2016 (5) TMI 482 - AT - Income Tax

Addition invoking the provisions of section 56(2)(v) - whether gift cannot be revoked after acceptance? - Held that - The gift deed, as reproduced hereinabove, clearly shows that the amount was being transferred, but such transfer was irrevocable at the instance of the transferor. It is trite that a document has to be read as a whole, in order to gather the intention behind the transaction. A reading of the gift deed shows that though the term employed is gift , the transferor intended to transfer the source of ₹ 5 lacs to the assessee only temporarily. This fact is also confirmed by the fact of issuance of revocation notices by the transferor to the assessee. It also gets buttressed by the very relevant fact of return of the amount by the assessee to the transferor on 27.03.2011, which fact has also been affirmed by the ld. CIT(A). It shows as covered in the written submissions that the assessee was never vested absolute ownership of the amount transferred. The transfer of the amount of ₹ 5 lacs to the assessee was a revocable transfer and it was in fact revoked. The nomenclature employed is not determinative of the transaction, as is well settled. In fact, by making this observation, the ld. CIT(A) has himself accepted that the transaction was not a gift. It was a temporary transfer of money, which was revoked at the option and instance of the donor. The transfer, as stated, is taken to be interest free unsecured loan. It amounts to money received, which money was returned. Moreover, even before the AO, the assessee had offered the explanation of the transaction being a gift, which position does not undergo any change in view of the document of transfer, as per which, the transfer was a revocable transfer. Revocation notices were issued and the money was ultimately returned. Observation of the ld. CIT(A) that the mere repayment after more than five years was done with a motive to change the colour of the transaction from that of a gift is erroneous. The fact remains that the transfer was revocable a transfer, at the instance of the transferor, which fact has not been disputed. Rather, to reiterate, revocation notices were issued by the transferor and in response to such notices, the transfer was revoked and the money was returned to the transferor. The ld. CIT(A) talks of certain motive behind the transaction. However, as to what such certain motive could be, does not have any reference to whatsoever in the impugned order. This observation of the ld. CIT(A) is also based only on assumptions and presumptions and the same cannot stand in the eye of law. Thus, the transaction in question has neither been shown to have been undertaken to avoid any tax liability, nor to have been undertaken for any ulterior intention of the assessee to circumvent any legal process. It was a temporary advancement of the money by the transferor to the assessee and the amount was repaid when asked for, as per the transfer document. Finding merit in the grievance sought to be raised by the assessee, the same is accepted. The order of the ld. CIT(A) is reversed. The addition is deleted. - Decided in favour of assessee

Issues Involved:
1. Validity of the addition of ?5 lacs to the assessee's income under Section 56(2)(v) of the Income Tax Act, 1961.
2. Interpretation of the gift as revocable and its implications under the Income Tax Act.
3. Explanation of the source of the ?5 lacs received by the assessee.
4. The legal standing of the gift deed and its revocability.
5. The appellant's change of stand regarding the nature of the transaction.
6. The motive behind the repayment of the amount after five years.

Issue-wise Detailed Analysis:

1. Validity of the Addition under Section 56(2)(v):
The assessee received ?5 lacs from his nephew, which the AO added to the assessee's income under Section 56(2)(v) of the Income Tax Act, 1961. The CIT(A) confirmed this addition. The assessee argued that the amount was a revocable gift and thus should not be considered as income. The Tribunal found that the transaction was indeed a revocable transfer and not a gift, thus not falling under the purview of Section 56(2)(v).

2. Interpretation of the Gift as Revocable:
The assessee contended that the gift was revocable at the donor's discretion, supported by a gift deed. The Tribunal agreed, citing that the document should be read as a whole to understand the intention behind the transaction. The gift deed explicitly stated that the transfer was revocable, and the donor had the right to revoke the gift at any time. This was further supported by the issuance of revocation notices and the eventual return of the amount to the donor.

3. Explanation of the Source of ?5 lacs:
The CIT(A) held that the assessee failed to explain the source of the ?5 lacs. However, the Tribunal noted that the source was explained as a gift from the nephew, and the assessee had provided the donor's income tax return acknowledgment, showing sufficient income to justify the gift. The Tribunal found that the source of the amount was adequately explained, and the CIT(A)'s demand for further explanation was unwarranted.

4. Legal Standing of the Gift Deed:
The CIT(A) argued that a gift cannot be revoked after acceptance. However, the Tribunal found this observation incorrect, noting that the gift deed explicitly mentioned the revocability of the gift. The Tribunal cited legal provisions and case law to support that a revocable gift does not constitute a valid gift under the Transfer of Property Act, 1882, and thus cannot be taxed under Section 56(2)(v).

5. Change of Stand by the Appellant:
The CIT(A) observed that the assessee changed his stand from contesting the genuineness of the gift to questioning its veracity. The Tribunal found this irrelevant, as the transaction was always presented as a revocable transfer. The Tribunal emphasized that the nature of the transaction did not change, and the revocability was always a part of the explanation.

6. Motive Behind Repayment After Five Years:
The CIT(A) suggested that the repayment after five years indicated a motive to change the nature of the transaction. The Tribunal dismissed this, stating that the repayment was in accordance with the revocable nature of the gift. The Tribunal found no evidence of any ulterior motive or tax avoidance scheme.

Conclusion:
The Tribunal concluded that the transaction was a revocable transfer and not a gift, thus not taxable under Section 56(2)(v). The source of the amount was adequately explained, and the revocability of the gift was legally valid. The addition of ?5 lacs to the assessee's income was deleted, and the appeal was allowed. The order of the CIT(A) was reversed, and the Tribunal emphasized the importance of reading the transaction documents as a whole to understand the true nature of the transaction.

← Previous Next →