Is it permissible for the older brother to retract his pardon of his younger brother who stole money from him, and to demand the return of the money, knowing that retracting a gift is forbidden? And if the recovered money is unlawful, must it be returned to the younger brother and to their father who helped in repaying it?

The elder brother should have forgiven his brother, pardoned him, and accepted his apology. Allah Almighty has indeed urged forgiveness and overlooking, as He says: "And let them pardon and overlook. Would you not like that Allah should forgive you?" And His saying: "So whoever pardons and makes reconciliation - his reward is due from Allah." And His saying: "But if you pardon and overlook and forgive - then indeed, Allah is Forgiving and Merciful." And the Prophet, peace and blessings be upon him, said: "Allah does not increase a servant in anything due to forgiveness except honor." As for the brother's internal thought of relinquishing his right over his brother, it is not considered a binding gift, and he may demand his right, because absolution from a right requires a formal declaration, and intention alone is not sufficient.