A Kolkata tax court has recently ruled that a large gift from a brother-in-law is completely exempt from income tax, even if no formal gift deed was created. The Income Tax Appellate Tribunal (ITAT) in Kolkata recently ordered in favour of a person, overturning a decision by tax authorities to add Rs 80 lakh to his taxable income.
The assessee had received a substantial sum as a gift from his brother-in-law (sister's husband). While the gift was transferred through banking channels, tax officials had questioned the transaction, arguing that the transfer wasn't validly documented and that the source of the money was unclear.
A key point of contention was the requirement of a formal gift deed. Tax officials initially insisted that because a proper deed was not made in India, the gift could not be recognised as tax-exempt.
The tribunal clarified that under the relevant section of the Income Tax Act (Section 56(2)(vii)), a sister's husband (a brother-in-law) is clearly defined as a relative. Gifts received from any person on this defined list are, therefore, fully tax-exempt.
The Tribunal further said that for the purpose of this tax exemption, the law does not require a formal gift deed. They noted that since the Gift Tax Act is no longer in operation (since 1998), the insistence on a formal deed for a gift from a relative is unnecessary.
As per the tax court, because the relationship was not disputed and the money was transferred via the banking system, the court ruled that the tax exemption must stand. The court stated that any questions about the original source of the funds should be directed toward the giver (the brother-in-law), not the person who received the gift.
According to Manish Garg, lead, transfer pricing and litigation, AKM Global, a tax and consulting firm, though gifts from relatives are tax free, this ruling strengthens the position that gifts from spouse of brother and sister, even from abroad, remain tax-free when the source is explained.
However, he advises taxpayers to maintain key documents such as bank statements, gift confirmation and other supporting documents to establish the bona fide nature of the gift.
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