ANDHRA HIGH
COURT
PENDURTHI
CHANDRASEKHAR VS THE DEPUTY COMMISSIONER OF INCOME TAX
Summarised Judgement (Scroll for Complete Judgement)
In the Instant case, additions were made under section 68 on the
grounds that assessee had failed to show why, without any occasion, Rs. 73
Lakhs had been gifted by the maternal aunt without any consideration. The
appellate authorities also upheld the action of the Assessing Officer. On
further apeal, the High Court held in favour of assessee that an occasion is
not necessary to accept a gift from a relative. Section 56 does not envisage
any occasion for a relative to give a gift, it was almost impermissible for any
authority and even for the Court to import the concept of occasion
and develop a theory based on such concept.
The Court further held that when donor had given a confirmation
letter that she had transferred Rs. 73 lakhs to her nephew as a gift out of
natural love and affection, the AO should not have further doubted her. The
donor in instant case was assessee's own maternal aunt and was covered within
the definition of 'relative' defined under explanation to section 56(2)(v).
Therefore, unexplained addition under section 68 with respect to gift of Rs. 73
lakh received by assessee from his maternal aunt was to be deleted.
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Complete
Judgement
ANDHRA HIGH
COURT
PENDURTHI
CHANDRASEKHAR VS THE DEPUTY COMMISSIONER OF INCOME TAX
I.T.T.A.
Nos.701 of 2016 and batxh
THE
HONOURABLE SRI JUSTICE C.V. NAGARJUNA
REDDY
THE
HONOURABLE SRI JUSTICE CHALLA KODANDA
RAM
Pronouncement
- 23-02-2018
As
the parties to these appeals are common and the subject matter is connected in
both the cases, though not identical, we have heard both these appeals together
and decided to dispose of the same by this common judgment.
2.
The appellant (hereinafter referred to as the assessee) is an individual. A search under Section 132 of the Income Tax Act,
1961 (for short, the Act) in the group entities of M/s. Ambience Property
Private Ltd., has taken place on 9.10.2007. As the assessee happens to be a
Director of one of the group companies, namely, M/s. Dakshin Shelters Private
Limited, a search took place at his residence also. The assessee has not filed any return of
income prior to the search, as purportedly he did not have regular source of
income. Consequently, proceedings under
Section 153-A of the Act were initiated against the assessee. On receipt of the notice, he has filed his return
of income for a total income of Rs.43,809/- for the assessment year
2006-07. The Assessing Officer (AO) did
not accept the return. He has issued a
notice proposing to make certain additions to the income of the assessee. The AO has eventually made additions to the
income of the assessee. The additions in
respect of the following items relating to the assessment year 2006-2007, are
the subject matter of dispute in these appeals.
(i) Gift of Rs.73,00,000/- to the assessee by
his maternal aunt Smt. Mikkilineni Nirmala.
(ii) Unsecured loans of Rs.87,95,724/- from Mr. Dev Singh Palak.
(iii) Addition of a loan of Rs.10,00,000/- received by the assessee as
unsecured loan from Mr. J.V. Sudhakar, which
was returned before the search by cheque.
(iv) Interest income in respect of the amounts advanced by the assessee to
M/s.
Dakshin Shelters Pvt. Ltd. for which TDS was deducted and remitted to the
tax authorities by the donee company
(v) Unsecured loan of Rs.14,50,000/- given by the assessees wife from out of
the gift received from her father.
3. The assessee has filed an appeal before the Commissioner of Income Tax (Appeals)-I, Hyderabad [for
brevity, CIT(A)], questioning the additions.
The CIT(A), by order dt.30.11.2011 allowed the appeal of the assessee to
the extent of item No.(v) addition of unsecured loan of Rs.14,50,000/- and
dismissed the appeal in respect of other four items. Feeling aggrieved by the order of the CIT(A),
the assessee has filed I.T.A. No.2120/H/11, and the Revenue has filed I.T.A. No.106/H/12
to the extent of the order of the CIT(A) allowing the appeal in respect of item
No.(v). By common order dt.22.3.2013,
the Income Tax Appellate Tribunal, Hyderabad Bench A, Hyderabad, (hereinafter
referred to as the Tribunal) disposed of the appeals and cross-objections of the
assessee, and the appeals of the Revenue for the assessment years 2005-06 to 2008-09. For the assessment year 2006-2007, it confirmed the order of the CIT(A) in
respect of items Nos.(i) to (iv) and reversed the order in respect of item (v),
in I.T.A. No.2120/H/11, and questioning the additions in respect of items (i) to
(iv) the assessee filed I.T.T.A. No.701 of 2016, and he has filed I.T.T.A.
No.702 of 2016 against the order of the Tribunal in allowing the appeal of the
Revenue being I.T.A No.106/Hyd/12 in respect of item No.(v).
4. The substantial questions of law
originally framed and those subsequently reframed in the appeals are as
follows: ITTA No.701/2016 Substantial
questions of law originally framed: Item No.(i) (i) Whether on the facts and circumstances of
the case, the Honble Tribunal is right in upholding the addition under Section
68 of the IT Act, notwithstanding the fact that the Appellant/Assessee has
discharged his onus of proof regarding the gift by furnishing all the materials
required for establishing the genuineness of the gift?
(ii)
On the facts and circumstances of the case, whether the Honble Tribunal
is justified in adopting the theory of occasion in respect of the gift received
by the Appellant/Assessee, which is regulated by the provisions of Proviso (a)
of Section 56(1)(v) of the IT Act, 1961, under which in case of specified
relatives inter se, no occasion is required to make a gift irrespective of its
quantum?
(iii) Whether the findings of the Honble Tribunal
are perverse and bad
in law due to non-consideration of relevant factors and instead basing it on
surmises, conjectures and suspicion and by discarding the evidence and the
reasons and explanations adduced by the Appellant/Assessee for the gift and
proving the source of funds for making the gift and despite the clinching evidence
to establish the gift, the test of occasion for gift, which is quite irrelevant
and strikes at the root of the concept of gifts as understood in law was
imposed, which thereby stand vitiated?
Item No.(ii)
(i) Whether the Tribunal has committed a serious
error of law in brushing aside clinching evidence in the form of documents evidencing
the loan transaction by means of cryptic observation that the
Appellant/Assessee has not discharged burden of proof?
(ii) Whether finding of the Tribunal is vitiated
is evident from the fact that the Tribunal refers to donor and gift which do
not exist here? (iii) Whether the two
reasons given by the First Appellate Authority and relied on by the Tribunal,
viz, the evidence by way of documents filed, does not have any evidentiary
value in the absence of any authentication and secondly, such huge amounts of
loan could not have been given by a
friend residing in the UK without any return are either irrelevant or based on
surmises, conjectures and suspicion?
Item No.(iii)
The
Assessing Officer having independently called for the bank account statements of Mr. J.V. Sudhakar and having compared it with the bank account statements
of the Appellant/Assessee and having found that the loan transaction was
genuine and the repayment of the loan having also been made in less than four
months through bank transfer, all these transactions having taken place long
before the search, was the Assessing Officer right in drawing a hasty
conclusion against the veracity of the loan due to the mere non-appearance of
Mr. J.V. Sudhakar by the summons issued to him by overlooking the fact that Mr.
J.V. Sudhakar was a person of substantial means and had the sources to give the
loan, without re-issuing the summons to him, thereby, vitiating the finding and
order against the Appellant/Assessee and therefore causing a miscarriage of
justice to the Appellant/Assessee?
Item No.(iv)
(i) Whether the Honble Tribunal was justified
in law in upholding the addition of interest not received by the Appellant/Assessee
only on the reasoning that the Appellant/Assessee had claimed credit towards
TDS on the basis of the certificate sent by the loanee company? (ii) Whether the Appellant/Assessee who was
consistently following the cash system of accounting would
be required to account for such unreceived interest merely because the income
stood credited to his account in the book of the loanee company, which has been
following the mercantile system of accounting?
