MUMBAI: In a noteworthy decision, the Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) has ruled that a gift of Rs 20 lakh received by a taxpayer from his non-resident brother, who resides in the UAE, is not subject to tax. This ruling underscores the exemptions provided under Indian tax laws, particularly in cases involving gifts from close relatives.
Background of the Case
The case revolves around A Salam, an Indian taxpayer who received a substantial gift of Rs 20 lakh from his brother, a long-term resident of Dubai engaged in business there for over 25 years. Upon receiving this gift, Salam found himself in a legal tussle with the Income Tax department, which initially classified the gift as taxable income under the category of “income from other sources.”
Tax Exemptions for Gifts Under Indian Law
Under the Income-Tax Act, gifts exceeding Rs 50,000 are generally taxed as “income from other sources” at the applicable slab rate in the hands of the recipient. However, there are specific exemptions, particularly for gifts received from close relatives.
Section 56(2)(x) of the Income-Tax Act specifically exempts gifts received from certain relatives, including siblings, from being taxed. Other exemptions include gifts received on the occasion of marriage, or those acquired through a will or inheritance. The law is clear that gifts from a brother, as in the case of Salam, fall under this exempted category, thereby making such gifts non-taxable.
Initial Tax Assessments and Appeals
Despite these legal provisions, the Income Tax officer handling Salam’s case classified the Rs 20 lakh gift as taxable income. The Income Tax Commissioner of Appeals supported this decision, arguing that Salam failed to convincingly prove the donor’s creditworthiness and the genuineness of the gift. This resulted in the inclusion of the gift as taxable income in Salam’s assessment.
Challenging this decision, Salam appealed to the ITAT, providing substantial evidence to support his claim that the gift was legitimate and exempt from taxation.
Evidence Presented by the Taxpayer
In his defense, Salam provided comprehensive documentation to establish the legitimacy of the gift. This included:
- Bank Statements and Cheque Transactions: Salam presented evidence showing that the Rs 20 lakh was transferred through three cheques from the Bank of Baroda and ICICI Bank, ensuring transparency in the financial transaction.
- Brother’s Financial Capacity: He submitted his brother’s bank statements, passport, and an investor-class visa to establish his identity and financial capacity. These documents demonstrated that his brother, a resident of Dubai for over two decades, was financially capable of making such a gift.
- Gift Deed: A formal gift deed dated August 26, 2022, was also submitted, further supporting the claim that the gift was made out of “natural love and affection” between siblings.
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ITAT’s Ruling
After reviewing the evidence, ITAT member Prashant Maharishi, who presided over the case, recognized the legitimacy of the gift. Maharishi took cognizance of the fact that the parental names of both the donor and recipient matched, which clearly established that they were real brothers. This familial relationship placed the gift squarely within the exemptions provided under Section 56(2)(x) of the Income-Tax Act.
Maharishi concluded that the Rs 20 lakh received by A Salam should not be classified as taxable income. He directed the Income Tax officer to delete the addition made to Salam’s taxable income, effectively ruling in favor of the taxpayer.
Implications of the Ruling
This ruling by the ITAT reinforces the principle that gifts from close relatives, particularly siblings, are exempt from taxation under Indian law, provided they are genuine and properly documented. The case highlights the importance of maintaining thorough documentation when dealing with significant financial transactions, especially those involving gifts from non-resident relatives.
Taxpayers receiving gifts from close relatives should ensure they have all necessary documentation in place, including bank statements, gift deeds, and any other relevant proof, to substantiate the legitimacy of such gifts if questioned by tax authorities.
This decision by the ITAT serves as a significant precedent, clarifying the application of tax laws regarding gifts from relatives and providing relief to taxpayers in similar situations.
