Lady with Rs 3.4 lakh annual income gets a Rs 33 lakh property via gift deed; tax dept sends notice; she wins in ITAT Delhi
Feb 25, 2026
Synopsis
The Income Tax Appellate Tribunal (ITAT) Delhi ruled that property received through a Hindu family settlement is not a taxable gift. The tribunal found that the transfer, executed as a formality following a family arrangement, did not constitute a taxable 'transfer' under the Income Tax Act, thereby dismissing the tax department's appeal.
On February 4, 2026, the Income Tax Appellate Tribunal (ITAT) Delhi ruled that a gift of property made under a Hindu family settlement does not fall under the definition of ‘transfer’ and, therefore, is not subject to taxation under Section 56(2)(vii)(b) as deemed income.
ITAT delivered this judgement in a case filed by Smt Aggarwal, who has challenged a tax notice issued by the Income Tax (I-T) department. The tax department had flagged her case after reviewing her file and ITR (Income Tax Return), in which she had declared an income of Rs 3,40,540. The review disclosed that she had received a property valued at Rs 33,43,440 by way of a gift deed. The tax department issued a notice stating that the donor did not qualify as “specified relatives” under Section 56(2) of the Income-tax Act, 1961, thereby making the gift taxable.
She argued that since she received the property as part of a family settlement deal, its value is not taxable. However, the income tax assessing officer (AO) rejected her argument and added the value of the property to her income and made her liable to pay tax on this additional income.
Background of this property and its subsequent settlement deal
This property was originally received by a family member through a registered gift deed on June 12, 2017, and subsequently came into Smt Aggarwal’s possession via a Hindu family settlement deal.
The transaction was carried out between her and her brother-in-law, Mr Ravi Agarwal, the son of late Shri A.D. Agarwal, who is the real brother of late Sahdev Prasad (her father-in-law).
Shri A.D. Agarwal, in his dying wish, expressed a desire to gift shares of his property to the family of his late brother, Shri Sahdev Prasad, and the same was pursued by his son, Dr. Ravi Agarwal, a reputed doctor and Non-Resident Indian who has been settled in the US for the past 36 years. Ravi Agarwal, to honour the wishes of his father, registered the property located in Delhi in her name through a family settlement.
She also claimed before the Commissioner of Income-tax (Appeals), or CIT (A), that the late Shri A.D. Agarwal had purchased the property with contributions coming from the late Sahdev Prasad Aggarwal, the real brother of A.D. Aggarwal and her father-in-law. Thus, in a way pleading for it to be a joint Hindu family property.
She claimed that, while filing the ITR during the reopening assessment, the value of the property was inadvertently shown as income from other sources due to wrong advice; therefore, a revised computation was submitted.
CIT (A) accepted her arguments, deemed the family settlement/family arrangement to be a genuine transaction and noted that AO had not made any adverse remark regarding it; therefore, the allegation concerning the registered gift deed was not considered a ‘transfer’ as defined under section 2(47). The I-T department, feeling aggrieved, filed an appeal before the ITAT Delhi.
The Income Tax Department contended that the narrative of family settlement is fabricated and subsequently devised to add validity to the registered gift deed, which was hit by the provision of Section 56(2).
On February 4, 2026, she won the case against the tax department. Advocate Mayank Patawali and Advocate Akash Ojha represented her in ITAT Delhi.
ITAT Delhi said that if a property is received without consideration from members of the Hindu
Undivided Family (HUF), the same shall not be considered deemed income.
Mihir Tanna, associate director, S.K Patodia LLP says: “Whenever any asset is transferred under gift or as a family settlement or under a will, it is neither considered a taxable transfer for the transferrer nor does the provision of Section 56(2)(x) need to be checked for income from other sources for the transferee. This is because the said transactions are usually without any consideration under natural love and affection.”
ITAT Delhi analysis and discussion
ITAT Delhi said that as they went through the assessment order, they found that during the assessment proceeding, it was mentioned that the gift is the outcome of a family settlement, and a detailed account of the background of family settlement was narrated.
ITAT Delhi said: “The AO has not at all commented on the merits of this claim, and the computation of the taxable income in para 5 would show that income declared in the ITR filed in response to notice u/s 148 of the Act itself has been picked up.”
The ITAT Delhi said that initially she had filed the ITR, declaring the value of the gifted property as income, but during the assessment proceedings had changed the stand, which was altogether left out of consideration.
The CIT(A) has taken into consideration this revised claim, and in light of the decision of the Supreme Court in the case of Goetze India (2006) 284 ITR 323 (SC), the Income Tax Department, while filing this appeal, has not questioned the discretion of the First Appellate Authority (CIT (A)) in admitting the additional claim and examining the issue in the context of the validity of the family settlement.
ITAT Delhi said that the representatives of the Income Tax Department contended that the property received by her under the family settlement would still be regarded as deemed income under Section 56(2)(vii)(b), as the donor, Ravi Aggarwal, son of the late Shri A.D. Aggarwal, does not fall in the definition of relatives.
In this context, ITAT Delhi said that they are of the considered view that the proviso to sub-clause (b) of clause (vii) of Subsection (2) of section 56 provides that clause (vii) will not apply in the case of property received from any relative, and the definition of ‘relative’ in Explanation (e)(ii) mentions the case of a Hindu Undivided Family or any member thereof.
ITAT Delhi said: “Meaning thereby that if the property is received without consideration from members of HUF, the same shall not be considered deemed income.”
ITAT Delhi said that in her case, the property was transferred as a result of a family settlement rather than a straightforward gift. The family settlement involved members of the family who formed a HUF due to the manner of acquisition of property and respective antecedent rights and interest in the subject property.
ITAT Delhi said: “The execution of the gift was only a formality to transfer a valid title consequent to family settlement.”
ITAT Delhi said that these factual aspects of family settlement have been duly pleaded before AO, but as rightly observed by the CIT(A), AO has not disputed the same on any factual or legal aspect so as to now challenge in appeal; thus, have to be admitted as settled as held by the CIT(A).
ITAT Delhi thus said that at one end the conclusion of CIT(A) that the transaction of gift only culminated in the family settlement, which does not fall in the definition of ‘transfer’ for the purpose of Section 2(47) of the Act, needs no interference.
ITAT Delhi said: “On the other hand, the provisions of Section 56(2) also do not apply, as the gift deed was merely the execution of a formal document amongst the family members constituting HUF.”
ITAT Delhi judgement: “In the light of the aforesaid, we find no substance in the ground as raised, and the appeal of revenue is dismissed. Order pronounced in the open court on 04.02.2026.”
[The Economic Times]