(iii) Whether the reasoning of the Tribunal at
Para 71 that claiming of credit towards TDS and claiming of deduction of
interest shall go together and there could not be dual method for the same
income is sustainable in law especially having
referred to the provision contained in Section 145 of the I.T. Act and the
inequitable consequences that flow?
(iv) Whether the factum of adjusting TDS against the tax payable by
Appellant/Assessee would ipso facto convert the income not at all received by
the Appellant/Assessee as taxable income for the relevant year?
(v) Whether on the facts and circumstances of
the case, the Honble Tribunal is justified in upholding the addition towards
interest income by observing that the Appellant/Assessee claimed credit towards
TDS on the disputed interest income and for other portion of interest the
Appellant/Assessee is following cash system of accounting?
(vi) Whether the impugned order is not perverse
as the Honble Tribunal has failed to consider the materials on record and considered
irrelevant materials in arriving in its decision?
Reframed substantial questions of law:
1. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal while confirming
the addition of Rs.73,00,000 as unexplained credit under Section 68 of the Act,
is right in law in holding that there should be sufficient reasons for receiving
gifts though it is from mothers sister and the gift is covered by the
provisions of Section 56 of the Act?
2. Whether on the facts and in the
circumstances of the case, the decision of the Income Tax Appellate Tribunal is
perverse and without application of mind in confirming the addition of Rs.87.95 lakhs received as loan from Mr.
Devsingh Palak, on the ground that the burden of proof is on the assessee to
establish that the donor has means and the gift was genuine though it is a loan
and burden is discharged by filing all required documents?
3. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
ignoring the reference made by the Assessing Officer to the Foreign Tax Division
of the Central Board of Direct Taxes requesting to verify the genuineness of
the amounts received from UK and confirming
the addition though no adverse communication is received as per records?
4. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
confirming the addition of Rs.10,00,000 being loan received and repaid from one
Mr. J.V. Sudhakar on the ground that his identity is not proved though the
transaction is through bank and assessee discharged his burden?
5. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
upholding the conclusion of the Assessing Officer and the learned Commissioner
of Income Tax (Appeals) that undisclosed income
has been brought in the form of
gifts in spite of the fact that there was no income earning activity to the
assessee?
6. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
holding that the assessee has to discharge his onus though the assessee
has complied with the provisions of law?
7. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal while confirming
the addition of Rs.3,05,713 as interest income on mere ground of claiming
credit for TDS on entire amount in utter
disregard to the provisions of Sec. 145 of the Act and method of accounting followed
by the assessee?
ITTA
No.702/2016
Substantial
questions of law originally framed:
(a) Whether the Tribunal was legally justified
in treating the loan given by the wife of the Appellant/Assessee as unexplained
cash credit on the two grounds, viz, (1) that the credit received by the Appellant/Assessee
cannot be said to be genuine unless there is evidence to establish that the
wife is having sources of income and that her own income is not much, and; (2)
it is very easy to make self-serving gift letter and relying on it;
(b)
In making the above observations, whether the Honble Tribunal has committed an
error of law in as much as the Tribunal overlooked the material on record,
establishing the source of her funds and secondly, found fault with the
confirmation of gifts letter, by merely characterising the same as
self-serving?
(c)
Whether under the facts and circumstances of the case, the Honble Tribunal was
justified in reversing the Order of the Commissioner of Income Tax (Appeals)
without evaluating and appreciating the
materials on record furnished by the Appellant/Assessee to substantiate the
genuineness of the transactions?
(d) Whether under the facts and circumstances of
the case, the direction given by the Commissioner of Income Tax (Appeals) to the
Assessing Officer to take steps to assess the credit amounts in the hands of
the lender?
(e)
In view of the reference to FTD of CBDT having not brought out any adverse
finding against the Appellant/Assessee, is the order of the Honble Tribunal liable
to be struck down by drawing adverse inference against the revenue under
illustration (g) of Section 114 of the IT Act.
Reframed substantial questions of law:
1. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal while reversing
the decision of the Commissioner of Income Tax (Appeals) and confirming the addition of Rs.14,50,000 received as loan from
wife Smt. P. Shanti Chowdary as unexplained credit under section 68 of the Act,
is right in law in holding that genuineness of the transaction is not proved in
spite of substantial evidence on record?
2. Whether on the facts and in the
circumstances of the case, the decision of the Income Tax Appellate Tribunal is
perverse and without application of mind in confirming the addition of Rs.14,50,000/-
received as loan from Smt. P. Shanti Chowdary?
3. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
ignoring the reference
made by the Assessing Officer to the Foreign Tax Division of the Central Board
of Direct Taxes requesting to verify the genuineness of the amounts received
from UK and confirming the addition
though no adverse communication is received as per records?
4. Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal is right in law in
upholding the conclusion of the Assessing Officer and the learned Commissioner
of Income Tax (Appeals) that undisclosed
income has been brought in the form of
gifts in spite of the fact that there was no income earning activity to the
assessee?
5. At the hearing, Mr. K. Vasanth Kumar,
learned counsel for the assessee, submitted that the CIT(A) as well as the Tribunal
fell into serious error in treating the gift from the assessees aunt as
unexplained credit under Section 68 of the Act on unsustainable inferences and
unwarranted presumptions. That the
reasoning of the Tribunal that there was no occasion for the assessee to accept
the gift is in the teeth of Section 56(2)(v) of the Act introduced with effect
from 01.4.2005
envisaging that for a relative no occasion is needed for making a gift. The learned counsel further submitted that for
drawing a conclusion of undisclosed income, the authority must find a source
for the assessee and that no such source has been detected. In support of his submissions, the
learnedcounsel placed reliance on the judgment in C.I.T. v. P. Mohanakala
. The learned counsel further submitted
that the maternal aunt of the assessee has gifted the amount received from her
daughter sent from the United States of America as evident from the bank
statements including the US bank statements and confirmation issued by the
bank. That the said amount was received
from abroad and that the AO has made the addition by stating that the statement of
the assessee that his mother and father looked after her and that as she has no
male child she treated him as her son, is false, which is wholly unsustainable.
6. As regards item No.(ii), i.e., loan
received from Mr. Dev Singh Palak, the
learned counsel submitted that during the financial year 2005-06 the assessee
has received a loan of Rs.87,95,000/- from one of his family friends, Mr. Dev
Singh Palak, a resident of U.K., that out of the said sum, Rs.47,45,724/- was
received from U.K. and the balance was received
from Punjab in the form of demand drafts. That during
the course of assessment proceedings, the assessee submitted confirmation letters from Mr. Dev
Singh Palak, the U.K. company, which transferred the amount, the companys financial
statements, confirmation of the drafts and copies of sale of lands in
Punjab. The AO, submitted the counsel, however,
held that the loan is not proved and that he has further held that the
signature of the person in the confirmation demonstrates that the person is not
a man of means. The learned counsel
submitted that such a reasoning of the AO, as confirmed by both the appellate
authorities, cannot stand the scrutiny of the Court.
7. With regard to item No.(iii), the learned
counsel submitted that during the financial year 2005-06, the assessee received
Rs.10,00,000/- as loan from one J.V. Sudhakar on 21.3.2006 and the same was
repaid on 5.7.2006 by bank transfer.
That during the course of the assessment proceedings as the said
Sudhakar was not available, he could not appear before the AO. That the AO obtained bank statement from the
bank which proves the version of the assessee and that in spite of the same,
the AO has added the amount as unexplained credit on the ground that identity
of the creditor was not proved. The
learned counsel submitted that the reasoning of the AO as confirmed by both the
appellate fora is not sustainable, as the very bank statement obtained by the
AOproves the identity of the creditor and his creditworthiness.
