(First published on Linkedin)
Clause 92(2)(m) of the new Income-tax Bill [presently, section 56(2)(x)] taxes receipt of shares/ securities/ specified properties without consideration as deemed income in the hands of the recipient. However, there are two relevant carve outs: a) Direct gifts in case of “relatives”, as defined, from the recipient’s perspective; and b) Contribution to a private trust solely for the benefit of relatives, from the contributor’s perspective. This creates a dichotomy as under:
– Direct Gift: The overall tone of deemed gift tax has been drafted from the recipient’s perspective, and rightly so, since deemed gift tax is in the hands of the recipient. Hence, in case of a direct gift, an uncle gifting shares/ securities/ specified properties to a nephew/niece is exempt, since “relative” includes brother/sister of the parents of the individual from the recipient’s perspective.
– Contribution to a Trust: However, when an uncle contributed shares/ securities/ specified properties in a trust for the benefit of nephews/nieces, the exemption fails, if literally interpreted – because the term “relative” is tested from the contributor’s side, and lineal descendants of a brother or sister of an individual is not included from a contributor’s perspective.
Thus, the same relationship is treated differently in substance depending on the route – a gift vs. a trust, which is a logical absurdity.
Interestingly, the Select Committee on the Income-tax Bill, 2025 did flag this asymmetry, but ultimately parked it as a “policy issue”, and did not make suitable amendments to the Income-tax Bill, 2025, leaving the asymmetry unresolved.
What makes this more curious is that in other parts of the same Bill, as well as under the current Act, the law does recognize “lineal descendants of a brother or sister of an individual” as a valid inclusion in the definition of a relative:
– Clause 355 (new law) and Section 13 (current law) in the context of charitable trusts.
– Clause 515 (new law) and Section 288 (current law) for defining a “relative” of an accountant.
If the term “relative” under Clause 92(2)(m) is aligned with these broader definitions, the contribution of shares/ securities/ specified properties by an uncle in favor of nephews/nieces via a trust would be exempt and maintain:
a) the spirit of the original direct gift exemption;
b) logical validity of reciprocal relationships; and
c) the sanctity of legislative symmetry over narrow technicalities.
This symmetry is utmost necessary in today’s time when succession planning for Indian business families have picked up significant steam.