CA Jaydeep Babubhai Vadher
Background of the case
The Kolkata Bench "C" of the Income Tax Appellate Tribunal recently decided an important issue on taxability of gifts received from relatives under section 56 of the Income-tax Act, 1961 in the case of Deb Prasanna Choudhury vs ADIT/DCIT (IT)-1(1), Kolkata for AY 2012-13.
The assessee, an individual and NRI based in UAE, had filed a return under section 139(4) declaring total income of Rs 20,28,740, which was later reassessed under section 143(3) r.w.s. 147 at Rs 1,50,28,740 by treating a gift of Rs 80,00,000 as taxable under section 56(2)(vii).
Facts leading to the dispute
During proceedings triggered by investigation into large value transactions, the Assessing Officer noticed that the assessee had received Rs 80,00,000 in his Indian bank account, claimed as a gift from his brother-in-law through normal banking channels from an NRE account.
The assessee submitted that the donor was the spouse of his sister, the amount was transferred through banking channel, and therefore was exempt as a gift from a "relative" within the meaning of section 56(2)(vii).
Assessment and first appellate order
The Assessing Officer treated the amount as "income from other sources" on the primary ground that there was no proper gift deed and that the source of the funds in the donor's NRE account was not satisfactorily explained, particularly a deposit of Rs 55 lakh.
On appeal, the CIT(A) partly allowed the appeal by deleting an unrelated addition of Rs 50 lakh (inter-account transfer of the assessee) but confirmed addition of Rs 80 lakh, questioning the genuineness and validity of the gift deed executed in USA and the unexplained source of Rs 55 lakh in the donor's NRE account.
Key arguments before the ITAT
Before the Tribunal, the assessee emphasized:
- The donor was the assessee's brother-in-law, clearly covered within the definition of "relative" in Explanation (e) to section 56(2)(vii).
- The gift was routed through normal banking channels from the donor's NRE account, with bank statements, passports, relationship proof and gift deed placed on record.
- For the purpose of exemption under section 56(2)(vii)/(x), the statute does not mandate execution of a gift deed, nor prescribe that it must be executed in India.
The Departmental Representative supported the order of the CIT(A), relying on doubts about the gift deed and the source of funds in the donor's account.
Tribunal's analysis on "relative" and section 56
The Tribunal extracted and examined section 56(2)(vii) and the definition of "relative", which includes "brother or sister of the spouse of the individual" and "spouse of the persons so listed".
On this basis, the Bench held that the spouse of the assessee's sister, i.e. his brother-in-law, clearly falls within the definition of "relative", and therefore any sum of money received from him is outside the mischief of section 56 when received without consideration.
Role of gift deed and documentary proof
The ITAT categorically noted that section 56 does not require a "gift deed" as a condition for exemption where the amount is received from a relative, nor does it prescribe any particular form or place of execution of such document.
The Tribunal observed that the authorities below focused excessively on the alleged deficiencies in the gift deed executed and notarised in California in 2020, instead of appreciating the bank trail and relationship evidence showing that the amount was indeed received from a relative through banking channels.
Source of funds: assessee vs donor
A crucial reasoning of the Tribunal was that any doubt regarding the source of funds in the donor's NRE account cannot justify taxing the gift amount in the hands of the recipient where the relationship and flow of funds from the relative are established.
The Bench held that if at all there was any issue about the source of Rs 55 lakh in the donor's NRE account, such enquiry and addition, if warranted, should be examined in the hands of the donor and not in the hands of the assessee who received the amount as a gift from a relative.
Treatment of evidence and remand proceedings
The assessee had placed on record various documents before the CIT(A), including gift deed, bank statements of donor, passports and proof of relationship, and these were also sent to the Assessing Officer in remand.
The Tribunal noted that the AO did not raise any meaningful objection in the remand report regarding the documentary evidence establishing the relationship and banking trail, further weakening the Revenue's stand.
Reliance on judicial precedents
The assessee also relied on decisions such as Atul H. Patel v ITO (Ahmedabad ITAT) and other rulings which recognise that sums received from relatives are exempt under section 56, once relationship and transaction through banking channels are demonstrated.
The Tribunal accepted the legal position that where the statute itself carves out a clear exemption for sums received from specified relatives, the Revenue cannot insist on additional conditions like a formal gift deed when the primary requirements are satisfied.
Final decision and takeaway
Holding that the money was received from a "relative" as defined in section 56 and routed through normal banking channels, the ITAT held that the amount of Rs 80,00,000 was not taxable as income from other sources in the hands of the assessee.[1]
Accordingly, the Tribunal allowed the assessee's appeal and deleted the addition sustained by the CIT(A), reinforcing that gifts from covered relatives remain exempt under section 56, and any source enquiry has to be directed at the donor, not the recipient.
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