8. As regards item No.(iv) - the addition of
Rs.3,05,713/-, the learned counsel submitted that the assessee advanced loan to
the company, by name, M/s. Dakshin Shelters Private Limited, on various dates. That the company though credited interest in
its books of account and deducted tax at source, it has never paid interest to
the assessee. That the assessee followed
the cash system of accounting and admitted the tax deducted at source as income
and claimed the credit for TDS as the same was admitted as income. That during the course of the assessment
proceedings, the AO was informed that the interest income in its entirety is not
admitted as the assessee is following cash system of accounting. The AO however held that as the basis of
charge is Section 5 of the Act, interest income is taxable totally ignoring
Section 145 of the Act which mandates admission of income on the basis of
accounting method. The learned counsel argued that if the
company has followed the accounting method and debited the amount in its accounts
as being paid to the assessee and deducted tax at source, as for the assessee
as he was following only cash system he has not included the amount under
income as he has not received the same
during that financial year. That even
the Central Board of Direct Taxes while issuing clarification on the recently
introduced provisions of Income Computation andDisclosure Standard, has
recognised this method and gave clarification
in this regard. In this context, the
learned counsel has referred to Section 199 of the Act which envisages that credit
shall be given in the year when income is assessable, that the assessee
admitted income to the extent of TDS on receipt basis/cash basis and that once
the income to this extent is admitted there is no error in claiming credit for
TDS. The learned counsel further
submitted that the AO should have at best directed to restrict the claim of TDS
in proportion to the income admitted and to allow the balance in the year in
which the interest income is admitted on receipt basis. That the assessee has admitted entire
interest income in the assessment year
2012-13, as in the previous year relevant to that assessment year, the deposit
was converted into shares by the said company.
The learned counsel accordingly submitted that the order of the AO, as
confirmed by the CIT (A) and the Tribunal suffers from non-application of mind
and is contrary to law.
9. As for item No.(v), which is the subject
matter of ITA No.702 of 2016, the learned counsel submitted that during the financial
year 2005-06 the assessee received loan of Rs.14,50,000/- from his wife, Smt.
P. Shanti Chowdhary, byway of transfer from her bank account to the assessees
bank account on three dates, that during the course of assessment proceedings
the assessee filed confirmation letter along with bank statement, details of
gifts received by her from her father and that of foreign remittances to her account,
and that the loan was given from out of the gifts received by his wife. The learned counsel also submitted that the
petitioners wife is the only daughter to her parents, who are U.K. citizens and
also Doctors, that in proof of transferring the money to the assessees wife by
her father, relevant bank statements were filed. That the AO has not accepted the material and
made the addition as unexplained credit under Section 68 of the Act and that
the CIT(A), however, has allowed the assessees appeal, but the Tribunal on an
erroneous view of the matter, reversed the said order of the CIT(A).
10. Ms. M. Kiranmayee, learned Senior Standing
Counsel for the Income Tax Department,
opposed the above submissions and commended the correctness of the decision of
the AO and the two appellate fora in
respect of the order challenged in ITTA No.701 of 2016, and the decision of the
Tribunalreversing the order of the CIT(A) challenged in ITTA No.702 of 2016.
11. We have carefully considered the
respective submissions of the learned counsel for both the parties with
reference to the record.
12. With regard to item No.(i), the learned
counsel placed heavy reliance on the following material which was produced before
the AO. (i) The confirmation letter dt. Nil, given by Smt. Mikkilineni Nirmala,
maternal aunt of the assessee, that she has transferred voluntarily a sum of
Rs.73,00,000/- from her SB Account No.737010068905, ING Vysya Bank, Banjara
Hills, Hyderabad, on 16.07.2005 to the SB
Account No.737010054632 of the same bank
belonging to the assessee.
(ii)
The copy of the statement of account of said Nirmala, issued by the ING Vysya
Bank, on 18.3.2010, showing credit of Rs.73,23,152/- in her account on
08.07.2005 and debit of Rs.73,00,000/- on 16.7.2005 and transfer to the SB
Account 54632 belonging to the assessee.
(iii) The copy of the statement showing Remittance (Purchase) of
$1,68,200 showing that Sudha R Ravoori
has remitted the aforesaid sum to ING Vysya Bank to the account of Nirmala Mikkilineni,
via Abn Amro, New York, and crediting of the said amount to the account of said
Nirmala Mikkilineni. (iv) The copy of
the statement of account No. 737010054632 standing in the name of the assessee for the period from 01.04.2005 to
31.03.2006, showing credit of sum of Rs.73,00,000/- on 16.7.2005. (v) The
copies of Passport of R. Sudha Rani, daughter of Smt. Nirmala Mikkilineni. (vi)
The copy of the statement of account of Bank One of USA, standing in the name
of Sudha Rani Ravoori for the period from 27.6.2005 to 20.7.2005 inter alia
showing electronic withdrawals of $1,68,200.00 from her bank account, to the
account of Nirmala Mikkilineni, via., Abn Amro, on 05.7.2005.
13. In his order, the CIT(A) has mainly relied
upon the circumstance that the assessee failed to show any occasion for which
such huge amount could have been given as gift, that too by maternal aunt, and
that it is very odd to note that the entire amount received from her daughter
has been diverted to the assessee as a gift without any consideration. The Tribunal placing reliance on the judgment
in Tirath Ram Gupta v. C.I.T. , Jaspal Singh v. C.I.T. , held that unless the
identity of the donor, his creditworthiness, relationship with the done and the
occasion are proved, the plea of gift cannot be accepted.
14. In this context, the provisions of Section
56(1) and (2)(v), and Section 68 of the Act are relevant which read as under:
Income from other sources.
56.(1). Income of every kind which is not
to be excluded from the total income under this Act shall be chargeable to income-tax
under the head Income from other sources if it is not chargeable to income-tax
under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to
the generality of the provisions of sub-section (1), the following incomes,
shall be chargeable to income-tax under the head Income from other sources,
namely: -
(i) to (iv)
(v) where any sum of money exceeding
twenty-five thousand rupees is received without consideration by an individual
or a Hindu undivided family from any person on or after the 1st day of
September, 2004 but before the 1st day of April, 2006, the whole of such sum:
Provided
that this clause shall not apply to any sum of money received-
(a) from any relative; or
(b) on the occasion of the marriage of the
individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
(e) from any local authority as defined in the
Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university
or other educational institution or hospital or other medical institution or
any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered
under section 12AA.
Explanation.- For the purposes of this
clause, relative means
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii)
brother or sister of the spouse of the individual;
(iv)
brother or sister of either of the parents of the individual;
(v)
any lineal ascendant or descendant of the individual;
(vi)
any lineal ascendant or descendant of the spouse of the individual;
(vii)
spouse of the person referred to in clauses (ii) to (vi) Cash credits.
68.
Where any sum is found credited in the books of an assessee maintained for any
previous year, and the assessee offers no explanation about the nature and
source thereof or the explanation offered by him is not, in the opinion of the Assessing
Officer, satisfactory, the sum so credited may be charged to income-tax as the
income of the assessee of that previous year:
Provided
that where the assessee is a company (not being a company in which the public
are substantially interested), and the sum so credited consists of share
application money, share capital, share premium or any such amount by whatever
name called, any explanation offered by such assessee-company
shall be deemed to be not satisfactory, unless
(a) the person, being a resident in whose name
such credit is recorded in the books of such company also offers an explanation
about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the
Assessing Officer aforesaid has been found to be satisfactory:
Provided
further that nothing contained in the first proviso shall apply if the person,
in whose name the sum referred to therein is recorded, is a venture capital
fund or a venture capital company as referred to in clause (23FB) of section
10.
15. Section 56(2)(v) was inserted by the
Finance Act, 2005 with effect from 1.4.2005.
The relevant assessment year is 2005-2006. As rightly submitted by the learned counsel
for the assessee, for accepting a gift from a relative, no occasion need be
proved. As could be seen from the
language of sub-clauses (a) and (b) of clause (v) of sub-section (2) of Section
56, while under clause (a) which deals with a gift from any relative no occasion
is envisaged, clause (b) dealing with money received from any other person,
specifies the occasion of marriage. The explanation
to the said provision defined relative, as persons including brother or sister
of either of the parents of the individual.
All the three fora below failed to refer to and discuss this pivotal
provision.
