Gift by NRI to Resident: Be aware of Section 68 of Income Tax Act

I receive a lot of queries on the tax implications in India in case an NRI makes a gift to a family member or a friend in India. While it is fairly widely known that Section 56 of the Income Tax Act (ITA) exempts gift from relative irrespective of the amount, not many people know that the Income Tax Department can raise a questions on the genuineness of the gift by invoking a little known Section 68. If assessee cannot prove genuineness of the gift, notwithstanding that it is exempt u/s 58, Income Tax Department (ITD) can tax it as unexplained income u/s 68 and also initiate penalty proceedings u/s 270A. It may be noted that off late, ITD has become tough on these transactions and increasingly flagging those for scrutiny and sending notices to person receiving gifts.

In this regard, apart from an analysis of the applicable legal provisions, I have also analysed some 30+ judgments of Hon’ble ITAT and High Courts on this matter and presenting my views on the following issues:

Tax provisions surrounding NRI gifts
Possible actions by Assessing Officer (AO) to bring to tax this amount u/s 68
Remedies available to the assessee – Important learnings from the legal precedents and settled principles of law to help you defend your case
Precautions to be taken while entering into gift transactions with NRI

Notes:

Since my practice focuses on NRI taxes, I’ve written this post from an NRI perspective. However, please note that most of the post also applies to resident-to-resident gifting as well. Even a single unexplained entry in your bank account (irrespective of residential status) falls into the scope of Section 68.
If you are a CA, please note that while I’ve tried to comprehensively analyse the issue and give citations of case laws wherever possible if you feel I have missed any important judgment/legal provision which is relevant to the context, I will greatly appreciate if you can bring it to my attention by way of a comment.

Image Credit: www.dnaindia.com

Tax and legal provisions surrounding gifts from NRI

First I am presenting a summary of applicable tax provisions in case of a gift transaction from NRI:

Section 122 of Transfer of Property Act:

“Gift” is defined as – “Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.

Also read: Transfer of Property Act – Important Points

As per this definition, to be valid, gift should have following characteristics:

It is made voluntarily i.e. without any obligation or coercion
It is without consideration – a quid pro quo arrangement are not two separate gifts
Gift has to be “accepted” by donee.

It may be noted that the Act does not require gift other than of immoveable property to be reduced in writing or to be registered. However, Registration Act, 1908 allows registration of a gift deed at the option of the parties.

Section 56 of ITA:

So, in brief, what this section says is that any gift to a relative is exempt. Any gift to a non-relative is taxable if amount in aggregate for a year exceeds INR 50,000.

Section 68 of ITA:

Now, we come to the little known Section 68 as follows:

Cash credits.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10.

So, basically what this Section does it that it gives power to the Assessing Officer (AO)to question ANY credit entry in the bank statement of assessee as to the nature and source of such income. And, if the assessee is not able to explain or explanation is not satisfactory in opinion of AO, he can tax this money.

Section 115BBE of ITA:

This section prescribes tax rate for unexplained amount u/s 68. Earlier provisions prescribed a flat 30% tax however after demonetisation, the Taxation Laws Amendment Act, 2016 has brought big change to this provision of law. Now, if the unexplained income is disclosed by assessee himself, 60% tax will be applicable – please note that this is a brief overview – the discussion around recent changes to Section 115BBE merits a separate post & I will post it shortly.

NRI gift treated as a cash credit u/s 68 – A Case Study

As we discussed above, Section 68 gives a right to Assessing Officer to question nature and source of any transaction. This is irrespective of the fact that the transaction is in nature of a gift as is exempt u/s 56 (2)(vii) of ITA.

In such a situation, the settled position of tax law in India is that the assessee who receives the gift shall have the primary onus to prove that it is a “genuine” gift transaction and one that onus is discharged, the burden of rebutting the view of assessee will fall on the Assessing Officer.

Let us understand with the help of a case study.

