TN PANDEY, FINANCIAL EXPRESS, AUGUST 13, 2OO6
With increase in number of incidents occurring consequent to floods, earthquakes, riots/civil disturbances, fires, explosions, terrorist activities, the issues relating to taxability of compensation/monetary relief in cash and kind are cropping up in big numbers. The problems that arise in this context are whether the sums received by the affected parties are liable to Income-Tax?
That such sums are not exempt from tax automatically and special provisions are needed to secure tax benefits for these is clear from the subsequent discussion.
• Section 10(BB) was required to be inserted in the I-T Act, 1961 (Act) by the Finance Act, 1992, to give exemption from tax for payments made under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 and any scheme framed thereunder to assessees in receipt of such sums with a rider to prevent double advantage.
• Section 33B from April 1, 1967, gave deduction from total income equal to 60% of the amount admissible as deduction in respect of depreciation u/s 32(1)(iii) when extensive damage was caused to any building, machinery, plant or furniture of an assessee because of flood, typhoon, hurricane, riot or civil disturbance, fire, explosion, enemy action, etc. The tax benefit was by way of deduction – not to any grant of compensation received to compensate the assessee for the loss suffered. However, this benefit stands withdrawn from April 1, 1985.
These illustrations show that the I-T Act does not contain any in-built provision to exempt such benefits from Income-Tax even though these are received in unusual/extraordinary circumstances – not within the control of an assessee.
Position worsens after gifts are taxed as income
For the amounts received consequent to tragedies (supra), it could have been argued that such receipts are not taxable because these do not have any ‘source’. These come as a windfall and hence, not taxable. However, this argument may no longer be valid after insertion of clause (v) in sub-section (1) of section 56 from April 1, 2004, which taxes receipts under the head “income from other sources” and provides for taxation of gifts as income in the specified circumstances. This provision applies only to individuals and Hindu undivided families and is attracted when amounts are received by such assessees “without consideration”. The limit of the exempt amount, which was Rs 25,000 on each occasion without “aggregation” has been raised to Rs 50,000 from the AY 2007-08, applicable to aggregate of money (gifts) received during a financial year. The liability to tax extends to sums received from local authorities/corporations/ governments/charitable institutions, etc., whose income is exempt from tax except when such sums are received on the occasions of marriage under wills/inheritance/in contemplation of death. Amounts received from relatives are exempt and for this, the term “relative” has been defined in the explanation thus:-
(i) spouse of the individual;
(ii) brother or sister of the individual or spouse;
(iii) brother or sister of the parents of individual;
(iv) any lineal ascendant or descendent of the individual;
(v) spouses of the persons referred to earlier at (i) to (iv).
Thus, from April 1, 2004, gifts or voluntary payments, compensations, etc, received on account of the loss suffered consequent to tragedies of the nature described earlier are liable to tax unless exempted as in the case of Bhopal Gas victims. The sums received by the family members of persons killed in Jammu & Kashmir or in other places in the country (like Bombay blasts of 11/7) or in countries like Afghanistan (in the case of persons like Suryanarayana) would be liable to tax unless exempted by law or notifications. The payments received in the above situation cannot be said to be in lieu of some ‘consideration’ as the term “consideration” has been assigned legal meaning.
Urgent attention to the problem mentioned is necessary to avoid hardships in the case of families of recipients of the tragedies. The practical way to exempt such receipts is to authorise the CBDT to give exemption in such situations by notifications, whose copies can be placed on the tables of the two Houses of Parliament. Amendment of law (as in cases of Bhopal Gas victims) may not be possible when such situations arise. Further, such amendments would make the law cumbersome and long. Immediate action in this regard is necessary.
The author is former chairman, Central Board of Direct Taxes