16. Section 68 of the Act which deals with
cash credits laid down that where any sum is found credited in the books of an assessee
maintained for any previous year, and the assessee offers no explanation about the nature and source
thereof or the explanation offered by him is not, in the opinion of
theAssessing Officer, satisfactory, the sum so credited may be charged to
income-tax as the income of the assessee of that previous year. This provision could be pressed into service where
the assessee offers no explanation. In
the instant case, Section 68 is not attracted for the reason that the assessee
has offered an explanation supported by uncontroverted material showing
transfer of the amount from the daughter of the assessees maternal aunt and the
latter in turn transferring the money to the assessee.
17. Section 68 of the Act fell for
interpretation of the Supreme Court in many a judgment. In Sumati Dayal v. C.I.T. , the Supreme Court held as under: In all cases in which a receipt is sought
to be taxed as income, the burden lies on the Department to prove that it is within
the taxing provision and if a receipt is in the nature of income, the burden of
proving that it is not taxable because it falls within exemption provided by
the Act lies upon the assessee [See Parimisetti Seetharamamma v. C.I.T. :
(1965) 57 ITR 532]. But, in view of s. 68 of the Act, where any sum is found
credited in the books of the assessee for any previous year the same may be
charged to income-tax as the income of the assessee of that previous year if
the explanation offered by the assessee about the nature and source thereof is,
in the opinion of the Assessing Officer, not satisfactory. In such as case there is, prima facie, evidence
against the assessee, viz., the receipt of money, and if he fails to rebut, the
said evidence being unrebutted, can be used against him by holding that it was
a receipt of an income nature.
18. On reviewing the case law on the subject,
the Supreme Court in P. Mohanakala (1 supra) held in paragraph 12 as under:
12.
The question is what is the true nature and scope of Section 68 of the Act?
When and in what circumstances Section 68
of the Act would come into play? That a bare reading of Section 68 suggests
that there has to be credit of amounts in the books maintained by an assessees;
such credit has to be of a sum during
the previous year; and the assessees offer no explanation about the nature and
source of such credit found in the books; or the explanation offered by the
assessees in the opinion of the Assessing Officer is not satisfactory, it is
only then the sum so credited may be charged to income-tax as the income of the
assessees of that previous year. The expression "the assesses offer no
explanation" means where the assessees offer no proper, reasonable and
acceptable explanation as regards the sums found credited in the books maintained by the
assessees. It is true the opinion of the Assessing Officer for not accepting
the explanation offered by the assessees as not satisfactory is required to be
based on proper appreciation of material and other attending circumstances
available on record. The opinion of the Assessing Officer is required to be
formed objectively with reference to the material available on record.
Application of mind is the sine qua non for forming the opinion.
19. A Division Bench of this Court in R.B.
Mittal v. Commissioner of Income Tax , after copious reference to the case law,
observed as under: From the above
discussion of the case law on the point what transpires is that the assessee,
in order to discharge the onus cast on him under s. 68 of the Act, has to
establish not only the identity of his creditors and confirmation of the
credits but also the capacity of the creditors to advance money as well as the genuineness
of the transactions.
20. In the instant case, though the AO has
stated as a general proposition of law that creditworthiness and identity of
the donor and the genuineness of the gift, apart from establishing the occasion
are relevant, no specific finding was rendered by him that the assessee has not
established the identity and relationship of the donor with him. The AO has primarily misdirected himself in
thinking that the main ingredient for a valid gift is proof of existence of
occasion. This demonstrably is a flawed
reason as the same is in the teeth of Section 56(2)(v(a) of the Act, as
discussed above.
21. The further observation of the AO that the
assessee appeared to have opened the bank account only for the purpose of
receiving cash in the guise of a gift, is also flimsy. When the donor herself
has given a confirmation letter clearly stating therein that she has
transferred the amount of Rs.73,00,000/- to the account of the assessee and
further declaring that she gave the said gift out of her natural love and affection
towards her nephew, the AO ought not to have entertained
further doubts. If for facilitating
receipt of a gift the assessee has opened an account, we do not find anything wrong in that.
In our opinion, the whole approach of the AO is wholly perverse which
cannot be sustained. Equally, the reasons
assigned by the two appellate bodies confirming the order of the AO are also
perverse.
22. The findings of the CIT(A) that gifts are
traditional in nature, that they are given in functions like marriages etc.,
that there was no such occasion warranting receipt of gift from Nirmala to the
assessee, and that it is very odd to note that the entire amount received from
her daughter has been diverted to the assessee as a gift without any
consideration, look to us to be empty sermons as the CIT (A) evidently judged
the conduct of the parties from his personal perception, which is wholly impermissible.
23. When the Act itself does not envisage any
occasion for a relative to give a gift, it is well-nigh impermissible for any authority
and even for that matter for the Court to import the concept of occasion and
develop a theory based on such concept.
The donor being no other than the assessees own maternal aunt, is a
relative as defined under the explanation to Section 56(2)(v) of the Act and in
the light of the plea of the assessee that she was brought up by the assessees
parents, and her daughters having
already been married off and in a well-to- do position, it cannot be said that
such a gift falls beyond human probability test as quite often applied by the Courts. Hence, it is not permissible
for the AO to judge the conduct of the donor sitting in his arm chair.
24. As held by the Supreme Court in P.
Mohanakala (1 supra) when an explanation is offered by the assessee for the cash
receipt, the AO is required to form an opinion objectively based on proper
appreciation of material and application of mind which is a sine qua non for forming the opinion. Such approach, in our opinion, is utterly
lacking in the order of the AO. When the
documents filed by the assessee referred to above clinchingly establish that
the donors daughter, an NRI with independent source of income, transferred the
money from her bank account to her mothers account and the latter in turn has
transferred the money to the assessee, there is no justification for the AO to
doubt the authenticity of these documents.
If he had any such doubts, he should have referred those documents to
the ING Vysya Bank, whose statements of
account were filed by the assessee, to get their authenticity confirmed. No such effort was made by the AO.
25. The judgments in Tirath Ram Gupta (2
supra) and Jaspal Singh (3 supra) turn
on their own facts. In Tirath Ram Gupta
(2 supra) the Punjab & Haryana High Court held that
the ingredients, namely, identification of the donor, hismeans and the
genuineness of the gift were established, and the relevant assessment year
therein being 1997-1998, which is much prior to the insertion of clause (v) of
sub-section (2) of Section 56 of the Act, a finding was therefore rendered that
the assessee has failed to prove the occasion for accepting the gift.Similarly,
the judgment in Jaspal Singh (3 supra) relates to the assessment year
1998-99. The Tribunal failed to take
notice of the distinction between the facts of the said cases and the present
case which arose after the amendment to Section 56 of the Act.
26.
As regards item No.(ii), it is the
pleaded case of the assessee that during the financial year 2005-06, he has
received loan of Rs.87,95,000/- from one of his family friends by name Mr. Dev
Singh Palak, who is a resident of U.K., that out of the said amount, an amount
of Rs.47,45,724 was received from U.K.
and the balance amount was received from Punjab in the form of demand
drafts. During the course of assessment proceedings,
the assessee submitted confirmation letters from Mr. Dev Singh Palak, the U.K.
company which transferred the amount, the companys financial statements,
confirmation for the drafts and evidence of sale of lands in Punjab. The AO has however held that the loan is not
proved and further held that the signature of the person in the confirmation
demonstrates that the person is not of a man of means. The CIT(A) and theTribunal confirmed the
order of the AO.
27. The learned counsel for the assessee
argued that the Tribunal in its order fell into an error in proceeding on the premise
that the receipt of the amount by the assessee was by way of a gift, whereas it
was only a loan and that on thisassumption the Tribunal held that the assessee
has not proved the means of the donor and that the gift was genuine. It is further argued that the AO has made
reference to the CBDT Cell on Foreign Transactions for verification of the
genuineness of the transaction, but no report was received even till the date of
disposal of the appeal by the Tribunal.
