2009 (1) TMI 539 - AT - Income Tax

Income from other sources - Addition of unsecured loan as a gift u/s 56(2)(vii)(a) - loan transaction is also covered under section 56(2)( v ) of the Act or not - Whether the transaction of loan can be without interest? - assessee is an individual and aged about 50 years - assessee has income from salary and other sources - CIT(A) in confirmed the action of AO in treating the loans taken by the assessee from 4 parties as income chargeable to tax u/s 56(2)(v). HELD THAT - Apparently, it is a case of loan transactions and not a case of gift as held by the Assessing Officer. It is also noted that loan taken from M/s. Utkanth Trading (P.) Ltd. has been repaid on 27-3-2004, itself, i.e., before passing of the assessment order which is also a material fact so as to rebut the presumption of the Assessing Officer that assessee was not under any obligation to repay the loans and this fact also proves the assessee s claim that no opportunity was granted by the Assessing Officer to the assessee before making such addition. We are also of the view that it cannot be a case of assessee s un-accounted or undisclosed income being brought into the hands of the assessee as loans because even according to Revenue Authorities the assessee is not a person of sound financial status. - We are, however, unable to find any material being brought on record by the revenue to support these findings, hence, the orders of Revenue Authorities appear to be passed on assumptions and presumptions and, particularly, when apparently, there exist no provision in the section 56(2)(v) to treat loans, which may not be repaid, as income of the assessee. we consider it pertinent to refer to provisions of section 4(1)( b ) of the erstwhile Gift-tax Act, 1958 which provided for deemed gift in case consideration for a transfer was not paid or not intended to be paid and also to provisions of section 4(1)( c ) of that Act which provided for deeming a gift made by the person who was respon- sible for the release, discharge, surrender, forfeiture or abandonment of any debt, contract or actionable claim or of any interest in property by any person without bona fide reasons to the extent of value of such release, discharge, surrender, forfeiture or abandonment. No such kind of situations have been prescribed u/s 56(2)(v) hence, if this view of Revenue Authorities is accepted, then, it would amount to re-writing of provisions of this section and which is not in the domain of executive or judicial forum. Hence, we are of the prima facie opinion that this addition is not correct in law. We are further of the opinion that when a specific provision exist in law for particular thing, then, that thing is liable to be examined thereunder only and if that item cannot be taxed under that provision, then, that thing cannot be charged to tax under other provisions of the Act. Surprisingly, in present case, it is not that provisions of section 68 were not applicable at all, hence, AO invoked the provisions of section 56(2)( v ). On the contrary, AO has made necessary enquiries in that regard and AO has not made addition u/s 68 for the reason that all the requirements of that section, i.e., identity; creditworthiness and genuineness of transactions have been proved. Hence, in our view, a loan transaction has to be treated as a loan transaction only and it should be examined in the light of provisions of section 68 and not under provisions of section 56(2)( v ) and for this reason alone, this addition is liable to be deleted. Having held so now, we would like to deal with other contentions of the revenue. That the liability to repay never existed at the time of receipt of the said sums and this fact was not proved by the assessee - the intention to repay gets established by the fact that the assessee has shown it as a loan in the Balance Sheet and this fact has been further supported by the parties by submitting loan confirmation certificates during the course of the assessment proceedings. Therefore, we reject this contention of the revenue. That proof of repayment had been furnished subsequently and this being additional evidence, the matter should go back to the file of AO - In this regard, we have to state that as we have found that the transaction is with consideration and loan transactions, as such, are not chargeable under the provisions of section 56(2)(v), hence, we do not find any necessity to send the matter back to the file of AO for this purpose. Thus, this contention of the revenue is also rejected. That charging of notional interest perquisite in the hands of the assessee in case the sum so received was not held as chargeable u/s 56(2)( v ) - as there is no relationship of employee and employer between the assessee and the lenders and the same is rejected accordingly. To treat the impugned sums as deemed dividend in the hands of the assessee, however, as stated by the learned counsel at bar that the assessee was not a substantial shareholder in such company as it was holding shares, hence, we hold that the provisions of section 2(22)(e) are not applicable. Accordingly, we reject this contention of the revenue also. Assessee has also taken two other contentions i.e. without expressed desire of the parties to a contract the colour of transaction could not be changed unless there was some material to show that whatever was apparent was not real - In this regard, we find that AO has merely doubted the nature of transaction for the reason that there was no re-payment obligation, however, this conclusion has been arrived merely on the basis of the financial status and association of the assessee with the lenders and except for this, no other material has been brought on record which could really support this assumption as financial status/association cannot be presumed to have resulted into no obligation to repay the loan particularly when both the parties have, by their conduct treated this transaction as a loan transaction. Hence, we accept the contention of the assessee that expressed desire/terms and conditions of contract cannot be given a different colour without bringing any material on record to support such stand. That a loan can be with interest or without interest which we also accept because no condition exists in law of contract that a loan can be with interest only - In regard to our view on the aspect of repayment obligation, being implied in case of loan transaction and loan can be with or without interest. In the end, we would like to emphasise on the fact that several commercial considerations prevail in the business world for entering into business transactions of various types and as observed by the Hon ble Bombay High Court in the case of Keshub Mahindra 1968 (4) TMI 3 - BOMBAY HIGH COURT if the revenue Authorities tax such transactions in this manner, then, the conduct of busines s would become impossible. It is also pertinent to mention here that 0 per cent interest loan or interest free loan have been institutionalized where the manufacturing companies or marketing companies compensate the financing companies who give money to the customers interest free to buy the products and these types of loan result into a vibrant economy benefiting all concerned and if the view taken by the Revenue Authorities is accepted then, all such transactions can be taxed as income under section 56(2)( v ) of the Act which cannot be the intention of the legislature, hence, in our view, the interpretation of section 56(2)( v ) made by the Revenue Authorities is not at all valid and justified. Accordingly, we hold that a transaction of loan can be without interest and a transaction of loan implies an agreement to repay the money i.e. borrowed which also gives reply to the revenue s query regarding existence of the obligation to repay the money at the time of taking of such loan. Thus, in view of above discussion, we accept ground of the assessee and direct AO to delete the addition in toto .

