2015 (6) TMI 604 - AT - Income Tax

Appeal dismissed, sum from White Label Trust taxable income, not capital receipt.

The Tribunal dismissed the appeal, upholding the Assessing Officer's decision that the sum received from White Label Trust was taxable income in the hands ... Capital receipt versus revenue receipt - onus of proof in respect of unexplained credits - treatment of distributions by foreign discretionary trusts - reliance on foreign trust documents and proof of trusteeship - applicability of section 68 and consequence of failure to satisfactorily explain creditsCapital receipt versus revenue receipt - treatment of distributions by foreign discretionary trusts - reliance on foreign trust documents and proof of trusteeship - Whether the sum credited by the assessee was a capital distribution from a foreign discretionary trust and therefore not chargeable to tax in India - HELD THAT: - The Tribunal examined the evidence relied upon by the assessee (certificate of trustee, settlement deed, trust ledger and financial results filed before CIT(A)) and the record of non-production before the Assessing Officer. It found that the assessee failed to prove the genuineness of the trust, the valid substitution/appointment of the alleged trustee, and that the payment was made out of capital or accumulated income of earlier years. The Trust Deed on record showed the original trustee and prescribed procedures (deed of appointment, memorandum endorsed on the settlement, approval/signature on accounts) for change of trustee and for audited/approved accounts; those procedural safeguards and supporting documents were not produced. Given that the credit appeared in the assessee's books, the Tribunal applied the settled principle that where an amount is credited and its nature is not satisfactorily explained the onus lies on the assessee to establish that it is not income (noting Kale Khan and subsequent decisions). The Tribunal held that, in the particular factual matrix where the source jurisdiction was outside India and material lay within the assessee's control, the general rule that the revenue must prove income did not apply; instead the assessee had to discharge the burden under section 68/related jurisprudence and failed to do so. For these reasons the Tribunal did not accept the trustee's certificate as having legal sanctity sufficient to establish a capital distribution and affirmed the taxability of the receipt as income. [Paras 24, 25, 31, 35, 36]Assessee failed to prove that the sum was a capital distribution from the foreign discretionary trust; the addition was confirmed and the appeal dismissed.Onus of proof in respect of unexplained credits - applicability of section 68 and consequence of failure to satisfactorily explain credits - Whether the assessee discharged the legal burden to explain the credit in his books as not being taxable income - HELD THAT: - The Tribunal reiterated that when a sum is credited in the assessee's books the burden lies on the assessee to prove its nature and source. It applied authoritative precedent (Kale Khan Mohammad Hanif and authorities) holding that in absence of satisfactory explanation the Income Tax Officer/Revenue may treat the credit as taxable income. The Tribunal noted material omissions: lack of audited or trustee-approved accounts, absence of documentary evidence of appointment of the new trustee in accordance with the settlement deed (deed of appointment, endorsed memorandum), and non-production of earlier years' accounts to show accumulation. Because the relevant evidentiary material was within the assessee's control and was not produced before the Assessing Officer, the Tribunal held the assessee did not discharge the onus and the addition was sustainable. [Paras 23, 24, 25, 34, 35]Onus not discharged by the assessee; consequently the receipt can be treated as taxable income and the addition stands.Final Conclusion: The Tribunal affirmed the addition of the impugned sum to the assessee's income after holding that the assessee failed to prove that the amount was a capital distribution from a bona fide foreign discretionary trust; the appeal is dismissed. Issues Involved:1. Whether the sum of Rs. 4,55,78,880/- received by the assessee from White Label Trust is a capital receipt not chargeable to tax.2. Whether the sum received can be considered income under section 5 of the Income Tax Act.3. Validity of the levy of interest under section 234B.Issue-Wise Detailed Analysis:1. Capital Receipt vs. Revenue Receipt:The primary issue revolves around whether the sum of Rs. 4,55,78,880/- received by the assessee from White Label Trust is a capital receipt, which is not chargeable to tax. The assessee claimed that the amount was a capital distribution from a trust established under the laws of the Island of Jersey. The Assessing Officer (AO) questioned the nature of the receipt and requested detailed information about the trust, including its nature, founders, beneficiaries, and financial statements. The assessee failed to provide complete information, citing secrecy laws. The AO concluded that the trust is a foreign discretionary trust, and any fund distributed to an Indian resident is chargeable to income tax in India. The AO added the sum to the income of the assessee, noting the absence of provisions to exempt such receipts under the Indian Income Tax Act or any applicable Double Tax Avoidance Agreement (DTAA).The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the amount received was a capital distribution and relied on various judicial precedents to support their claim. The CIT(A) upheld the AO's decision, dismissing the appeal. Before the Tribunal, the assessee reiterated their arguments and presented additional documents, including the settlement deed and financial statements of the trust. The Tribunal scrutinized these documents and found inconsistencies, such as the lack of evidence regarding the appointment of the new trustee and the authenticity of the financial statements. The Tribunal concluded that the assessee failed to discharge the onus of proving that the amount received was a capital receipt and upheld the CIT(A)'s decision.2. Income Under Section 5:The AO and the Tribunal examined whether the amount received could be considered income under section 5 of the Income Tax Act, which defines the scope of total income. The AO argued that the amount received by the assessee from a foreign trust is income in the hands of the recipient, as there is no provision in the Indian Income Tax Act to exempt such receipts. The Tribunal agreed with this view, noting that the assessee failed to provide sufficient evidence to prove that the amount was a capital receipt. The Tribunal emphasized that the onus is on the assessee to prove the nature and source of the credit in their books of account. In the absence of such proof, the AO is entitled to treat it as taxable income.3. Levy of Interest Under Section 234B:The assessee also contested the levy of interest under section 234B of the Income Tax Act. The Tribunal did not specifically address this issue in detail, as the primary focus was on the nature of the receipt. However, given that the Tribunal upheld the addition of the amount to the assessee's income, the levy of interest under section 234B would logically follow, as it pertains to the payment of advance tax on the assessed income.Conclusion:The Tribunal dismissed the appeal filed by the assessee, confirming the CIT(A)'s order and rejecting the claim that the amount received was a capital receipt. The Tribunal emphasized that the assessee failed to discharge the onus of proving the nature and source of the receipt and upheld the AO's decision to treat it as taxable income under section 5 of the Income Tax Act.