I am likely to get gift of shares from one of my business acquaintances in an off-market deal. What will be the implications of such a transaction? —By Rikin- dated 03/01/2019 To bring into tax bogus transactions, gifts from unknown persons and non-relatives are subjected to tax under Section 56(2)(x) of the Income Tax (IT) Act, 1961, under the head, ‘Income from other sources'. Gift means any sum of money, moveable property or immoveable property received without consideration or inadequate consideration. Moveable property covers shares, securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art and bullion. If the aggregate fair market value (FMV) moveable property received without consideration is more than Rs 50000, then the whole aggregate fair market value of such moveable property is taxable as income from other source. If moveable property is received for a consideration of more than Rs 50000 less than the FMV, then the FMV exceeding such consideration will be chargeable to tax. All transactions of moveable property in a financial year are taken into consideration for calculating threshold limit of Rs 50000. There are exceptional cases of taxability not arising on gift of movable and immovable property. The gift should have been received from any relative. It should have been received on the occasion of marriage of the individual, under a Will, by way of inheritance, in contemplation of death of the payer or donor, from any local authority. The gift is derived from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Section 10(23C) of the IT Act or from any trust or institution registered under Section 12AA or12A of the IT Act. The gift should have been received by way of distribution of capital assets on partition of a Hindu undivided family (HUF) under Section 47(i) of the IT Act or by way of transaction in a scheme of amalgamation. The amalgamated company should be an Indian company under Section 47 (vi) of the IT Act, a foreign company under Section. 47 (via) or a banking company and a banking institution sanctioned by the Central government under Section 47 (viaa). The gift received is following a scheme of demerger, with the resulting company is an Indian company under Section 47 (vib) and when the resulting company is a foreign company under Section 47 (vic). The gift should be by way of a business reorganization of co-operative banks as referred to under Section 47 (vica).The gift could be a transaction not regarded as transfer on receipt of shares by a shareholder. Other examples of gift being exempt from tax are when it arises from business recognition of co-operative bank under Section 47 (vicb), demerger of companies under Section 47 (vid) and amalgamation of companies under Section 47 (vii). Receipt by a private trust created or established by an individual solely for the benefit of his relatives is also exempt from tax. There is no ceiling limit and, therefore, the entire sum of money or property received is exempt. The definition of ‘relative' in the case of individual is spouse of the individual, brother or sister of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendant or lineal descendant of the individual, any lineal ascendant or lineal descendant of the spouse of the individual, and spouse of the relatives or any member of an HUF. There are a number of tour and travel operators organizing trips to destinations outside India. They announce their charges in newspaper ads and other printed material. When the customer goes to make a booking, they encourage payment in cash avoid the 5% goods and services tax (GST). They seem to be ignorant of Section 269ST of the Income Tax (IT) Act, 1961. Can you elaborate? — Kirti Dewangan, e-mail No person can receive Rs 2 lakh or more in aggregate from a person in day for a single transaction or in transactions related to an event otherwise than by an account payee cheque, account payee bank draft or electronic clearing system through a bank account. The provision is not applicable to any receipt by government, bank, post-office savings bank or co-operative bank or by a person from these sources. Transactions referred to in Section 269SS of the IT Act and receipt by a business correspondent on behalf of a bank or co-operative bank in accordance with the guidelines issued by the Reserve Bank of India (RBI) are also exempt. Business correspondents are retail agents engaged by banks to provide banking services other than a bank branch or ATM. Receipt by a white label automated teller machine operator from retail outlet sources on behalf of a bank or co-operative bank in accordance with the authorization issued by the RBI such as ATM cash filing, too, is excluded. The exemption covers receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the authorization issued by the RBI or by a company or institution issuing credit cards against bills raised in respect of one or more credit cards. Receipt not included in the total income under Section 10(17A) of the IT Act, i.e., awards and reward instituted in public interest, too, does not come under the purview. Just like Section 269SS, Section 269ST prohibits a person from receiving a sum beyond the specified limit for certain transactions in cash. While the scope of Section 269SS is limited to receipt of loan, advance or specified sum, that of Section 269ST is wider and covers all the receipts excluding those covered by Section 269SS. Gifts from specified relatives are exempt by virtue of Section 56(2) of the IT Act. However, if the mode of receipt of such gift is in contravention of Section 269ST, the entire sum is subject to penalty in the hands of the recipient. Thus, exemption provided under Section 56(2) cannot protect the levy of penalty. The claim of the recipient that the transactions are fully disclosed, the receipt is for share application money, the receipt is for personal purposes or a claim that the sum received has been immediately deposited into the banking system are irrelevant in the context of levy of penalty, where the sum received is in excess of the limit and in contravention of modes specified. Section 269ST became effective from 01 April 2017 and says ‘no person shall receive'. Accordingly, transaction of sale or service completed before 01 April 2017 but the actual receipt was on or after that date and the sum received and the mode are in contravention of Section 269ST, the amount is subjected to penal provisions in the hands of the recipient. Any contravention of the provisions of Section 269ST attracts penalty in the hands of the recipient equivalent to the sum of receipt. The payer is not covered by the scope of Section 269ST. No penalty is levied if such person proves that there were good and sufficient reasons for the contravention.   Can you provide solution to protect the business of our private limited company from the loss of key person? — Moti Bhagat, e-mail You can opt for keyman insurance. Keyman Insurance is a life insurance cover bought by a company to compensate for the financial loss that it anticipates on death of a key member of the organization. It provides a financial cushion to the company for the loss of customers or sales and day-to-day specialised skills of the deceased. It compensates the cost of recruiting and training a replacement. It covers delay or cancellation of any project that the keyman is working on. It includes loss of opportunity to expand in the future, stable management and good labour relations. The cover addresses the reduction of credit worthiness and recall of loans guaranteed by the keyman. Premiums paid under the keyman insurance are permissible as business expenses under Section 37(1) of the Income Tax Act, 1961, and are entitled for full deduction. The premiums paid by the company are not treated as perquisites in the hands of the employee. Death benefit received by the company is taxable. The maximum sum assured is limited to 10 times the keyman's compensation or three times the average gross profit of past three years or five times the net profit of last year. The key person should hold less than 51% of the company's shares. The number of shares of the company held by the keyman and his family should be less than 70% of the company's total shares. Family includes spouse and minor child.  

