Gift deed under family settlement arrangement not taxable under Section 56(2)(vii)(b) as substance over form principle applies

ITAT Indore held that a gift deed executed pursuant to family settlement arrangement does not attract Section 56(2)(vii)(b) provisions. The tribunal determined that substance over form principle applies when interpreting documents. The land transfer through gift deed was part of asset distribution under family settlement, not a gratuitous transfer. Since the transaction involved exchange of assets between parties under settlement arrangement rather than transfer without consideration, it fell outside Section 56(2)(vii)(b) ambit. Assessee's appeal was allowed.

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Issues Involved:

1. Legality of the assessment order and additions made by the Assessing Officer (AO).
2. Applicability of u/s 56(2)(vii)(b) of the Income Tax Act concerning the gift deed and its classification as undisclosed income.

Summary:

Issue 1: Legality of the Assessment Order and Additions

The assessee challenged the assessment order dated 17.03.2023 by the Commissioner of Income Tax (Appeal), Bhopal, for the Assessment Year 2017-18, arguing that the order was unlawful and illegal. The assessee contended that the assessment was made without any incriminating material and opposed the findings of the lower authorities.

Issue 2: Applicability of u/s 56(2)(vii)(b) of the Act

The assessee, a member of the Asnani Group, was subjected to a search and seizure operation u/s 132 of the Act, leading to the discovery of various documents, including a gift deed dated 04.02.2017. The AO proposed an addition of Rs. 3,67,00,000/- u/s 56(2)(vii)(b) of the Act, treating the gift as undisclosed income from other sources.

Before the Tribunal, the assessee argued that the gift deed was part of a family settlement arrangement, not a conventional gift. The family settlement dated 14.02.2015 and subsequent Memorandum of Understanding (MOU) dated 27.09.2017 were cited to demonstrate that the transfer of land was an exchange within the family arrangement. The assessee emphasized that the AO erred by considering the gift deed in isolation and not in the context of the entire family settlement.

The Tribunal noted that the seized documents, including the family settlement and MOU, indicated that the land transfer was part of a broader family arrangement. The Tribunal held that the AO should have considered the substance over the form, recognizing the transfer as an exchange under the family settlement rather than an isolated gift. Consequently, the Tribunal concluded that the transaction did not fall under the ambit of u/s 56(2)(vii)(b) of the Act, and the addition made by the AO was deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the transfer of land through the gift deed was part of a family settlement and not taxable under u/s 56(2)(vii)(b) of the Act. The assessment order and the addition of Rs. 3,67,00,000/- were quashed.

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