2006 (3) TMI 119 - HC - Income Tax

Income from an undisclosed source - Gift from NRI - banking channels - burden of proof - identity of the creditor - genuineness of the transaction - credit worthiness of the creditor - Whether the conclusion of the Tribunal that the claim of gift is not genuine is reasonable and based on relevant material and not perverse? - HELD THAT - It is seen from the materials available on record that the donor was brought up by the assessees as their family member. It stands established that the name Ariavan Thotan and Suprotoman are the nick names of the donor and it is an alias name. It has also come out on record that those names relate to the donor. There is nothing on record to show that the gifts received by the assessees were sent by any person other than the donor in his own name. Simply because the donor writes letters in his alias name, namely, letters dated December 8, 1994, and May 27, 1994, cannot mean that there is a dispute regarding the identity of the donor, especially when the donor appeared pursuant to the notice issued by the income-tax authorities and affirmed his gifts. The donor is shown to be an income-tax assessee not only in the United Kingdom but also in India. In addition to the above, it is not in dispute that the proceedings initiated against the donor under the provisions of the Foreign Exchange Regulation Act were not taken to their logical end by the Department. This means, the donor had not violated any provisions of the Foreign Exchange Regulation Act. In Nemi Chand Kothari 2003 (9) TMI 62 - GAUHATI HIGH COURT held that in order to establish the receipt of a cash credit as required u/s 68 of the Income-tax Act, 1961, the assessee must satisfy three conditions namely, (1) identity of the creditor (2) genuineness of the transaction and (3) credit worthiness of the creditor. Once this is established, then, it is held that the assessee has discharged his burden. The assessees in the present appeals had done that. As we have noted, in this case, the donor had shown his love and gratitude for the family of the assessees; he wanted to reciprocate by showing his gratitude by making the gift ; he has channellised the transaction through banking channels and he had confirmed in his declaration that he had made the gifts. In the said circumstances, it is not for the income-tax authorities to go one step further and read his mind as to why he has decided to make a substantial gift. Simply because close relatives are not shown as the beneficiaries of such gift, the gift itself would not be invalidated in law, is the settled position in law. Now, if we apply our mind to the various reasons, which we have extracted in the earlier portion of this judgment and which had entered the mind of the authorities under the Act to reject the explanation, we have no doubt at all that the authorities were in the realm of imagination, surmises and conjectures. On the facts of this case, when the assessees have established all the requirements of section 68 of the Income-tax Act as referred to above, rejection of those explanations is definitely due to arbitrary and unreasonable exercise of power. From the facts, the reasons which entered the mind of the authorities to reject the explanation offered by the assessee in each case, we have no doubt at all that the explanation offered by the assessee in each case has been arbitrarily and unreasonably rejected. All the reasons, we have no doubt at all, are in the realm of surmises, conjectures and suspicions, which approach stands totally prohibited by the decided case law referred to above. We are fully conscious that the Appellate Tribunal is the final fact finding body. But on the facts established, the authorities under the Act have failed to draw the only conclusion that is possible legally and logically. Therefore, such a decision definitely raises a question of law warranting consideration at our hands. Accordingly, all the questions of law, on which the tax appeals are admitted, are answered in favour of the assessee and against the Revenue.

Issues Involved:
1. Whether the Income-tax Appellate Tribunal was correct in law to accept the principle of preponderance of probabilities in holding the appellant's claim of receiving gifts through normal banking channels as not genuine and assessable under section 68 of the Income-tax Act, 1961.
2. Whether the Tribunal was legally justified in concluding that the burden of proof under section 68 of the Income-tax Act, 1961, was not discharged by the appellant.
3. Whether the Tribunal's conclusion that the claim of gift is not genuine is reasonable and based on relevant material and not perverse.

Detailed Analysis:

Issue 1: Acceptance of Preponderance of Probabilities
The court examined whether the Income-tax Appellate Tribunal correctly applied the principle of preponderance of probabilities in holding that the appellant's claim of receiving gifts through normal banking channels was not genuine. The Tribunal had relied on the principle of preponderance of probabilities, which means that the explanation provided by the assessee should be more likely than not to be true. The Tribunal found that the substantial gifts received by the assessees were improbable and more likely to be income from undisclosed sources.

Issue 2: Burden of Proof Under Section 68
The Tribunal concluded that the appellant did not discharge the burden of proof cast under section 68 of the Income-tax Act, 1961. According to section 68, if any sum is credited in the books of an assessee and the assessee offers no satisfactory explanation about the nature and source, the sum so credited may be charged to income-tax as the income of the assessee. The Tribunal found that the assessees failed to provide a satisfactory explanation for the large sums credited as gifts from an NRI. Despite the donor's confirmation and the transactions being through proper banking channels, the Tribunal held that the explanation was not convincing.

Issue 3: Reasonableness and Material Basis of Tribunal's Conclusion
The Tribunal's conclusion that the claim of gift is not genuine was challenged as being unreasonable and not based on relevant material. The court noted that the Tribunal and lower authorities had relied on various factors, such as the improbability of such large gifts, contradictions in statements, and the lack of detailed information about the donor. However, the court found that the authorities had acted on surmises and conjectures rather than concrete evidence. The court emphasized that the donor's identity, solvency, and reasons for gifting were established, and the transactions were through proper banking channels.

Court's Findings:
1. Preponderance of Probabilities: The court found that the authorities had unreasonably applied the principle of preponderance of probabilities. The donor's identity, solvency, and the legitimate banking channels used for the transactions were established. The authorities' reliance on the improbability of such large gifts was deemed insufficient to reject the explanation provided by the assessees.

2. Burden of Proof: The court held that the assessees had discharged their burden of proof under section 68 by establishing the identity and solvency of the donor and the genuineness of the transactions. The authorities' rejection of the explanation was found to be arbitrary and unreasonable.

3. Reasonableness and Material Basis: The court concluded that the Tribunal's decision was not based on relevant material and was influenced by surmises and conjectures. The court emphasized that the authorities should not act unreasonably and must consider all relevant facts and evidence fairly.

Conclusion:
The court found that the authorities under the Income-tax Act had acted unreasonably and arbitrarily in rejecting the explanation offered by the assessees. The court held that the assessees had satisfactorily established the identity, solvency, and genuineness of the gifts received. Consequently, the court answered all the questions of law in favor of the assessees and against the Revenue, thereby setting aside the Tribunal's order.

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