What is a Hindu undivided family (HUF)? What is the process for an HUF to get insurance policies?

— Suman Bangera, e-mail

HUF may consist of a single male member and his wife, daughters and/or widows of deceased coparceners. There must be at least two members to constitute an HUF. Every coparcener has a joint possession and joint interest in the HUF property. Coparcener also has the right to quit HUF and can also ask for partition of HUF.

Insurance under HUF is allowed only on the life of the karta. Proposals on the life of co-parceners or member are permitted only if the karta is uninsurable. In all such cases, karta will be the proposer. Neither the karta nor any member of the HUF can buy policies to be financed from HUF income to seek benefits to himself or his immediate dependents.

The karta or any member of the HUF cannot take a policy under Section 6 of the Income Tax Act, 1961, of the Married Women's Property Act as there will be cross-violation of purpose. The HUF policy is to protect the joint family, while the MWP Act protects the interests of the individual member, his wife and children.

Insurance under HUF belongs to and becomes asset of the HUF. Payment of premium will always be through HUF funds. Payment of premium partly out of HUF funds and partly out of non-HUF funds is not permitted. Policy moneys will be payable only to a karta and in the event of his death to the new karta.

If a karta takes a policy on his own life, the proposal form needs to be accompanied by a declaration stating that premiums will be paid out of HUF funds. Karta will not be entitled to make nominations and he can surrender the policy only for the benefit of the HUF. Karta can assign the policy only for raising loans or funds for the benefit of the HUF. The proceeds of the policy or claims including bonus will only be payable to the HUF.

If a coparceners of the HUF takes a life insurance policy on his or her life, besides the declaration that the premiums will be paid out of HUF funds, the proposal must specifically seek a clarification from the karta of the reasons for allowing a particular coparcener of the HUF to take a policy on his or her life as against other coparceners.

Where the proposal is to cover the risk on the life of a female member, a no-objection letter has to be obtained from all members. Also, the karta has to give reason for obtaining insurance on the life of female member and a special moral hazard report from the bancassurance manager.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com