That the loan transaction is genuine one is supported by several
documents filed by the appellant before the AO.
28. We have carefully perused the copies of
the documents filed by the assessee in these appeals. In its letter dt.7.10.2009 a company by name
Eurox UK confirmed to the AO that on 25.5.2005 Future Garments Limited
transferred the sum of 60,000
to the ING Vysya Bank Limited in Hyderabad, India, to be credited to account
number 737010054632, held by the assessee
and that these funds were transferred on behalf of Mr. Dev Singh of 209,
Lordswood Road, Harborne, Birmingham, B17, 8QP, England and payment being in respect
of a liabilityin the company accounts in favour of Mr. Dev Singh. Even Mr. Dev Singh addressed letter
dt.2.6.2009 from UK from the same address as found in Eurox UK letter
dt.7.10.2009 to the AO, wherein he has confirmed that he has given
Rs.87,95,724/- towards interest free unsecured loan to the assessee on variou dates
commencing from 27.5.2005 to 19.7.2005, that he has given the said amount out of his
income/savings and that he is a British Citizen and a business man. It is evident from the said letter that on
27.5.2005 a sum of Rs.47,45,724/- was sent to the assessee by wire
transfer. In order to prove that fact,
the assessee has filed a copy of inward remittance (purchase) dt.27.5.2005
generated by the ING Vysya Bank Limited, Secunderabad, showing that Future Garments
Limited remitted a sum of 60,000 equivalent to Rs.47,46,000/-
at the rate of Rs.79.1000 per pound. The
assessee also produced Passport and a copy of electricity bill, showing
permanent address of Mr.Dev Singh Palak in UK and also that he is a British
citizen. A copy of the independent audit
report in respect of Future Garments Limited, was also filed to show that Davinder
KaurPalak, Hardip Singh Palak, Kuldip Singh Palak and Manjir Kaur Palak have
3,125/- shares each in the said company.
Mr. Dev Singh Palak has sent a notarized affidavit, wherein he has inter
alia stated as under:
AFFIDAVIT
I,
Dev Singh Palak, S/o. Gulzara Singh, aged about 69 years, Resident of 209,
Lordswod Road, Harborne, Birmingham B17, West Midlands, United Kingdom,
Occupation: Retired, do hereby affirm and state that.
1.
I am a citizen of United Kingdom with
British Passport No.GBR 456123613.
2.
I am having two sons by name Kuldip Singh and Hardip Singh who are also residents of Birmingham, UK.
3.
We are having business concerns in the name of M/s. Aqua Holdings Limited and M/s. Future Garments
Limited shareholding total held by me
and my two sons Kuldip Singh and Hardip
Singh and our respective wives. Palak is
our surname.
EUROX
is the Branding name of M/s.Future Garments Limited registered in UK with
Registration number 2690536, having registered office at Aqua house, Buttress
Way, Smethwick, West Midlands, B663DL.
4. M/s. Aqua Holdings Limited is the wholly
owned holding company of M/s. Future Garments Ltd.
5. I was born in Malupota village in Punjab,
India, in the year 1940 and shifted to United Kingdom (UK) in the year 1973 and
since then I am staying in UK working in the family business.
6. Myself and my family members are having
agriculture lands in Punjab. My
brother-in-law Mr. Avatar Singh is looking after these agriculture lands on our
behalf. We visit our village and agriculture
lands occasionally as and when required.
7. Sri P. Chandra Sekhar is well known to me
while he is staying in UK with his father-in-law, in the same locality. He is a family friend for more than 15 years
to me and my sons, Kuldip & Hardip.
8. I have given the following unsecured loan
to Sri P. Chandra Sekhar. ……….25.5.2005
Unsecured loan Wire Transfer 60,000 Equivalent INR 47,45,724 19.7.2005
Unsecured loan Demand Drafts 40,50,000, Total 87,95,724.
1.
The amount of 60,000 was paid from the amounts due to me by the company M/s.
Future Garments Ltd. and as explained above this amount was transferred by my
son Kuldip Palak on the direction given by me as he is the director of the
company, M/s. Future Garments Limited.
2.
Amount of Rs.40,50,000 was sent by way of five demand drafts in the name of Sri
P. Chandra Sekhar. This amount was sent by my brother-in-law Mr. Avatar Singh
on the basis of my instructions to him. This amount consists of the sale
proceeds of agricultural lands which are in name of my sons Kuldip and Hardip
and sold for a sum of Rs.36,75,000/- vide sale deed No.3991 dated 24/6/2005 and
the balance amount from the monies due to my family from Mr. Avatar Singh.
This
affidavit I am giving with free will and consent and with full knowledge of
contents in this affidavit.
Deponent
Dev Singh Palak The assessee has also filed copies of the sale deeds executed
by Kuldip Singh and Hardip Singh Palak, sons of Mr. Dev Singh Palak, conveying
agricultural lands for consideration of Rs.40,50,000, and proof of sending that
amount to the assessee by way of demand drafts, by Avatar Singh, brother-in-law
of Dev Singh Palak living in Punjab. Here again the CIT(A) has adopted a
fractured reasoning by imposing his personal views on Mr Dev Singh Palak as
could be seen from the following observations.
No
shareholder can maintain any account in the company in the first place. Even
the contents of letter of Future Garments reveals that the amount given
represents liability of Mr. Dev Singh. It is totally uncommon to obtain loan
from a company and pass on the same to Indian resident as a loan without any
interest on such loan. It is against the human probability of any friend to
advance such substantial sums without any return on such sums.
29.
Letter dt.07.10.2009 of Eurox UK reads as under:
e
u r o x UK Deputy Commissioner of Income Tax Central Circle 2 Hyderabad, A.P
INDIA Date: 7th October, 2009 Subject: Funds transfer of $60,000 to Mr. Chandra
Sekhar, Pendurthi on 25th May 2005.
Dear
Sir, Please be advised that on 25th May, 2005, Future Garments Limited
transferred the sum of 60,000 (Sixty Thousand Pounds only), to the ING Vysya
Bank Ltd. in Hyderabad, India, to be credited to account number 737010054632,
held in he name of Mr. Chandra Sekhar Pendurthi..
These
funds were transferred on behalf of Mr. Dev Singh of 209 Lordswood Road,
Harborne, Birmingham, B17 8 QP, England, payment being in respect of a
liability in the Company Accounts in favour of Mr. Singh.
Yours
faithfully, Peter GW Round A.C.M.A.
Finance
Director In our opinion, the CIT(A) has misread the transactions. If we
carefully read the letter dt.7.10.2009 of Eurox UK, as reproduced above, it is
clear that M/s.Future Garments Limited transferred 60,000 on behalf of Mr. Dev
Singh Palak to be credited to the assessees account.
In
his affidavit filed by Dev Singh Palak, it is clearly stated that the sum of
60,000 was transferred on behalf of Dev Singh Palak in respect of a liability
in the Companys Accounts in favour of Mr. Singh. It thus appears that the
company owed money to Dev Singh Palak and not vice versa and the said amount
was transferred by the company to the account of the assessee. However, the
CIT(A) was under the wrong assumption that Mr. Dev Singh Palak has obtained
loan from the company. On such erroneous premise, he observed that no one would
lend interest free loan from out of borrowed money. On what terms a person
advances loan to another person depends upon the relationship and the implied
understanding between them. While in his letter dt.2.6.2009 Dev Singh Palak has
confirmed that he has sent the amount towards interest free unsecured loan to
the assessee, there is no reason to infer that Dev Singh Palak has not expected
any return from the assessee.
It
could well be that the assessee may have intended to invest the amount
profitably and share the proceeds. At the time of scrutiny there was no
obligation for the assessee to explain his future plans as to how he intends to
utilise the loans he received, as it will be his responsibility to account for
the gains if any made on such investments, as and when they are made.
Similarly, the finding of the CIT (A) that no person would sell the ancestral
properties at the village and pass on the sale proceeds in entirety to a friend
in India without any consideration or yield on such amount, also falls in the
realm of speculation of human conduct.
