2017 (1) TMI 1836 - AT - Income Tax

ITAT remands gift addition under section 56(2)(vii), upholds cash purchase disallowance under section 40A(3)

The ITAT Chennai remanded the matter regarding addition u/s 56(2)(vii) for gift in contemplation of death, directing the AO to examine expenditure ... Addition u/s. 56(2)(vii) - gift in contemplation of death - ‘gift’ having taken effect much prior to the date of death, with the moneys having been in fact utilized by the assessee for investment in immovable properties as well as in his business - whether gift admittedly received from a person who does not fall within the definition of ‘relative’ as given in the section (vide Explanation (e) thereto)? - HELD THAT:- We restore the matter back to the file of the AO to enable the assessee an opportunity to establish his case with reference to our findings. AO has not examined this aspect, and both the expenditure and, consequently, the amount of gift, if any, is indeterminate. Where and to the extent the assessee is able to prove the expenditure incurred – whether by himself or by the donor (who may also incurred a part of the expenditure), the same would stand excluded as a gift and, thus, as a gift assessable u/s. 56(2)(vii), though is liable to be assessed u/s. 69C to the extent the source of the expenditure, incurred for the current year, remains unproved. The estimate of the total expenditure incurred over the years, i.e., during the currency of the illness, which shall have to precede this exercise, is to be an informed estimate, based on medical history, reports, prescriptions, bills, etc. – a matter of record. A similar estimate in respect of the medical treatment and nursing of the donor’s aunt may also be made, to the same effect and in the same manner. Further, where (and to the extent) the total expenditure falls short of the gift amount the same is surely a gift for the love, care and affection bestowed by the assessee on the donor and his aunt. The same would though, for the reasons afore-stated, not be a gift/s in contemplation of death, and assessable u/s. 56(2)(vii). True, the burden of proof in case of the deeming provision of s. 69C, as for others, viz. 69, 69A, 69B, et. al., is on the Revenue, so that it is only where the factum of the assessee being the owner of any property, investment, etc., or of having incurred expenditure is established by the Revenue, that the assessee can be called upon to explain the nature and source thereof, failing which only the deeming shall have effect. In the instant case, however, the fact of incurring expenditure emanates only from the document furnished and relied upon by the assessee in furtherance of his case. We have also, albeit for different reasons, expressed our concurrence in-as-much as if the ‘gift’ is toward reimbursement or in consideration of the expenditure incurred, the same cannot - to that extent, be possibly considered as a gift, so as to fall within the purview of s. 56(2). The expenditure having been admittedly incurred by the assessee, it is only he who can therefore furnish information in its respect, furthering his case in the matter. That sec 69C may have applicability where the source of the expenditure, incurred during the current year, is not proven, is a different matter altogether. At the same time, in the absence of the assessee showing the factum of the expenditure incurred by him, i.e., failing to exhibit the same, its mention in the deposition by the ‘donor’ is merely a surreptitious mention, to therefore no legal effect. We have already clarified that where the expenditure is to a part extent, the balance shall operate to be a gift, qualifying as such, which though would not be a gift in contemplation of death. Purchases in cash u/s. 40A(3) - assessee’s case is that in all cases the payments were for business expediency; the sellers’ insisting on the same, so that in case of non-payment thus, he would stand to loose business - HELD THAT:- The section is cast in near absolute terms, with the excepting categories provided for under proviso to s. 40A(3A), stating the consideration of, inter alia, business expediency, per r. 6DD. The assessing authority has clearly stated that none of these excepting circumstances, which are exhaustive, are applicable in the facts and circumstances of the case, with the CIT(A) finding no reason to, in view of the undisputed facts, differ with him. There is no estoppel against law. The terms of a contract must therefore yield to the law, made explicit per s. 40A(4). Rather, any contract which is inconsistent with the public policy or the express provision of law is not valid in law. The plea that the sellers insisted on cash payment – itself unproved, is thus not a legally valid argument, even as pointed out by the AO with reference to s. 40A(4). We find no infirmity in the invocation of the provision by the Revenue in the instant case. There is no excess of the legislative intent or abuse of the judicial process in the instant case. We decide accordingly, and the assessee fails. Issues Involved:1. Deeming of gifts received as income under Section 56(2)(vii) of the Income Tax Act.2. Disallowance of purchases made in cash under Section 40A(3) of the Income Tax Act.3. Disallowance under Section 40(a)(ia) for non-deduction of TDS.Issue-wise Detailed Analysis:1. Deeming of Gifts as Income under Section 56(2)(vii):The first issue pertains to whether the gifts received by the assessee during the financial year 2011-12 should be deemed as income under Section 56(2)(vii) of the Income Tax Act. The assessee claimed that the gifts were in contemplation of death and thus excluded under sub-clause (c) of the second proviso. However, the Revenue rejected this claim because the gifts were received much earlier than the date of death and were utilized for investments. The Tribunal examined the definition of a gift in contemplation of death under Section 191 of the Indian Succession Act, 1925, and the conditions laid down by the Apex Court in CGT v. Abdul Karim Mohd. The Tribunal found that the gifts were not given in contemplation of death as they were made eight months prior and utilized for investments. The Tribunal also noted that the gifts were not made per a registered document but by an affidavit, which is legally valid for movable property. The Tribunal emphasized the need to examine the circumstances and totality of facts, including the donor's illness and the nature of the gifts. The Tribunal concluded that the gifts were not in contemplation of death but rather a reimbursement for medical and related expenses incurred by the assessee. The matter was restored to the Assessing Officer to determine the actual expenditure incurred and exclude it from the gift amount assessable under Section 56(2)(vii).2. Disallowance of Purchases Made in Cash under Section 40A(3):The second issue involves the disallowance of Rs. 46,82,000/- for purchases made in cash, which is not allowed under Section 40A(3) of the Income Tax Act. The assessee argued that the payments were made for business expediency as the sellers insisted on cash payments. However, the Assessing Officer found that the payments were not advance payments and represented the total consideration. The Tribunal noted that Section 40A(3) is cast in near absolute terms, with exceptions provided under Rule 6DD. The Tribunal found that none of the exceptions applied in this case and that the plea of business expediency was not legally valid. The Tribunal upheld the disallowance, emphasizing that the law must be followed, and the terms of a contract must yield to the law. The Tribunal referred to the decision in Shree Shanmuga Gunny Stores, which supports the strict application of Section 40A(3).3. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:The third issue concerns the disallowance of Rs. 3,56,180/- under Section 40(a)(ia) for non-deduction of TDS on commission and audit fees. The reason for disallowance was the lack of availability of PAN of the payees. The Tribunal noted the subsequent amendments to Section 40(a)(ia) and held that the matter should be re-examined. The Tribunal directed that to the extent the assessee could adduce evidence of the payments forming part of the income of the payees, duly returned and tax paid thereon, Section 40(a)(ia) would not apply.Decision:The Tribunal restored the matter back to the file of the Assessing Officer for further examination concerning the gifts and the expenditure incurred. The disallowance under Section 40A(3) was upheld, and the matter concerning Section 40(a)(ia) was remanded for re-examination. The assessee's appeal was partly allowed for statistical purposes.