Gift Provision Under Income Tax Act - Codified

Gifts Provisions under Income Tax Act - Codified

Gift of CAPITAL ASSET by an individual to other Individual

1.       Capital Gain on transferor

There is no capital gain in the hands of transferor on gift of capital asset. – Section 47(iii).

2.       Taxability in the hands of Transferee- If asset is treated as Capital asset by Transferee.

a)      Transferee is not liable to any tax on receipt of gift, if transferee is relative within the meaning of Clause (e) of Explanation to section 56(2) (vii).

b)      Transferee is Not a Relative-The value of Gift, if it exceeds Rs. 50,000, is liable to be included in taxable income of Transferee, provided capital assets is among the following (Here in after referred to as Prescribed Capital Asset):- (Section 56(2)(vii))

i)                    Immovable property, being land or building or both

ii)                   Shares & Securities

iii)                 Jewellery

iv)                 Archaeological collections

v)                  Drawings

vi)                 Paintings

vii)               Sculptures

viii)              Any work of art

ix)                 Bullion

In case, capital asset does not fall in above category, nothing is taxable in the hands of Transferee on receipt of gift.

3.       Taxability in the hands of Transferee- If asset is Stock in trade for Transferee.

In this case, nothing would be taxable in the hands of Transferee on value of gift received, since section 56(2)(vii) will not be applicable. Said section is applicable, where assets is capital asset in the hands of Transferee.

4.       Cost of Acquisition in the hands of Transferee- asset is capital asset for transferee.

a)      Transferee is Relative – Cost of acquisition in the hands of Transferee will be aggregate of Cost of acquisition and cost of improvement in the hands of transferor – Section 49(1)

b)      Transferee is Non Relative

a)      Capital asset is other than Prescribed Capital Asset -  Cost of acquisition in the hands of Transferee will be aggregate of Cost of acquisition and cost of improvement in the hands of transferor – Section 49(1).

b)      Capital assets is Prescribed Capital Asset -  Cost of acquisition will be fair market value of capital asset on the date of gift – section 49(4).

5.       Cost in the hands of Transferee- Asset is stock in trade for Transferee.

In case gifted asset is treated as Stock in Trade by Transferee, the cost of such asset would be aggregate of Cost of acquisition, cost of improvement and expenditure incurred wholly and exclusively in connection with transfer, in the hands of Transferor – Section 43C.

6.       Period of Holding of capital asset in the hands of Transferee- Section 2(42A)

At the time of sale of capital asset by transferee, acquired by way of gift, the period of holding in the hands of transferee will include the period for which asset was held  by transferor, irrespective of following:-

a)      Whether Transferee is relative or not.

b)      Nature of capital asset

c)       Whether value of gift is taxable in the hands of transferee or not.

7.       Capital assets is Depreciable assets – Reduction in WDV of Block of asset of Transferor

Section 43(6)(c) provides the method of computation of Value of block of assets for purpose of calculating depreciation us/ 32. The method is as under:-

a)      Opening WDV of Block of asset

b)      Add: Actual cost of asset purchased which is falling within the block.

c)       Less: Moneys Payable in respect of asset, falling in the block, which is sold or discarded or demolished or destroyed during the previous year.

For reduction in block of asset, it is essential that money should be payable in respect of asset discarded.

Since on Gift of depreciable asset, there is no moneys payable in respect of asset transferred, so nothing will be reduced from Block of assets on gift of depreciable asset.

8.       Capital Asset is Depreciable Asset- WDV in the hands of Transferee, where asset is treated as capital depreciable asset by transferee.

a.       The Mode of computation of value of Block of asset is stated above. The addition to block of assets is actual cost of asset acquired.

b.      Explanation 2 to section 43(1) governs the provision relating to Actual cost, in the hands of recipient, of assets acquired by Gift. The Actual cost will be computed as under:-

i)                    Actual Cost in the hands of Transferor

ii)                   Less: Depreciation actually allowable as if the said asset was only assets in the block.

