2025 (11) TMI 337 - AT - Income Tax

Gift from sister's spouse not taxable under section 56(2)(vii) even without deed, if bank-source explained

ITAT Kolkata allowed the assessee's appeal and deleted the addition made u/s 56(2)(vii) treating the gift as income from other sources. It held that the ... Addition u/s 56(2)(vii) - 'Gift from Relative' - Income from other sources - source of the amount being from the relative - gift deed requirement - assessee is an individual and had received gift through NRE account from the spouse of his sister i.e. his brother-in-law - Assessee is NRI, stays in UAE - as contended that the gift deed was made outside India in the USA and as per the Transfer of Property Act, the gift deed is not required in case of movable property. The transaction was executed through normal banking channel from one bank to another. HELD THAT:- The spouse of the sister of the assessee is also covered as relative and since the assessee has filed the copy of bank account evidencing the source of gift, the same is not liable to be added in the income of the assessee. For the purpose of section 56 of the Act, there is no need or requirement of any gift deed and the Gift Tax Act is not in operation with effect from 01.10.1998. AO questioned the validity of the gift deed made in USA without examining whether the source of the amount received from the relative was validly explained or not. AO primarily was of the view that since no proper gift deed was made, therefore, the amount was liable to be assessed as ‘income from other sources’ and not exempt u/s 56 of the Act. However, section 56 of the Act for exemption from assessing any sum received which exceeds ₹50,000/-, does not require a valid gift deed but it is provided in the section itself that if the amount is received from a relative as defined therein, the same is not liable to be assessed u/s 56 of the Act. That being so, the source of the amount being from the relative not being in question, the amount is not liable to be included in the total income of the assessee. AO did not make any comment in the remand report when the documents were forwarded to him by the CIT(A) vide letters dated 17.11.2022 and 03.05.2023. Since the necessary documentary evidence in support of the claim that the amount was received from the relative, there was no occasion to insist on a gift deed for excluding the amount received from the brother-in-law. The money has been received through banking channel. The addition, if any, should be made in the hand of the relative of the assessee only and the exemption for the purpose of section 56(2)(x) of the Act does not require any gift deed but only the sum being received from any relative which has not been disputed in the order. Therefore, the appeal is allowed and the addition upheld by the Ld. CIT(A) is hereby deleted. Accordingly, the grounds taken by the assessee in his appeal are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the appeal should be admitted despite delay in filing and whether sufficient cause was shown to condone delay. 2. Whether sums credited to the assessee's bank account from the spouse of his sister (brother-in-law) are taxable as 'income from other sources' under section 56(2)(vii) (receipt of money without consideration exceeding threshold) or are exempt as amounts received 'from any relative' within the proviso to section 56(2)(vii). 3. Whether validity, timing or form of a gift deed (executed abroad, notarised later and unsigned by recipient) is a pre-condition for exemption under section 56(2)(vii), and whether the recipient must additionally explain the source/nature of the credited amount to attract exemption. 4. Whether, if the donor's source (e.g., sale of mutual funds) is not fully explained, any addition should be made in the hands of the recipient or the donor. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Rules permitting condonation of delay in filing appeals where sufficient cause is shown. Interpretation and reasoning: The assessee, an NRI resident in UAE, produced a petition explaining medical reasons and inability to file within time. The Tribunal found the reasons reasonable and sufficient. Ratio vs. Obiter: Ratio - the Tribunal applied the governing principle that substantial cause for non-filing will justify condonation; factual application rather than laying new law. Conclusion: Delay of 105 days was condoned and the appeal admitted for adjudication. Issue 2 - Whether receipt from brother-in-law is taxable under section 56(2)(vii) or exempt as receipt from a 'relative' Legal framework: Section 56(2)(vii) (applicable period stated in judgment) taxes without-consideration receipts in money/property exceeding threshold, with specific provisos excluding receipts 'from any relative.' The definition of 'relative' in the section includes spouse of the donor's sister (i.e., brother-in-law). Precedent treatment: The assessee relied on case law holding that receipt from a relative is exempt without requirement of a gift deed; the Tribunal cited reliance on such decisions (e.g., decision referred to in the record) and applied same