Landmark Order in Step-Sibling Gift Case: Expanding the Definition of “Relative” Under the Income Tax Act

 The Mumbai Tribunal delivered a significant ruling in RABIN ARUP MUKERJEA vs. INCOME TAX OFFICER(MUM-Trib.) (2025) 139 TLC 103, fundamentally altering the interpretation of “relative” under Section 56(2) of the Income Tax Act 1962. This case centered on a gift of property from a step-sister to her step-brother, challenging the application of tax exemptions.

Background:

Ms. Vidhie Mukerjea gifted a flat in Mumbai to her step-brother, Mr. Rabin Mukerjea. While connected through a step-sibling relationship stemming from their parents’ marriage, the Income Tax Officer (ITO) contended that they did not qualify as “brother and sister” as defined within the Act, thus rendering the gift taxable under Section 56(2).

ITO’s Argument & ITAT’s Ruling:

The ITO argued that Section 56(2) specifically defines a “relative” as a brother or sister. However, the ITAT ruled in favor of the assessee, interpreting “relative” broadly to encompass individuals connected by affinity – specifically, step-siblings. The Tribunal cited relevant provisions within the Companies Act and the Reserve Bank of India Act, which explicitly recognize step-siblings as relatives. Crucially, the ITAT reasoned that the concept of “affinity” should be considered when interpreting the term “relative.”

Relevant Section of Income Tax Act 1962:

Section 56(2): Defines “relative” as a brother or sister. However, the ITAT’s interpretation extends this definition to include individuals connected by affinity.

Section 107: Deals with exemptions from tax on gifts between relatives.

Outcome:

The ITAT determined that the gift from the step-sister to the step-brother qualified for exemption under Section 107, as it fell within the definition of “relative” encompassing individuals connected by affinity. The property valued at Rs. 7.5 crores was therefore deemed exempt from tax.

Broader Implications & Future Considerations:

This ruling represents a significant shift in interpreting “relative” within the Income Tax Act. It raises questions about the scope of “affinity” and could influence future cases involving non-biological family relationships. While the ITAT’s decision expands the definition of “relative,” further legal scrutiny and potential amendments to the Act may be necessary to ensure clarity and consistency.

Conclusion:

The Mukerjea case establishes a precedent for a broader interpretation of “relative” under Section 56(2) of the Income Tax Act 1962, potentially impacting the tax treatment of gifts between step-siblings and other related parties. It underscores the importance of considering the concept of “affinity” when applying the Act’s provisions.