2012 (10) TMI 93 - AT - Income Tax

Gift of India Millennium Deposit (IMD) - whether gift of IMDs can be equated with gift of money and thus brought within the purview of s. 56(2)(v)? - Held that - The AO has equated the IMDs with bank fixed deposits and concluded that the same is money. On perusuing the terms and conditions of the IMDs and the various restrictions placed upon the free transferability of the IMDs. It is true that no restrictions apply to the transferability of money, which is currently accepted as a medium of exchange. Thus, IMDs, which have these restrictions, cannot be treated as money. At the best they can be treated as anything convertible into money. For that matter, any property whether movable or immovable can be converted into money but the same is not treated or akin to money. This is precisely the reason that an amendment has been brought by the Finance Act 2009 for bringing within the purview of tax, the gifts in kind. However, the amendment is prospective in nature and applies to transactions on or after 1.10.2009 - assessment year in this appeal is 2006-07 - decided against revenue.

Summary

Issues Involved:
1. Whether the gift of India Millennium Deposits (IMDs) can be equated with a gift of money under section 56(2)(v) of the Income Tax Act.
2. Whether the Assessing Officer (AO) was correct in making an addition to the total income of the assessee based on the gift of IMDs.

Issue-wise Detailed Analysis:

1. Whether the gift of India Millennium Deposits (IMDs) can be equated with a gift of money under section 56(2)(v) of the Income Tax Act:

The department contested the deletion of an addition of Rs. 98,56,827 made by the AO on account of a gift of IMDs under section 56(2)(v) of the Act. The assessee received a gift in the form of IMDs with a face value of USD 1,50,000 from an NRI on 25.9.2005 and prematurely encashed it on 5th October 2005, receiving USD 2,22,452 (INR 98,56,827). The AO treated the IMDs as equivalent to money, invoking section 56(2)(v) to add the amount to the assessee's income, arguing that IMDs, like bank fixed deposits, could be prematurely encashed and thus should be treated as money.

The CIT(A) held that section 56(2)(v) applies only to money received without consideration, not to gifts in kind. The CIT(A) emphasized that IMDs, despite being convertible into money, are not money themselves due to restrictions on their transferability and usage. The CIT(A) cited the Supreme Court's decision in H.H. Sri Rama Verma v. CIT (187 ITR 308), which clarified that items convertible into money do not fall within the scope of section 80G(2)(a) for deductions, implying that IMDs are not money but property convertible into money. The CIT(A) also referenced the Finance Act, 2009, which prospectively included gifts in kind under section 56(2)(vii) from 01.10.2009, indicating that prior to this amendment, gifts in kind were outside the purview of section 56(2)(v).

2. Whether the Assessing Officer (AO) was correct in making an addition to the total income of the assessee based on the gift of IMDs:

The CIT(A) found that the assessee provided sufficient documentary evidence to establish the genuineness of the gift, including affidavits, bank letters, and details of the donor. The AO did not dispute these documents or provide reasons to disbelieve them. The CIT(A) noted that the AO did not invoke section 68, which deals with unexplained cash credits, implying that the transaction was considered a genuine gift. The CIT(A) concluded that the AO erroneously equated IMDs with money, and since IMDs are not freely transferable or acceptable as money, they should not be treated as money under section 56(2)(v).

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, agreeing that IMDs are not money and thus not subject to section 56(2)(v). The Tribunal referenced similar cases, including ACIT vs. Anuj Agarwal and ACIT vs. Haresh N Mehta, where it was held that gifts in kind were outside the scope of section 56(2)(v) before the amendment in 2009. The Tribunal dismissed the department's appeal, confirming that the addition made by the AO was not justified.

Conclusion:

The appeal by the department was dismissed, and the Tribunal upheld the CIT(A)'s order, confirming that the gift of IMDs does not fall under the purview of section 56(2)(v) as it is not considered a gift of money.