A woman with an annual income of just Rs 3.4 lakh received a property worth Rs 33 lakh through a registered gift deed — and soon found herself facing a tax notice. The tax department treated the entire value of the property as her income under Section 56, arguing that the donor — her brother-in-law — did not fall under the definition of a “specified relative”.
The case, highlighted in a social media thread containing multiple posts by tax advisory platform TaxBuddy, has now resulted in a significant ruling by the Income Tax Appellate Tribunal (ITAT) Delhi, which ruled in favour of the taxpayer and deleted the addition.
Mrs. Ratna with ₹3.4 lakh annual income received a ₹33 lakh property via gift deed.
Tax Dept said: “Brother-in-law is not a specified relative.”
Added the entire amount as income u/s 56.
But ITAT Delhi ruled in her favour.
Here’s what happened🧵👇— TaxBuddy (@TaxBuddy1) February 28, 2026
Here’s a simple breakdown of what happened and why this ruling matters.
What triggered the tax notice?
Mrs. Ratna filed her income tax return declaring total income of Rs 3,40,540. Later, her case was reopened under Section 147 of the Income Tax Act.
The reason? She had received an immovable property worth ₹33 lakh via a registered gift deed.
The Assessing Officer (AO) noted that the donor — her brother-in-law — was not covered under the “specified relatives” list as per Section 56(2)(vii)(b). Based on this interpretation, the entire value of Rs 33 lakh was added to her income as “deemed income”.
What was the taxpayer’s defence?
The assessee argued that this was not a simple taxable gift.
She said the property was part of a larger family settlement and it had a Joint Hindu Family (HUF) background. The gift deed merely formalised an already existing family arrangement. A revised computation was filed during reassessment explaining the position.
In short, she claimed the transaction was part of a genuine family settlement and not a taxable transfer.
The core legal issue the tribunal had to examine was if property is received under a genuine family settlement within a Hindu Undivided Family (HUF), can it be treated as a “transfer”? If it is not a transfer, can Section 56 still apply and tax it as income?
What did ITAT Delhi decide?
The ITAT made two important observations:
1. Family settlement is not a transfer
The tribunal held that a family arrangement among members to resolve claims is not a “transfer” under Section 2(47) of the Income Tax Act.
The gift deed, in this case, merely formalised the settlement. Since it was not a transfer in the strict legal sense, the capital transfer logic could not apply.
2. Section 56(2) did not apply
Section 56(2) taxes gifts received without consideration unless they fall under specific exemptions — one of which is property received from “relatives”.
The tribunal noted that in the case of an HUF, any member qualifies as a relative. The arrangement was among family members forming an HUF.
The Assessing Officer did not dispute the genuineness of the family settlement, therefore, the tribunal concluded that Section 56(2) could not be invoked to tax the ₹33 lakh property as deemed income. The revenue’s appeal was dismissed, and the addition was deleted.
What did ITAT say about the tax officer’s approach?
The tribunal also pointed out that the AO did not properly examine the claim of family settlement. The facts were not rebutted during the assessment stage.
The department cannot ignore relevant facts at the assessment stage and later challenge them, the tribunal said.
This observation strengthens the principle that tax authorities must examine the substance of a transaction and not rely only on technical interpretation.
How does Section 56 treat gifts from relatives?
Section 56(2) of the Income Tax Act provides that if a person receives money or property without consideration (or for inadequate consideration), it may be taxed as income under the head “Income from Other Sources”.
However, there are important exceptions.
Gifts received from “relatives” are not taxable. The law provides a specific list of relatives, which includes spouse, siblings, lineal ascendants and descendants, and in certain cases, members of an HUF.
If the gift does not fall within the specified relative definition, and its value exceeds the prescribed limit, it can be taxed as income in the hands of the recipient. This case highlights that in situations involving HUFs and genuine family settlements, the substance of the arrangement matters more than the mere label of a “gift deed”.
Key takeaway for taxpayers
-Not every gift deed automatically results in taxable income.
-Genuine family settlements are legally recognised.
-Substance of the transaction is more important than its form.
-Always document the background of family arrangements.
-Seek professional advice before responding to reopening notices.
However, it is important to note that such tribunal rulings can still be challenged by the tax department before the High Court or even the Supreme Court, depending on the legal questions involved.
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