2010 (11) TMI 710 - AT - Income Tax

Addition of income - In the course of scrutiny assessment the A.O. noticed that the assessee has credited an amount of Rs. 13,39,252 in the Capital Account, which was stated to be gift received from Shri Vijay Vora, brother-in-law - Since the creditworthiness was not submitted for verification, the A.O. made the addition of the amount as undisclosed income of the assessee eventhough the assessee claimed that the bonds were free from income tax, wealth tax and gift tax even for the transferees - that there is no need to admit any further additional evidence and accordingly the prayer made was rejected Loss on sale of unit Assessee has invested in mutual fund which has two record dates and AO was of the opinion that the provisions of section 94(7) are applicable - in the case of ITO v. Shambhu Mercantile Ltd. (2008 -TMI - 65568 - ITAT DELHI-I) wherein after analysing the use of words as such person , such unit and such date with such securities or units in clauses (b) & (c) of section 94(7) it was held that all the three clauses are to be read together and all the three conditions mentioned in clauses (a), (b) and (c) thereon must be cumulatively satisfied Accordingly the appeal is dismissed

Summary

Issues Involved:
1. Deletion of addition of Rs. 13,39,252 made by the AO on account of income from undisclosed sources.
2. Allowing the Short-Term Capital Loss of Rs. 3,85,587 which was disallowed by the AO.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 13,39,252 as Income from Undisclosed Sources

The assessee, an individual, declared an income of Rs. 5,93,930 from various sources. During scrutiny, the AO noticed a credit of Rs. 13,39,252 in the assessee's Capital Account, claimed as a gift from the assessee's brother-in-law, Shri Vijay Vora, on redemption of Resurgent India Bonds. The AO questioned the identity, creditworthiness, and genuineness of the gift. The assessee provided the donor's passport, bond copies, and redemption certificates to establish identity and genuineness but failed to provide evidence of the donor's creditworthiness. Consequently, the AO added the amount as undisclosed income.

The CIT(A) examined the transaction's genuineness and the Government of India's assurance regarding tax exemptions on Resurgent India Bonds. The CIT(A) concluded that the addition was unjustified, stating that the denial based on the donor's creditworthiness alone, ignoring other evidence, was not valid. The Revenue contested this decision.

The Tribunal considered the facts, noting that the donor, an Indian origin person residing in the USA since 1982, invested in the bonds in 1998 and gifted them before maturity in 2003. The bonds were redeemed tax-free as per government assurances. The Tribunal found that the AO's addition under section 68 was incorrect as the investment's nature and source were explained. The Tribunal upheld the CIT(A)'s decision, rejecting the need for additional evidence and confirming that the transaction was genuine, and the donor's capacity was adequately demonstrated.

Issue 2: Allowing Short-Term Capital Loss of Rs. 3,85,587

The assessee claimed a short-term capital loss from investments in Prudential ICICI Power Units and Sundaram Select Midcap units. The AO disallowed the loss under section 94(7), considering the second Record Date of the Fund. The CIT(A) found that the transactions were not covered by section 94(7) and deleted the disallowance.

The Tribunal reviewed the investments and the application of section 94(7), which prevents dividend stripping. The Tribunal agreed with the CIT(A) that the Record Date relevant to the purchase should be considered, not subsequent Record Dates. The Tribunal noted that the AO's interpretation would lead to impractical outcomes, such as disallowing losses even after holding units for extended periods if sold within three months of any subsequent Record Date.

The Tribunal upheld the CIT(A)'s decision, confirming that the initial Record Date should be used to determine the applicability of section 94(7). The Tribunal found that the provisions were not applicable, and the loss was correctly allowed, rejecting the Revenue's ground on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The addition of Rs. 13,39,252 as undisclosed income was deleted, and the short-term capital loss of Rs. 3,85,587 was allowed. The judgment emphasized the importance of considering the nature and source of transactions and the correct interpretation of tax provisions.