Without evidence, transaction of a gift is suspect

Q: My wife who is in India received gifts from her brother who works in Thailand. She claimed exemption of such gifts but the tax officer asked for explanation about her brother's source of funds using which he bought the gifts. He did not give a satisfactory explanation. The assessing officer has treated this amount as my wife's income. I want to know whether he is right in doing so.
- P.K. Suri, Sharjah
A: Gifts received from relatives are not treated as income. However, courts have taken the view that the burden is on the tax payer to prove that the amounts received from a relative are genuine gifts. The relative who has given the amount would have to show his creditworthiness, his financial standing and his declaration that the amount is given as a gift.
The Kerala High Court has recently held that in the absence of relevant and credible evidence, the transaction of a gift would be suspect. Relevant documents will have to be produced in this regard. Where such documents are not available, the assessing officer will be justified in treating the amount received as taxable income. The tax authorities will also be justified in reopening a past assessment where the amount transferred in an earlier year was not taxed as income.
Q: My family runs a charitable trust in India. The main object of the trust is to publish books for education of schoolchildren. These books are sold at government-approved prices, but some books are distributed at subsidised prices to poor and needy students. In the past, tax exemption was granted to the trust. However, last year the assessing officer denied exemption on the ground that the trust earned profits from sale of the books. Should the trust accept this order?
- L. Vishwanath, Abu Dhabi
A: The assessing officer is not right in denying the exemption. The charitable trust set up by your family was correctly granted exemption in the past since it was set up for educational purposes. Publication of text books for schoolchildren is an educational activity. Courts have taken the view that education does not necessarily mean running a school or college.
It has also been held by courts that where a trust has been registered under the law after considering its charitable objects, this issue cannot be reexamined unless there is new evidence which was not available earlier. Hence, exemption cannot be denied on the ground that profits have been earned from the distribution and sale of books in a financial year. The trust should appeal against the order of the tax department.
Q: My brothers and I had invested in a residential property. However, as there was some dispute, the investment was not disclosed in my tax returns of past years. Based on information received from one of my brothers, the tax department has reopened the assessment for the past year. What are the consequences of this?
- C.R. Shekhar, Dubai
A: The assessing officer will call upon you to disclose the source of the funds which you have utilised for the house. If you have adequate records to show that the funds were from your disclosed sources of income based on your past tax returns, there will be no adverse consequence. However, if you are not able to do this, the amount invested in the house will be treated as your concealed income for the relevant year.
Such concealed income will be taxed at a flat rate of 60 per cent as provided by law. Interest and penalty will also be levied by the tax officer.  There is also a risk of prosecution proceedings being initiated by the tax department. Under the law, an assessing officer can reopen assessments of the past seven financial years.

source: Khaleejtimes