2025 (6) TMI 1628 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe - Additions u/s 56 - addition of the gift received from 20 donors in respect of equity shares - principles of doctrine of relating bank HELD THAT - Coordinate Bench in the case of Charanjiv Lal Aggarwal 2017 (4) TMI 390 - ITAT AMRITSAR we are of the view that the reassessment order is liable to be quashed as it is noticed that the reasons recorded are undated which itself proves that the AO has not applied his mind. Secondly the same are founded on incorrect facts and reflects a manifest non-application of mind. AO had not made any positive enquiries as the reasons cited rely solely on uncorroborated and unconfronted information without any independent verification or inquiry. Furthermore the assumption that the entire amount of Rs.100 per share (comprising Rs.10 face value and Rs.90 share premium paid by the donors) constitutes taxable income in the hands of the appellant is in gross contravention of Section 56(2)(vii)(c) of the Income Tax Act and such an interpretation is legally untenable. Whether additions could have been made during the year under consideration or not? - We noticed that the shares were gifted and transferred by the donors to the assessee on 09.04.2009 as per the respective letters of the donors and also as per gift deed dated 30.04.2009 wherein the donor had gifted and transferred all the rights of the shares in favour of assessee along with other supporting documents. Company who had issued the shares to the respective donors had requested for gift deeds to be on stamp papers therefore on 18.09.2010 the gift deeds on stamp papers were supplied. Thus by applying the principles of doctrine of relating bank the same could be effective from 09.04.2009 and 30.04.2009 itself. In this way the entire transaction of gift stood completed between the donor and the done on 09.04.2009 itself. Even delivery of share certificates to the Donee was not necessary in view of section 122 of the transfer of property act as has been held in the case of Vasudev Ramchandra Shelat Vs Pranlal Jayanand Thakkar 1974 (7) TMI 78 - SUPREME COURT AO had merely raised doubts and has not conducted and independent enquiry worth a name to refute the submissions of the assessee and has not even doubted the veracity and genuineness of the gift deeds. Even the provisions of section 56(2)(vii)(c) of the I.T. Act was introduced with effect from 01.10.2009 i.e F.Y 2009-10 (A.Y. 2010-11) and the shares were already gifted in the name of the assessee by the donors prior to that. Thus the provisions of section 56(2)(vii)(c) of the Act is not applicable to the assessee so far the above gifts are concern. It is only that the gift deed was stamped on 18.09.2009 at the request of the Company the AO initiated the reassessment for AY 2011 12 whereas AO himself admitted that gift deed was executed on 30.04.2009 itself. Thus in this background no additions were called for in the hands of the assessee for the year under consideration i.e A.Y 2011-12. Thus AO erred in initiating the re-assessment and making additions in the hands of the assessee u/s. 56(2)(vii)(c) for the year under consideration. Assessee appeal allowed.

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the reassessment proceedings initiated under section 147/148 of the Income Tax Act, 1961, were validly commenced, specifically whether the Assessing Officer had recorded valid reasons for reopening the assessment.

2. Whether the addition made under section 56(2)(vii)(c) of the Income Tax Act, 1961, on receipt of gifted shares from multiple donors was justified for the assessment year 2011-12.

3. Whether the provisions of section 56(2)(vii)(c) apply to gifts received prior to its introduction on 1 October 2009.

4. Whether the doctrine of "relating back" applies to the gift deeds executed on stamp paper at a later date, thereby fixing the date of transfer earlier than the stamp paper execution date.

5. Whether the Assessing Officer was justified in treating the entire value of shares received as taxable income without conducting independent enquiry or verifying the genuineness of the gift deeds.

Issue-wise Detailed Analysis

1. Validity of Reassessment Proceedings

The legal framework governing reassessment proceedings under sections 147 and 148 mandates that the Assessing Officer must record reasons to believe that income has escaped assessment before issuing a notice. The reasons must be dated and must reflect an application of mind, supported by material on record.

Precedents relied upon include the Supreme Court judgment in Asst. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. and the Delhi High Court decision in CIT v. SFIL Stock Broking Ltd., which emphasize that mere information or directions from higher authorities cannot substitute for the Assessing Officer's independent satisfaction. The reasons must be specific, dated, and demonstrate that the AO has applied his mind.

In the present case, the Tribunal noted that the reasons recorded by the AO were undated and relied solely on uncorroborated information without any independent verification or inquiry. The AO did not examine the assessee under sections 131 or 133(6) of the Act to verify the information. The reasons were found to be borrowed satisfaction, lacking material basis, and hence legally unsustainable.

The Tribunal also referred to coordinate bench decisions where similar reassessment orders were quashed on grounds of non-application of mind and lack of proper reasons. The learned Commissioner of Income-tax (Appeals) had attempted to distinguish these precedents, but the Tribunal rejected such distinctions, holding that the facts were analogous.

Conclusion: The reassessment proceedings were invalid and void ab initio due to the absence of valid, dated reasons reflecting application of mind by the AO.

2. Applicability of Section 56(2)(vii)(c) to the Gifted Shares

Section 56(2)(vii)(c) of the Income Tax Act, introduced with effect from 1 October 2009 (FY 2009-10, AY 2010-11), taxes the fair market value of shares received without consideration or for inadequate consideration exceeding Rs. 50,000.

