This Act is applicable to all those assessees (tax-payers) making taxable gift except the following:

• A Company incorporated under the Companies Act, 1956 in which substantial interest of the public vests.
• A Company which is going through a scheme of amalgamation.
• Any Institution or fund covered under section 11 or section 12 of the Income Tax Act.

The objective behind this act is to derive revenue from unproductive and under utilised assets or to placate income in tax avoidance schemes by means of a gift to persons with lower income. The object is to make large transfers of income and distribution of wealth by the moneyed persons difficult except in certain cases as provided. The tax on the same is to act as a deterrent, so as to provide social equity. This safeguards the interests of the income and wealth tax laws.

• What is gift in the layman’s language?

Any voluntary contribution leading to a transfer in title, of both movable or immovable, tangible or intangible property, goods or services without consideration in terms of money or money’s worth is a gift. It is a present or discharge given for nothing in return.

For any valid gift there should be four elements to be fulfilled.

1. There must be a transfer of property.
2. The transfer must be from one person to another.
3. It must be voluntary.
4. It should be without consideration of money or money’s worth.

• Does the location or the place where the gift is made have any effect on the charge to tax? For example, I have money in an American bank account or a house in London, which I gift?

Yes, the actual place where the gift is made does effect the charge to tax. Since the gift taxes are to be paid by the donor, and the donee becomes the taxpayer in default; either one of the parties or the consideration should have been in India. In effect gifts made within India, Gifts made abroad but brought within India, Gifts made abroad but the title passing to a person resident in India, would all be subject to tax. It is also material where the property or valuables are situated. Inclusion for the purposes of this Act will get altered on account of the actual place where gift may be made. Regarding money in an American Bank account or a house in London, the taxability has to be viewed in relation to the residential status of the assessee.

• So the Residential status of the Assessee has a major implication on the charge to gift tax. What are the provisions under the law?

The residential status has a major impact on the liability to wealth tax. We may classify Gifts = G for our convenience. Further, we may prefix Foreign Gifts with the abbreviation "F", if the gift is not made in India. Details are given in the table below.

• Are all assets charged to tax including personal effects or does the law specify assets?

Yes, all assets, which are given as gift, will be subject to tax. The law does not specify any particular asset for this purpose.

"Gifts to be made only of existing property" – CIT Vs R. S. Gupta

"Mere book entries do not purport gift" – Sukhlal Sheo Narain Vs CWT

• It is understood that there are many other things, which are considered as "Deemed Gifts" for the purpose of inclusion in the definition of the term Gifts. What are they?

"Transfer of buses to company and allotment of shares in lieu thereof" – CGT Vs B. Sathiar Singh – u/s 4(1)(a)

"Transfer of part of existing business for which new partners bring in capital" – CGT Vs Sardar Wazir Singh

"Amount lent for purchase of shares in three Indian companies" – ICI(India) Pvt. Ltd. Vs GTO

"Transfer of title for which consideration is not passed on" – CGT Vs Kesavan Nair – u/s 4(1)(b)

• It seems some items and transactions are exempt from gift tax. What are they?

• Are Income Tax, Wealth Tax or other Tax liabilities also considered to be gifts, since these are without adequate consideration?

It is true that the direct taxes paid to the government are without adequate direct consideration. Taxes such as Wealth Tax, Income Tax or Gift Tax are not debts. This is because these are not sums owed generally or in respect of any transaction but a legal fiction created by the legislature. But merely not having a consideration is not the moot point. In the case where taxes are concerned, such a payment is involuntary on account of their basis of creation. Further there is intangible and implied consideration involved as taxes buy civilisation, environment and it is the public cost of governance in a peaceful society. Even otherwise, section 5(1)(iv) provides that any contribution to the government in terms of gift is exempt from tax.

• How do we derive the value of various taxable gifts? Our forefathers acquire many assets, some are acquired at various stages during the lifetime and inflationary pressures mean that we do not spend the same sums for similar assets. How should the problems of valuing different types of gifts be resolved?

