He got Rs 89 lakh as gift from relatives; Tax dept doubted its genuineness, but ITAT Mumbai ruled in his favour: Here’s why
Sep 12, 2025
Synopsis
Manwani faced an Rs 89 lakh income tax addition due to unexplained cash credit, which he claimed were gifts from relatives. Despite providing detailed documentation, the tax department doubted the donors' creditworthiness. ITAT Mumbai ruled in Manwani's favor, emphasizing that he met all conditions under Section 68, with transparent fund trails and independent corroboration, dismissing the addition.
When Mr. Manwani filed his income tax return (ITR) for AY 2018-19 by declaring an income of Rs 98 lakh, he was issued a tax notice. The reason for this notice was that his ITR was selected for scrutiny, and in the course of assessment proceedings, the Income Tax Assessing Officer (AO) noticed that Manwani had introduced fresh cash (Rs 89 lakh) in his account.
Manwani explained that this cash is a gift from his close relatives and they satisfy the definition of “relative” as contemplated under section 56(2)(vii) of the Income Tax Act, 1961. Manwani even went as far as to give detailed list of the relatives who gave him this money, including their PAN numbers.
However, the Income Tax Department was not satisfied. The tax officer analysed the evidences given by Manwani and proceeded to record certain adverse observations with respect to each of the donors. The tax officer's analysis was predominantly focused on doubting the creditworthiness of the gift donors, emphasising that their declared incomes were meagre and that the funds used for making the gifts were received only a few days prior from third parties.
In the tax officer's view, this proximate nexus between inflow and outflow suggested that the gift donors lacked independent financial strength, and therefore the gifts were not genuine. On this reasoning, the tax officer invoked the provisions of section 68 of the Income Tax Act, 1961, and treated the entire sum of Rs 89 lakh as unexplained cash credit.
Aggrieved by this action of the tax department, Manwani filed an appeal with the commissioner of appeals (CIT A). On January 27, 2025 he lost the case in CIT (A). After this he filed an appeal before Income Tax Appellate Tribunal (ITAT) Mumbai and here he won the case on August 25, 2025.
The ITAT Mumbai pointed out that based on the evidence provided by Manwani, it’s clear that all the fundamental conditions under Section 68, namely identity of the creditor, genuineness of the transaction, and creditworthiness of the creditor stands amply satisfied. The ITAT Mumbai also said that apart from this, the trail of funds is both proximate and transparent and the repayments credited into the donors’ bank accounts were promptly transferred as gifts to Manwani.
While announcing the judgement in Manwani’s favour, the ITAT Mumbai said that this evidence and bank account trail nexus leaves no scope for adverse inference.
Keep reading to find out more about how Manwani successfully won this case of unexplained cash credit.
Brief facts of this case
According to the ITAT Mumbai order (ITA No. 2733/Mum/2025) dated August 25, 2025, the brief facts of the case are that Manwani is an individual who filed his ITR for AY 2018-19 declaring a total income of Rs 98 lakh (98,70,370). His ITR was selected for scrutiny and in the course of assessment proceedings, the Assessing Officer noticed that Manwani had introduced fresh cash in his account during the year.
On further enquiry, Manwani explained that a substantial part of such capital introduction represented gifts received from certain close relatives. Manwani also told the tax officer that these relatives fall within the definition of relatives under Section 56(2)(vii).
The particulars of such family members, together with the quantum of gifts received from each, were placed before the Assessing Officer also. Specifically, Manwani submitted the following:
ITAT Mumbai explains that gifts received from relatives do not constitute taxable income in recipient’s hands
ITAT Mumbai in its order dated August 25, 2025 said that the gift donors are not remote connections or unrelated third parties but immediate family members of Manwani, who fall squarely within the definition of “relatives” as contained in the proviso to section 56(2)(a), read with the Explanation to clause (vii) of the Income Tax Act, 1961.
ITAT Mumbai said: “By the very scheme of the statute, therefore, gifts received from such relatives do not constitute taxable income in the hands of the recipient. Importantly, the assessee (Manwani) has not rested his case on the statutory position alone but has gone much further in furnishing a complete body of evidence to substantiate the gifts.”
ITAT Mumbai says the money trail and evidence leaves no scope for adverse inference
ITAT Mumbai said that all the evidences submitted by Manwani shows that the donors are identifiable and assessed to tax; the transactions are routed through normal banking channels and backed by written gift deeds; and the creditworthiness is established not on the basis of their annual income alone but by demonstrating the repayment of earlier loans advanced by them, which constituted the direct source of funds for the gifts.
