Raj Kundra's ₹12.5 Crore Gift to Shilpa Shetty: ITAT Mumbai Remands Case Under Section 68 of the Income Tax Act

When a Gift Deed Is Not Enough: The Section 68 Problem

A gift deed bearing valid signatures and recording a genuine transfer of funds between spouses might appear to be airtight documentation under Indian tax law. The Income Tax Appellate Tribunal (ITAT), Mumbai, has demonstrated in a recent ruling that appearances can be deceptive — at least from a tax scrutiny standpoint. The case involves businessman Raj Kundra, who transferred ₹12.5 crore to his wife, Bollywood actress Shilpa Shetty, through a formally executed gift deed. The ITAT has directed the matter back to the Assessing Officer for fresh examination, and the reasoning behind this remand exposes a nuance that trips up countless assessees who presume that executing a deed conclusively settles the matter.

It does not — not always, and certainly not at this scale.

What Does Section 68 Say?

Section 68 of the Income Tax Act, 1961 is the statutory provision squarely at the centre of this controversy. It governs what are legally termed "unexplained cash credits" — amounts that appear in the books of an assessee without a satisfactory explanation of their nature and source. Where such credits cannot be adequately explained, the Assessing Officer holds the authority to treat the entire unexplained sum as income chargeable to tax in the relevant assessment year.

In the present case, Shilpa Shetty was the recipient of the gift. Under the Income Tax Act, 1961, amounts received by a spouse by way of gift are exempt from taxation in the recipient's hands. On the surface, her position appeared unassailable. The gift deed was in place, the funds had been received, and the spousal exemption seemingly applied without complication.

What the ITAT identified, however, was that the scrutiny triggered by Section 68 does not confine itself to the recipient's side of the transaction.

The Three-Pronged Test Under Section 68

Identity, Genuineness, and Creditworthiness

For a transaction to pass muster under Section 68 of the Income Tax Act, 1961, three distinct conditions must be satisfactorily demonstrated:

  1. Identity of the creditor or transferor — Who is the person from whom the funds have originated?
  2. Genuineness of the transaction — Did the transfer actually occur in the manner claimed?
  3. Creditworthiness or financial capacity of the source — Did the person making the transfer actually possess the means to do so from legitimate, declared income?

All three limbs must be established. Satisfying only one or two of them is insufficient.

In the Raj Kundra matter, the ITAT appears to have found the first two conditions reasonably met. The gift deed identified Kundra as the donor, and the actual movement of ₹12.5 crore was not disputed. It was the third condition — financial capacity — that the Tribunal found inadequately addressed. Kundra's declared income, as reflected in his tax filings, did not appear to comfortably reconcile with the ability to transfer such a substantial sum by way of gift.

Critical Note: A gift deed establishes the fact and intent of a transfer. It does not, by itself, establish that the funds underlying that transfer were ever declared, taxed, or derived from a legitimate source. These are entirely separate legal questions under Section 68.