Bollywood star Khan fights taxman over Dubai villa gift

One of Bollywood's biggest stars will have a tough time proving to Indian authorities his claim that a luxury villa in Dubai was a gift, and could face prosecution as well as back taxes if he cannot, legal experts say.

Shah Rukh Khan is being investigated by Indian tax authorities over a villa on Dubai's Palm Island that he received from Nakheel, the Dubai-based property developer.

Officials have raised questions about whether the actor received it as a gift, or in lieu of payment for promoting Nakheel's real estate development.

In 2005, Nakheel issued a press release detailing the actor's visit to the Palm sales centre, noting the actor had visited a year earlier. Nakheel did not provide any further details on the relationship yesterday.

The villa, valued at US$3.93 million (Dh14.43m), was given to the actor in 2004, according to a Nakheel spokesman. He did not declare it on his tax return in 2009, according to Indian media reports.

Now Khan faces a maze of Indian tax laws that could see him hand over a hefty pile of back taxes on the property's total value.

He has said the home was a gift, but tax authorities have challenged that claim, saying it was payment from Nakheel, which used his name for promotional campaigns.

"Brand ambassador or not, such a gift is considered as an income in India. And they will tax it as an income," said Abdul Azeez, a legal consultant for non-resident Indians in Dubai who specialises in corporate and commercial property matters.

Dipesh Mehta, a Mumbai-based lawyer, said Indian nationals who had lived in India for more than 182 days were liable for income tax on immovable property held anywhere in the world.

India has tax treaties with countries such as Britain, so tax paid in India or the UK can be adjusted, but Khan would be liable for taxes in India because the Emirates are tax-free.

He said that in the past, Indian residents sent money to Dubai for investment, but in June 2009, India adopted the stringent Prevention of Money Laundering Act, under which authorities can make arrests.

"It's a very important act and, if proved, it's a very serious crime," Mr Mehta said. "Today the whole world has become commercial - even a brother will not give a sister a villa worth millions of dollars, so it becomes obligatory for the person who says it is a gift to show it as part of a series of events, to show documentation."

Several high-profile Indian actors, including Salman Khan, and Abhishek and Aishwarya Rai Bachchan own properties in Dubai.

Shah Rukh Khan's situation could put other actors in the spotlight, according to Mr Azeez, who said "the government can take action on others in a similar situation".

Mr Mehta said the case spelt trouble for the actor if he could not furnish solid proof that the villa was a gift.

"It can turn out to be a serious problem," Mr Mehta said. "The onus is on [Khan] to prove it was a genuine gift given out of love and affection. A casual or informal explanation will not give him a way out. Satisfactory legal documents must be produced; it's not going to be easy."

As a resident of India, Khan is "100 per cent" legally bound to declare a gift overseas, or the acquisition of an asset abroad, and obliged to pay taxes on them, he said.

Apart from paying high penalties, he said the actor could face prosecution by India's Enforcement Directorate, which investigates and prosecutes tax evasion. "It is the privilege of the concerned authority, but a 300 per cent penalty can levied, and they can prosecute as well."

The actor is one of the biggest income taxpayers in the industry, with about 30 million rupees (Dh2.4m) in payments in the 2008-2009 fiscal year.

Representatives at Red Chillies, a production company co-founded by Khan, could not be reached for comment.