Income tax is a tax on the income of a person. It is quite settled that such income, does not include capital receipts. Prior to introduction of gift taxation u/s 56, gifts received out of natural love and affection were treated as capital receipts not chargeable to tax under the Income-tax Act, 1961 (‘the Act’).The same was laid down by the Apex Court in case of Mahesh Anantrai Pattani & Anr. vs. CIT [TS-5061-SC-1960-O]. In this case, it was had held that sum paid as a personal gift and as a token of personal esteem cannot be taxed under the Act. Further, the CBDT also clarified the same by way of Circular bearing number 158 dt. 27^th December, 1974. In the said circular, which was in context of section 10(3) [then prevailing], the Board clarified that “Receipts which are of a casual and non-recurring nature will be liable to income-tax only if they can properly be characterised as "income" either in its general connotation or within the extended meaning given to the term by the IT Act. Hence, gifts of a purely personal nature will not be chargeable to income-tax, except when they can be regarded as an addition to the salary or when they arise from the exercise of a profession or vocation”.

In the above context, a major controversy arose whether gifts received by professionals constitutes capital receipt or business income arising out of exercise of the profession.  The Department always contended that gifts received by any professional either from his clients or followers were in connection with and arising out of exercise of the profession and therefore, the professional receipts cannot be taken under the guise of gift.However, the assessees used to contend that such receipts were casual in nature which did not arise out of exercise of the profession.

Reference in this regard can be made to the judgment of the Hon’ble Bombay High Court in case of Dilip Kumar Roy vs. CIT (94 ITR 1). In this case, the assessee received gift from the donor who only knew the assessee through his books and records. Further, such donation was sent for the purpose of building the temple house. Such gift was treated by the Department as being received by the assessee from the exercise of his profession. When the matter travelled to the High Court, it held that the sums received were voluntarily out of personal regard, esteem and veneration to enable assessee to build a temple. The Court also held that merely because the assessee was carrying on a vocation there was no presumption in law that any amount received by a person carrying on a vocation was automatically income subject to tax and that the burden was on the Department to prove the same. Similar view was taken in the following cases:

1. CIT vs. DR. B.M. Sundaravadanam - 148 ITR 333 (Mad)
2. CIT vs. M. Balamuralikrishna - 171 ITR 447 (Mad)
3. CIT vs. Prof. P.G.A. Nath- 234 ITR 854(Del)
4. CIT vs. Gopala Naicker Bangaru - 344 ITR 297(Mad)
5. Aroon Puria vs. CIT - 375 ITR 188 (Del).

Contrary view was taken by the Hon’ble Calcutta High Court in case of Amarendra Nath Chakraborty vs CIT (79 ITR 342). In this case, receipt of gift of property by the assessee was held to be traceable to the assessee's vocation as a preacher of the Satsang cult. Donor had made clear in the deed of gift that in consideration of the benefits she derived from the assessee's preachings the gift was made. In such circumstances the Court held that value of the gift was undoubtedly a part of assessee's income as a preacher.

Thus, it can be deduced from the above referred cases that in such type of controversies, everything would hinge upon the peculiar facts of the case.

A similar controversy was recently adjudicated upon by the Mumbai bench of the Income tax Appellate Tribunal in case of Shahrukh Khan vs. ACIT [TS-6420-ITAT-2017(Mumbai)-O].

Brief facts of the case:

The assessee is a very famous actor in Bollywood. The case deals with the AY 2008-09.In the year under consideration, assessee received a gift of Signature Villa in Dubai from one M/s Nakheel PJSCin their Palm Project.Assessee, during the assessment proceedings, contended that the receipt of the said gift was simply a unilateral gratuitous act of gift from a personal friend of the assessee namely H.E. Sultan Ahmed Bin Sulayem (‘Sultan’) on account of natural love and affection, through his company Nakheel PJSC (‘company’).