The assessee received gifts of equity shares from 20 donors by letters dated 9 April 2009 and gift deeds dated 30 April 2009, i.e., prior to the effective date of the provision. The company requested the donors to execute gift deeds on stamp paper, which were subsequently executed on 18 September 2010.

The Tribunal held that the transaction of gift was complete between the donors and the assessee on 9 April 2009 and 30 April 2009. The later execution of stamp paper gift deeds was only a formality requested by the company and does not alter the date of transfer. This finding was supported by the doctrine of "relating back," which treats the later formal execution as effective from the original date of transfer.

Further, the Tribunal cited the Supreme Court decision in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakkar which held that delivery of share certificates is not necessary for transfer under Section 122 of the Transfer of Property Act, reinforcing that the gift was complete on the earlier dates.

Since the shares were gifted before the introduction of section 56(2)(vii)(c), the provision is not applicable to the assessee for these gifts. Therefore, the addition made under this section for AY 2011-12 was unwarranted.

3. Treatment of the Addition under Section 56(2)(vii)(c)

The AO treated the entire amount of Rs. 100 per share (face value Rs. 10 plus Rs. 90 share premium) as taxable income in the hands of the assessee without conducting any independent enquiry or valuation of the fair market value. The AO did not question the validity of the gift deeds nor did he verify the genuineness of the transactions.

The Tribunal emphasized that additions cannot be made on mere surmises or assumptions. The AO is obliged to conduct independent enquiries and cannot rely solely on uncorroborated information. The Tribunal relied on various Supreme Court decisions such as Dhirajlal Girdharilal v. CIT, Dhakeshwari Cotton Mills v. CIT, and Lal Chand Bhagat Ambika v. CIT, which hold that additions based on presumptions without enquiry are unsustainable.

Moreover, the Tribunal noted that natural love and affection is a valid consideration for gifts, and section 56(2)(vii)(c) applies only to property received without consideration. Without a proper exercise of determining fair market value, the invocation of section 56 is invalid.

Conclusion: The addition under section 56(2)(vii)(c) was legally untenable and deserved to be deleted.

4. Application of Doctrine of Relating Back

The doctrine of relating back was applied to treat the gift deed executed on stamp paper on 18 September 2010 as effective from the original date of gift, 9 April 2009 (and 30 April 2009 for the gift deed). This principle prevents the AO from using the later date of stamp paper execution to justify reopening the assessment for AY 2011-12.

The Tribunal held that since the gift transaction was complete before the introduction of the relevant section and before the AY 2011-12, the taxability, if any, would arise only in AY 2010-11 or earlier, not in AY 2011-12.

5. Treatment of Competing Arguments

The Revenue argued in support of the reassessment and addition, relying on the AO's order and the later date of gift deed execution on stamp paper. The Tribunal rejected this on the grounds that the AO's reasons were undated, non-application of mind, and that the AO failed to conduct any enquiry or valuation.

The assessee's submissions, supported by documentary evidence including letters from donors, gift deeds, and company correspondence, were accepted. The Tribunal found the assessee's case well-founded and supported by legal precedents.

Significant Holdings

"The reassessment order is liable to be quashed as it is founded on incorrect facts and reflects a manifest non-application of mind. The reasons cited rely solely on uncorroborated and unconfronted information, without any independent verification or inquiry."

"The shares were gifted and transferred by the donors to the assessee on 09.04.2009 as per the respective letters of the donors and also as per gift deed dated 30.04.2009, wherein the donor had 'gifted and transferred' all the rights of the shares in favour of assessee along with other supporting documents."

"By applying the principles of doctrine of relating back, the gift deed executed on stamp paper on 18.09.2010 is effective from 09.04.2009 and 30.04.2009 itself."

"The provisions of section 56(2)(vii)(c) of the Act is not applicable to the assessee so far, the above gifts are concerned as the shares were gifted prior to the introduction of the said provision."

"The AO erred in initiating the reassessment and making additions in the hands of the assessee u/s. 56(2)(vii)(c) for the year under consideration. Therefore while allowing the grounds, we direct the AO to delete the additions."

Core Principles Established

- Reassessment under section 147/148 requires valid, dated reasons reflecting application of mind; mere information or undated reasons are insufficient.

- Section 56(2)(vii)(c) applies prospectively from its date of introduction and does not apply to gifts made prior to that date.

- The doctrine of relating back applies to gift deeds executed subsequently on stamp paper, treating them as effective from the original date of gift.

- Additions cannot be made on mere surmises or assumptions without independent enquiry or valuation.

- Natural love and affection constitute valid consideration, exempting gifts from tax under section 56(2)(vii)(c).

Final Determinations

The Tribunal allowed the appeal, quashed the reassessment order as void ab initio due to non-application of mind and absence of valid reasons, and deleted the additions made under section 56(2)(vii)(c) for AY 2011-12. The Tribunal held that the gift of shares was completed prior to the introduction of the relevant section, and the subsequent stamping of the gift deed did not alter the date of transfer. Consequently, no income arose in AY 2011-12 from the gifted shares.

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