The lawmakers understood the need for an equitable basis for valuing gifts, insofar as the taxes are charged on an equitable basis in relation to the quantum. Hence, the manner of valuation is partly incorporated from the Wealth Tax Act and also item specific in relation to Gift Taxes. We now take a look at the different assets and their methods of valuation.

1. VALUATION OF BUILDING AND OTHER NON-MOVABLE PROPERTY

The basis for valuation of a building is the annual rent.

• Step 1 - We first derive the Gross maintainable rent that is based on the following, whichever is closest to as if the property is let out. It goes without saying that if alternative modes for determining this are available, it will be prudent to consider the actual rent.

1. Annual rent received or receivable.
2. Annual value of the property as assessed by local authority.
3. For property outside municipal area, the amount that is reasonably expected to be received as annual rent had such property been let out on rent.

• Step 2 – We now derive the Net maintainable rent. Deducting the following amounts enumerated below from the gross maintainable rent arrives at this. (As worked out in Step 1).

1. Any taxes that are levied by the municipal corporation or local authority towards the building / property.
2. 15% of the Gross Maintainable Rent to cover incidentals.

• Step 3 – We now have to capitalise the rent. Multiplying the net maintainable rent does this by the arithmetical indices as applicable and as stated below.

• For Freehold Land - 12.5
• For Leasehold Land where the period of lease is less than 50 years – 8
• For Leasehold Land where the period of lease is greater than 50 years – 10

• Step 4 – For properties that have been acquired or constructed after 31^st March 1974 there is a special provision. The higher of actual cost or capitalised value of rent shall have to be considered as the final capitalised value.

• Step 5 – Calculate premium for unbuilt area over specified area as follows.

(i) We first of all calculate the gross premium.

• In Metropolitan Cities – 60 % of the capitalised value.
• In Notified Cities - 65 % of the capitalised value.
• In Other Areas - 70 % of the capitalised value.

• Step 6 - Now the final step is to deduct the unearned increment. In other words, if the property is subject to lease terms in the previous year, such amounts spent on transfer of property eventually subject to maximum of 50% of the Capitalised value plus the premium.

• Where the assessing officer with the prior approval of the Dy. Commissioner of Gift Tax is of the opinion that provisions do not apply.
• In cases where the unbuilt area exceeds 20 % of the aggregate area.
• The property is on leasehold hand wherein the balance lease period is less than 15 years.

1. VALUATION OF BUSINESS ASSETS

The method for valuation of business assets is simple as we see under.

• For Depreciable assets we should consider the Written Down Value.
• For Non-Depreciable assets we should consider the Book Value.
• In respect of Closing Stock of items, we should take the value adopted for the purposes of the Income Tax Act.

• Where the value determined under Schedule III of the Wealth Tax Act exceeds 20%; such higher value should be adopted.

1. VALUATION OF INTEREST IN FIRM OR ASSOCIATION OF PERSONS

The value in the Books of accounts without considering any of the exemptions as is available in respect of the firm.

2. VALUATION OF LIFE INTEREST

• Step 1 – Take the average net annual income for the last three years form the life interest. Any expenses on account of the income, subject to a ceiling of 5% of the average net annual income may be deducted.
• Step 2 – Multiply the average net annual income from Step 1 by the following formula. {1/(P+D)-1} where P = The annual premium for a whole life insurance policy without profits. D = (6.5/100)/(1+6.5/100) =

• The Assessing Officer has the right to vary (increase) the premium if found tenable on circumstances.
• Value shall not exceed the value on valuation date under Schedule III of the trust corpus from which life interest is derived.

1. VALUATION OF JEWELLERY

1. VALUATION OF QUOTED SHARES AND SECURITIES

• The Closing price of such security on the valuation date.
• If the closing price is not available, the last available quote.
• On the basis of the average value quoted on 31^st March (preceding) nine assessment years.
• If the average value is not available for any particular number of years, the average for such years as available.