principle. Interpretation and reasoning: The Tribunal examined statutory language and concluded that where the payer qualifies as a 'relative' per the statutory definition, the proviso operates to exclude the receipt from chargeability under section 56(2)(vii). The Tribunal emphasized that the statutory proviso does not condition exemption upon execution of a gift deed or its formality; rather, the character of the donor as a 'relative' is dispositive for exclusion under the provision. Ratio vs. Obiter: Ratio - statutory exemption applies to sums received from a person falling within the definition of 'relative'; formalities of gift deed are not statutory prerequisites for invoking the proviso. Conclusion: The sums received from the brother-in-law are not liable to be included in the assessee's income under section 56(2)(vii) by virtue of the 'relative' proviso, provided the donor meets the definition in the section (which was not disputed). Issue 3 - Requirement and evidentiary role of a gift deed; obligation on recipient to explain source/nature of credited sum Legal framework: Section 56(2)(vii) sets out taxable receipts and statutory exceptions; no express statutory requirement for a gift deed. Separately, assessing officers may examine nature/source of credits to bank accounts under general assessment powers. Interpretation and reasoning: The Assessing Officer and the Commissioner (Appeals) placed weight on absence/timing/formal defects of a gift deed (executed abroad years after transaction and unsigned by recipient) and gaps in donor's proof as undermining genuineness. The Tribunal rejected the proposition that a valid contemporaneous gift deed is a condition precedent to the statutory exemption. It held that the statutory provision itself provides the exemption where receipt is from a defined 'relative.' The Tribunal also noted that the transaction occurred through normal banking channels and that the assessee had produced bank statements and other documents evidencing the credit from the donor's account. The Tribunal criticized the AO's and CIT(A)'s reliance on gift-deed formalities and observed that where the donor's source remains in question, any inquiry into source relates to the donor rather than converting the recipient's exempt receipt into taxable income if the donor is a relative under the statute. Precedent treatment: The Tribunal followed prior decisions relied upon by the assessee that exempted receipts from relatives without insisting on a gift deed; it did not overrule authority but applied consistent precedent. Ratio vs. Obiter: Ratio - statutory exemption is not conditional on presence of a gift deed; proof of receipt from a relative by bank records is sufficient to attract the proviso. Obiter - comments on evidentiary weight of notarisation/timing of gift deed and expectations from remand report. Conclusion: A gift deed in a particular form or contemporaneity is not required for exemption under section 56(2)(vii); where bank records establish transfer from a person who qualifies as a 'relative,' the receipt is excluded. The recipient need not produce a notarised gift deed as a precondition to exemption, though documentation may assist fact-finding. Issue 4 - Consequence if donor's source remains unexplained; locus of addition Legal framework: Assessing powers permit examination of source of funds; taxability of unexplained credits depends on whether amount is income of recipient or attributable to donor. Interpretation and reasoning: The CIT(A) had treated unexplained portion (Rs.55 lakh) as not satisfactorily substantiated by donor's evidence and therefore dismissed the claim of exemption in respect of that portion. The Tribunal held that even if the donor's source was in issue, the corrective measure - if any addition is warranted because of unexplained source (e.g., proceeds of sale of mutual funds not substantiated) - would lie in assessing the donor, not the recipient, when the recipient has demonstrably received a sum from a person qualifying as a relative. The Tribunal also noted that the AO's remand report did not comment on the remitted documents, and that the CIT(A)'s adverse inference based on procedural/formal defects was misplaced. Ratio vs. Obiter: Ratio - where a sum is received from a relative, and the transfer is evidenced by bank records, any unexplained aspects of the donor's source should not be used to tax the recipient; an addition, if justified, belongs on the donor's assessment. Conclusion: The unexplained source of funds (if any) is an issue concerning the donor; it does not justify inclusion of the credited amount in the recipient's income where the donor qualifies as a 'relative' and bank evidence establishes the transfer. Final Disposition Applying the statutory text, evidentiary material (bank statements and remand documents) and precedent relied upon by the assessee, the Tribunal concluded that the addition in the hands of the recipient in respect of Rs.80,00,000 was not sustainable under section 56(2)(vii) and deleted the addition; the appeal was allowed. The Tribunal also upheld condonation of delay in filing the appeal.