TaxTMI 
TaxTMI 
2018 (3) TMI 799
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....helters 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/....
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....ch 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 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 Appell....
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....ed by the Appellant/Assessee as taxable income for the relevant year? (v) Whether on the facts and circumstances of the case, the Hon'ble 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 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 applicatio....
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.... 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 Hon'ble 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 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 inferenc....
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....ce on the judgment in C.I.T. v. P. Mohanakala (2007) 291 ITR 278. 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 company....
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....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 and Disclosure 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....
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....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 t....
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....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 afo....
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....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 ( 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....
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....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.....
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....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 company's 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 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 th....
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....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 a....
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....out any return on such sums." 29. Letter dt.07.10.2009 of Eurox UK reads as under: "eurox 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 GBP60,000 (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 GBP60,000 on behalf of Mr. Dev Singh Palak to be c....
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.... "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. ....
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.... 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 latter's 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 assessee's bank account copy. Therefore, we are inclined to eschew the same for consideration. 35. ....
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....on 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 towar....
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....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 ....
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....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 ....
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...., 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 assessee's wife is the only daughter. The AO rejected the assessee's explanation and included the said amount as unexplained credit. The CIT(A), however, has reversed the order of the AO accepting the assessee's 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 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 wif....
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....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 CI....
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....r 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 assessee's 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 assessee's wife to lend the money. Both the parents of 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 ev....