1. VALUATION OF UNQUOTED PREFERENCE SHARES

1. VALUATION OF UNQUOTED EQUITY SHARES OF A COMPANY OTHER THAN A INVESTMENT COMPANY

• We should take 80% of the book value of such shares based on the Balance Sheet as on the date of the gift or the Balance Sheet for the immediately preceding year where the same is not available on the date of making the gift.

1. VALUATION OF UNQUOTED EQUITY SHARES IN AN INVESTMENT COMPANY

• We should take the book value of such shares based on the Balance Sheet as on the date of the gift or the Balance Sheet for the immediately preceding year where the same is not available on the date of making the gift or,

• The value of the shares based on a certificate given by the statutory auditors conducting an audit u/s 224 of the Companies Act, who are also doing the valuation.

1. VALUATION OF UNQUOTED EQUITY SHARES IN INTERLOCKED COMPANIES

• Ascertain the book value for five (5) years preceding the assessment year.
• All non-recurring and extra-ordinary items to be adjusted.
• Take the average value of the shares.
• Where the gross total income includes 51% or more of income from House Property multiply by 100/8.5 = and in all other cases by 10.
• The result as derived above should be divided by the total number of shares.
• The value of shares will be the paid-up value or as determined above, whichever is higher.

1. VALUATION OF GIFT WHICH IS NOT REVOCABLE FOR SPECIFIED PERIOD

• Take the average income (net) during three (3) preceding previous years.
• Take the product of number of completed years included in period for which gift is not revocable and average income after discounting at the rate of 4% per annum.

12. VALUATION OF ANY OTHER ASSET

Other than Cash all other items have to be estimated by the assessing officer at the marketable price. The marketable price is the price the asset would fetch if sold in the open market. If the asset is non-saleable in the open market, the guidelines issued by the Board of direct taxes in this regard should be followed.

• What is the amount on which Gift Tax is chargeable? What is the rate of Gift tax?

The law provides that the first Rs. 30,000 shall be exempt from tax. Any taxable gift over and above this limit is liable to be charged to tax at the flat rate of 30%.

• Who is supposed to pay the gift tax? If the assessee refuses, can the tax be recovered from any other person and how will the same be recovered?

• Unlike other taxes, the maker of the gift or the person who gives the gift is responsible to pay the gift tax. The donor is the assessee under the gift tax act.

• In the following cases gift tax may be recovered form persons other than the donor.

1. From the donee (recipient) when the Gift Tax cannot be recovered from the donor.
2. When the assessing officer is of the opinion that the donee is incapable to pay the tax.
3. When the number of donees is more than one.
4. U/s 30, the gift tax would amount to creation of a charge on property gifted and can be recovered from the same if all other modes fail.

• What is the time limit for filing the return of Gift?

Returns of Gift should be filed by June 30^th of the year succeeding the previous year in which gift is made. There is no power with the tax authorities to grant extension of time for filing the returns.

• Under section 18 – If within 15 days of making the gift, any part of tax on such gift is paid, a deduction of 10% of the total taxes pro-rata on amounts so payable against paid amounts is available. That is, if the taxable gift is Rs. 20000 and the tax works out to Rs. 6000 and Rs. 3000 is paid within 15 days, a rebate of Rs. 300 (10%) is available and the balance tax payable would be only Rs. 2700. If the entire tax is paid within the time limit, only Rs. 5400 (90% of the gift tax) need be paid.

• Under section 18A - If any stamp duty is paid on the instrument of gift of property, an amount equal to stamp duty or 50% of gift tax (before this deduction), whichever is less may be claimed as a deduction.

• But if the transaction involves stamp duty by way of under declaration of consideration as compared to the fair market value of the property. In such a case no rebate shall be admissible for the stamp duty paid.

• Are there any penalties on default? If so, what are they?

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