Large cash transactions within families often come under the scanner of the income-tax department, especially when the source and financial capacity of the giver are not clearly established. While gifts from relatives are generally allowed, taxpayers must be able to substantiate the origin of funds and the donor’s creditworthiness with proper documentation.
A recent Income Tax Appellate Tribunal (ITAT), Mumbai, ruling shows how failure to fully explain cash gifts can lead to partial additions as unexplained income, reinforcing the need for clear records and compliance with tax norms.
“If a relative gives a substantial amount of cash, the source of the cash must be explained and creditworthiness (capacity) must be proven. Also, it is advisable to execute a proper gift deed. If creditworthiness is not proved for some of the donors or the source is not explained for part of the amount then income tax department can consider it as unexplained and it will be taxable,” said Mihir Tanna, associate director, direct tax, an tax expert said.
What is the case?
An assessee, Shrenik Manish Mehta, moved ITAT against an addition of Rs 13.95 lakh made under Section 69A (which governs the taxation of unexplained money) of the I-T act for unexplained cash deposits. The issue stemmed from Mehta’s substantial credit-card payments, which included Rs 13.95 lakh in cash. He claimed that the cash came as gifts from his father (Rs 8 lakh), mother (Rs 4.50 lakh), and wife (Rs 3 lakh), aggregating to Rs 15.50 lakh. The assessing officer (AO) rejected this explanation, saying affidavits alone were not sufficient proof and that Mehta failed to establish the earning capacity of the family members. The Commissioner of Income Tax (Appeals) (CIT-A) also upheld this view, leading to the appeal before the ITAT.
In ITAT, Mehta submitted income-tax returns, bank statements and affidavits of all three family members to prove the gifts were genuine. It was argued that the father engaged in small business activities, the mother earned through tuition and sale of homemade food items, and the wife had professional income. The tribunal examined these documents and found that the wife had sufficient declared income under Section 44ADA and regular bank transactions, making her gift of Rs 3 lakh fully explainable. Similarly, the bank records of the father and mother showed regular financial activity, indicating some income-generating capacity, though their declared incomes were relatively modest.
After evaluating the evidence, ITAT held that while the entire cash gifts could not be accepted as fully explained, they also could not be entirely treated as unexplained. Accordingly, it allowed partial relief, accepting 100 percent of the wife’s gift of Rs 3 lakh, and 50 percent each of the gifts from the father and mother – Rs 4 lakh out from the father and Rs 2.25 lakh from the mother. Out of the total Rs 13.95 lakh, Rs 9.25 lakh was deleted, while Rs 4.70 lakh was sustained as unexplained. The appeal was thus partly allowed, establishing that documented financial activity and income records can justify cash gifts but only to the extent they are reasonably supported by evidence.
Experts say if cash withdrawn for a specific purpose is not used for that reason, proper documentation is a must. The I-T Act imposes statutory restrictions on accepting and paying large cash sums.
