In a landmark decision, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that a Rs 3 crore gift from a Hong Kong-based hedge fund operator to his mother in Mumbai is genuine and exempt from taxation.
The case revolved around the Mumbai-based mother who received the substantial sum as a gift from her non-resident Indian (NRI) son during the financial year 2010-11. The Income Tax (I-T) Department had classified the amount as “unexplained cash credit” under Section 68 of the I-T Act, attempting to levy a hefty 60% tax rate (plus cess and surcharge).
The department also raised suspicions about the son’s financial dealings, citing a previous Securities and Exchange Board of India (SEBI) ban on his hedge fund in India. Officials alleged that the mother’s subsequent unsecured loan to an Indian company was a “colorable device” to funnel money back into the Indian securities market. They claimed the transaction was part of a circular trading scheme, as the funds were returned to the son in 2012-13.
However, the ITAT dismissed these allegations, ruling in favor of the taxpayer. The tribunal noted that the gift transaction was well-documented, with clear evidence of the donor’s financial capacity. Detailed bank records confirmed that the son had sufficient funds to make the transfer. Additionally, the SEBI ban on the hedge fund had been withdrawn.
The ITAT bench, comprising B.R. Baskaran and Anikesh Banerjee, criticized the I-T Department’s reliance on unverified Google searches and local newspaper reports. The bench stated, “The I-T officer failed to conduct cross-verification or any independent inquiry to substantiate claims.”
This ruling follows a similar August decision, where the Mumbai ITAT held that a Rs 20 lakh gift from a UAE-based NRI to his sibling in India was not taxable.
Under Indian tax laws, gifts received from NRIs fall under the purview of the Foreign Exchange Management Act, 1999 (FEMA), and the Income Tax Act, 1961. Gifts—including liquid funds, immovable property, shares, securities, or valuables like jewelry—are exempt from tax if there is no obligation to return the asset.
The decision sets a significant precedent for similar cases, offering clarity on the taxability of gifts received from NRIs.