“A”, an NRI, lives and works in USA. In a particular year, he transfers INR 25 lacs to “B” who is his father from his NRE account. The understanding was that the transaction is a “gift” which father will use to purchase a flat in Mumbai. Assessing Officer selects the case of “B” for scrutiny assessment. He asks for the bank statement of B and sees a credit entry of INR 25 lacs. Father is retired and has disclosed only up to INR 5 lacs as income from investments etc. out of his corpus in India. AO asks B to explain nature and source of this transaction from B.

In this case, B may get one of the following notices:

Notice u/s 131 – This is a general notice where AO can ask for questions or clarifications or require books and accounts to be brought before him for verification
Notice u/s 143(2) – This pertains to a scrutiny assessment
Notice u/s 147 – This pertains to a reassessment where already an assessment is closed or where the assessment is not done, AO still has the power to re-assess a case till 6 years.
Notice u/s 263 – This pertains to a revision by Commissioner/Principal Commissioner of an already closed assessment which the concerned feels has not been enquired properly and is prejudicial to the revenue.

In this case, if B gets a notice for this transaction, first thing that B has to do is NOT TO IGNORE THE NOTICE.

Not appearing before the AO gives a strong presumption that transaction was intended to avoid tax. Hence, B should appear before AO – he should take help of a CA as his authorized representative but in my opinion, it is highly recommended that B should also personally accompany his CA before the AO.

In such a situation, the settled tax position in India is that the assessee will need to prove following three points to the Assessing Officer:

Transaction is a genuine “gift” transaction
There was a reason or occasion for the gift
The donor was financially capable & credit worthy to give a gift

