct investment (FDI) through beneficial tax jurisdictions, raising of capital by Indian companies through global depository receipts (GDRs), and investment in Indian stock markets through participatory notes. It is possible that a large amount of money transferred outside India might actually have returned through these means.

       I.            ROLE OF THE CMAs

Corruption and fraud are generally interlinked. In fact corruption is a special type of fraud and treated as such in many jurisdictions. Fraud and Corruption both pose serious challenges to audit, as they seek to mislead and distort the true state of financial and non-financial affairs of the entity. Fraud awareness or recognition amongst the CMAs is necessary to play a vigilant role in containing frauds by ensuing correction of system deficiencies and building up effective system controls and checks in the audited entities.

Fraud is most likely to involve deliberate misrepresentation of information that is recorded and summarized by an entity; its impact can be compared to an accounting error and would involve issues such as measurement, occurrence, and disclosure. Fraud poses a serious problem from an audit perspective because it is normally accompanied by efforts to cover/ falsify/ misdirect the entity records and reporting. Thus, fraud can directly affect the financial statements and records of the audited entity.

Any transaction entered into by the taxpayer must be reported in books of account which are summarized at the end of the year in the form of financial statements. The financial statements basically comprise statement of income and expenditure which is called by different names such as ‘Profit and Loss Account’ or ‘Income and Expenditure Account’ and statement of assets and liabilities which is called ‘Balance Sheet’ or ‘Statement of Affairs’. Tax evasion involves misreporting or non-reporting of the transactions in the books of account.  Therefore, it is important for the CMAs to understand the different kinds of manipulations of financial statements resulting in tax evasion and the generation of black money. Hence, the CMAs should remain alert, vigilant and develop a nose to smell these manipulations in the Accounts. It is also desirable to introduce such an orientation to the Audit.

Therefore, examination of system for detection and prevention of fraud and corruption will be an integral part of all regularity audits and also of performance audits. At the commencement of each audit, information about the fraud and corruption awareness, detection and prevention policy and related environment should be collected from the audited entity management. During the course of audit work, the audit teams / officers should be vigilant and seek explanations.

Though corruption is clandestine and takes place outside the books, it is likely to leave tell-tale marks here and there. Even from well-maintained books, a whiff of corruption may rise. Audit can remain alert to such indirect indications and develop a nose to the smell of corruption and therefore, it is desirable for the CMAs to introduce such an orientation to the Audit.

A comprehensive analysis of the factors leading to generation of black money in India along with the various measures attempted to counter it till date makes it apparent that there is no single panacea that can rid society of this menace. At the same time, it is not impossible to curb, control, and finally prevent the generation of black money in future as well as repatriation of black money, if a comprehensive mix of well defined strategies is pursued with patience and perseverance by the central and state governments and put into practice by all their agencies in a coordinated manner. All stakeholders who are likely to benefit from prevention and control of black money generation will welcome and support the important initiative of curbing the black money and provide needed inputs. Let us play our role as CMAs in addressing this gigantic task!

[Published in the Monthly journal 'CIRCUIT' of the Hyderabad Chapter of the ICAI during October & November, 2012]

Source: White Paper on Black Money dated 16th May, 2012 of Ministry of Finance, Department of Revenue, CBDT.

[1] TDRs are rights for construction beyond the usual limits, which can be transferred by the owner. These rights can be made available in lieu of area or land surrendered by the owner.

[2] Report of the Committee on Public Procurement, 6 June 2011( Para 1.5)
[3] ibid
[4]Christianaid, Death and Taxes: The Truth of Tax Dodging, March 2009.



By K P C Rao., LLB.,  FCMA., FCS
Practicing Company Secretary

Gift tax in India is regulated by the Gift Tax Act, 1956 which was constituted on April 1, 1958. It came into effect in all parts of the country except Jammu and Kashmir.  Under this Act gifts by taxpayers to their close relatives and others were brought under the tax net for the first time in India at the instance of Nicolas Kaldor who gave to India its “integrated system of taxation” where he recommended wealth tax, expenditure tax and gift tax to make a more complete picture with the then prevailing income tax on incomes and estate duty on estate passing on death.

