2014 (1) TMI 27 - HC - Income Tax

Genuineness of gift received in the form of IDBs - matter referred to larger bench with the following questions - Whether the immunity provided to the bond holder of India Development Bond in US dollars, under Sections 6 and 7 of the Remittance of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991 which includes that no enquiry to be made from bond holder, regarding the source, is also available to gifts, which are found to be bogus gifts, routing the unaccounted money of the bond holder, through such bonds, by purchasing the bonds for consideration in India? Whether the view taken in the judgment Commissioner of Income Tax vs. Smt. Usha Omer 2011 (7) TMI 441 - Allahabad High Court , that no investigation can be allowed to be held pertaining to the India Development Bonds which were received from NRI s/overseas, Corporate Bodies as gifts is a correct view, in law?

Summary

Issues Involved:
1. Validity of assessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Legitimacy of gifts received in the form of India Development Bonds (IDBs).
3. Applicability of immunities under the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991.
4. Interpretation of the judgment in Commissioner of Income Tax vs. Smt. Usha Omer (2011) 338 ITR 448.

Issue-wise Detailed Analysis:

1. Validity of assessment proceedings under Section 147 of the Income Tax Act, 1961:
The writ petition arises from assessment proceedings initiated under Section 147 of the Income Tax Act, 1961, following a notice dated 11.2.2005 under Sections 142(1) and 143(2) for the Assessment Year 1997-98. The petitioner argued that the action under Section 147 was barred by limitation and that the gift deeds were bogus. The Assistant Commissioner of Income Tax, Kanpur, rejected these objections on 15.10.2004. The court found that the notice under Section 143(2) preceded the order of the same date, rejecting the objections. The court's analysis focused on whether the reassessment was justified and within the permissible timeframe.

2. Legitimacy of gifts received in the form of India Development Bonds (IDBs):
The petitioner claimed to have received IDBs as gifts, which were scrutinized during search operations. The department contended that the alleged gifts were based on bogus gift deeds. The petitioner's statements during the search revealed that he was unaware of the donors' identities, and the gifts were allegedly arranged by one Sita Ram Makhija. The court noted that the petitioner failed to establish the genuineness of the gifts, as he admitted to not knowing the donors and having no relationship with them. The court concluded that the transactions were not genuine gifts but rather an attempt to introduce unaccounted money through bogus gift deeds.

3. Applicability of immunities under the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991:
The petitioner relied on the immunities provided under Sections 6 and 7 of the Remittances of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991, which protect bondholders from inquiries regarding the source of the bonds. The court, however, emphasized that these immunities presuppose a genuine gift. Since the petitioner failed to establish that the IDBs were received as genuine gifts, the immunities did not apply. The court highlighted that the intent of the Act was not to shield tax evaders who disguise their unaccounted income as gifts.

4. Interpretation of the judgment in Commissioner of Income Tax vs. Smt. Usha Omer (2011) 338 ITR 448:
The petitioner cited the judgment in Commissioner of Income Tax vs. Smt. Usha Omer, where it was held that no investigation could be conducted regarding IDBs received as gifts from NRIs/overseas corporate bodies. The court in the present case found it difficult to agree with this reasoning. It opined that the judgment did not apply to bogus gifts arranged through fraudulent means. The court decided to refer the following questions to a larger bench for clarity:
- Whether the immunity provided to bondholders under Sections 6 and 7 of the Act applies to bogus gifts routing unaccounted money.
- Whether the view in the Usha Omer case, prohibiting investigations into IDBs received as gifts, is legally correct.

Conclusion:
The court concluded that the petitioner failed to prove the legitimacy of the gifts and that the immunities under the Act did not apply to fraudulent transactions. The questions raised were referred to a larger bench for further examination. The court's order was to be placed in the pending Income Tax Appeal No. 4 of 2005 at the Lucknow Bench.