Important points from my reading of court judgments on this issue

ITD and Indian courts accept duly authenticated foreign country tax return to find out credit worthiness of NRI donor
It is settled law that identity of the donor, as well as the transactions moved through the banking channels is not sufficient to prove the genuineness of the gift. The onus lies upon the donor to establish the identity and also the donor’s capacity to make such gift. – Assistant Commissioner of Income-tax 20(2) v. Deepal H. Shroff[2011] 9 taxmann.com 3 (Mumbai)
If assessment is reopened u/s 148 and assessee is asked to furnish a return, he should furnish it promptly and within time – Aiyub Umarji Patel v. Income-tax Officer [2014] 42 taxmann.com 471 (Gujarat)
If assessee fails to produce copy of passport of donor or arrange for a personal appearance of the donor, condition regarding proving identity of donor fails and gift can be treated as cash credit – Deputy Commissioner of Income-tax* , Special Range I, Lucknow v. Alok Gautam [2010] 41 SOT 102 (LUCK.)
If the proceeds of gift are invested by resident in India, as far as possible, it should be ensured that time gap between receipt of gift and making the investment is not very high as that can raise suspicion on the reason of gift. –Alok Gautam case and B.P. Sheraffudin v. Assistant Commissioner of Income-tax, Circle-1, Palakkad [2008] 23 SOT 227 (COCHIN)
it is a well-settled principle of law that the appellate authority has no power to enhance the assessment by discovering new source of income not mentioned in the return and which is not subject-matter of the assessment order. The Commissioner (Appeals) has no jurisdiction to assess a source of income which is not disclosed either in the return or in the assessment order – B.P. Sheraffudin case
A close relationship between donor and donee is a must for proving genuineness of gift – if there is no close relationship; onus is all the more on assessee to prove natural love affection for the gift.
Donee and even his wife should know the family details of donor, place/city of residence in USA and India – if donee fails to answer these questions in the assessment, it can raise strong presumption against the genuineness of gift.
The fact that the transaction between NRI and resident is cleared by RBI and cash deposit is not possible as a permitted credit in NRE account will not make it a genuine transaction under ITA – Commissioner of Income-tax, Delhi (Central) – II v. Anil Kumar [2008] 167 Taxman 143 (Delhi)
Once the particulars of income have been duly declared, then it cannot be concluded that the assessee has concealed the particulars or has furnished inaccurate particulars of his income. It has also been held that mere observation of the Assessing Officer without recording any satisfaction concerning concealment of income was not sufficient for initiation of proceedings under section 271(1)(c) of the Act – Commissioner of Income-tax, Chandigarh v. Balbir Singh [2007] 164 TAXMAN 65 (PUNJ. & HAR.)
If assessee files an application for revision of order u/s 264 and it is rejected, it is not an appealable order and only route for assessee is to file a writ petition to the High Court under Article 226/227 of the Constitution of India – Miss. Veena v. Commissioner of Income-tax [2015] 56 taxmann.com 364 (Punjab & Haryana)
Once assessee brings sufficient material on the record in the assessment proceedings, the initial burden which depended on the assessee gets discharged and the shifts to the AO to disprove the same – Income-tax Officer v. Kailash Chand Bansal 2003] 1 SOT 485 (DELHI)
In ascertaining source of funds for the gift, AO cannot question the source of the source of funds for the gift. [2015] 61 taxmann.com 178 (Chandigarh – Trib.) Gulshan Verma v. Deputy Commissioner of Income-tax, Yamuna Nagar – in this case, donor produced USA tax return which disclosed sufficient income to make the gift – if AO does not challenge the veracity of tax return, he cannot challenge the source of funds of that income in tax return
Once the Assessing Officer is satisfied with the explanation offered on inquiry, it is not open to the Commissioner in exercise of his revisional power to direct that further enquiry has to be done. At the very highest, the case of the revenue is that this is a case of inadequate inquiry and not of ‘no enquiry.’ It is well settled that the jurisdiction under section 263 can be exercised by the Commissioner only when it is a case of lack of enquiry and not one of inadequate enquiry. [2016] 71 taxmann.com 272 (Bombay) Commissioner of Income-tax, Central-III v. Nirav Modi
If a donor makes a gift of a big amount and his wife is not aware of the gift, that raises a strong presumption that the gift was not genuine – [2008] 171 TAXMAN 136 (DELHI)(MAG.) Assistant Commissioner of Income-tax, Circle Hardwar v. Vishan Narayan Khanna
If assessee revises the tax return and declares the gift as income in a return filed in response to a tax notice with an understanding that he will not push the case in appeal and AO will not levy penalty for concealment of income, AO cannot levy the penalty. Also, if assessee is not given an opportunity to cross examine a witness, it violates principle of natural justice and cannot be admissible as evidence – [2003] 131 TAXMAN 87 (ASR.) (MAG.) VINOD KHURANA V. ASSISTANT COMMISSIONER OF INCOME-TAX
The mere fact that gift is made from NRE account and flow of funds was through banking channels will not make the gift sacrosanct and unquestionable [2015] 56 taxmann.com 195 (Delhi) Sarita Aggarwal v. Income-tax Officer

What questions can the AO ask the assessee to ascertain the genuineness of gift?

In one of the judgment DEVICHAND B. JAIN v. INCOME-TAX OFFICER [2002] 77 TTJ 789 (PUNE), I came across the exact questions asked by AO to the assessee to ascertain the genuineness of gift. I am reproducing the extract here so that you can get a sense of what kind of questions can AO ask and how you should prepare yourself, in case need arises.

“Q. 4 : On going through your return, it is seen that you have received the gift of Rs. 7,84,500. Please give the details of the gift received.

Ans. :I have received the gift from Shri Sunil K. Kriplani. This amount has been received by demand draft by registered A.D. This gift has been sent by Shri Kriplani from USA. The amount of gift is $ 25,000.

Q. 5 : How do you know Sunil K Kriplani ?

Ans. :Myself and Shri Sunil Kriplani were classmates, before 1942, in Bombay. We were students of Marwadi Vidyalaya High School, Sandhurst Bridge, Bombay.