This levy on gifts was recommended as a measure of plugging a loophole by gifts by wealthy persons just prior to death thereby escaping estate tax which could only be levied on wealth passing on death of that person.  Estate duty was abolished in 1985 and ordinarily gift tax should have also been abolished around the same time. However, the government found several positive benefits of retaining gift tax as a source of revenue. Needless to state, the levy of gift tax was always on the donor of gifts and the tax was linked to the value of the gift.

With effect from October 1, 1998, this donor-based gift tax was abolished and it was proposed to substitute it by donee-based gift tax. However, for several reasons including serious anomalies in the done-based gift tax, gift tax on the donee was not made into law. However, Budget 2004 has brought back the donee-based tax on gifts through the backdoor by treating certain gifts as income of the recipient donee and recovering income tax on such amounts of gifts received. Thus we now have income tax on the sum of money received after September 1, 2004 as gifts from non-relatives.

 Accordingly, gifts from non-relatives are included as income under section 56(2)(v) of the Act with effect from September 1, 2004. The basic exemption initially was Rs 25,000. However, gifts from relatives are exempt without any limit. The purpose of the provision is to tax primarily gifts from non-relatives including from friends from abroad. This basic exemption of Rs 25,000 received as gift from non-relatives was raised to Rs 50,000 with effect from April 1, 2006.

The Income Tax Office is empowered to collect the assessed tax, directly from the donee but the amount will be what the donor would have paid on the clubbed income. However, the Income Tax Office is required to serve on the donee a notice of demand.


As per Section 2 (xii) of the Gift-Tax Act, 1958, ‘Gift’ means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and includes the transfer or conversion of any property referred to in section 4 of Gift Tax Act, 1956, deemed to be a gift under that section. According to Explanation given under this section a transfer of any building or part thereof referred to in clause (iii), clause (iiia) or clause (iiib) of section 27 of the Income-tax Act by the person who is deemed under the said clause to be the owner thereof made voluntarily and without consideration in money or money’s worth, shall be deemed to be a gift made by such person.

(a)  What about the gifts received between 01.04.2006 to 30.09.2009?

Where any sum of money, the aggregate value of which exceeds Rs.  50,000 is received without consideration by individual/HUF, the whole of aggregate value is taxable as income from other sources.
Provided that this clause shall not apply to any sum of money received;
(a)  from any relative; or
(b)  on the occasion of marriage of the individual; or
(c)  under a will or by way of inheritance; or
(d)  in contemplation of death of the payer.

(b)  What about the gifts received on or after 01.10.2009?

With effect from 1.10.2009, new clause [Sec. 56(2)(vii)] is introduced for charging of Gifts received by individual/HUF. Earlier, only gifts received in the sum of money was chargeable under Income Tax Act. However w.e.f. 01.10.2009 gift received in kind is also chargeable subject to certain conditions. The new provisions are described as under:
I.       If any sum of money received without consideration, the aggregate of which exceeds Rs.  50,000, the whole of such sum will be chargeable.
II.    If any immovable property received –
(a)  without consideration, the stamp duty value of which exceeds Rs. 50,000, the stamp duty value of such property will be chargeable.
(b)  For a consideration, which is less than stamp duty value of property by an amount exceeding Rs.  50,000, the stamp duty value of such property as exceeds such consideration will be chargeable.
III.If any property other than immovable property received –
(a)  without consideration, the aggregate fair market value (FMV) of which exceeds Rs. 50,000, the whole of aggregate FMV of such property will be chargeable.
(b)  For a consideration, which is less than the aggregate FMV by an amount exceeding Rs.  50,000, the aggregate FMV as exceeds such consideration will be chargeable.
However any such gifts received from relatives shall not be treated as income.

(c)  What is the Meaning of a Relative?

