In a significant development for taxpayers, a recent tax court order has provided clarity on the taxability of cash gifts exchanged between close blood relatives, even if the transaction does not occur through traditional banking channels or is not supported by a formal gift deed.
The order, referencing earlier decisions by the Peshawar High Court and the Supreme Court, highlights that gifts between blood relations, such as a father and son, may not be subject to taxation by the Federal Board of Revenue (FBR) provided both the donor and the recipient transparently report the gift in their respective income tax returns.
Previous Stance and Court Case
Previously, FBR regulations generally required gifts to be transferred via a banking channel, documented by a gift deed, and declared in tax returns by both parties to be considered valid for income tax purposes. Failure to meet these conditions could result in the FBR levying tax on the gift amount.
The court’s stance came to light following a case where a father gifted his son a substantial cash amount, which was not transferred through a bank. While both individuals reported the gift in their tax returns, a formal gift deed was absent. The tax authorities initially challenged this, imposing a tax on the gifted amount.
However, the tax court (ATIAR) ruled in favor of the taxpayer, asserting that for gifts between blood relatives, the crucial factor is the open declaration and documentation of the gift in both parties’ tax returns. The court’s decision implies that in such instances, the FBR cannot solely impose tax on the grounds that the cash was not transferred through a bank or lacked a gift deed.
Recommendation for Best Practice
Despite this favorable court order, experts still recommend utilizing banking channels for gifts and maintaining proper documentation to avoid potential scrutiny and queries from tax authorities.
Further details and the complete court order are reportedly available for those seeking a more in-depth understanding of this ruling.
