2017 (10) TMI 628 - AT - Income Tax

Distribution of amount out of corpus - assessee is a beneficiary of trust called AADT - whether teared as capital receipt not chargeable to tax - Held that - We find that the case of the assessee is squarely covered by the decisions referred by the assessee whereas the facts in the cases relied upon by the revenue are distinguishable on facts and law. Accordingly, we hold that the distribution out of corpus funds received by the assessee is capital in nature of capital receipt not liable to tax. Accordingly AO is directed to delete the addition. The ground of appeal by the assessee is allowed. Income from undisclosed sources - gifts received - whether the gift from the company can be treated as gift or unexplained receipt in the hands of the assessee? - Held that - The gift received by the assessee is permissible and the element of natural love and affection is not relevant and material. We therefore, hold that corporate gift is valid. Accordingly, we set aside the order of ld.CIT(A) and direct the AO to delete the same.

Summary

Issues Involved:
1. Taxability of the amount received from Anil Agarwal Discretionary Trust (AADT) by the assessee.
2. Validity of the gift of shares received by the assessee from M/s Volcan Investment Ltd.

Detailed Analysis:

1. Taxability of the Amount Received from Anil Agarwal Discretionary Trust (AADT):

The assessee filed a return of income declaring a total income of ?1,44,340/-. The AO reopened the assessment under section 147 r.w.s.148 of the Income Tax Act upon discovering that the assessee received ?59,55,59,638/- from AADT, Bahamas, which was not disclosed in the return. The AO added this amount to the assessee's income, treating it as income from unexplained sources.

The CIT(A) upheld the AO's decision, distinguishing the assessee's case from another beneficiary, Mrs. Kiran Agarwal, who received similar distributions but was not taxed. The CIT(A) noted that the assessee was both a settler and a beneficiary of the trust and received the amount without any resolution or documented decision for distribution. The CIT(A) also observed that the amount was received within less than a year from the trust's receipt of the dividend.

The ITAT, however, found that the distribution from AADT was out of the corpus fund, making it a capital receipt not liable to tax. The ITAT relied on the Supreme Court's decision in CIT v. Kamalini Khatau, which held that income distributed by a discretionary trust to its beneficiaries is taxable only if it is received by the beneficiaries in the relevant accounting year. The ITAT concluded that the amount received by the assessee from AADT was a capital receipt and not taxable.

2. Validity of the Gift of Shares Received by the Assessee from M/s Volcan Investment Ltd:

The assessee received a gift of shares worth ?72,92,100/- from M/s Volcan Investment Ltd. The AO added this amount to the assessee's income, arguing that a corporate body cannot make a gift out of natural love and affection. The CIT(A) upheld the AO's decision, stating that the gift was a sham transaction and not genuine.

The ITAT, however, allowed the assessee's additional ground of appeal, holding that a corporate gift is valid and permissible. The ITAT relied on several judicial decisions, including DP World (P) Ltd v. DCIT and Redington (I) Ltd v. JCIT, which recognized the validity of corporate gifts. The ITAT concluded that the gift received by the assessee from M/s Volcan Investment Ltd was valid and not taxable.

Conclusion:

The ITAT allowed the appeals of the assessee, holding that the amount received from AADT was a capital receipt and not taxable, and that the gift of shares received from M/s Volcan Investment Ltd was valid and not taxable. The revenue's appeal was dismissed.