Written in : June 1998

In the previous article, we saw how an effort at taxing gifts received got enlarged while the bill was converted into taxing of all capital receipts. We also saw various examples which, under no stretch of imagination, could be considered either gifts received or transactions with a view to avoid tax. You would agree that the amendments were unjustified. But the amendments do not end there. They are amplified further and more disaster is added.

Not only does the proposed law levy tax on capital receipts and gifts received, but also now levies tax on assumed avoidance of tax in property transactions.

If you buy immovable property, you need to compute the difference between the market value and the consideration paid by you. And offer the difference for taxation as your income.

The valuation of market value is to be done according to the wealth tax act.

Is there any justification whatsoever for a law like this?

This law assumes that the value of the property, as calculated artificially according to the wealth tax law, is the real value property. That is absurd and far from the truth. The mechanism by which valuation is done under the wealth tax law cannot offer correct value nor are transactions done at that value. They are always at an amount which are higher or lower than these values. To take such a value for consideration is entirely unjustified.

Secondly this amendment assumes that the difference between the so called market value and the stated consideration is because of under-statement of consideration. This again is unjustified nor can one assume generalised concealment on the basis of artificial assumptions and calculations.

The proposed amendments are again retrograde and will cause avoidable hardship to taxpayers.

You enter into an agreement for purchase of an apartment. The builder is supposed to make the apartment according to certain specifications. He does not do so. You believe you have been cheated by him. You do not pay the entire consideration to him and retain a part of it.

Under the proposed amendment, that part of the consideration that is not fully passed for purchase of property is to be treated as income. In our example, the amount not paid by you can be treated as your income, unless your tax officer, 'having regard to the circumstances of the case' believes it was justified.

There can be a large number of reasons why the consideration does not fully pass in real life. Not always is it possible to explain settlements, negotiations and compromises which are often a part of the entire process. Each such compromise will now have to be justified before the tax officer. That, you would agree, is entirely unjustified.

You and your wife open a joint bank account. It is your money that normally gets deposited in it. If she utilised any part of the funds then it will be treated as her income and taxed in her hands under the new law.

The law provides for a few exemptions. These are:

• gifts from NRE accounts
• gifts received from abroad in foreign currency
• gifts of specified assets owned by NRIs
• gifts of specified funds by NRIs
• properties received under a will
• properties received in contemplation of death
• gifts received on marriage - upto Rs. 2,00,000.
• ex-gratia payment received from employers towards bonus, gratuity and pensions <
• amounts received from supporting relative towards educational and medical expenses
• a basic exemption on gifts received of upto Rs. 30,000 every year.

All these exemptions deserve detailed discussion. We shall take them up for examination if - hopefully not - the proposed amendments become law.

A Company in which the public were interested was exempt of gift tax. However, no such exemption is offered under the proposed law. Which means all public companies will now be subject to tax on capital receipts. Is this again because the government suspects leakage of revenue by public companies using gifts as a medium of tax avoidance?

In amalgamation of two companies into one, technically there can be transactions which can appear as gifts received or property received without adequate consideration. All schemes of amalgamation are approved by the High Court. It, therefore, goes without saying that the transactions are above board. The gift tax law exempted such transactions from gift tax. However, no such exemption exists in the proposed law and a large number of shareholders can be subjected to income tax when there is amalgamation and they receive shares in the amalgamated company in exchange of shares in the amalgamating company.

The gift tax law had several exemptions. For example, several savings certificates, specified bonds etc were exempted from gift tax.

However, no such exemptions have been provided for under the income tax law. This would be unjustified as the Government would be going back on its commitment not to levy gift tax on such securities.

I would like to repeat the first article's questions once again: Are these the type of transactions which are intended to be taxed to plug leakage of revenue resulting from abolition of gift tax? Is this what the very Honourable Finance Minister intended to do?

Look out for another episode of hidden catastrophes in the Budget.