Affidavits from Family members sufficient to prove genuineness of cash gift

India is a country with many festivals and occasions, there are many instances where gifts are exchanged to show the love and respect towards near and dear ones. Sometimes gifts are given just to hide certain exchanges in the garb of gifts and avoid tax implications on such transactions.

Provisions were introduced in Income Tax Law, to curb and regulate such practices. However, there are certain relationships and occasions in the life of an individual where such exchanges cannot be avoided. On the same lines, recently in an ITAT judgement it was ruled that in case of Cash gifts, affidavits from the family members are sufficient to prove the genuineness of the cash gift.

In this article we will discuss about the tax provisions with regards to cash gifts and taxation of the same. Further, we will discuss about the practical implications of the case.

What are Cash Gifts?

Gifts are defined in Sec.56 of the Income Tax Act, according to which Cash/Money Gifts are

Any sum received without consideration (whether by cash, cheque, draft etc.)

And

Where such amount is more than Rs.50,000/-

the same will be liable to tax.

Are all Cash Gifts Taxable?

As they say, law of any land is made after considering all the social and cultural factors of that country. That is why, lawmakers made certain exceptions to the above rule of taxation of gifts: –

Where the money is received from one of the following people, gift will not be taxable

1. Spouse of individual
2. Brother/Sister of self and spouse
3. Brother/Sister of parents of individual
4. Children of self and spouse
5. Parents of self and spouse.
6. Spouse of person in (2) to (4)

Also, any gifts received by the individual on the occasion of his marriage are exempt.

This implies that where the gifts are received from close relatives or on the occasion of marriage of the individual, then same are exempt from tax.

What is Rate of Tax on gifts?

Cash gifts are taxable at normal slab rate applicable to the individual. This means that the amount of cash gift that is taxable will be added to the total income of the assessee and will be taxed accordingly at the applicable slab rate.

How to verify if such cash gifts are genuine or not?

This has been a debate between Income Tax Authorities and assessee’s for a long time, where Income Tax Authorities get deep into these transactions, so as to detect some tax planning/ evasion in such transfers between families. On the other hand, assessee always stay firm on the fact that law exempts all gifts from family (as covered under Sec.56) so the details should not be checked.

There was a ruling from ITAT recently where the genuineness of cash gifts from family members was one of the pivotal points.

Let’s discuss the case: –

Case of Dheeraj Thakran Vs ITO: Are affidavits from family enough to prove the genuineness of cash gift?

Background of the case: –

The assesse is an individual and had income from rent, profession and other sources.
The case of the assessee was selected for scrutiny and assessment.
The assessing officer had observed that there were cash transactions in the bank accounts of the assessee. There was cash Deposits as follows:-
Bank Account 1- Rs.32,90,000/-
Bank Account 2- Rs.17,50,000/-
Since the assessee did not file any reply to explain the source of such cash deposits in the bank account, the AO relying on various previous decisions, made addition of the same to the total income of the assessee.

Proceedings at the level of CIT (A)

The assesee explained that cash deposits include the gifts received from relatives i.e. Parents, Brother and Spouse.
However, the genuineness of the transactions was questioned on the following grounds: –
The financial ability of the presenter of the gift was questioned
The reason/ occasion for which gift was presented was questioned
On the abovementioned grounds the, the additions were maintained.

Proceedings at the level of ITAT

As assessee was not satisfied with the decision, he further appealed to Income Tax Appellate Tribunal (ITAT)
The assessee again re-affirmed that gifts of Rs.9,25,000/- were received from

1. Father – 5,75,000/-
2. Mother – 1,00,000/-
3. Wife – 1,00,000/-
4. Brother – 1,50,000/-

And 4 affidavits from family members in the form of E-stamp were submitted, where assesse had accepted gifts from Parents, brother, and spouse. Tribunal was also informed about the fact that

Brother of the assesse is a tax payee himself,
Father had partly withdrawn the cash from Bank Account of the assessee and part was given from his own savings.
The amount given by mother and wife is small and same should not be doubted.

- It was also insisted that gifts have been received from the immediate family members and are not received from any outsider or any unknown relatives.

Final Decision of ITAT

ITAT held that Income Tax authorities should do independent inquiry at initial stage itself.
Also, assessee has explained cash gifts through affidavits from family members. So, once the gifts are explained, identity and credit worthiness of the donor and genuineness of the transaction of gift should not be doubted.
Tribunal accepted the explanation of assesse and Rs.9,25,000/- deposited in banks was taken as gifts and thus the addition was removed.

Conclusion

It can be concluded, that although provisions of Income Tax for taxation of gifts lays down the basis for exemption, however Income Tax authorities can still ask for explanation of such transactions. And that is the place where this judgement comes and tells that points like credit worthiness and occasion etc. does not matter and where there is an acknowledgement from both the receiver and presenter in form of affidavits, such affidavits from family are enough to prove the genuineness of cash gifts.