Explanation to Sec. 56(2) (vi) provides that the expression "relative" means:
(1)        Spouse of the individual;
(2)        Brother or sister of the individual;
(3)        Brother or sister of the spouse of the individual;
(4)        Brother or sister of either of the parents of the individual;
(5)        Any lineal ascendant or descendant of an individual;
(6)        Any lineal ascendant/descendant of spouse of the individual

Meaning of the expression ‘Relative’ in terms of the explanation given under Section 56(2) (vi) of the I.T Act can be better explained with the following diagram:

Surprisingly, and for no particular reason, this definition differs from the definition as contained in Securities Contracts (Regulation) Act, 1956 and also in the Companies Act, 1956. Take the instance of Miss X whose mother's brother is Mr. Y. Yes, Y is a relative of X (Mother's brother) but X is not a relative of Y (Sister's daughter). One may presume if X is a relative of Y, the Y is also a relative of X. Surprisingly it is not under Sec. 56(2) (vi)!

Significantly, the clubbing provisions in the Income Tax Act 1961 and Wealth Tax Act, 1957 are not deleted. Therefore, income and wealth from assets transferred directly or indirectly without adequate consideration to minor children, the spouse (otherwise than in connection with an agreement to live apart) or daughter-in-law will continue to be deemed income and wealth of the transferor. Same is the case when assets are held by a person or an Association of Persons for benefit of assesses, the spouse, daughter-in-law and minor children. Therefore, now the gift received during the previous year shall be included in the income if the aggregate of the gifts received exceeds Rs.  50,000.

(a)  Whether all the Gifts from Relatives are Tax-Exempt?

Any gift received from relatives of any amount during financial year is completely exempt from tax.  Hence, Gift of more than Rs. 50,000/- can be received from below mentioned relatives without any taxes.
(1)  Exemption for Marriage Gifts
Any gift received from any person on occasion of marriage of the gift's recipient will not be liable to income tax at all. Also there is no monetary limit attached to this exemption, which is provided by Section 56(2) (vi).
(2)  Tax-Exempt Gifts from other Persons
Besides gifts received from relatives or on occasion of marriage, following are the other gifts which are completely tax-exempt as provided in Section 56(2) (vi) of the I.T. Act:
1)    Gift received from a Will or by way of inheritance;
2)     Gift received in contemplation of death of the donor;
3)     Gift from a local authority;
4)     Gift received from any fund, foundation, university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
5)     Gift received from any trust/institution, which is registered as public charitable trust or institution u/s 12AA.
(3)  Gifts in Kind are Tax-Exempt
Provisions relating to the taxation of gifts from non-relatives & non-specified persons in excess of Rs. 50,000 will be liable to income tax only when the gift is sum of money, by way of cash, cheque or a bank draft. Gifts in kind like a gift of shares, gift of land, gift of house, gift of units or even mutual funds, jewellery, etc. shall not be liable to any income tax at all.


(a)  Under the Income-tax Act, 1961

Under the Income-tax Act, 1961, an assessee is generally taxed in respect of his own income. However, there are certain cases where as assessee has to pay tax in respect of income of another person. The provisions for the same are contained in sections 60 to 65 of the Act. These provisions have been enacted to counteract the tendency on the part of the tax-payers to dispose of their property or transfer their income in such a way that their tax liability can be avoided or reduced.

In the case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.

Sections 60 to 65 of the Act deal the following situations:
a)     Transfer of income without transfer of asset [Section 60]
b)  Income arising from revocable transfer of assets [Section 61]
c)     Exceptions where clubbing provisions are not attracted even in case of revocable transfer [Section 62]
d)     Clubbing of income arising to spouse [Section 64(1)(ii)]
e)     Transfer of assets for the benefit of spouse [Section 64(1)(vii)]
f)      Income arising to son’s wife from the assets transferred without adequate consideration by the father-in-law or mother-in-law [Section 64(1)(vi)]
g)   Transfer of assets for the benefit of son’s wife [Section 64(1)(viii)]
h)   Clubbing of minor’s income [Section 64(1A)]
i)      Cross Transfers
j)       Conversion of self-acquired property into the property of a Hindu Undivided Family [Section 64(2)]

The main distinction between the two sections is that section 61 applies only to a revocable transfer made by any person while section 64 applies to revocable as well as irrevocable transfers made only by individuals.