Gift of Stock in Trade by an individual to other Individual

1.       Taxation in the hands of Transferor

a)      There is no express provision in the Act on this aspect, except where stock in trade is land or Building or both. Gift of stock in trade by Individual will amount to his drawings from the business and going by the decision of Supreme Court in Kikabhai Premchand, nothing would be taxable in the hands of transferor on value of gift of stock in Trade.

b)      In case of stock in trade, being land or building or both, stamp duty value of asset will be deemed sales consideration in the hands of Transferor and will be taxed accordingly.- (Section 43CA)

2.       Taxation in the hands of Transferee

a)      If the transferee is relative and treat the gifted asset as capital asset, nothing will be taxable in the hand of transferee on account of value of gift.

b)      If Transferee, being non-relative, treat the gifted assets as Capital asset, which is prescribed capital asset, then value of gift, in excess of Rs. 50,000 will be taxable in the hands of Transferee- Section 56(2)(vii), read with Clause (d) of Explanation to said section. As per said explanation, “Property means the Following CAPITAL ASSET of the assessee---“

(Note: In this scenario, in case of gift of land or building or both, there will be double taxation of same income, once in the hand of Transferor (u/s 43CA) and second, in hand of Transferee (u/s 56(2)(vii))

c)       If Transferee, being non-relative, treat he gifted asset as capital asset, which is not a prescribed capital asset, then, nothing will be taxable in the hand of transferee on account of value of gift.

d)      If transferee treat the gifted asset as Stock in Trade, nothing would be taxable in the hands of Transferee on value of gift received, since section 56(2)(vii) will not be applicable.

3.       Cost of Acquisition in the hands of Transferee- asset is capital asset for transferee

a)      Transferee is Relative –

i)                    Cost of acquisition in the hands of Transferee will be aggregate of Cost of acquisition and cost of improvement in the hands of transferor – Section 49(1)

ii)                  However there will be practical problems to determine the cost of acquisition in the hands of Transferor, unless transferor is following specific identification method for valuation of Stock. For Example a jeweller give a gift of jewellery, being stock in trade, to his relative. Generally jeweller follows either FIFO, LIFO or average cost method for stock valuation. So in the instant case it would be difficult to work out the actual cost of acquisition of asset gifted, it may be valued on the basis stock valuation method followed.

b)        Transferee is Non Relative

i)                    Capital asset is other than Prescribed Capital Asset- Cost of acquisition in the hands of Transferee will be aggregate of Cost of acquisition and cost of improvement in the hands of transferor – Section 49(1).

ii)                  Capital asset is  Prescribed Capital asset -  Cost of acquisition will be fair market value of capital asset on the date of gift – section 49(4)

4.       Cost in the hands of Transferee- Asset is stock in trade for Transferee

a)      In case gifted asset is treated as Stock in Trade by Transferee, the cost of such asset in the hands of Transferee would be cost of acquisition in the hands of Transferor- Section 43C.

b)      In case of Gifted asset, being land or building or both, Transferor has paid tax deemed consideration, being stamp duty value of property, but the cost in the hands of Transferee will be the Cost of Acquisition in the hands of Transferor u/s 43C, since there is no corresponding provision for enhancement of cost in the hands of Transferee, where transferor has subjected to tax by virtue of provision of section 43CA.

5.       Period of Holding of capital asset in the hands of Transferee- Section 2(42A)

a)      At the time of sale of capital asset by transferee, acquired by way of gift, the period of holding in the hands of transferee will include the period for which asset was held  by transferor, irrespective of following:-

i)      Whether Transferee is relative or not.

ii)     Nature of capital asset

iii)   Whether value of gift is taxable in the hands of transferee or not.

b)      However, there will be practical problems in working out the period of holding of asset in the hands of Transferor, for whom gifted asset was stock in trade.

6.        Asset is Depreciable Asset for transferee- WDV in the hands of Transferee.     

a)      Same as stated at point no. 8 under the heading “ Gift of Capital Asset by Individual to other Individual

b)      One will encounter the practical problem in arriving at actual cost in the hands of Transferor.