30.
As regards the sum of Rs.40,95,724/- with the same understanding between the
parties on which Dev Singh Palak has sent 60,000 to the assessee he must have
sent the balance amount of Rs.40,95,724/. If Dev Sigh Palak has come forward to
claim that the money belongs to him with proof, it is not within the power or
jurisdiction of the AO to reject the same, more so when the lenders identity
and capacity to lend are established. The AO has also assigned jejune reasons
to reject the documents filed by the assessee in support of the transactions.
The AO addressed letter dt.29.12.2009 to the Director, FT and TR 1, New Delhi,
wherein he has called for a detailed report on the transfer of funds from UK.
The letter reads as follows:
F.
No.DCIT/CC-2/Hyd/S & S/2009-10 Office of the Deputy Commissioner of Income
Tax, Central Circle-2, Aayakar Bhavan, Hyderabad.
29-12-2009
To The Director, FT and TR 1, Room No.908 HUDCO Vishala building Bikajikama
place New Delhi 110066 Sir, Sub: Search and seizure assessment in the case of
Sri P. Chandra Sekhar AY 2005-06 to 2008-09. Huge amounts of NRI funds credited
into the bank account of the assessee as loan and gift Verification of identity
and creditworthiness of the donor regarding:
Please
refer to the above.
During
the course of search assessment proceedings of the above said case it is
noticed that the assessee was in receipt of loans and gifts from the following
persons and credited the same into his bank account (A/c.No.737010054632 of ING
Vysya Bank, Banjara Hills, Road No.2, Hyderabad). The details are furnished in
the proforma enclosed. It is pertinent to mention here that the assessee has
never filed any return of income till date of search i.e., 09.10.2007. After
issue of notice u/s. 153A of the IT Act he has filed his return of income and
disclosed the amounts mentioned in the proforma. As the funds are transferred
from Birmingham, U.K. the reference has been made to FTD as per the prescribed
proforma. The information sought in the proforma may be investigated and a
detailed report may be forwarded to the undersigned.
Yours
faithfully, (Dr. S. Palanikumar) Deputy Commissioner of Income Tax Central
Circle-2, Hyderabad Proforma for seeking specific information under the
provisions of exchange of information, article of double taxation avoidance
agreement, was also enclosed to the said letter. In Sl. No.5, a sum of
Rs.87,95,724/- was mentioned as the amount lent by Dev Singh Palak as loan to
the assessee. Having thus sought for confirmation about the genuineness or
otherwise of the transactions, from the Director, FT and TR 1, New Delhi, the
AO was silent in his order as to whether he has received a report and, if so,
to what effect. As rightly argued by the learned counsel for the assessee,
failure of the AO to refer to his queries to the Director and the result
thereof in his order would give rise to an adverse inference against the Revenue
and in favour of the assessee that the report is favourable to him and that
therefore the AO deliberately refrained from referring to the report.
31.
The reliance of the AO on the pattern of the signature to arrive at the
conclusion that Mr. Dev Singh Palak was not a man of means, reflects his highly
archaic and imbalanced approach. Such a test can never be applied to determine
ones possession of means. The overwhelming material filed by the assessee
explaining the cash receipt under item No.(ii) which remained unimpeached,
renders the decision to treat the sum of Rs.87,95,724/- as unexplained credit,
is wholly unjust and illegal. All the findings in support of such inclusion
rendered by the AO and confirmed by both the appellate fora suffer from perversity.
32.
Item No.(iii) relates to treating a sum of Rs.10,00,000/- claimed to be a loan
from one J.V. Sudhakar as unexplained cash credit under Section 68 of the Act.
The assessees case is that during the financial year 2005-06, i.e., on
21.03.2006 he has received Rs.10,00,000/- as loan from one J.V. Sudhakar and
that the same was repaid by him on 5.6.2006 by bank transfer. That as Mr. J.V.
Sudhakar was not available during the assessment proceedings, he could not
appear before the AO. However, the AO obtained bank statement from the bank
concerned and that though the said bank statement has proved the bank
transaction, the AO has added the same as unexplained cash credit under Section
68 of the Act and the said order was confirmed by the CIT (A) as well as the
Tribunal.
33.
To substantiate the plea of the loan, the assessee has filed the confirmation
letter issued by J.V. Sudhakar wherein he has stated that he has given an
unsecured loan of Rs.10,00,000 to the assessee by way of transfer from his bank
account No.737010035602 with ING Vysya Bank Ltd. Banjara Hills, Hyderabad, on
21.03.2006 and that the loan amount was returned by the assessee on 25.07.2006
by transfer from the latters account with ING Vysya Bank, Banrara Hills,
Hyderabad.
34.
The AO has observed that though the assessee has stated at page No.13 of the
written submissions that the confirmation letter of J.V. Sudhakar was filed in
annexure 16, a verification of the same shows that it is nothing but the
assessees bank account copy. Therefore, we are inclined to eschew the same for
consideration.
35.
It is evident from the AOs order that he has summoned the bank account
statements pertaining to J.V. Sudhakars account. While he did not doubt the
correctness of the entries in the bank statement, the AO, however, relied upon
the circumstances that the summons issued to J.V. Sudhakar were returned
unserved with the endorsement that no such addressee was residing in that
address. From this fact, the AO has concluded that the assessee has failed to
establish the identity and creditworthiness of the lender and genuineness of
the transaction.
36.
A copy of the bank account statement of Mr. J.V. Sudhakar stated to have been
obtained by the AO and filed in the appeal shows that on 21.3.2006 a sum of
Rs.10,00,000/- was withdrawn from his account and transferred to the assessees
account, and on 25.07.2006 a sum of Rs.10,00,000/- was credited to the account
of J.V. Sudhakar, transferred from account No.737010054632 which admittedly
belongs to the assessee. This statement also shows that the bank account of
J.V. Sudhakar was full of day to day transactions, and withdrawals and deposits
of amounts upto around Rs.50,00,000/- were also shown on many occasions. The
assessee also produced his own bank statement for the period 1.2.2006 to
31.3.2007 which shows that on 21.3.2006 a sum of Rs.10,00,000/- was credited to
his account from the account of J.V. Sudhakar by way of transfer. The facts
discussed above would not only show the genuineness of the transaction, but
also the creditworthiness of the lender.
37.
As regards the identity, the assessee is not a privy to the alleged return of
the summons with the endorsement that no such person is residing in the
address. The identity of J.V. Sudhakar is clearly established from the bank
account sent by ING Vysya bank, the authenticity and genuineness of which were
not doubted by the AO. If the AO has entertained a doubt about the existence or
otherwise of J.V. Sudhakar, in all fairness, he ought to have issued a notice
to the assessee to produce the said Sudhakar, but he did not do so. Despite the
availability of overwhelming and unimpeachable documentary evidence, the AO was
not prepared to accept the same, as his approach appeared to be loaded with
prejudice, suspicion and pre-determined mind and preconceived notions. The
whole approach of the AO appears to be some how reject the every explanation of
the assessee and the evidence produced in support of such explanation, by
assigning reasons which are wholly imaginary and perverse.
38.
As regards item No.(iv), the case of the assessee is that he has advanced a
loan to a company by name M/s. Dakshin Shelters Pvt. Ltd., on various dates.
That the company though credited interest in its books of account and deducted
tax, has never paid the interest on the loan to the assessee, that the assessee
followed cash system of accounting and admitted the tax deducted at source as
income and claimed the credit for TDS. That during the course of assessment
proceedings, the assessee submitted that the interest income in its entirety
was not admitted. That the AO, ignoring the provisions of Section 145 of the
Act, which mandates admission of income on the basis of accounting method,
erroneously relied upon Section 5 of the Act for treating the interest income
as taxable. While confirming the order of the AO, the Tribunal held that once
the assessee claimed credit towards TDS on the interest income, it cannot be
said that for the other portion of interest the assessee is following cash
system of accounting, that claiming of credit towards TDS and claiming of
deduction of interest income shall go together and that therefore there cannot
be dual method for the same income.
