The Income Tax Appellate Tribunal (ITAT) Delhi has ruled in favour of a taxpayer, a teacher by profession, in a case involving a cash gift of ₹3.5 lakh received from her daughter. The Tribunal set aside the additions made by the Assessing Officer and later upheld by the Commissioner of Income Tax (Appeals), bringing relief to the assessee after a protracted legal battle.
Background of the Case
The matter began when the Income Tax Department, acting on information of large cash deposits, reopened the teacher’s assessment for Assessment Year (AY) 2018-19 under Section 147 of the Income Tax Act. A notice under Section 148 was issued on March 30, 2022.
The taxpayer had already filed her income tax return for AY 2018-19, declaring a total income of ₹7.4 lakh. In response to the notice, she explained that a sum of ₹3.5 lakh reflected in her bank account was a gift from her daughter, intended for the purchase of property. She submitted her bank statements, passport details, cash flow statement, and a declaration of gift. Her daughter had not filed income tax returns since her income was below the taxable threshold.
Assessing Officer’s Findings
The Assessing Officer (AO) was not convinced. He noted that the donor (the teacher’s daughter) had deposited ₹4 lakh in cash shortly before gifting the money, and that her bank account showed minimal balance prior to the deposits. The AO concluded that she lacked the financial capacity to gift ₹3.5 lakh and treated the amount as unexplained cash credit under Section 68 of the Income Tax Act.
The assessment was completed under Section 147 with the disputed addition.
CIT(A)’s Decision
The taxpayer appealed, but the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s order in March 2025. The appellate authority echoed the view that the donor lacked creditworthiness and pointed to the pattern of cash deposits and withdrawals as inconsistent with maintaining genuine savings.
Tribunal’s Observations
Challenging the order, the teacher approached the ITAT Delhi. During the hearing, she emphasized that her daughter had maintained cash balances over the years, regularly depositing and withdrawing money in small denominations to keep her account active. She also produced deposit slips dated March 9 and March 12, 2018, showing deposits of various note denominations.
It was further argued that her daughter, then 25 years old, was an adult capable of managing her own finances. She had small savings accumulated over several years, which were not significantly affected by the demonetization exercise of 2016 since her holdings were in smaller currency notes.
The Tribunal noted that the identity of the donor was never in dispute. The daughter had sufficient cash balance at the time of the gift, and the relationship between the donor and donee fell squarely within the definition of “relative” under Section 56(2)(x), which exempts such gifts from taxation.
The Ruling
In its order pronounced on September 12, 2025, ITAT Delhi observed:
“The assessee has truly and fully explained the source of the transaction which has been received in the form of gift from her daughter in the form of love and affection, who was having sufficient balance in her account at that point of time. Therefore, the addition in dispute made in the hands of the assessee is not sustainable in the eyes of law.”
The Tribunal set aside the orders of the lower authorities and deleted the addition of ₹3.5 lakh.
What Section 68 Says
Section 68 of the Income Tax Act empowers tax officers to treat any unexplained credit in the books of an assessee as income, unless the assessee can satisfactorily explain its source. The assessee must establish:
- The identity of the creditor,
- The creditworthiness of the creditor, and
- The genuineness of the transaction.
If these conditions are met, the onus shifts to the tax authorities to disprove the explanation.
Takeaway for Taxpayers
The ITAT ruling reiterates that while gifts between close relatives are tax-exempt, the donor’s financial capacity and the genuineness of the transaction remain crucial in defending such cases. For taxpayers, the lesson is clear: documentation and transparent financial practices can prevent unnecessary disputes with the tax department.
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