Date:20/02/2006 URL: http://www.thehindu.com/2006/02/20/stories/2006022000381500.htm

Business

Whether gifts in kind avoid tax net

In a recent issue of Business Line, in the column relating to "For the Asking", it has been stated that gifts in kind from non-relatives are immune from taxation in the hands of the donee, tempting the tax evaders to convert ill-gotten cash into some other assets and pass on the same in the guise of gift. On the basis of this reasoning, some taxpayers seriously ask some of us (auditors) to advise them about this method of tax planning. Obviously, such a tax advice cannot be given. But what is the answer to our clients in the light of the view taken in the column as above?

"Sum of money" that is referred to should cover even money's worth, because it is used in the context of the deeming provision treating such gifts as "income from other sources". Income under Sec. 2(24) includes both money and money's worth. Sec. 2(24) has been amended by insertion of clause (xiii) to include items covered under Sec. 56(2)(v), which makes gifts being "sum of money" from non-relatives taxable. Be that as it may, where the bonds are purchased for making a gift, the purchaser will have to explain the source of funds for the same.

In case of such bonds, without satisfactory explanation from donors, gifted to the donees, the inference that the funds initially belonged to the donee may well be justified, so that wherever there is no explanation for the source, both the donor and the donee may well be vulnerable. There is no easy way to avoid tax and much less to evade it.

S. RAJARATNAM