39.
The learned counsel for the assessee submitted that as the company was following
the mercantile system of accounting, it has deducted TDS on the assumption of
payment, though it was not actually paid and that when it comes to the
assessee, who was following the cash system of accounting, he has not admitted
the same as income as the company has not paid the same. The learned counsel
relied upon the clarification issued by the CBDT on the recently introduced
provisions of Income Computation and Disclosure Standards. He has also
submitted that the view taken by the Tribunal relying upon the assessment on
the basis of claim for TDS is contrary to the provisions of Section 199 of the
Act, which envisages that the credit shall be given in the year when the income
is assessable. That the assessee has admitted income to the extent of TDS on receipt
basis/cash basis and that once this income is admitted there is no error in
claiming credit for TDS. He has further submitted that the AO could have at
best directed to restrict the claim of TDS in proportion to the income admitted
and allowed the balance in the year in which the interest income is admitted on
receipt basis. The learned counsel further submitted that the assessee has
admitted the entire interest income for the year 2012-13 as in the previous
year relevant to that assessment year, and the deposit was converted into
shares by M/s. Dakshin Shelters Pvt. Ltd. In the grounds appeal, a detailed
explanation has been offered by the assessee, which reads as under:
The
treatment of the TDS amount and the non-received receipt balance interest operate
in two distinct spheres and have no linkage with each other. The income tax
authorities takes away the TDS which is served to it on a platter. It cannot
have the cake and eat it too. It cannot dictate terms to the Appellant/Assessee
who is mandated to follow one of the two accounting methods under Section 145
of the IT Act. He also cannot have two modes of accounting at the same time for
the same Assessee.
Adding
the unreceived income to the income of the Appellant/Assessee when he has not
received it can have alarming and disastrous consequences. In the event of the
loanee company going into liquidation, the Appellant/Assessee may not get back
his interest or principal. Being unable to meet its liability to its creditor,
the loanee company chose to issue equity shares to its creditors. So,
whereupon, the interest loan and interest liability to the loanee company stood
extinguished. Having not received the interest income year after year and with
no reasonable prospect of receiving it ever as subsequent developments have
shown, and coercing the Appellant/Assessee to account for it as income for the
year and on top of it, pay tax for the same, is unreasonable, unjust and
iniquitous. Such an interpretation of the Income Tax Act would not have been
envisaged by the legislators. In equity and good conscience, the income tax,
surcharge, penalty, etc., imposed on the non-received income is liable to be
recalled and the TDS credit received should remain in the credit of the
Appellant/Assessee to be adjusted against past or future income tax liability.
The
Assessing Officer made an incorrect addition of Rs.3,05,753/- under the head
interest income by holding that even though the Appellant/Assessee had enclosed
the TDS certificate, he did not include the balance of interest due to him, but
not received by him, to tax, by disregarding the fact that the
Appellant/Assessee was following the cash system of accounting.
The
non-payment of interest of the loanee company to the Appellant/Assessee was due
to the fact that it did not do any business except saving application money
from applicants for allotment of equity shares and unsecured lenders which was
utilised by the loanee company to buy peace from the landowners from whom land
was taken for development. The loanee company could not go beyond this stage of
business in view of prohibition orders of the Government, prohibiting
development of land falling in the Bio-Conservation Zone. Following the impasse
created by this prohibition, the loanee company which had blocked its finances
for the land deal, suffered losses and had lost its capacity to repay its loans
and meet its interest liabilities. On account of this, the loanee company
capitalised the unsecured loans and unpaid interest in its hands due to
Appellant/Assessee and capitalised it into equity share during the year
2011-2012 and issued equity share certificates in lieu of unsecured loans and
unpaid interest thereon. The loanee company has adopted this uniform policy in
case of all other lenders.
The
Appellant/Assessee appealed against the assessment order inter alia contending
that though the amount remained in the books of accounts in the loanee company
as due to the Appellant/Assessee, the amount was not paid to him. Hence, the
Appellant/Assessee who has been following the cash system of accounting
consistently, had filed his return of income in the manner he did as the amount
did not reach his hands ever. Unfortunately, the CIT(A) took an erroneous view
of the facts and the law and upheld the additions made by the Assessing
Officer, by giving a go-bye to the provisions of Section 145 which permits an
Appellant/Assessee to opt for one of the two approved accounting methods and
not an amalgam of them.
Section
145 of the Act reads as under:
Method
of accounting.
145.
(1) Income chargeable under the head Profits and gains of business or
profession or Income from other sources shall, subject to the provisions of
sub-section (2), be computed in accordance with either cash or mercantile
system of accounting regularly employed by the assessee.
(2)
The Central Government may notify in the Official Gazette from time to time
income computation and disclosure standards to be followed by any class of
assessees or in respect of any class of income.
(3)
Where the Assessing Officer is not satisfied about the correctness or
completeness of the accounts of the assessee, or where the method of accounting
provided in sub-section (1) has not been regularly followed by the assessee, or
income has not been computed in accordance with the standards notified under
sub-section (2), the Assessing Officer may make an assessment in the manner
provided in section 144.
40.
It is evident from the above extracted statutory provision that the assessee
shall be free to follow either cash or mercantile system of accounting. Perhaps
the only condition to be fulfilled by an assessee in this regard is whatever
method he follows must be consistently followed without switching over from one
method to the other frequently. It is not in dispute and cannot also be
disputed that unlike mercantile system, in cash system of accounting return is
filed based on actual receipt basis. The Government of India, Ministry of
Finance, Department of Revenue, Central Board of Direct Taxes (TPL Division)
vide Circular No.10/2017, dt.23.3.2017 has issued clarifications to various
questions. Question No.13 and the answer, which are relevant for the present
purpose, read as under:
Question
13: The condition of reasonable certainty of ultimate collection is not laid
down for taxation of interest, royalty and dividend. Whether the taxpayer is
obliged to account for such income even when the collection thereof is
uncertain?
Answer:
As a principle, interest accrues on time basis and royalty accrues on the basis
of contractual terms. Subsequent nonrecovery in either cases can be claimed as
deduction in view of amendment to S.36(1)(vii). Further, the provision of the
Act (e.g. Section 43D) shall prevail over the provisions of ICDS.
41.
In his order, the AO has proceeded on the assumption that since interest has
accrued in the account books of M/s. Dakshin Shelters Private Limited, there is
no prohibition on the assessee to withdraw the amounts from the unsecured loan
amount in the books of M/s. Dakshin Shelters Private Limited. He has further
observed that in the instant case, the assessee has received the interest
income, but chose to keep it in the account in order to get interest on such
income also.
42.
As regards the first mentioned aspect, it defies any logic for, crediting of
interest in account books does not enable the assessee to withdraw the amount
as the same was not physically made available by M/s. Dakshin Shelters Private
Limited for the assessee to make such withdrawal. The finding that the assessee
has received interest income but chose to keep it in the account in order to
get interest, is in conflict with his previous observations that there is no
prohibition for the assessee to withdraw the interest on the unsecured loan in
the books of account of the company. Indeed, the Revenue has not disputed the
claim of the assessee that the loanee company converted the unsecured loan and
unpaid interest into equity shares during the year 2011-12 and accordingly
issued equity shares certificates in lieu of repayment of unsecured loans and
unpaid interest thereon. As submitted by the learned counsel for the assessee,
the AO could have at best directed to restrict the claim of TDS in proportion
to the income admitted and to allow the balance in the year in which interest
income is admitted on receipt basis.
43.
Item No.(v), which is the subject matter of I.T.T.A. No.720 of 2016, relates to
inclusion of Rs.14,50,000/- allegedly received from Smt. P. Shanti Chowdhary,
wife of the assessee, in the income as unexplained credit under Section 68 of
the Act. The explanation offered by the assessee was that during the financial
year 2005-2006 he received the aforementioned amount as loan from his wife by
way of transfer from her bank account to his bank account on three dates. He
has explained to the AO that the loan was given from out of gifts received by
his wife from her father in U.K. to whom the assessees wife is the only
daughter. The AO rejected the assessees explanation and included the said
amount as unexplained credit. The CIT(A), however, has reversed the order of
the AO accepting the assessees explanation. But, the Tribunal has upheld the
order of the AO setting aside the order of the CIT(A).
