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Gifts from abroad
August, 04th 2007

There is a popular misconception that gifts received from abroad through bank drafts will be exempt from income- tax. There have been several court rulings pointing out that the nature of the transaction will have to be looked into.

The Foreign Exchange Regulations Appellate Board (FERAB) has pointed out that in most of the cases of foreign gifts, the recipients made cash payments to the account holders, their nominees or agents on receipt of the amount by cheque in India. In the Shanti Devi Jain vs Director of Enforcement (1996 89 Taxman 198) case, the FERAB observed: It is also not unreasonable to take note of the common phenomenon that receiving gift cheques in this manner is a common mode of mone y laundering.

The Mohanakala case

In this case (CIT vs P. Mohanakala 2007 291 ITR 278 SC), one common donor Sampath Kumar sent several cash gifts through cheques from abroad to Srinivasan, his wife, his son, his brother, and brothers wife, Mohanakala. These five persons received aggregate gifts to the extent of 1,79,27,703. During the course of the income-tax enquiry, they stated that payments were made by instruments issued by foreign banks and credited into the respective accounts of the five persons by negotiation through a bank in India. The assessing officer (AO) brought the entire amount to tax as unproved credits. After investigation, the Tribunal concluded that there was no love and affection between the foreign party and the recipients of gifts in India. The Tribunal upheld the assessment.

The Madras High Court decided the case in favour of the assessee (291 ITR 178). The Revenue took up the matter in appeal to the Supreme Court. The apex court held that the Madras High Court had committed an error in disturbing the concurring findings of facts given by the lower authorities. The apex court pointed out that under Section 68 of the Income-Tax Act ,1961 any sum found credited in the books of the assessee may be charged to income-tax as income if there is no satisfactory explanation about the nature and source of the credit. It referred to its own ruling in the Sumati Dayal (214 ITR 801 SC) case.

Taxable as income

The fact that money came by way of cheques and was paid through the banking channel was not by itself of any consequence. The AO has to base his opinion on proper appreciation of material and the other attending circumstances available on the record. He has to form his opinion objectively. Application of mind is the sine qua non for forming the opinion. The Supreme Court held that the so-called foreign gifts were liable to be taxed as income.

The above case was considered under Section 68, which relates to cash credits in the I-T Act. Much has happened since then. The task of the I-T department is now rendered easier. Section 56(v) of the Act brings to tax cash receipts exceeding Rs 25,000 received by an individual or an Hindu Undivided Family (HUF) without consideration from a non-relative.

The Taxation Laws (Amendment) Act, 2006 further lays down that if the cash receipts from several parties exceeded Rs 50,000 per year, the whole of the aggregate value of the gift will be brought to tax as income. The AO is now fully armed to tackle all claims about amounts being received through banking channels. All that the new Section 56 requires is that the monies must have been received from a non-relative without consideration. Exemptions are provided in the case of marriage gifts or bequest by will, etc.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)
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