A makes a gift of Rs.50,000 to his friend B. the gift was made on 01.09,2010. The Income Tax authorities levy income-tax on the gifted amount. The assesse challenges this levy. Decide.

Facts in the Case

• A person, ‘A’, made a gift of ₹50,000 to his friend ‘B’.
• The gift was made on 01.09.2010.
• The Income Tax authorities levied tax on the gifted amount.
• The assessee challenged the levy, arguing that the gifted amount should not be subject to tax.

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Issues in the Case

• Whether the gift of ₹50,000 by A to B, who is not a relative, is taxable in the hands of B under the Income Tax Act, 1961?
• Was the levy of income tax legal considering the amount and the nature of relationship between the donor and donee?

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Principles Applied

1. Section 56(2)(v) and 56(2)(vii) of the Income Tax Act, 1961

• These provisions deal with taxability of gifts received by an individual or Hindu Undivided Family (HUF).
• As per Section 56(2)(v) applicable till 31.03.2006, and Section 56(2)(vii) applicable from 01.10.2009 onwards:
  • Any sum of money exceeding ₹50,000 received without consideration (i.e., as a gift) from a non-relative is taxable as “Income from Other Sources” in the hands of the recipient.
  • If the amount does not exceed ₹50,000, it is not taxable.
  • Relatives are exempt from this rule (e.g., spouse, parents, siblings, etc.).

2. Applicability to this Case

• The gift was made on 01.09.2010, which falls after 01.10.2009, hence the amended Section 56(2)(vii) applies.
• The recipient ‘B’ is a friend, not a “relative” under the meaning given in the Income Tax Act.
• The gift amount is exactly ₹50,000, not exceeding the threshold.

CBDT Clarification & Case Laws
Courts and circulars clarify that if the gift amount is exactly ₹50,000, and not more, the exemption applies. Tax liability arises only if the amount exceeds ₹50,000.

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Judgment / Conclusion

• Since the gift of ₹50,000 does not exceed the threshold, and the amount is exactly at the limit, it does not attract tax liability under Section 56(2)(vii).
• Therefore, the assessee’s challenge is valid.
• The levy of income tax on the gifted amount is not legal, and the tax authorities cannot tax the gift of ₹50,000 made to a non-relative, provided it does not exceed ₹50,000.