Assessing Officer’s contentions:

The Assessing Officer (‘AO’) gathered certain material from the website of the company. He found that assessee made many visits to the sale/site office of the donor in the year 2004 & 2005 and also participated in their Annual Day Celebration in the year 2007, the photographs of which were displayed on the website of the company. Based on the same, he opined that the said company was using assessee's brand image for endorsing its Palm Project since 2004 on its official website and other electronic & print media.

AO also noted that assessee derived major income from advertisement and stage shows and was regularly endorsing various brands because of his iconic image and globally recognized fame.

AO also alleged that ownership of the said Villa vested with the corporate entity which had separate/distinct legal identity from its directors and therefore, such company being bereft of any emotions/sentiments like natural love and affection was incapable of making the said gift to the assessee.

Joining all the dots, he alleged that the said gift transaction was mere camouflage to evade taxes.

Argument of the assessee before the AO:

Assessee contended that in the year 2004, Sultan by a letter expressed his intention to donate the said villa to the assessee. Therefore, it was argued that the said gift was offered in the year 2004 itself. Thereafter, the assessee sought permission of RBI which was only granted in the year 2007. Accordingly, the assessee argued that the said gift was received much earlier, although fructified later ondue to government permission and therefore, there was no linkage with assessee's appearance at the Annual Day which took place in the year 2007.

Not impressed by the arguments of the assessee, the AO added the value of the Villa (Rs. 17 crores) to the total income of the assessee as professional receipts.

The assessee carried the matter to the Commissioner of Income-tax (Appeals). However, the Commissioner (Appeals) upheld the action of the AO in adding the value of the Villa to the total income of the assessee, however a small relief was provided in the matter of valuation. Both the assessee and Department carried the matter to the Tribunal. In the Tribunal, detailed and elaborate arguments were made by the assessee which is given hereunder:

Arguments of the assessee before the Tribunal:

• Sultan, Executive Chairman of a Company called Nakheel LLC-a private Limited Company, was personal friend of the assessee and he expressed his desire to gift a villa to assessee vide letter dated 16/12/2004.The assessee sought permission of RBI as the Villa was situated in Dubai. The permission of the RBI came only in the year 2007.Pursuant to the offer by Sultan, assessee visited sales office of the donor twice in 2004 & 2005 to finalize the location etc. of the Villa. Thereafter, when the permission was received from RBI, the gift deed was executed by the donor in assessee’s favour.
• Assessee argued that since, the ownership of the property was vested in the company which was under exclusive control of the Sultan, gift deed was executed by the said company.
• The assessee attended the Annual Day celebrations of the said company in the year 2007 at the request of the Sultan and merely addressed the employees of the company. He argued that he did not undertake any stage appearance or performance which tantamount to brand endorsement or advertisement for the donor. Further, the assessee showed the general agreements which he enters for undertaking stage performances and also demonstrated the fact that such performances require extensive preparation including lots of peripherals, back up artists and rehearsals etc.
• It was also argued that the AO obtained few photographs from the company’s website. The said photographs were one of the news items from many other news items. Further, such news itemswere placed at an obscure portion of the website and was not prominently displayed to public at large and had to be extracted from the website of the company. Accordingly, it was argued that the photos could not lead to a conclusion that the assessee undertook any sort of brand endorsement or advertisement for the donor.
• It was also argued that assessee charged fees ranging from Rs.6.50 crores to Rs.8 crores in the impugned AY for brand endorsement for various products. The assessee also demonstrated that the endorsements are subject to heavy rehearsals, shoots etc. Whenever, the assessee undertakes such kind of brand endorsement, the same is splashed all over electronic/print media to get maximum public attention and therefore, reliance of revenue merely on two photographs and one of the news item placed in the obscure portion of the website was not justified to tax the value of the gifted Villa in the hands of the assessee.
• In so far as the issue as to gift by a corporate entity was concerned, the assessee argued that as per the prevailing practice/custom in Dubai, the company remains under the exclusive domain of Sultan and nobody could question the action of Sultan. Since, the ownership of the villa was vested in the company, the gift deed was executed by the company only at the behest of Sultan and to fulfil his desire to gift a Villa to the assessee.

