Donee-Based Gift Tax – Comprehensive Overview of Taxation on Gifts Under Section 56(2)(x)

Donee-based taxation of gifts refers to the tax liability imposed on the recipient (donee) rather than the giver (donor) of a gift. Under this regime, any individual, HUF, firm, or company receiving money, immovable property, or specified movable property without consideration, or for inadequate consideration exceeding the threshold limit of ₹50,000, is liable to pay tax on the value of the gift as "Income from Other Sources." Introduced in 2004 and expanded through subsequent amendments, donee-based taxation aims to prevent money laundering and the transfer of assets at below-market value, ensuring that gifts are taxed appropriately when received by all types of assessees.

Tables of Contents

1. Donor Based Gift-Tax Under the Gift-Tax Act, 1958
2. Donee-Based Gift-Tax Introduced by the Finance (No. 2) Act, 2004
3. Taxation Laws (Amendment) Act, 2006 Substituted Limit of ₹25,000 per Transaction with Limit of ₹50,000 for Entire Year
4. Donee-Based Taxation Extended to Gifts in Kind Received by Individual and HUFs by the Finance (No. 2) Act, 2009
5. Limited Extension of Donee-Based Taxation to Firms and Closely Held Companies by Finance Act, 2010
6. Donee-Based Taxation of Gifts Made Universally Applicable to All Recipient Assessees Including Companies, Firms, AOPs, BOIs & AJPs
7. Amendments by the Finance Act, 2022 – COVID-19 Death Compensation Relief
8. Amendments by the Finance Act, 2022 – Net of Section 56(2)(x) Extended to Gifts Received of Virtual Digital Asset
9. Definition of “Gift”
10. Whether a Company Can Give/Receive Gifts?
11. Salient Features of Donee-Based Taxation Regime of Gifts Under Section 56(2)(x)

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1. Donor Based Gift-Tax Under the Gift-Tax Act, 1958

The Gift-tax Act, 1958 required the donor to pay gift-tax on taxable gifts made by him to others. The Gift-tax Act, 1958 was abolished in 1997.

2. Donee-Based Gift-Tax Introduced by the Finance (No. 2) Act, 2004

The Finance (No. 2) Act, 2004, introduced the concept of donee-based taxation of gifts. The Finance Minister, in his Budget Speech of 2004 explained that the objects of donee-based gift-tax as under:

‘… a loophole requires to be plugged to prevent money laundering. Accordingly, purported gifts from unrelated persons, above the threshold limit of ₹25,000, will now be taxed as income. Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasion like marriage will continue to be totally exempt.’

3. Taxation Laws (Amendment) Act, 2006 Substituted Limit of ₹25,000 per Transaction with Limit of ₹50,000 for Entire Year

The TLA, 2006 amended clause (v) to provide that the same shall apply to gifts received from 01.09.2004 to 31.03.2006 and inserted new clause (vi)of sub-section (2) of section 56 with effect from 01.04.2006. The effect of this amendments by TLA, 2006 was that the threshold limit of ₹25,000 (applicable to each transaction) was amended to ₹50,000 (which applies to aggregate of all transactions during the financial year). As stated by the Finance Minister in his speech in Lok Sabha on 17-5- 2006, ‘The intention is to prevent split transactions, which we find is happening when the threshold is ₹25,000’.

4. Donee-Based Taxation Extended to Gifts in Kind Received by Individual and HUFs by the Finance (No. 2) Act, 2009

The Finance (No. 2) Act, 2009 amended clause (vi) of sub-section (2) of section 56 to provide that the said clause (vi) shall apply to gifts of money received from 1-4-2006 to 30-9-2009. The Finance (No. 2) Act, 2009 inserted a new clause (vii) in sub-section (2) of section 56 with effect from 1-10-2009 to expand the scope of donee-based gift tax to cover gifts received of immovable property and gifts received of specified movable property also besides gifts received of money.

The Finance Act, 2010 amended clause (vii) so as to bring ‘bullion’ within the definition of ‘property’ w.e.f. 1-6-2010.

In Assistant Commissioner of Income-tax, Central Circle 29, Mumbai v. Shahrukh Khan [2017] 84 taxmann.com 209 (Mumbai – Trib.), the assessee, a renowned film star, received villa from Dubai based company in 2008. It was held that the mere fact that assessee attended annual day celebrations and addressed to employees of donor company, it did not amount to rendering professional services or carrying out brand endorsement activities and, thus, value of villa could not be brought to tax under sec. 28(iv).