Q. 6 : How long were you associated with ‘Shri Sunil Kriplani after 1942 ?

Ans. :I left the school in 1942. He used to occasionally meet me upto 1948 in Bombay. I have resided in Poona from 1948. Sometimes after 1948, I used to meet him at Bombay.

Q. 7 : Where was Shri Sunil Kriplani residing in Bombay.

Ans. :He was residing at Colaba in Bombay. I do not know the exact residential address.

Q. 8 : Can you give the details of migration of Shri Sunil Kriplani and the business carried on by him ?

Ans. : Appropriately he has migrated 20/25 years before. He runs a departmental store of cloth. He resides at Sant Martin, U.S.A.

Q. 9 : When have you met last Shri Kriplani ?

Ans. : Approximately, 4-5 years back I met him.

Q. 10 : Can you give details of educational qualification and family members of Shri Kriplani ?

Ans. : I do not know the details.

Q. 12 : Please give the exact details of Shri Kriplani’s visit to you.

Ans. : I cannot give the exact details.

Q. 13 : In what context Mr. Kriplani visited India ?

Ans. : I do not know the purpose of his visit. He stayed in my house.

0.14. Can you give the details of business premises of Shri Kriplani ?

Ans. : He runs business at Saint Martin. I do not know the exact address.

Q. 16 : How did you receive the gift from Shri Kriplani, Please furnish full details.

Ans. : Shri Kriplani visited me at Poona. He made desire to gift money and amount was not decided. I do not have any gift deed.

Q. 17 : Do you have any confirmation of Shri Kripalani or affidavit for the said gift received by you ?

Ans. : I do not have any confirmation or affidavit of Shri Kriplani at present.

Q. 18 : I am giving a period of 10 days for filing of affidavit of Shri Kriplani for the gift amount.

Ans. : I will not file any confirmation/affidavit within the said period.”

What documents/information can AO ask to support gift transaction?

Basis the analysis of court judgments, AO can ask donee to produce all or any of the following documents or information in the course of assessment proceedings:

Gift deed
Affidavit from donor confirming the gift (a signed declaration on plain paper should also do, but in one case, a specific affidavit was called for)
Overseas/NRE/NRO Bank statement of NRI from which gift was made
Bank statement of donee
Tax return of donor and donee
Other documentation to prove source of funds for the gift in hands of donor
Balance sheet of donor (to prove financial capacity of donor to make the gift)
Documentation regarding relationship between donor and donee
PAN of donor and donee (to establish identity)
Copy of passport of donee
Copy of Permanent Residency Card of donee, if applicable (to prove residency outside India)
Statement from issuing and recipient bank on flow of funds

Can AO ask for personal appearance of NRI donor?

If the documentation sufficiently proves the nature and source of gift, AO normally does not insist on personal appearance of donor.

However, in cases where the transaction is with a non-relative OR where the documentation provided fails to establish the genuineness of gift transaction, AO is within his powers to require a personal appearance.

To the best of my knowledge, unlike Companies Act, ITD do not as up till now permit video conference proceedings hence if NRI donor is called, he will have to appear personally. In such a case, non-appearance of donor will raise a suspicion on genuineness of gift.

CA representing on behalf of assessee can first insist that the affidavit/declaration given by NRI donor should be considered in lieu of his presence. If this contention is not accepted, and it is not possible for NRI to attend on short notice, CA should formally ask for a extension specifying a date when NRI can appear before the AO.

What if AO relies on statements made by third parties to prove that transaction was not genuine?

AO has powers u/s 131 to ask for information from various sources. So, for a gift transaction where donor A mentions source of funds to be sale of shares through broker X, AO can make X as witness. However, principles of natural justice require A to be given an opportunity to cross-examine X in order to ensure that statement of X is admitted as evidence.

It is seen in a few cases that the AO did not offer such an opportunity to the assessee and that became one of the reasons for the court to set aside the order of AO treating gift as income.

Pointers on drafting a gift deed

In my view, NRI and resident entering into a gift transaction MUST enter into a gift deed either before or after the transaction to document the mutual intention of parties.

