Gifts by resident of India to a person outside India deemed to accrue as income in India- taxable as income subject to some exceptions. The proposal seems beyond power to impose tax on income.

[CA DEV KUMAR KOTHARI]

Budget 2019 clause 4:

Budget proposal and related notes, explanations and budget speech are reproduced below with highlights, highlighted catch words, underlining, italicizing and coloring, added by author for easy analysis and understanding:

Budget proposal:

FINANCE (No. 2) BILL, 2019

Amendment of section 9.

4. In section 9 of the Income-tax Act, in sub-section (1), after clause (vii), the following clause shall be inserted with effect from the 1st day of April, 2020, namely:––

“(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.”.

Notes:

Clause 4 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India.

Sub-section (1) of the said section provides for the incomes which shall be deemed to accrue or arise in India.

It is proposed to insert a new clause (viii) to said sub-section so as to provide that certain income, being any sum of money paid or any property situate in India transferred on or after the 5th day of July, 2019 by a person resident in India to a person outside India, shall be deemed to accrue or arise in India.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

Explanatory Memorandum:

Deemed accrual of gift made to a person outside India

Section 9 of the Act relates to Income deemed to accrue or arise in India. Under the Act, non –residents are taxable in India in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or is deemed to be received in India. Under the existing provisions of the Act, a gift of money or property is taxed in the hands of donee, except for certain exemptions provided in clause (x) of sub-section (2) of section 56. It has been reported that gifts are made by persons being residents in India to persons outside India and are claimed to be non-taxable in India as the income does not accrue or arise in India. To ensure that such gifts made by residents to persons outside India are subject to tax, it is proposed to provide that income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after 5th July, 2019 by a person resident in India to a person outside India shall be deemed to accrue or arise in India. However, the existing provision for exempting gifts as provided in proviso to clause (x) of sub-section (2) of section 56 will continue to apply for such gifts deemed to accrue or arise in India. In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gifts as well.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years. [Clause 4]

From Budget speech:

Direct Tax Proposals:

1. Widening and deepening of tax base

1.3 Gifts made to non-residents: Presently, gifts made by a resident to another resident are liable for income tax subject to some exemptions. It is proposed to provide that gift of any sum of money, or property situated in India, by a person resident in India to a person outside India (not being a gift otherwise exempt), on or after 5th day of July 2019, shall be deemed to accrue or arise in India.

Observations of author:

As per above clause etc. it is apparent that what is being tried is an attempt to widen and deepen tax base.

Admittedly the provision is being inserted to impose tax on “gifts” (which can be wholly gift like cash or transfer of other property without consideration or can be partial gift- when less than fair market value is paid by transferee for property transferred).

Therefore, admittedly the amount proposed to be charged to tax, in prescribed manner is a capital receipt in hand of person receiving.

The amount of gift paid in cash or by transfer of other property without or for inadequate consideration will, in most of situations will be a payment on capital account in hands of the transferor/ donor and will not be claimed as an expenditure.

Therefore, transfer on a capital account in hands of transferor will be treated as taxable income in hands of transferee.

Under the Constitution of India (COI), the central Government can impose tax on “income other than agricultural income”. The amount sought to be taxes should be income, within the meaning of ‘income’ as per Constitution, therefore, sums which are really in nature of income can only be taxed under the Income-tax Act.

 Any sum which is not income but which is on capital account should not and cannot be included by artificially enlarging meaning of income. Such provisions are ultra-virse the Constitution of India. NAMO Government publicly try to shows lot of respect to the Constitution of India and claim to work within scope of COI, however, when matter comes to collect tax, the NAMO government also seems to have attitude to ignore provisions of COI, and therefore such provisions are continuing and more provisions are being inserted.

Readers can refer to the provisions of COI and some articles written by author and available on this website about provisions which appears to be beyond the power to impose tax on income.