Any gift in the form of money received by a person from his or her relatives is not subject to tax under the Income Tax Act (“the Act”). The family members covered by this provision are usually the immediate relatives such as parents, spouse, brothers/sisters, uncles/aunts and even the spouses of these parents.
The law has set no limit to the value of a gift received from such relatives which is exempt from tax. But here’s the catch: Any income earned on these gifts by the donee will be taxable in the hands of the donee. Although for many people this provision seems too good to be true, what the IT department seeks to verify in the case of high value gifts is the creditworthiness of the giver. In other words, does the giver have the capability/capacity to give gifts of great value?
In one of the tax cases, a taxpayer’s return was selected for review by the tax officer for the sole purpose of investigating the increase in his stated capital account in the tax return. During the assessment, the tax officer observed that the taxpayer classified an amount of Rs 8 lakhs as a gift received from a relative. When the relevant documents were produced, the tax officer found that the amount had been received from another person (hereinafter referred to as the debtor).
The taxpayer argued that the said amount was a gift of Rs 8 lakhs from his aunt, who was based outside the UAE. On his instructions, the debtor (in India) who was required to repay an old debt owed to the aunt, paid the money directly to the taxpayer into his Indian bank account. The taxpayer further argued that his aunt being a relative as defined by law, the sum of Rs 8 lakhs received from her would be exempt from tax.
In support of his request, the taxpayer produced a certificate from the bank concerned concerning the transfer of the amount from the debtor’s account to his account. The tax official, to verify the authenticity 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 official was unconvinced of the donor’s authenticity, creditworthiness and identity as a next of kin and therefore added the donation amount to his taxable income as an unexplained cash credit.
Dissatisfied with this order, in the first instance of appeal, the taxpayer reiterated before the authority that the amount is a gift from his aunt. The tax officer argued that the connection between the amount transferred from the debtor’s account and the aunt could not be proven by the taxpayer during the assessment. It was up to the taxpayer to prove the identity, authenticity and solvency of the aunt and the debtor. Since the same was not done, the appeal authority also upheld the addition of the amount of Rs 8 lakhs to the taxpayer’s income.
Before the Tax Court, the taxpayer argued that after presenting the bank certificate, the obligation to prove the authenticity of the donation by the bank and the solvency of the payer is duly fulfilled. The taxpayer further argued that under the relevant provisions of the Act, once the existence of the person in whose name the credits are on the taxpayer’s books is proven, the source of the source has no not to be proven. The taxpayer had submitted the aunt’s confirmation of remitting the money as well as the bank’s confirmation regarding the remittance of the said amount.
The tax official, in court, argued that authenticity could not be claimed to be proven when the money was not received directly from the aunt but from the debtor, who in turn is not related or related to the taxpayer.
The Tribunal observed that the taxpayer had not provided any evidence or document showing how this amount had been received from his aunt and not from the debtor. In the absence of any document justifying the movement of money between the aunt and the debtor, the taxpayer had therefore not established the claim for the donation from his aunt. Therefore, the Tribunal upheld the addition of Rs 8 lakhs to the taxpayer’s income for the said year.
Cash donations received from close relatives are not taxable.
Close relatives include spouse, sibling, parents, grandparents, etc.
The recipient of the gift must be able to prove that the gift was received from his relatives.
The gift giver must be able to demonstrate financial ability to provide such gifts.
(The author is the founder of Arvind Rao and Associates, a tax and financial advisory firm based in Mumbai)
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Posted: Sunday, March 13, 2022, 07:00 IST