ITAT Mumbai said: “The trail of funds is both proximate and transparent and the repayments credited into the donors’ bank accounts were promptly transferred as gifts to the assessee. This nexus leaves no scope for adverse inference.”
ITAT Mumbai also said that despite these evidence, the Assessing Officer, however, chose to disregard this comprehensive evidence and doubted the donors’ capacity solely on the ground that their declared incomes were modest.
ITAT Mumbai said: “Such reasoning, in our considered view, is legally untenable. Creditworthiness cannot be measured only by the touchstone of current year’s returned income; it must be judged in the wider context of the donor’s overall financial position, capital base, and receipts from legitimate sources such as repayment of loans. When the banking trail establishes that the donors were in possession of sufficient funds at the relevant point of time, the Revenue cannot dismiss the explanation merely on presumptions or suspicion.”
ITAT Mumbai says when third parties corroborates the taxpayer’s explanation then the chain of evidence is complete
ITAT Mumbai said that it is equally significant that the Assessing Officer himself had issued notices under section 133(6) to the donors, and each donor responded directly, confirming the gifts and furnishing supporting evidence.
ITAT Mumbai said: “When third parties independently appear before the Department and corroborate the assessee’s explanation, the chain of evidence becomes complete. In such circumstances, the addition sustained by the Assessing Officer rests more on conjecture than on material evidence.”
ITAT Mumbai final judgement
The ITAT Mumbai said that on an overall appreciation of facts, they are persuaded to hold that Manwani has discharged the burden cast upon him under section 68.
Judgement: “The Ld. CIT(A), after conducting a detailed donor-wise analysis of the evidences, has correctly appreciated the facts and law in deleting the addition. We find ourselves in complete agreement with his conclusions. Accordingly, we uphold the findings of the Ld. CIT(A) and direct that the addition of Rs 89,00,000 made by the Assessing Officer under section 68 of the Act be deleted. The grounds raised by the Revenue are, therefore, dismissed. In the result, the appeal filed by the Revenue fails and is dismissed. Order pronounced in the open court on 25-08-2025.”
Can the tax department check the creditworthiness of the gift doner to determine the taxability in the hands of the recipient?
Aditi Goyal, partner, Trilegal, said to ET Wealth Online: "The income tax law contains certain deemed income provisions in terms of which if a person receives a sum of money exceeding Rs 50,000 from another person in a financial year without consideration (i.e., as a gift), the amount received may be taxable in the hands of the recipient at the applicable tax rate. However, sums received from ‘relatives’ (as defined under the income tax law) are specifically excluded from tax under this provision. Accordingly, in the present case, where the taxpayer received gifts from persons covered under the definition of ‘relatives’, such gifts would ordinarily not be taxable for the taxpayer."
Goyal adds: "That said, under section 68 of the income tax law, the tax authorities have been granted wide powers to examine the nature and source of sums credited to a taxpayer's books. If the credit in the books of the recipient is in the nature of a loan or borrowing or any such amount, the tax authorities may also require the payer to also explain the nature and source of the funds. If the recipient or the payer fails to provide a satisfactory explanation regarding the nature and source of the funds, the amount may be brought to tax in the hands of the recipient. Essentially, if the tax authorities suspect that a gift is a cover for unaccounted income, they may invoke the anti-abuse provision under section 68, even if gifts from relatives are otherwise exempt under the income tax law. Therefore, as a conservative measure and to mitigate any adverse consequences, it is prudent for taxpayers to maintain documentation establishing the actual trail of funds, even in the case of gifts received from relatives."
Mihir Tanna, associate director, S.K Patodia LLP, says that whenever a person takes any unsecured loan (which is usually from relatives and in case of company, unsecured loan is usually from shareholder/relative of shareholder) of a substantial amount, the income tax officer checks whether the loan transaction is genuine or not.
Tanna adds: "If the lender files ITR and provides confirmation of loan given, genuineness of lender is proved. Bank statement of the lender proved the genuineness of the transaction. For creditworthiness of lender (capacity to give loan) is proved through balance sheet and same is always litigative issue."
According to Tanna: "Department is usually of the view that person having low income is not capable of providing loan. Many times loan is given after taking loan from other person OR from old saving/investments. In several judgments, court has accepted it as sufficient source to prove creditworthiness."
[The Economic Times]
