Facts in the Case
- A makes a gift of Rs. 50,000 to his friend B.
- The gift was made on 1st September 2009.
- The Income Tax authorities levy tax on this gifted amount in the hands of the recipient (B).
- B (the assessee) challenges the legality of the tax levy, arguing the gift should be exempt under the Income Tax Act.
Issues in the Case
- Whether a gift of Rs. 50,000 made to a friend is taxable under the Income Tax Act.
- Whether such gift falls within the scope of “income” under Section 56(2)(vii) of the Income Tax Act, 1961 (as it stood in 2009).
- Whether the gift is exempted on account of the relationship between the donor and donee.
- What type of interpretation should be applied to resolve the ambiguity regarding the taxability of gifts?
Principles Applied
1. Statutory Provision – Section 56(2)(vii) (Applicable in 2009)
- Section 56(2)(vii) of the Income Tax Act, 1961, introduced with effect from 1st October 2009, provided that:
- If an individual or HUF receives any sum of money exceeding Rs. 50,000 without consideration, the whole amount is taxable as income from other sources, unless it is received from a relative or falls under specified exemptions.
- However, since the gift in question was made on 1st September 2009, the amended section was not yet in force.
- Prior to this, under Section 56(2)(v) (effective from 1-9-2004 to 31-3-2006), only gifts above Rs. 25,000 from non-relatives were taxed.
- Between 1-4-2006 and 30-9-2009, there was no provision taxing gifts from non-relatives unless they were in the form of property or under certain conditions.
2. Literal and Temporal Interpretation
- When a statute imposes a tax, it must be interpreted strictly.
- A literal interpretation must be adopted unless it leads to absurdity.
- Taxing provisions must have clear legal authority, and cannot be enforced retrospectively unless explicitly stated.
3. Judicial Precedents
CIT v. P. Firm Muar, AIR 1965 SC 1216
- The Supreme Court held that taxation statutes must be interpreted strictly and there is no equity in tax laws.
K.P. Varghese v. ITO, AIR 1981 SC 1922
- The Court held that legislative intent must be gathered from the language of the provision, and burdens must not be imposed without express authority.
Judgment
- Since the gift of Rs. 50,000 was made on 1-9-2009, Section 56(2)(vii) of the Income Tax Act, which imposes tax on gifts from non-relatives above Rs. 50,000, had not yet come into force.
- The literal and temporal interpretation of the law supports the assessee’s challenge.
- In the absence of a specific charging provision at the time the gift was made, the levy of income tax is invalid.
- Therefore, the gift cannot be taxed, and the assessee succeeds in the challenge.
