Section 56(2)(vii) of Income Tax Act now clearly provides law relating to taxation of gifts received in cash or kind by an Individual. In plain and simple terms, the receipt of money in cash or kind is now tax free only if it is received from specified persons. One of them is relative of an individual. But the term relative has also been defined in the Explanation given under section 56(2)(vii) only. In general, the list of relatives who can give or receive the gifts are close blood relatives like son and daughter. So, when a person adopts a son or daughter, the question that generally arises is whether the adopted son as per a different law, can be considered a person included within the meaning of relative.
Meaning of relative as per sec.56(2)(vii) of Income Tax Act?
At four places under the Income Tax Act – section 2(41), Explanation to section 10(26BBB) , Explanation to section 13 , and under section Explanation to section 56(2)(vii). However, since the meaning of relative is defined in section 56(2)(vii), we do not to travel anywhere outside the section 56(2) itself.
(e) “relative” means,—
(i) in case of an individual—
(A) spouse of the individual;
(B) brother or sister of the individual;
(C) brother or sister of the spouse of the individual;
(D) brother or sister of either of the parents of the individual;
(E) any lineal ascendant or descendant of the individual;
(F) any lineal ascendant or descendant of the spouse of the individual;
(G) spouse of the person referred to in items (B) to (F); and
(ii) in case of a Hindu undivided family, any member thereof;
What one should note is that nowhere in the relative definition u/s 56(2) (vii) of Income tax Act , words like Father or Son or Daughter are used. All such relations are covered under words any lineal ascendant or descendant of the individual. So, the meaning of words “lineal ascendants or descendants of the individual “ required to be understood. If such words include an “adopted son” as the lineal descendant, then only one can say that gifts receipt to from adopted son is tax free under section 56(2) .
What is lineal descendant ?
First thing is that meaning of lineal descendant under income tax act is not given. Therefore, meaning of lineal ascendant or descendant has to be understood from other personal laws of India. This principle was applied by the Rajasthan High Court in the case of CIT v. Dhannalal Devilal [1956] 29 ITR 165 (F.B) while defining the term “lineal descendant.” Relevant extracts from that decision is given below :
“In Wharton’s Law Lexicon (14th Edition) ‘lineal consanguinity’ is defined as that ‘relationship which subsists between persons descended in a right line, as the grandfather, father, son, grandson.’ ‘Lineal descendent’ is defined as the descendent of an estate from ancestor to the heir in a right line. Reading these two together, ‘lineal descendant’ means descendant in the right line as from father to son, etc., without any deviation. In the Oxford English Dictionary, Vol. III, a ‘descendant’ is defined as one who ‘descends’ or is descended from an ancestor; issue, offspring (in any degree near or remote).
The idea of right line without any deviation seems to be absent from the dictionary meaning of the word ‘descendant’. So, when the law speaks of ‘lineal descendant’, the intention is that a person must descend in a right line without any deviation as from father to son, grandson, great grandson and so on. Similarly, it seems to us that the ‘descendent’ is lineal if it goes from mother to daughter, and grand-daughter, and great grand-daughter, because here also it is in a right line without any deviation.
Section 25 of the Indian Succession Act defines ‘lineal consanguinity’, while section 26 defines ‘collateral consanguinity’. Where the descendent is by lineal consanguinity, one may call it a lineal descendent and the person so descending is a lineal descendant. But where the relationship is by collateral consanguinity, one may be a descendant of the other, but he cannot be said to be lineally descended. That is, to our mind, the distinction between lineal descendant and descendant.
In other words, lineal descendant is not just descendant of an individual, but he is a descendant in a straight line. That’s why he is called Lineal Descendant.
An adopted son, may be taken as son of a person as per the adoption law, but he can not become lineal descendant of that person. For that simple reason, on a plain reading of law u/s 56(2)(vii), a gift given by or accepted by an adopted son can not be tax free as that is not gift from relative.
What if Child was used Instead of Lineal Descendant?
Before, I end I must point out that had there been a use of words like father or child in the meaning of relative given u/s 56(2), even adopted son would have come within meaning of relative. Why ? Because the definition of Child is given under section 2(15B ) of the Income Tax Act as under :
(15B)] “child”, in relation to an individual, includes a step-child and an adopted child of that individual ;
In conclusion, adopted son is not relative within meaning of section 56(2)(vii) of Income Tax Act and thus any gift received from adopted son or daughter or given by adopted son or daughter is not tax-free.