There is no requirement that gift deed should be on stamp paper – it can be on plain paper.

If gift is of high amount, notarization or better still, a registration is recommended.

To help you draft a gift deed, I have prepared a format, and you can download it here:

GIFT DEED FORMAT [DOWNLOAD]

After downloading the gift deed, you need to make changes as per your unique situation. You can also get the draft vetted through a CA/Lawyer if need be.

My thoughts on this issue & precautions to be taken before entering into gift transaction with NRI

Returning NRI should not use the gift route to invest in India in the name of parents’/ relatives’. This will have implication from Section 68 perspective as well as Benami Prohibition Act, even if funds are genuine. Also read – Benami Prohibition Act: An Analysis If it is noted by AO that there is a flow back of funds back to NRI some years after return to India, AO can say that it is not a “gift” and was merely a way NRI used to evade taxes in India. Be very careful! – read more here:
As regards cash gift, it is pertinent to refer that Finance Bill. 2017 has proposed that transactions in excess of INR 3 lac per day cannot be made in cash. This provision must be kept in mind. In my view, cash gift is risky and should be avoided at all costs. Gift should flow from banking channels only. Also read: Analysis of Finance Bill 2017 & Implications for NRI
If the gift is not genuine and is a part of the larger scheme of converting unaccounted income in India, note that there are also serious implications under FEMA and PMLA. Desist from such adventures at any cost. Also read: FEMA Implications on NRI Gift Transactions: A Scenario-wise Analysis
If NRI sends small amounts as maintenance expenses to parents in India, it should not be looked at adversely by ITD, however sending BIG amounts to parents who are relatively financially independent in India can be questioned. Care should also be taken that in such cases; parent should file tax returns in India and properly disclose income arising from those investments in the tax return.
In case of big amount of gift, though not required under Transfer of Property Act, a registration of gift deed should make assessee’s case strong on genuineness aspect of the gift. Fact that it requires both donor and donee to appear personally along with witness to Sub-Registrar office and record the transaction reduces the scope of argument that it is a bogus gift.
If the proceeds of NRI gift are invested by resident in investments in India say MF, shares, property etc., it can also come to notice of ITD through the Statement of Financial Transactions (erstwhile known as AIR) filed by financial institution to the ITD.
Person receiving gift and NRI should, as far as possible, fall in the definition of “relative” under the definition of Income Tax Act.
Gift deed should, as far as possible, specify the source of funds for the gift and the reason/occasion for making the gift.
There must be a case for a natural love and affection/close relationship or reason/occasion to make a gift. Mention this fact clearly in gift deed.
Resident should only accept a gift from a NRI who is willing to provide documentation to establish source of funds and, in the worst case, appear personally before the AO to confirm genuineness of gift transaction. DO NOT accept gift from strangers or people less known to you.
If resident receives exempt gift from NRI, he should disclose it as exempt income while filing tax return. This will ensure that even in the worst case that income is held taxable u/s 68, AO cannot levy penalty u/s 270A of ITA.
When AO calls and asks you for information, your statement is a statement under OATH – submission of false/contradictory information can not only lead to an adverse inference that transaction is not a gift, but also invite penal implications u/s 200 of Indian Penal Code (IPC) – hence, in assessment proceedings, if you do not know something, no AO can stop you from saying “Sir, I am not sure. I will check and get back to you”.
Gift of big amounts from NRI to resident can also cause concerns from a succession planning perspective. Legal heirs of donor can later challenge the gift in an Indian court on grounds of undue influence or coercion. In such cases, it is better to take all members of family in confidence and if possible, register the gift deed in India. I will not elaborate on this issue in this post as this is not the topic of the post.
NRI should, before filing tax return in India, scan all credit entries in the bank statement to ensure that there are no entries that you cannot explain the source of – if yes, they can be treated as your income u/s 68 of ITA.

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