It is significant to note that as per the Explanation 2 to section 64, ‘income’ would include ‘loss’. Accordingly, where the specified income to be included in the total income of the individual is a loss, such loss will be taken into account while computing the total income of the individual. This Explanation is also equally applies to clubbing provisions under both sections 64(1) and 64(2).

Sections 61 to 64 provide for clubbing of income of one person in the hands of the other in circumstances specified therein. However, service of notice of demand (in respect of tax on such income) may be made upon the person to whom such asset is transferred (i.e. the transferee). In such a case, the transferee is liable to pay that portion of tax levied on the transferor which is attributable to the income so clubbed.

(b)  Under Wealth Tax Act, 1957

According to Section 4 of the Wealth Tax Act, 1957, the following transfers shall be included in the net-wealth of an assessee:
<(1) Assets transferred to spouse [Section 4(1)(a)(i)]
(2) Assets held by minor child [Section 4(1)(a)(ii)]
(3) Assets transferred to a person or association of persons [Section 4(1)(a)(iii)]
(4)  Assets transferred under revocable transfers [Section 4(1)(a)(iv)]
(5) Assets transferred by an individual to son’s wife or son’s minor child including step child and adopted child [Section 4(1)(a)(v)]
(6)  Assets transferred by an individual for the benefits of son’s wife [Section 4(1)(a)(vi)]
(7)  Interest in the assets of the firm, etc. [Section 4(1)(b)]

(c)  Gift under a Will or in contemplation of Death

Gifts under a will or in contemplation of death do not attract stamp duty. According to section 191 of the Indian Succession Act (ISA), Gifts can be made in contemplation of death by a person who is ill and expects to die shortly delivers to another the possession of any movable property (Not immovable) as a gift in case he dies. Such a gift may be revoked by the donor if he recovers from the illness.

(d)  Gifting Minors & Realty

Even gifts received by minors will be brought within the purview of taxes by means of clubbing of income, in case of both parents having taxable income; it will be clubbed with the parent who is earning the highest.

Real estate deals done for values lower than the rates fixed by state governments / local bodies will also be taxed. Here, the tax will be levied on the difference of amount between state government's rate and purchase price. The tax needs to be paid by the buyer of the property.


ü  The main advantage of gifts accrues from the fact that in the case of spouse or daughter-in-law, income on income is not clubbed. If the spouse has no other income, no tax is payable unless the interest on interest crosses the minimum threshold of Rs. . 50,000. In other words, instead of investing in your own name, and pay tax thereon, it is better to give a gift, pay tax on the original corpus gifted and keep on building a corpus for your spouse. Yes, it is cumbersome to keep track of what is clubbable and what is not, but may be worth the effort.
ü  Unfortunately, this strategy cannot be used in case of minors since their entire income, including interest on interest, is clubbed in the hands of the parent having higher income than that of the other. There is a small solace in the form of exemption of Rs. 1,500 per child on income earned by the child. More the number of children better is the advantage. Forget family planning!
ü  Notwithstanding all this, it is necessary to ensure that if you have any minor children, you earn an income of at least Rs. 1,500 for each of them. Income up to that level is free from income tax.
ü  Are you (or your son) intending to get married in a near future? A good idea is to give a fiancée a handsome gift before the marriage. Even the first stage interest will not be taxed in your hands.
ü  Suppose you do not have enough funds to invest the maximum amount necessary to bring down your taxes in avenues covered by section 88 and also takes advantage of the freedom from the tax. You can contribute up to Rs.  99,000 every year to a PPF account in the name of the child, major or minor and only `Rs.  1,000 to your own account. It is treated as gift but the associated clubbing provision is rendered toothless, since the interest on PPF is tax-free.
ü  You may gift your wife (or daughter-in-law) shares of companies, which are announced bonuses. The capital gains on bonus escape clubbing whereas the loss on original holding arising out of the bon

