TMI Blog2018 (3) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 sitting in his arm chair - Decided against revenue Addition on loan from one of his family friends who is a resident of U.K. - Held that:- 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 ₹ 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 transactions, from the Director, FT and TR 1, New Delhi, the AO was silent in his order as to whether he has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... withdraw the interest on the unsecured loan in the books of account of the company. Indeed, the Revenue has not disputed the claim of the assessee that the loanee company converted the unsecured loan and unpaid interest into equity shares during the year 2011-12 and accordingly issued equity shares certificates in lieu of repayment of unsecured loans and unpaid interest thereon. As submitted by the learned counsel for the assessee, the AO could 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 interest income is admitted on receipt basis. Addition of sum received from Smt. P. Shanti Chowdhary, wife of the assessee, in the income as unexplained credit under Section 68 - Held that:- All the transactions, namely, gift of ₹ 73,00,000/- made by the maternal aunt of the assessee; loan of ₹ 87,95,724/- received from Dev Singh Palak; loan of ₹ 10,00,000/- advanced by J.V. Sudhakar and repaid by the assessee and the loan of ₹ 14,50,000/- received from the wife of the assessee are genuine and the onus cast on the assessee under Section 68 of the Act has been duly discharged with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Smt. Mikkilineni Nirmala. (ii) Unsecured loans of ₹ 87,95,724/- from Mr. Dev Singh Palak. (iii) Addition of a loan of ₹ 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 the tax authorities by the donee company (v) Unsecured loan of ₹ 14,50,000/- given by the assessee s wife from out of the gift received from her father. 3. The assessee has filed an appeal before the Commissioner of Income Tax (Appeals)-I, Hyderabad [for brevity, CIT(A) ], questioning the additions. The CIT(A), by order dt.30.11.2011 allowed the appeal of the assessee to the extent of item No.(v) addition of unsecured loan of ₹ 14,50,000/- and dismissed the appeal in respect of other four items. Feeling aggrieved by the order of the CIT(A), the assessee has filed I.T.A. No.2120/H/11, and the Revenue has filed I.T.A. No.106/H/12 to the extent of the order of the CIT(A) allowing the appeal in respect of item No.(v). By common order dt.22.3.2013, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 absence of any authentication and secondly, such huge amounts of loan could not have been given by a friend residing in the UK without any return are either irrelevant or based on surmises, conjectures and suspicion? Item No.(iii) The Assessing Officer having independently called for the bank account statements of Mr. J.V. Sudhakar and having compared it with the bank account statements of the Appellant/Assessee and having found that the loan transaction was genuine and the repayment of the loan having also been made in less than four months through bank transfer, all these transactions having taken place long before the search, was the Assessing Officer right in drawing a hasty conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 gift was genuine though it is a loan and burden is discharged by filing all required documents? 3. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in ignoring the reference made by the Assessing Officer to the Foreign Tax Division of the Central Board of Direct Taxes requesting to verify the genuineness of the amounts received from UK and confirming the addition though no adverse communication is received as per records? 4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner 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 Income Tax (Appeals) and confirming the addition of ₹ 14,50,000 received as loan from wife Smt. P. Shanti Chowdary as unexplained credit under section 68 of the Act, is right in law in holding that genuineness of the transaction is not proved in spite of substantial evidence on record? 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 ₹ 14,50,000/- received as loan from Smt. P. Shanti Chowdary? 3. Whether on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh Palak, a resident of U.K., that out of the said sum, ₹ 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. The learned counsel submitted that such a reasoning of the AO, as confirmed by both the appellate authorities, cannot stand the scrutiny of the Court. 7. With regard to item No.(iii), the learned counsel submitted that during the financial year 2005-06, the assessee received ₹ 10,00,000/- as loan from one J.V. Sudhakar on 21.3.2006 and the same was repaid on 5.7.2006 by bank transfer. That during the course of the assessment proceedings as the said Sudhakar was not available, he could not appear before the AO. That the AO obtained bank s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 14,50,000/- from his wife, Smt. P. Shanti Chowdhary, by way of transfer from her bank account to the assessee s bank account on three dates, that during the course of assessment proceedings the assessee filed confirmation letter along with bank statement, details of gifts received by her from her father and that of foreign remittances to her account, and that the loan was given from out of the gifts received by his wife. The learned counsel also submitted that the petitioner s wife is the only daughter to her parents, who are U.K. citize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lia 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 creditworthiness, relationship with the donee and the occasion are proved, the plea of gift cannot be accepted. 14. In this context, the provisions of Section 56(1) and (2)(v), and Section 68 of the Act are relevant which read as under: Income from other sources. 56. ( 1). Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources if it is not chargeable to income-tax un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame 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 for the assessee, for accepting a gift from a relative, no occasion need be proved. As could be seen from the language of sub-clauses (a) and (b) of clause (v) of sub-section (2) of Section 56, while under clause (a) which deals with a gift from any relative no occasion is envisaged, clause (b) dealing with money received from any other person, spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sitting in his arm chair. 24. As held by the Supreme Court in P. Mohanakala (supra) when an explanation is offered by the assessee for the cash receipt, the AO is required to form an opinion objectively based on proper appreciation of material and application of mind which is a sine qua non for form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 transferred the sum of 60,000 to the ING Vysya Bank Limited in Hyderabad, India, to be credited to account number 737010054632, held by the assessee and that these funds were transferred on behalf of Mr. Dev Singh of 209, Lordswood Road, Harborne, Birmingham, B17, 8QP, England an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn 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 60,000 Equivalent INR 47,45,724 19.7.2005 Unsecured loan Demand Drafts 40,50,000 Total 87,95,724 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37010054632, 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 60,000 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 60,000 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 602 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. 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 obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory 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 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 amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 3,00,000/-, ₹ 3,90,000/- and ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 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 appro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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