Summary

Issues Involved:
1. Taxation of long-term capital gain
2. Treatment of loans as income under Section 56(2)(v) of the Income-tax Act, 1961
3. Addition of notional interest as perquisite
4. Application of Section 2(22)(e) regarding deemed dividend
5. Initiation of penalty under Section 271(1)(c)
6. Levy of interest under Sections 234B and 234D

Detailed Analysis:

1. Taxation of Long-term Capital Gain:
The issue concerning the taxation of long-term capital gain was not pressed by the assessee and hence, dismissed as not pressed.

2. Treatment of Loans as Income under Section 56(2)(v):
The primary issue revolved around the treatment of loans taken by the assessee from four parties as income chargeable to tax under Section 56(2)(v) of the Income-tax Act, 1961. The Assessing Officer (AO) treated the loans as gifts, given without any obligation to repay, and added them to the assessee's income. The AO also taxed notional interest on these interest-free loans as perquisites. The assessee argued that these were genuine loans, evidenced by confirmations from lenders, and were used to purchase a residential flat. The assessee also highlighted that a significant portion of the loans was received before the applicability of Section 56(2)(v) from 1-9-2004. The CIT(A) upheld the AO's decision, citing the abnormal nature of the loans and the lack of repayment capacity of the assessee.

Upon appeal, the Tribunal noted several key points:
- The assessee was not given an opportunity to rebut the AO's assumptions.
- Loans amounting to Rs. 27,70,000 were received before 1-9-2004 and should not be covered under Section 56(2)(v).
- The loans were shown in the balance sheet and confirmed by the lenders, indicating they were genuine loans.
- The AO did not make sufficient inquiries from the lenders to ascertain the true nature of the transactions.
- The Tribunal emphasized that loan transactions should be examined under Section 68, not Section 56(2)(v), as the latter was intended to prevent money laundering through bogus gifts.

The Tribunal concluded that the loans were genuine and not gifts, thus not taxable under Section 56(2)(v). The addition of Rs. 54,45,000 was deleted.

3. Addition of Notional Interest as Perquisite:
The AO added notional interest on the interest-free loans as perquisites. The CIT(A) deleted this addition, noting the absence of an employer-employee relationship between the assessee and the lenders. The Tribunal upheld this deletion, agreeing that the relationship necessary to tax perquisites did not exist.

4. Application of Section 2(22)(e) Regarding Deemed Dividend:
The revenue contended that the loans could be treated as deemed dividends under Section 2(22)(e). However, the Tribunal rejected this contention, noting that the assessee was not a substantial shareholder in the lender companies.

5. Initiation of Penalty under Section 271(1)(c):
The assessee challenged the initiation of penalty under Section 271(1)(c). The Tribunal dismissed this ground as infructuous, given that the impugned addition was deleted.

6. Levy of Interest under Sections 234B and 234D:
The levy of interest under Sections 234B and 234D was deemed consequential. The Tribunal directed the AO to provide due relief in line with the Tribunal's order.

Conclusion:
The Tribunal allowed the appeal partly, primarily by deleting the addition of the loans as income under Section 56(2)(v) and dismissing the initiation of penalty under Section 271(1)(c). The Tribunal's detailed analysis emphasized the proper application of legal provisions and the need for adequate inquiry and opportunity for the assessee to rebut assumptions made by the AO.