No denial of exemption just because sum received as gift isn’t transferred from bank account of relative

 
Facts of the case - P. Srinivasan v. ITO - [2022] (Chennai - Trib.)

Assessee was a proprietor of rice mills. During the relevant assessment year, a scrutiny assessment under section 143(3) was conducted and it was found that assesse received a gift of Rs 50 lacs from his paternal uncle. However, such gift was received from the bank account of the son and daughter-in-law of the uncle.

Considering the fact that the gift is not received from the bank account of the uncle, the Assessing Officer (AO) denied the exemption available under section 56(2)(vii). AO stated that the son and daughter-in-law of the parental uncle are not covered under the term “relatives”. Thus, the sum received from them is to be treated as income of assessee.

On appeal, the CIT(A) upheld the order of AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

 

Decision of the case :

1)      The Tribunal held that the term ‘relative’ as defined under section 56(2)(vii) includes the brother or sister of either of the parents. Thus, the assessee’s uncle falls within the term ‘relative’.

 

2)      In the instant case, the only reason to deny the exemption to the assessee was that the gift amount was transferred from the bank accounts of the son and daughter-in-law of the uncle.

 

3)      The son and daughter-in-law are not alien to the uncle but very close relatives of the uncle and it could be understood that the gift was first provided by them to the uncle and then transferred by the uncle to the assessee. Thus, it can be considered a ‘Constructive Gift’ from the uncle.

 

4)      The uncle had also confirmed the grant of gift to the assessee and the transfer happened on the instructions of the uncle. Thus, the gift so received by assessee was eligible for exemption under section 56(2)(vii).

FULL TEXT OF THE ORDER

SHRI P. SRINIVASAN VERSUS ITO WARD-3, KARAIKUDI.

ITA No.709/Chny/2019

Dated: - 19-10-2022

Judgment / Order

Hon’ble Shri V. Durga Rao, Judicial Member And Hon’ble Shri Manoj Kumar Aggarwal, AM

For the Appellant : Shri S. Sridhar (Advocate) And Shri Tarun G (Advocate) – Ld. ARs

For the Respondent : Shri G. Johnson (Addl.CIT) – Ld. DR

ORDER

MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER)

1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals)-1, Madurai [CIT(A)] dated 19-02-2019 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 30-12-2016. The sole ground urged before us is the confirmation of addition of gift of Rs.50 Lacs u/s 56(2)(vii) as made by Ld. AO. No other ground has been urged in the appeal.

2. The Ld. AR, drawing attention to the documents, assailed the impugned order confirming the addition and submitted that the facts would establish that there was constructive gift from the donor to the assessee. The Ld. Sr. DR controverted the arguments of Ld. AR and submitted that gift received by the assessee from donor is not covered under exception clause of 56(2)(vii). Having heard rival submissions, the appeal is disposed-off as under.

Assessment Proceedings

3.1 The assessee being proprietor of rice mills was scrutinized u/s 143(3) on 30.12.2016. It transpired that the assessee received gift of Rs.50 Lacs from his uncle (father’s bother) Shri S. Chellapan. Accordingly, the transaction was subjected to scrutiny of Ld. AO.

3.2 The donor confirmed that the gift was out of love and affection for the welfare of brother’s son and his family. As per donor’s instructions, the gift was transferred through bank by his .son and daughter-in-law residing at Singapore as non-resident (NRI).

3.3 However, the evidence of relationship, copy of return of income of donor was not produced and accordingly, Ld. AO opined that the capacity of the donor and the genuineness of the transactions could not be furnished. The Ld. AO also held that his uncle was nowhere involved in the transaction. Finally, invoking the provisions of Sec.56(2)(vii), Ld. AO held that though gift from close relative is not taxable but the recipient of the gift has to produce the evidences to prove the genuineness of the gift. Since the assessee received the gift directly from Bank account of uncle’s son and daughter-in-law, it should be understood that the gift was received from them only. Since the son and daughter-in-law do not fall within the definition of ‘relative’ in Sec.56(2)(vii), the gift so received would be taxable in the hands of the recipient assessee. Accordingly, the sum was added to the income of the assessee.

Appellate Proceedings

4. During appellate proceedings, the assessee, inter-alia, submitted that the assessee’s uncle confirmed the transaction of gift through his letter dated 05.12.2016 and the gift has been transferred by his son and daughter-in-law under his instruction for the welfare of the assessee and his family. The assessee also submitted that the ingredient of Sec.68 r.w.s. 56(2)(vii) were fulfilled and the gift received from paternal uncle comes in exception clause and the term ‘relative’ include paternal uncle. Regrading financial capacity of the donor, the uncle was stated to be assessed to income tax and owned many businesses.

5. However, Ld. CIT(A) held that the assessee did not submit any documentary evidence to prove that the son and daughter-in-law had the capacity to make the payment of Rs.50 Lacs to the assessee. Mere making of statement by the person who falls u/s 56(2)(vii) as relative that a particular sum has been given as gift on the instruction of the said relative cannot make the sums of money received from other person as receipt of gift from the said relative. Therefore, the sum was not received from the ‘relative’ within the meaning of Sec.56(2)(vii) and accordingly, the grounds raised by the assessee were dismissed. Aggrieved, the assessee is in further appeal before us.

Our findings and Adjudication

6. It is undisputed position that had the gift been received by the assessee directly from the uncle, the same would not fall within the mischief of Sec.56(2)(vii) since the term ‘relative’ include brother or sister of either of parents of the assessee. The gift received from such relatives is considered exempt for recipient for the simple reason that such gifts could normally be received by a person out of natural love and affection. Such eventualities are made an exception u/s 56(2)(vii). In the present case, the assessee’s uncle falls within the term ‘relative’ and it is clear that the gift has happened on instruction of the uncle. The uncle has, unequivocally, confirmed the grant of gift to the assessee. The uncle is assessed to tax in India. The only reason to treat the same as the income of the assessee is that the amount has been transferred from bank account of uncle’s son and his daughter-in-law who are residing abroad as non-resident. Under such circumstances, the gift so received by the assessee could not be considered as income of the assessee. The son and daughter-in-law are not alien to the uncle but very close relatives and it could be construed that the gift was given by the son and daughter-in-law first to uncle and thereafter, it was remitted by uncle to the assessee. Considering the peculiar facts of the case, the gifts so received could be construed as constructive gift from uncle. Therefore, on the given facts and circumstances, the addition so made could not be considered to be income of the assessee and the same is liable to be deleted. We order so.

7. The appeal stand partly allowed in terms of our above order.

Order pronounced on 19th October, 2022.