The Department, on the other hand argued that :

• Mere presence of the assessee at the Annual Day resulted into advertisement & brand endorsement for the donor company. The assessee wanted to acquire the Villa in the said project and therefore, made several visit to sales offices of the donor company in the year 2004 & 2005.
• When the permission was obtained in the year 2007, the gift deed was executed by the assessee in exchange for performance at the Annual Day Celebrations of the Company. The mere presence of the assessee resulted into attracting prospective buyers to the said project and the donor company used assessee's photograph at its official website for the said purpose.
• The said gift was offered by Sultan but gift deed was executed by the corporate entity which has separate legal identity and is quite distinct from its owners. The said corporate entity being artificial juridical person could not have human sentiments/emotions like natural love and affection and therefore, was incompetent to execute the said gift. Therefore, the transaction in reality was not a gift but remuneration towards brand endorsement/advertisement

The Tribunalafter considering the arguments held as under:

• The whole genesis of the gift was Sultan's letter dated 16/12/2004. The same was executed on the letterhead of Nakheel by Sultan. A perusal of the same showed that the Villa was given as a token of appreciation.Thereafter, the assessee sought permission of the RBI and after a series of correspondence between assessee/assessee's representatives and RBI, the permission was finally given to the assessee vide RBI letter dated 20/04/2007.
• Subsequently, deed of gift was executed in assessee's favor on 16/09/2007, wherein it was mentioned that gift was given to honor the donee and without any monetary consideration.
• The Tribunal held that all the events, prima facie, were part and parcel of the same transaction solely aimed at fulfilling Sultan's wish to gift a Villa in assessee's favour.
• In so far as the reliance of the AO on the photos taken from website was concerned, the Tribunal held that same in no way suggested any stage performance by the assessee, rather it appeared that the assessee was merely addressing the employees of the company at the said gathering. For the said conclusion, the Tribunal also relied upon the confirmation from the company.
• Further, in respect of the photographs of assessee's visit to the Nakheel Sales Centre, the Tribunal stated that the said photos appeared in the 'news' tab of the website and was one amongst many other news items. Therefore, it could not be concluded that the said news item tantamount to any kind of advertisement or brand endorsement for the donor in exchange of gift.
• In so far as the capacity of the corporate entity to make gift was concerned, the Tribunal held that argument that the corporate has separate legal entity as distinct from its members/directors, may be true in Indian Context was not true as per customs prevailing in Dubai.Further, it relied upon a Mumbai Tribunal in the case of DCIT Vs. KDA Enterprises Private Limited [TS-5128-ITAT-2015(Mumbai)-O] to drive home a point that even in India, companies are competent to make gift.
• Ultimately, the Tribunal held that no addition could be made merely on the basis of suspicion, conjectures or surmises and that in the present case, the assessee haddischarged the onus of proving the gift transaction being unilateral gratuitous act of the donor company.
• The Tribunal also referred to section 56(2)(vii) to hold that gift in kind was taxable w.e.f. 1.10.2009 and was therefore not applicable to the year under consideration.

Thus, in the above referred judgment, after weighing the facts of the case, the Tribunal ruled that the gift received by the assessee had no connection with the profession exercised by him and was in fact a gratuitous gift given by a personal friend of the assessee.

The above judgment would have no relevance after the introduction of section 56(2)(vii). The said section brings to tax receipt of certain capital assets without adequate consideration after 1.10.2009 and before 31.3.2017. With effect from 1.4.2017 section 56(2)(x) takes care of such kind of transactions.

Since, this topic is discussed, it would not be out of context to highlight the fact the Government has slowly roped in various sections to tax various kinds of receipts which were earlier held to be capital receipts. Off late, the Government has also started shifting onus of proving everything on the assessee. Such actions of the Government are accepted by the masses without any noise. This in my view, would makeGovernment believe that no matter what they are legislating there shall be no resistance from the masses, which is not a sign of healthy democracy. I therefore, believe, that such actions of the Government should receive strong criticism and resistance from the masses so as to make the Government more responsible.