ITAT: Property Received Under Family Settlement Not Taxable u/s 56(2) Despite Gift Deed

The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which had deleted an addition made in the case of the Assessee for the Assessment Year 2018-19. The dispute arose regarding a property transaction where a gift deed was executed among family members who constituted a Hindu Undivided Family (HUF).

The Assessing Officer (AO) had treated the transaction as a taxable event, but the Assessee contended that the gift was merely a formal mechanism to give effect to a pre-existing family settlement based on antecedent rights and interests in the property.

Issue Raised: Whether a gift deed executed to formalize a family settlement among HUF members constitutes a “transfer” under Section 2(47) of the Income-tax Act, and whether such a transaction attracts the provisions of Section 56(2) regarding “income from other sources.”

ITAT’s Decision: The ITAT dismissed the Revenue’s appeal and upheld the CIT(A)’s order. The Tribunal observed that the family settlement was entered into between members who had genuine antecedent rights in the HUF property. The execution of the gift deed was characterised as a mere “formality” to transfer a valid title later to the settlement.

The Bench ruled that a family settlement does not fall within the definition of “transfer” for capital gains under Section 2(47). Also, the Tribunal held that Section 56(2) is not applicable to such instances as the document was a formal execution of rights already vested within the family unit. Since the AO failed to dispute the factual existence of the family settlement at the assessment stage, the Revenue could not challenge its validity on appeal.

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