The amount could not be brought to tax as section 56(2)(vi), which was applicable from 1-4-2006 to 30-9-2009, did not apply to gifts received in kind. The amendments by Finance (No.2) Act, 2009 addresses a vital lacuna. If the gift in kind cannot be taxed under section 28(iv), it would be captured in the tax net under section 56(2)(vii) (as applicable to gifts received from 1-10-2009 to 31-3-2017) or under section 56(2)(x) (applicable to gifts received on or after 1-4-2017)

5. Limited Extension of Donee-Based Taxation to Firms and Closely Held Companies by Finance Act, 2010

Though gifts in money and kind had been brought under the tax net, the problem remained that it applied only to gifts received by individuals and HUFs. Gifts received by firms, companies, AOPs, BOIs and AJPs were outside the dragnet of section 56(2)(vii).

In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, section 56 has been amended by the Finance Act, 2010 [by inserting new clause (viia) in section 56(2)] to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested).

6. Donee-Based Taxation of Gifts Made Universally Applicable to All Recipient Assessees Including Companies, Firms, AOPs, BOIs & AJPs

The limited extension of section 56(2)(vii) to firms and companies was not sufficient as it covered only unlisted shares received at below fair market value. Money gifts and other gifts in kind were still out of the tax net. In Mridu Hari Dalmia Parivar Trust v. Assessing Officer, Circle 31(1), New Delhi [2016] 68 taxmann.com 376 (Delhi – Trib.), it was held that any sum exceeding Rs. 50,000/- can fall within ambit of section 56(2)(vi)/ (vii)only if it is received by an individual or HUF; where assessee was an AOP sum of Rs.1.60 crore received by it without consideration could not be included in its total income within framework of section 56(2)(vi)/ (vii), A need was felt for a tax regime to bring to tax all gifts received of money or specified property in the hands of all assessees, whether individuals or HUFs or Firms or Companies or AOPs or BOIs or AJPs. The Finance Act, 2017 amended clauses (vii) and (viia) of sub-section (2) of section 56 of the Act to make these clauses inapplicable with effect from 01.04.2017. The Finance Act, 2017 inserted a new clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the property by any person on or after 01.04.2017 without consideration or for inadequate consideration in excess of threshold limit of ₹50,000 shall be chargeable to tax in the hands of the recipient under the head ‘Income from other sources’. The Explanatory Memorandum to the Finance Bill, 2017 explained the changes as follows:

Widening scope of Income from other sources

Under the existing provisions of section 56(2)(vii), any sum of money or any property which is received without consideration or for inadequate consideration (in excess of the specified limit of ₹50,000) by an individual or Hindu undivided family is chargeable to income-tax in the hands of the resident under the head ‘Income from other sources’ subject to certain exceptions. Further, receipt of certain shares by a firm or a company in which the public are not substantially interested is also chargeable to income-tax in case such receipt is in excess of ₹50,000 and is received without consideration or for inadequate consideration.

The existing definition of property for the purpose of this section includes immovable property, jewellery, shares, paintings, etc. These anti-abuse provi- sions are currently applicable only in case of individual or HUF and firm or company in certain cases. Therefore, receipt of sum of money or property without consideration or for inadequate consideration does not attract these anti-abuse provisions in cases of other assessees.

In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, it is proposed to insert a new clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the property by any person without consideration or for inadequate consideration in excess of ₹50,000 shall be chargeable to tax in the hands of the recipient under the head ‘Income from other sources’. It is also proposed to widen the scope of existing exceptions by including the receipt by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47.

The amendments made by the Finance Act, 2017 to widen the ambit of donee-based taxation of gifts regime are as under:

• Section 56(2)(vii)/(viia) is made inoperative with effect from 1-4- 2017 and accordingly, any sum or property received without or for inadequate consideration (as aforesaid) before 1-4-2017 shall be taxable as income under clause (vii)/(viia)
• Clause (x) is inserted in section 56(2) to provide that the following receipts during a previous year would be taxable as income in the hands of any person, under the head ‘Income from Other Sources’ subject to the other provisions relating thereto, made in the clause:

1. 1. Any sum of money without consideration, in aggregate exceeding ₹50,000 during the financial year; or
   2. Any immovable property without consideration, the stamp duty value of which exceeds ₹50,000; or
   3. Any immovable property for a consideration which is less than stamp duty value by an amount exceeding ₹50,000; or
   4. Any movable property (as defined and specified) without consideration where aggregate fair market value whereof exceeds ₹50,000; or
   5. Any movable property (as defined and specified) for consideration which is less than fair market value by an amount exceeding ₹50,000.

