2025 (7) TMI 38 - AT - Income Tax

Addition of gift received from assessee s daughter - creditworthiness of her daughter who gifted the amount to the assessee - Explanation for source of source - HELD THAT - We noted from the documents submitted by the assessee and from the bank statements of daughter that there is a transfer of money received on two occasions and the same amount has been given as gift to the assessee. During the proceedings before the lower authorities assessee has proved the source of source i.e. husband of the assessee. On going through the financial statements we noted that husband of the assessee has sufficient fund to give gift to his daughter and the daughter has given the same amount as gift to her mother (assessee). Accordingly creditworthiness is proved to the extent of the amount received as gift. Accordingly the addition made by the AO is not warranted. Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the addition of Rs. 45 lakhs made by the Assessing Officer (AO) on the ground that the assessee failed to establish the creditworthiness of her daughter, Ms. Kruthika Pathi Sanjay, who gifted the amount to the assessee, is justified. Specifically, the Tribunal examined:

• Whether the gift of Rs. 45 lakhs received by the assessee from her daughter is exempt income under the Income Tax Act.
• Whether the daughter's creditworthiness (i.e., the source of funds for the gift) has been satisfactorily established.
• Whether the source of the daughter's funds (the "source of source") was adequately proved, particularly the claim that the daughter received the amount as a gift from her father (the assessee's husband).
• The applicability and interpretation of precedents relating to the requirement of creditworthiness and source verification in cases of gifts received.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of Addition of Rs. 45 Lakhs on Grounds of Non-establishment of Creditworthiness of Daughter

Relevant legal framework and precedents: Under the Income Tax Act, gifts received from specified relatives are exempt from tax. However, when large gifts are received, the assessing authorities often scrutinize the genuineness and source of the gift to ensure that the transaction is not a device to evade tax. The principle of "creditworthiness" requires the recipient or the donor to demonstrate that the donor had adequate means to make the gift.

The authorities relied on several precedents including:

• CIT vs Sanjeev Jain [2023] 150 taxmann.com 487 (Calcutta)
• CIT vs Ramesh Suri [2015] 57 taxmann.com 84 (Delhi)
• ITO vs Smt. Ichudevi L. Choraria [2015] 59 taxmann.com 453 (Mumbai - Trib.)
• ACTT vs Pravin Pannalal Shah [2023] 156 taxmann.com 216 (Surat- Trib.)

These cases emphasize the necessity of establishing the source of funds and creditworthiness of the donor in gift transactions to claim exemption.

Court's interpretation and reasoning: The Tribunal carefully examined the bank statements of the daughter, which showed receipt of Rs. 30 lakhs and Rs. 15 lakhs on 05.10.2015 and 08.10.2015 respectively, shortly before gifting the same amounts to the assessee. The AO had noted the absence of any significant opening balance in the daughter's bank account and treated the gift as unexplained income.

However, the assessee argued that the daughter received the funds as a gift from her father (the assessee's husband), and thus the daughter's creditworthiness is established through the financial capacity of the husband. The Tribunal reviewed the financial statements of the husband and found that he had sufficient funds to make such a gift to his daughter.

The Tribunal accepted the "source of source" argument, i.e., the husband gifted the amount to the daughter, who in turn gifted it to the assessee. This chain of transactions was supported by credible documentary evidence including bank statements and financial records.

Key evidence and findings: The primary evidence was the bank statement of the daughter showing the receipt of Rs. 45 lakhs in two tranches immediately preceding the gift to the assessee. The financial statements of the husband demonstrated his capacity to gift such amounts. The assessee also filed a comprehensive Paper Book of 114 pages containing relevant documents and case laws supporting the claim.

Application of law to facts: The Tribunal applied the principle that when the source of funds of the immediate donor (daughter) is explained satisfactorily by tracing it to a credible source (husband), the gift received by the assessee from the daughter is exempt. The Tribunal found that the AO's addition was based on an incomplete view, ignoring the "source of source" evidence.

Treatment of competing arguments: The AO and CIT(A) relied on precedents emphasizing the need for creditworthiness and found the daughter's bank account did not show a genuine source. The assessee countered by proving the husband's financial capacity and the chain of gifts. The Tribunal gave weight to the assessee's evidence and found that the creditworthiness of the daughter was satisfactorily established.

Conclusions: The addition of Rs. 45 lakhs was not justified as the gift was from a relative and the source of funds was adequately proved. The gift amount is exempt income under the Act and therefore, should not have been added to the assessee's income.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"On going through the financial statements, we noted that Shri. Pathi Sanjay (husband of the assessee) has sufficient fund to give gift to his daughter and the daughter has given the same amount as gift to her mother (assessee). Accordingly, creditworthiness is proved to the extent of the amount received as gift. Accordingly, the addition made by the AO is not warranted."

Core principles established include:

• The principle of "source of source" is crucial in establishing creditworthiness in gift transactions.
• When a gift is received from a relative, and the immediate donor's source of funds is satisfactorily explained, the gift is exempt income under the Income Tax Act.
• Bank statements and financial statements of related parties are vital evidence to establish the genuineness of gifts and creditworthiness.
• Assessing authorities should not make additions based on incomplete or fragmented evidence ignoring credible documentary proof of source.

Final determination was in favor of the assessee, allowing the appeal and deleting the addition of Rs. 45 lakhs on account of the gift received from the daughter.