Any gift in the form of money received by an individual from his/ her relatives is not liable to tax under the Income Tax Act (‘the Act’). The relatives that are covered under this provision are typically the immediate relatives like parents, spouse, brothers/sisters, uncles/aunts and even spouses of these relatives.
The Act has not laid down any limits on the value of a gift received from these relatives which are tax-free. But here is the catch: Any income earned on these gifts by the donee will be taxable in the hands of the latter. While, for many individuals, this provision does sound too good to be true, what the IT department seeks to verify in case of high-value gifts is the credit-worthiness of the donor. In other words, does the donor have the capacity/capability to give high-value gifts?
In one of the tax cases, a taxpayer’s return was selected for scrutiny by the tax officer for the limited purpose of investigating the increase in his capital account as declared in the return of income. During the assessment, the tax officer observed that the taxpayer had categorized an amount of Rs 8 lakhs as a gift received from a relative. When the relevant documents for the same were produced, the tax officer observed that the amount was received from another individual (hereafter, referred to as the debtor).
The taxpayer submitted that the said amount was a gift of Rs 8 lakhs from his aunt, who was based out of UAE. On her directions, the debtor (in India) who was liable to return some old debt due to the aunt, paid the money directly to the taxpayer in his Indian bank account. The taxpayer further argued that his aunt being a relative, as defined under the Act, the sum of Rs 8 lakhs received from her would be exempt from tax.
To support his claim, the taxpayer produced a certificate from the respective Bank regarding the transfer of the amount from the account of the debtor to his account. The tax officer, to check the genuineness of the transaction, wrote a letter to the debtor at his address (as provided by the taxpayer), which was returned by the postal authorities unserved.
The tax officer was not convinced with the genuineness, creditworthiness and identity of the donor as a near relative and accordingly added the gift amount to his taxable income as unexplained cash credit.
Unhappy with this order, at the first appellate level, the taxpayer reiterated before the authority that the amount is a gift from his aunt. The tax officer argued that the nexus of the amount being transferred from the account of the debtor with the aunt could not be proved by the taxpayer during the assessment. It was the taxpayer’s responsibility to prove the identity, genuineness and creditworthiness of the aunt and the debtor. With the same not being done, the appellate authority too confirmed the addition of the amount of Rs 8 lakhs to the taxpayer’s income.
Before the Tax Tribunal, the taxpayer argued that having submitted the bank certificate, the obligation to prove the genuineness of the gift through the banking channel and credit-worthiness of the payer stands duly discharged. The taxpayer further submitted that under the relevant provisions of the Act, once the existence of the person in whose name, the credits are found in the books of the taxpayer is proved, the source of the source is not required to be proved. The taxpayer had submitted the confirmation from the aunt of having paid the money as well as the confirmation from the bank regarding the remittance of the said amount.
The tax officer, before the Tribunal, contended that the genuineness could not be claimed to be proved when the money was received not directly from the aunt but the debtor, who in turn is not connected or related to the taxpayer.
The Tribunal observed that the taxpayer had not furnished single evidence or document to show how this amount has been received from his aunt and not the debtor. In the absence of any documentary evidence for movement of amount between the aunt and the debtor, the taxpayer had thus failed to establish the claim of the gift from his aunt. Consequently, the Tribunal confirmed the addition of Rs 8 lakhs to the taxpayer’s income for the said year.
Summary
Gifts of money received from near-relatives are not taxable.
Near-relatives include spouse, brother/sister, parents, grandparents, etc.
The recipient of gift should be able to prove that the gift has been received from their relatives.
The donor of the gift should be able to demonstrate their financial capability to give such gifts.
(The writer is the Founder of Arvind Rao and Associates, a tax and financial consulting firm based in Mumbai)
