ITAT Mumbai ruled NRI’s Rs.3 Crore gift to Mom ‘genuine’, not ‘taxable’

In a landmark ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) decided that a Rs 3 crore gift from a Hong Kong-based hedge fund operator to his mother in Mumbai is legitimate and tax-free.

The case focused around a Mumbai-based mother who received a large amount as a gift from her non-resident Indian (NRI) son during the financial year 2010-11. The Income Tax Department categorised the amount as a “unexplained cash credit” under Section 68 of the IT Act, aiming to impose a hefty 60% tax rate (plus cess and surcharge).

The government also expressed concerns about the son’s financial operations, noting an earlier Securities and Exchange Board of India (SEBI) suspension on his hedge fund in India.

Officials claimed that the mother’s subsequent unsecured loan to an Indian company was camouflaged as a real transaction for funnelling funds back into the Indian stocks market. They alleged that the transaction was part of a circular trading scheme, as the funds were returned to the son in 2012-13.

However, the ITAT dismissed the claims and ruled in favour of the taxpayer. The tribunal observed that the gift transaction was well-documented, with convincing proof of the donor’s financial capacity. Detailed bank records indicated that the son had enough money to make the transfer. Additionally, the SEBI prohibition on the hedge fund had been lifted.

The bench of ITAT, which included B.R. Baskaran and Anikesh Banerjee, criticised the IT Department for relying on unproven Google searches and reports of local newspaper.

The bench stated, “The Income Tax officer failed to conduct cross-verification or any independent inquiry to substantiate claims.”

This decision follows a similar one from August, when the Mumbai ITAT ruled that a Rs 20 lakh gift from a UAE-based NRI to his Indian sibling was not taxable.

Gifts received from non-resident Indians are subject to the Foreign Exchange Management Act of 1999 (FEMA) and the Income Tax Act of 1961. Gifts including liquid funds, immovable property, shares, securities, or rare items like as jewellery are tax-free if there is no obligation to return the asset.

The decision establishes a major precedent for comparable cases by providing clarity on the taxability of gifts received from NRIs.