Gifts Between Spouses: Why Documentation Matters Under the Income Tax Act

In the realm of Indian taxation, gifts between ‘relatives’—especially between spouses—are often perceived as straightforward, tax-exempt transactions. However, a recent ruling by the Income Tax Appellate Tribunal (ITAT) in the case of Shilpa Shetty Kundra (ITA No.996/M/2025) serves as a critical reminder that tax exemption does not equate to an exemption from scrutiny. When a taxpayer claims to have received a substantial sum as a gift, the burden of proof lies heavily on them to establish the transaction’s legitimacy.

The Shilpa Shetty Kundra Case: A Reality Check for High-Value Gifts

The case revolves around a significant sum of ₹12.54 crore credited to the account of the assessee, prominent actress Shilpa Shetty Kundra, as a gift from her husband. While Section 56(2)(x) of the Income Tax Act generally exempts gifts received from relatives from being treated as ‘Income from Other Sources,’ the Assessing Officer (AO) invoked Section 68 to question the nature and source of this credit.

The assessee provided a gift deed and basic documentation, but the revenue authorities sought deeper evidence regarding the actual transfer of funds, the source of those funds in the hands of the donor, and the financial capacity of the donor to make such a large gift. This case highlights that even in the closest of relationships, the ‘identity, capacity, and genuineness’ test remains the gold standard for tax compliance.

The Three Pillars of Section 68: Identity, Capacity, and Genuineness

Section 68 of the Income Tax Act deals with ‘Unexplained Cash Credits.’ If any sum is found credited in the books of an assessee and the assessee offers no explanation, or the explanation is not satisfactory, the sum may be charged to income tax. To satisfy the requirements of this section, three specific criteria must be met:

1. Identity of the Donor

The taxpayer must clearly identify who the donor is. In cases between spouses, identity is rarely the issue, but it must still be backed by Government-issued identification and Permanent Account Numbers (PAN).

2. Creditworthiness (Capacity) of the Donor

This is where most high-value gift claims face hurdles. It is not enough to say the donor felt generous. The taxpayer must prove that the donor actually had the financial standing to give away such a large amount. This is typically evidenced by the donor’s Income Tax Returns (ITR), audited balance sheets, and bank statements showing a sufficient surplus.

3. Genuineness of the Transaction

The movement of money must be real. The authorities look for a ‘trail.’ Was the money transferred via banking channels? Was there a clear gift deed executed? Does the transaction reflect natural love and affection, or does it look like an attempt to circulate unaccounted money (round-tripping)?

Essential Documentation Checklist for Spousal Gifts

To avoid litigation and ensure a smooth assessment process, taxpayers should maintain a robust trail of documentation when receiving high-value gifts. As a Chartered Accountant, I recommend the following checklist:

• Registered Gift Deed: A formal document executed on stamp paper, clearly stating the relationship and the fact that the gift is made out of natural love and affection without any consideration.
• Bank Statements: Both the donor’s and the recipient’s bank statements should reflect the transaction. Avoid cash gifts for large amounts, as they are virtually impossible to substantiate under current tax laws.
• Donor’s Financials: Keep copies of the donor’s ITR and a statement of affairs. If the donor is an NRI, ensure compliance with FEMA (Foreign Exchange Management Act) regulations.
• Source of Source: In some cases, the AO may ask for the ‘source of the source.’ If the husband gifted money to the wife, where did the husband get that money? Being prepared for this secondary level of inquiry is vital.

Conclusion: Transparency is the Best Policy

The ITAT’s focus in the Shilpa Shetty Kundra case reinforces the principle that the ‘onus of proof’ is on the taxpayer. While the law allows for tax-free gifts between spouses, it does not allow for the use of such provisions as a shield for unexplained wealth. For high-net-worth individuals and everyday taxpayers alike, the lesson is clear: every credit in your bank account must have a story that is supported by a verifiable paper trail. Without clear evidence of actual transfer, source of funds, and donor capacity, even a gift from a spouse can lead to heavy tax demands and penalties.