44.
In his order, the AO has referred to the confirmation letter dt.17.09.2009
issued by the assessees wife stating therein that she has transferred
Rs.3,00,000/-, Rs.3,90,000/- and Rs.7,50,000/- on 19.12.2005, 27.01.2006 and
31.03.2006 respectively to her husband as loan. That the assessees wife has not
appeared in response to summons dt.18.11.2009 and failed to furnish the books
of account maintained by her for the financial years 2001-02 to 2007-08; the
returns of income filed by her for the said period; the copies of bank account
held by her individually as well as jointly for the said period maintained in
India as well as in abroad; and the copy of her Passport. He has referred to
the letter dt.25.11.2009 sent by the assessee stating that his wife is
presently in Burmingham, U.K. and is expected to come back to India only in
January, 2010. In her absence, the assessee gave the following information.
(i)
She did not live in India during the F.Y. 2001-02 to 2005-06;
(ii)
Hence, she did not maintain any books of accounts and also not filed any return
of income;
(iii)
She has not maintained any joint bank account in India or Abroad;
(iv)
As she went to abroad her copy of passport is not readily available.
The
AO commented that if the assessees wife was not in India, it is not known how
confirmation letter dt.17.09.2009 could be filed before the AO on 20.10.2009.
That her passport was not produced by the assessee in order to verify the
entire claim and that she was not having any source of income nor did she file
any return of income in India. The AO has expressed the following doubts which
we find are rather unusual.
If
at all the assessee needs any money he can directly take from his
father-in-law. It is not known why the money should be routed through the
account of Smt. P. Shanti Chowdary and in turn should come into the bank
account of the assessee. The assessee has invested these amounts only for the
purpose of real- estate transactions. Under these circumstances, the identity
and creditworthiness as well as genuineness of the transaction is not
established by the assessee. Hence, the entire amount of Rs.14,50,000/- is
added back to the total income of the assessee.
45.
The CIT(A) while reversing the order of the AO, gave the following reasons.
I
have considered the submissions as well as the facts of the case. There is no
dispute about the identity of Smt. P. Shanti Chowdary, wife of the appellant.
She has confirmed that she has lent the above sum of Rs.14,50,000/- to the
assessee during the year. In fact the amount received from Smt. P. Shanti Chowdary
during the year is Rs.14,40,000/- received on 3 different occasions of Rs.3
lakhs, Rs.3.90 lakhs and Rs.7.50 lakhs.
The
said amounts have been transferred from the bank a/c maintained at ING Vysya
Bank, Banjara Hills, Hyderabad to the assessee who is also having bank a/c in
the same branch. Even assuming that the gifts received by Smt. P. Shanti
Chowdary from her father as bogus, still the loan received from her cannot be
treated as unexplained income of the assessee. Action can be initiated under Income-tax
provisions to tax the so called gifts received by Smt. P. Shanti Chowdary in
the respective years as unaccounted income. But as far as the assessee is
concerned, the amounts have been transferred from the bank a/c of Smt. P.
Shanthi Chowdary whose identity has been clearly established and confirmed by
her, cannot be treated as unexplained income in his hands. Accordingly, the AO
is directed to delete the addition of Rs.14.50 lakhs as computed by him and
recomputed the total income. However, AO is directed to initiate appropriate
proceedings under I.T. Law to bring the so called gifts received by Smt. P.
Shanthi Chowdary to tax over the years.
46.
The Tribunal has reversed the order of the CIT(A) by advancing generic reasons,
such as merely by filing confirmation from his wife, the assessee cannot make a
non- genuine transaction as genuine and that in order to discharge the onus
cast on the assessee under Section 68 of the Act, he has to establish not only
identity of the creditors and confirmation of the credits, but also the
capacity of the creditors to advance money as well as genuineness of the
transactions.
47.
Apart from the confirmation letter of his wife regarding transfer of amounts
from her account to the assessees account, the assessee has filed bank
statements of his wife showing transfer of the amounts to the assessees
account. He has also filed copies of passport of his wife issued by United
Kingdom of Great Britain and Northern Ireland and the residential permit
dt.9.11.2006 issued by the Commissioner of Police, Hyderabad City, showing that
the assessees wife is a U.K. nationality holding UK Passport and permitted her
to remain in India until 02.02.2010. The assessee also produced certificate
dt.26.3.2009 issued by the ING Vysya Bank to the effect that there was a
Foreign Inward Remittance of GBP 400,000 to the credit of the assessees wife on
16.05.2006 and the remittance was received from NatWest Bank from the account
of Mr. Babu Rao Choudary Chaparala (the assessees father-in-law) and the same
was converted to FCNR deposit bearing No.123092135700 on 17.05.2006. The
extract of the bank account of Dr. BC Chaparala with C&G Cheltenham &
Gloucester is also filed to show that a sum of GBP 400,000 was transferred from
the account of Babu Rao Choudary Chaparala to the account of P. Shanti
Chowdary, wife of the assessee. Letter dt.17.9.2009 of Baburao C. Chaparala
addressed to the AO confirming that he has given the said amount as gift to his
daughter - P. Shanti Chowdary and that the said gift was made by him towards
natural love and affection for her and the same has been accepted. He has
further stated that he and his wife Dr. Bharathi Chowdary Chaparala are British
Citizens and have been working in the United Kingdom for the National Health Service
for over 30 years and that these amounts are out of their joint savings and
earnings. He has also enclosed a table giving the details of the amounts.
48.
The material filed by the assessee shows that as in the case of the loan
advanced by Mr. Dev Singh Palak, the AO has sought for specific information
under the Provisions of Exchange of Information Article of Double Taxation
Avoidance Agreement, to the Director, FT and TR1, Bikajikama place, New Delhi,
to verify and report on the genuineness or otherwise of amount of
Rs.1,52,00,000/- and Rs.1,30,00,000/- transferred by the assessees wife for the
assessment years 2007-08 and 2008-09; amount of Rs.11,97,267/- and
Rs.3,40,000/- transferred by Baburao Chowdary, to his daughter as gifts in the
assessment years 2005-06 and 2006-07.
49.
One cannot but be left wondering as to what better evidence one could have
produced to establish the identity, genuineness and authenticity of the
transaction of the loan. When the father-in-law of the assessee has himself
given the confirmation letter that he has given the amount towards gift out of
love and affection, we find no justification whatsoever for the AO and the
Tribunal to raise doubt about the capacity of the assessees wife to lend the
money. Both the parents of the assessees wife are not only British citizens,
but also Doctors for over 30 years. Therefore, neither their capacity to gift
the money nor their intention in doing so could be suspected. The evidence
produced by the assessee is of such high standard that the approach of the AO
in rejecting such evidence can only be termed as myopic. While the authorities
are entitled to examine each transaction minutely, they cannot approach every
transaction with undue suspicion by wearing coloured glasses. The approach of
the AO reminds us of somebody describing a lamb as a dog and trying to make
everyone to believe it to be so.
50.
The learned counsel for the assessee was critical of the approach of the CIT(A)
who while reversing the order of the AO directed him to initiate appropriate
proceedings under the I.T. Law to bring the so called gifts received by the
assessees wife to tax over the years, on the ground that this direction was
issued behind her back. However, we are not inclined to render any findings
thereon. If any such proceedings are initiated by the AO, the assessees wife
shall be free to question the same on all sustainable legal grounds.
52.
It is, however, directed that in respect of item No.(iv), the AO shall restrict
the claim of TDS in proportion to the income admitted for the assessment year
2005-06 and allow the balance in the year in which interest income is admitted
on receipt basis.
53.
The impugned orders of the Tribunal are accordingly set aside and both the
appeals are allowed.
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