Question

According to Section 56(2)(x), of the Income-tax Act, 1961, if an individual receives a sum of money, without consideration, from a person other than a relative, and the amount exceeds the prescribed limit. What is the correct legal position?

• A. It is taxable under the head 'Income from Other Sources'.
• B. It is fully exempt from tax.
• C. It is treated as a capital receipt and is not taxable.
• D. It is taxable only if received in cash.

Hint:

Remember the golden rule of Section 56(2)(x): Gift from Relative = Generally Exempt Gift from Non-Relative exceeding ₹50,000 = Taxable This distinction is frequently tested in Income Tax examinations.

Answer 1

The Correct Option is A

Step 1: Section 56(2)(x) of the Income-tax Act, 1961 is a residuary anti-avoidance provision. It applies when a person receives money without giving anything in return, and the person paying is not covered by the list of relatives the Act recognises for exemption purposes.

Step 2: The provision sets a threshold of \( \text{₹}50{,}000 \). If the total sum received without consideration from such a non-relative in a year crosses this figure, the law treats the whole amount, not just the excess, as chargeable income, unless it falls under a specific carve-out such as receipt on marriage, under a will, or by inheritance.

Step 3: None of those carve-outs apply here, since the payer is a non-relative and no exempting occasion is mentioned, so the amount is brought to tax. Because a gratuitous receipt of this kind does not fit under salary, house property, business income or capital gains, it is charged under the residuary head.
\[ \boxed{\text{It is taxable under the head Income from Other Sources.}} \]

Answer 2

Section 56(2)(x) can also be approached by asking what mischief it was designed to stop, and then checking which option matches that design.

1. The problem before this provision existed: Before such anti-avoidance rules, a person could receive a large sum of money dressed up as a gift from someone with no family connection, and claim it was not income at all, effectively converting taxable income into a tax-free transfer.
2. How the provision closes this gap: Once a non-relative hands over money without consideration and the amount crosses the prescribed limit, the law refuses to treat it as an innocent gift and instead brings the full sum into the tax computation.
3. Where it gets taxed: Because such a receipt does not arise from employment, property, business, or the sale of a capital asset, it is placed under the residuary head that exists precisely to catch income not falling under any of the other specific heads, namely Income from Other Sources.
4. Why exemption, capital-receipt, or cash-only treatment all fail: Full exemption would defeat the anti-avoidance purpose entirely. Treating it as a capital receipt mislabels a gratuitous payment as if it arose from a capital asset transaction, which it did not. Limiting taxability to cash payments would let the same transaction escape tax by routing it through a bank transfer instead, which contradicts the provision's mode-neutral wording.

The correct answer is It is taxable under the head 'Income from Other Sources'.