TaxTMI 
TaxTMI 
2018 (3) TMI 799
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.... 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....
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....quantum? (iii) Whether the findings of the Hon'ble 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 ab....
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....he 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 Hon'ble 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 mother's 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 g....
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....rlooked 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 Hon'ble 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 Hon'ble 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 I....
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....ents 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 company's 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.....
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....nised 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. 14,50,00....
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....d 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. 304 ITR 145 (P&H) , Jaspal Singh v. C.I.T. 290 ITR 306 (P&H), held that unless the identity of the donor, his creditw....
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.... 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 f....
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...., 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 ( 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 assessees 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 Assessin....
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....hey 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 assessee's 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 assessee's parents, and her daughters having already been married off and in a well-todo 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 sit....
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....dence 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 the Tribunal 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 this assumption 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 transfe....
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.... 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. Date Nature of Transaction Mode of Transaction Amount Rs. 25.5.2005 Unsecured loan Wire Transfer GBP 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 GBP 60,000 was paid ....
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.... 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 GBP60,000 on behalf of Mr. Dev Singh Palak to be credited to the assessee's account. In his affidavit filed by Dev Singh Palak, it is clearly stated that the sum of GBP60,000 was transferred on behalf of Dev Singh Palak "in respect of a liability in the Company's 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 relationsh....
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....ans 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 tra....
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....4. 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 assessee's bank account copy. Therefore, we are inclined to eschew the same for consideration. 35. It is evident from the AO's order that he has summoned the bank account statements pertaining to J.V. Sudhakar's 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 assessee's account, and on 25.07.2006 a sum of Rs. 10,00,000/- was credited to the account....
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.... 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....
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....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 ....
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....tly. 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 a....
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....n letter dt.17.09.2009 issued by the assessee's 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 assessee's 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 com....
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....s 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 nongenuine 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 assessee's account, the assessee has filed bank statements of his wife showing transfer of the amounts to the assessee's 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 assessee's wife is a U.K. nationality holding UK Passport and permitted her to remain in India until 02.02.2010....
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....the assessee's 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 assessee's 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 assessee's wife shall be free to question the same on all sustainable legal grounds. 51. In our opinion, all the transac....