ü Husbands may give gifts, out of natural love and affection, to someone else’s wife and vice versa. Utmost care is taken to ensure that husband of the donee does not give a gift to donor’s wife. A different wife is selected every year for the favours. Such cross gifts are not permitted by the Act. The Supreme Court, in case of CIT v. Keshavji Morarji [1967] 66 ITR 142, observed that if two transactions are inter-connected and are parts of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade tax, the implication of clubbing provisions would be attracted.

ü In a far-reaching judgment, the Delhi High Court in the case of R. Dalmis v CIT (1982) 133ITR149 held that savings made by the wife out of house hold expenses given by her husband would be separate property of the wife. Any income arising there-from cannot be aggregated with the income of the husband.

ü It has now become possible to keep the title of the money to yourself, earn income through long-term capital gain and yet avoid tax by using section 54EC or 54ED. Another method is to use equity-based schemes of mutual funds, which are tax efficient.

ü Finally, and this would surprise you most, the best method of avoiding clubbing is not to give a gift at all!us is welcome for the clubbing. Even the dividend is charged on tax, if it is taxable, in her hand and not his.

ü  Some persons carefully choose cumulative schemes like the 3-year Cumulative-FDs for a child of over 15 years of age, 6 year NSC-VIII for over 12 years, etc. They are under the mistaken notion that the cumulative interest received after the child becomes major will escape clubbing. Interest on these schemes, though paid at the end of their term, accrues on yearly basis and is brought under the ambit of income tax by section 5 of Income Tax Act.
ü  There are couples that have taken a divorce just to bypass the clubbing provision and are staying happily together.


The Gift Tax has had a bit of a roller-coaster ride in India, with a brief period when it was abolished and then it getting renewed in a new avatar.  It was found that many individuals used the loopholes in the Gift Tax Act, to launder money.  The key reason for bringing back Gift Tax in its latest avatar is to plug loopholes and make norms more stringent. It is clear that exchanging assets amongst relatives to evade taxes have come under control and this has also ensured that the Income tax authorities can keep tab on the movement of assets (movable / immovable). It is also hoped that the new rule will effectively prevents money laundering in the guise of high value gifts.

The new rule related to gifts says that the receiver has to pay tax for receiving any gift valued at ` 50,000 and more. The term 'any gift' means that not only cash but all gifts of any value. The phrase 'received without consideration' is too much generic in nature and therefore, it is litigations-oriented. Whether sum received by way of interest-free loan will fall into this category or not is a question mark.

Deletion of Gift Tax Act has opened floodgates for litigation. Determining whether a transaction is a genuine gift or not, would be at the discretion of the Income Tax Office. Obviously ‘donor-donee’ relationship, financial ability of the donor, justification for giving the gift, etc., have suddenly become paramount parameters. These are essentially subjective in nature. Abolishing gift tax is an excellent idea but not before the infrastructure handling our premier tax legislation as well as the judiciary system is in its right place. The very fact that the cases handled under The Prevention of Money Laundering Act 2002 (PMLA) supports the view that the effective enforcement machinery is not in place. The PMLA came into force with effect from 1 July 2005. The Directorate of Enforcement has so far (up to 16/05/2012) registered only 1437 cases for investigation under the PMLA. During investigation, 22 persons were arrested and 131 provisional attachment orders issued in respect of properties valued at ` 1,214 crore. The Directorate has filed only 38 Prosecution Complaints in PMLA-designated courts for the offence of money laundering. Therefore, the infrastructure in handling these cases should be strong enough so that it would be difficult for anybody to get away with any tax evasion by adopting gifts and the consequent Inspector.

[Published in the Corporate Secretary -Monthly Journal of Hyderabad Chapter of ICSI  during October,2012]

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