Gift Pursuant To Family Settlement Not Taxable As Deemed Income: ITAT Delhi Dismisses Revenue's Appeal

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Revenue's appeal against an individual taxpayer, Ratna Aggarwal, holding that, in the facts of the case, a property received pursuant to a family settlement was not taxable under Section 56(2)(vii)(b) of the Income Tax Act.

Section 56(2)(vii)(b) provides that where an individual receives immovable property without consideration from a person who is not a specified "relative," the stamp duty value of such property is taxable as income from other sources.

A coram of Judicial Member Anubhav Sharma and Accountant Member Manish Agarwal upheld the order of the National Faceless Appeal Centre, which had deleted an addition of Rs. 3,03,43,440.

Aggarwal had filed her return for Assessment Years 2018–19, declaring income of Rs. 3,40,540. The case was reopened after the department noted that she had received an immovable property through a registered gift deed. The assessing officer held that the donor did not fall within the definition of “relative” under Section 56(2) and added the stamp duty value as income from other sources.

During reassessment, the assessee initially offered the value to the tax. She later revised her computation. She contended that the property was received pursuant to a family settlement and was therefore not taxable.

The record showed that the property was registered in her name by her brother-in-law, Dr. Ravi Agarwal, in order to honour the dying wish of his father. The assessee maintained that the arrangement formed part of a family settlement involving members of a Hindu Undivided Family and that the gift deed merely formalised that settlement.

The AO rejected the explanation. The Commissioner (Appeals) accepted it. He held that the family settlement was genuine and that the transaction did not amount to a “transfer” under Section 2(47).

Before the tribunal, the Revenue argued that the family settlement was a “concocted story” devised to escape Section 56(2).

The Tribunal was not persuaded. It noted that the background of the family settlement had been explained during assessment and that the AO had not commented on its merits. It also recorded that the Revenue had not challenged the discretion exercised by the appellate authority in admitting and examining the revised claim.

Referring to the proviso to Section 56(2)(vii)(b), the bench observed that property received from a “relative” is excluded from tax. In the case of a Hindu Undivided Family, the term “relative” includes any member thereof.

On facts, the tribunal held that the settlement was between family members constituting an HUF. The execution of the gift deed was “only a formality to transfer a valid title consequent to family settlement.”

It affirmed the finding that “the transaction of gift only culminated the family settlement which does not fall in the definition of 'transfer' for the purpose of Section 2(47) of the Act.”

It further held that “the provisions of Section 56(2) of the Act, also do not apply as the gift deed was merely execution of a formal document amongst the family members constituting HUF.”

Finding no infirmity in the appellate order, the tribunal dismissed the revenue's appeal.