15 May 2025
In this update:
Partner: Tanmay Patnaik, Counsel: Raj Chheda, Associate: Eisha Singh
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has interpreted step-siblings to mean ‘relatives’ for tax purposes and accordingly held that gifts exchanged between step-siblings are exempt under Section 56(2)(vii)(b) of the Income Tax Act, 1961 (IT Act).1 The case involved an assessee who received immovable property from his step-sister through a registered gift deed. The Assessing Officer (AO) concluded that since step-siblings were not explicitly defined as ‘relatives’ under the IT Act, the gift was taxable as income from other sources. The Commissioner of Income Tax (Appeals) upheld this view, prompting an appeal before the ITAT.
The ITAT, noting the absence of a direct reference to step-siblings in the statutory definition of relatives under the IT Act, adopted a purposive interpretation. It held that the term ‘brother and sister’ should reasonably be construed to include relationships formed through the marriage of a parent. It further noted that other statutes, such as the Companies Act, 2013 (Companies Act), explicitly include step-siblings as relatives, supporting this inclusive interpretation.
This decision brings valuable clarity for estate planning in blended families, affirming that gifts between step-siblings are exempt from tax under Section 56(2) of the IT Act. It reflects a broader, more inclusive understanding of family relationships under tax law, consistent with evolving societal norms.
On 20 February 2025, the Karnataka High Court issued a ruling clarifying the interplay between life insurance nominations and succession laws. The Court affirmed that, despite the 2015 amendment to Section 39 of the Insurance Act, 1938 (Act), a nomination in a life insurance policy does not automatically override the rights of legal heirs under succession laws.2 The case involved a man who had named his mother as the nominee in two insurance policies before his marriage. Following his death in 2019, his wife and minor son sought their rightful share of the policy proceeds as Class I heirs under the Hindu Succession Act, 1956. The trial court awarded equal shares to the widow, son, and mother. The mother appealed, relying on the 2015 amendment to Section 39 of the Act which conferred beneficial ownership on a certain class of nominees, namely, the spouse, parents and children of the policyholder, giving the nominee preferential right to the insurance payout over other legal heirs, to claim entitlement to the policy proceeds. However, the Karnataka High Court rejected this argument, holding that nominees merely receive the proceeds as trustees and do not override the rights of legal heirs unless no such heirs exist.
This ruling aligns with the Supreme Court’s position on nomination rights across other legislative frameworks. For instance, in Shakti Yezdani v Jayanand Salgaonkar,3 the Supreme Court clarified that nominations under the Companies Act do not supersede the laws of succession. However, the Karnataka High Court’s interpretation contrasts with the decisions of the Andhra Pradesh and Rajasthan High Courts, which interpreted the 2015 amendment as granting full beneficial entitlement to close-family nominees. This lack of judicial consensus has created legal uncertainty, particularly in the absence of a definitive ruling by the Supreme Court on the amended Section 39 of the Act.
Given this ambiguity, policyholders must take proactive steps to prevent future disputes. This includes periodically updating nominations after key life events, executing a Will to ensure clarity of bequests, and seeking legal advice when structuring estate plans. Financial institutions also have a vital role in educating policyholders that nominations are not substitutes for Wills or proper succession planning. Until definitive legislative clarity or judicial consensus emerges, the safest course is to treat nominations as one part of a broader estate planning strategy and not a standalone directive.
On 28 February 2025, the Securities and Exchange Board of India (SEBI) issued a circular (Circular),4 amending and clarifying its earlier circular dated 10 January 2025. This action aims to streamline nomination procedures for mutual fund portfolios and demat accounts. The Circular clarifies that, in the event of the demise of one or more joint holders, ownership will pass directly to the surviving holder or holders by a simple name deletion process.
To further enhance operational efficiency, SEBI clarified that regulated entities are not required to request fresh Know Your Customer (KYC) documentation from surviving joint holders, provided that the documentation was previously submitted. Surviving holders can update their personal details, such as address and contact number, either during or after the transmission process. The Circular also clarifies that all credit transactions, including those arising from corporate actions, will continue uninterrupted during the transmission period.
The Circular applies to all asset management companies (AMC), depositories, and market intermediaries. It highlights SEBI’s broader objective of streamlining transmission processes and ensuring greater operational consistency across the securities market, enhancing investor trust and institutional efficiency.
[1] Rabin Arup Mukerjea v ITO, ITA No.5884/Mum/2024
[2] Neelavva Somanakatti v Chandravva Somanakatti, RFA No. 100471 of 2023
[3] (2023) 16 SCR 695
[4] SEBI Circular No. SEBI/HO/OIAE/OIAE_IAD-3/P/ON/2025/0027 dated 28 February 2025
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