• The clause also provides for exceptions, mode of computation and other related provision for taxation of the above receipts.
• In section 49(4), reference of clause (x) is inserted to provide that cost of acquisition of property, value whereof is subject to tax under section 56(2)(x), shall include such value, for computing capital gains.
• Sub-clause (xviia) is inserted in clause (24) of section 2 so as to include income referred in clause (x) of sub-section (2) of section 56, in the definition of income.

7. Amendments by the Finance Act, 2022 – COVID-19 Death Compensation Relief

The Finance Act, 2022 has amended the proviso [1st proviso w.e.f. Assessment year 2023-24] to clause (x) of sub-section (2) of section 56 by inserting two new clauses (xii) and (xiii) in the proviso so as to provide that:

1. any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, in respect of any illness related to COVID-19 subject to such conditions, as may be notified by the Central Government in this behalf, shall not be the income of such person; [Clause (xii)]
2. any sum of money received by a member of the family of a deceased person, from the employer of the deceased person (without limit), or from any other person or persons to the extent that such sum or aggregate of such sums does not exceed ten lakh rupees, where the cause of death of such person is illness relating to COVID-19 and the payment is, received within twelve months from the date of death of such person, and subject to such other conditions, as maybe notified by the Central Government in this behalf, shall not be the income of such person. [Clause (xiii)]

For the purposes of both of the said clauses, “family” in relation to an individual shall have the same meaning as assigned to in the Explanation 1 to clause (5) of section 10.

Explanation 1.—For the purposes of this clause, “family”, in relation to an individual, means—

1. the spouse and children of the individual; and
2. the parents, brothers and sisters of the individual or any of them, wholly or mainly dependant on the individual.

These amendments take effect retrospectively from 1st April, 2020 and will accordingly apply in relation to the assessment year 2020-21 and subsequent assessment years.

8. Amendments by the Finance Act, 2022 – Net of Section 56(2)(x) Extended to Gifts Received of Virtual Digital Asset

In order to provide for taxing the gifting of virtual digital assets, the Finance Act, 2022 has amended Explanation to clause (x) of sub-section (2) of section 56 of the Act to inter-alia, provide that for the purpose of the said clause, the expression “property” shall have the meaning as- signed to it in Explanation to clause (vii) and shall include virtual digital asset. This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

To define the term “virtual digital asset”, a new clause (47A) has been inserted in inserted to section 2 of the Act.

As per clause (47A),—

• a virtual digital asset (also known as ‘cryptocurrency’) means any information or code or number or token providing a digital representation of value which is exchanged with or without consideration with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically.
• It does not matter whether it is generated through cryptographic means or otherwise.
• The term ‘virtual digtital asset’ is not Indian currency or any foreign currency, by whatever name called.
• Non-fungible token and any other token of similar nature are included in the definition. The Non-fungible tokens means such digital assets as notified by the Central Government. Further, Central Government can notify such assets which shall not be considered as virtual digital assets.
• Central Government may notify any other virtual digital asset as virtual digital asset by way of notification in the Official Gazette.
• If above conditions are satisfied, it is a VDA no matter by whatever name it is called.

9. Definition of “Gift”

Section 5 of Transfer of Property Act, 1882 defines ‘transfer’ as

“an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons”.

Section 5 further clarifies that

“In this section “living person” includes a company or association or body of individuals, whether incorporated or not…”

Section 122 of TOPA defines “Gift” as

• the transfer of certain existing movable or immovable property
• made voluntarily
• and without consideration,
• by one person, called the donor,
• to another, called the donee,
• and accepted by or on behalf of the donee

Mode of gifting-section 123 of TOPA

• Gift of Immovable property: transfer must be effected by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses.
• Gift of movable property: the transfer may be effected either by a registered instrument signed as aforesaid or by delivery.
• Note: In case of shares, transfer must be as per the provisions of Companies Act, 2013
  The assessee-firm transferred shares held in two companies in favour of another company without any consideration, it is a ‘gift” and there can be no taxable capital gains u/s 45(1) as section 47(iii) applies.

The word ‘gift’ need to appear in the deed in order for transaction to be treated as a gift. It is sufficient that there is a voluntary transfer without consideration.—Ultima Search v. ACIT [2016] 75 taxmann.com 205 (Mumbai – Trib.)

In Jayneer Infrapower & Multiventures (P.) Ltd. v. Dy. CIT [2019] 103 taxmann.com 118 (Mum. – Trib.), it was held as under:

• There is no requirement in TOP Act that a ‘gift’ can be made only between natural persons out of natural love and affection.
• As long as a donor company is permitted by its memorandum/articles of association to make a ‘gift’, it can do so.
• For movable property, a gift deed in writing is not necessary, an oral agreement with transfer of possession is sufficient to complete a gift of a movable property.

10. Whether a Company Can Give/Receive Gifts?

Chennai Tribunal in the case Redington (India) Ltd. v. JCIT [2014] 49 taxmann.com 146 held as under:

• There is nothing against a company making gift of its property to another company.
• There is nothing anywhere in law, which prescribes that only natural persons can make gift on the ground of ‘love and affection’.
• Therefore, a corporate body can make a gift.

(Above case involved transfer of shares without consideration by a company to its step-down Thholly Owned Subsidiary (ThOS) in Cayman Island)

In Prakriya Pharmacem v. ITO [2016] 66 taxmann.com 149 (Guj.), the assessee company gifted shares to its sister company. It was held that section 45 (capital gains) would not be attracted as this is a gift and would attract section 47(iii)

In Deere & Co., In re [2011] 11 taxmann.com 388 (AAR), with intent to restructure its operations, JDA transferred without consideration its entire shareholding in JDIPL to JDA Singapore. This was held to be a gift and in absence of any income (capital gains) accruing, it was held that Transfer Pricing provisions also cannot be invoked. (Now of course, this will be taxed u/s 56(2)(x).

In M/s Direct Media Distribution Ventures Private Limited v PCIT (ITA No. 2211/Mum/2019), it was held that there is nothing in law which stops corporates from making a gift of shares to each other, more so when the intention of the parties is supported by an internal restructuring exercise, which was driven by commercial reasons

11. Salient Features of Donee-Based Taxation Regime of Gifts Under Section 56(2)(x)

The following salient features of the donee-based taxation regime in section 56(2)(x) may be noted:

• The word ‘gift’ is not used in section 56(2)(x). This word was also not there in any of its earlier avatars viz. section 56(2)(v)/section 56(2)(vi).
• Advisedly, unlike section 45(iii), section 56(2)(x) does not use the word ‘gift’. If word ‘gift’ is used, only transactions without consideration will be in the tax net. It would have been easy to evade the provisions by giving immovable property or other valuable property for token consideration of say Re.1. To prevent such circumvention, section 56(2)(x) only refers to receipts without consideration or receipts where consideration is inadequate i.e. less than stamp duty value/fair market value.
• Section 56(2)(x) as well as its previous avatars use the words “receives…. any sum of money, without consideration”, “receives…any immovable property, without consideration”, “receives ….any immovable property, the stamp duty value of such property exceeds such consideration”, “receives …any property, other than immovable property, without consideration” for a consideration which is less than the stamp duty value of the property” and “receives….for a consideration which is less than the aggregate fair market value of the property”
• The receipts contemplated [any sum of money or ‘property’ immovable property or movable property as per (b) above], exceed threshold limit as per the table in (e) below are taxable
• The amount liable to tax would be:

• The receipts could be by any person.
• The receipt must be on or after 1-4-2017.
• The sum of money or property received from any relative, etc. (as specified in the proviso to the clause) would not be liable to tax.
• Explanation to the clause provides reference of certain terms or expressions as defined in Explanation to clause (vii).

11.1 ’Property’ [Clause (d) of Explanation to section 56(2)(x)]

Clause (d) of Explanation to section 56(2)(x) defines ‘Property’ to mean the following capital assets of the assessee, namely:

1. Immovable property of the assessee being land or building or both
2. Shares and securities
3. Jewellery
4. Archaeological collections
5. Drawings
6. Paintings
7. Sculptures
8. Any work of art
9. bullion
10. virtual digital asset (w.e.f. assessment year 2023-24)

Items (ii) to (x) above have been referred to as ‘Specified Movable Property’ in Table in (b) above.

In Ram Prasad Meena v. Income Tax Officer, Ward 1(2) Kota [2020] 119 taxmann.com 217 (Jaipur – Trib.) [03-09-2020], it was held that any property which is not a capital asset is not covered within meaning of movable or immovable properties under section 56(2)(vii) [now section 56(2)(x)]

The term ‘capital asset’ is defined in section 2(14) of the Act.

The term “Capital asset”:

• Means: property of any kind held by the assessee
• Specifically includes:

1. 1. Any securities held by a FII [sub-clause (b)]
   2. Unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof. [new sub-clause (c) inserted by the Finance Act, 2021 with effect from assessment year 2021-22]
   3. Jewellery (other than held as stock-in-trade) [item (a) of sub- clause (ii)]
   4. Archaeological collections (other than held as stock-in-trade) [item (b) of sub-clause (ii)]