2018 (3) TMI 799 - HC - Income Tax

Addition u/s 68 - Gift to the assessee by his maternal aunt - onus of proof regarding the gift by furnishing all the materials required for establishing the genuineness of the gift - Held that - When the donor herself has given a confirmation letter clearly stating therein that she has transferred the amount of ₹ 73,00,000/- to the account of the assessee and further declaring that she gave the said gift out of her natural love and affection towards her nephew, the AO ought not to have entertained further doubts. If for facilitating receipt of a gift the assessee has opened an account, we do not find anything wrong in that. Thus the whole approach of the AO is wholly perverse which cannot be sustained. Equally, the reasons assigned by the two appellate bodies confirming the order of the AO are also perverse. When the Act itself does not envisage any occasion for a relative to give a gift, it is well-nigh impermissible for any authority and even for that matter for the Court to import the concept of occasion and develop a theory based on such concept. The donor being no other than the assessee s own maternal aunt, is a relative as defined under the explanation to Section 56(2)(v) of the Act and in the light of the plea of the assessee that she was brought up by the assessee s parents, and her daughters having already been married off and in a well-todo position, it cannot be said that such a gift falls beyond human probability test as quite often applied by the Courts. Hence, it is not permissible for the AO to judge the conduct of the donor sitting in his arm chair - Decided against revenue Addition on loan from one of his family friends who is a resident of U.K. - Held that - Proforma for seeking specific information under the provisions of exchange of information , article of double taxation avoidance agreement, was also enclosed to the said letter. In Sl. No.5, a sum of ₹ 87,95,724/- was mentioned as the amount lent by Dev Singh Palak as loan to the assessee. Having thus sought for confirmation about the genuineness or otherwise of the transactions, from the Director, FT and TR 1, New Delhi, the AO was silent in his order as to whether he has received a report and, if so, to what effect. As rightly argued by the learned counsel for the assessee, failure of the AO to refer to his queries to the Director and the result thereof in his order would give rise to an adverse inference against the Revenue and in favour of the assessee that the report is favourable to him and that therefore the AO deliberately refrained from referring to the report. The reliance of the AO on the pattern of the signature to arrive at the conclusion that Mr. Dev Singh Palak was not a man of means, reflects his highly archaic and imbalanced approach. Such a test can never be applied to determine one s possession of means. The overwhelming material filed by the assessee explaining the cash receipt under item No.(ii) which remained unimpeached, renders the decision to treat the sum of ₹ 87,95,724/- as unexplained credit, is wholly unjust and illegal.- Decided against revenue Treating a sum claimed to be a loan from one J.V. Sudhakar as unexplained cash credit under Section 68 - Held that - The identity of J.V. Sudhakar is clearly established from the bank account sent by ING Vysya bank, the authenticity and genuineness of which were not doubted by the AO. If the AO has entertained a doubt about the existence or otherwise of J.V. Sudhakar, in all fairness, he ought to have issued a notice to the assessee to produce the said Sudhakar, but he did not do so. Despite the availability of overwhelming and unimpeachable documentary evidence, the AO was not prepared to accept the same, as his approach appeared to be loaded with prejudice, suspicion and pre-determined mind and preconceived notions. The whole approach of the AO appears to be some how reject the every explanation of the assessee and the evidence produced in support of such explanation, by assigning reasons which are wholly imaginary and perverse. Assessee advanced loan to the company, by name, M/s. Dakshin Shelters Private Limited, on various dates - assessee followed the cash system of accounting and admitted the tax deducted at source as income and claimed the credit for TDS as the same was admitted as income - Method of accounting - Held that - The finding that the assessee has received interest income but chose to keep it in the account in order to get interest, is in conflict with his previous observations that there is no prohibition for the assessee to withdraw the interest on the unsecured loan in the books of account of the company. Indeed, the Revenue has not disputed the claim of the assessee that the loanee company converted the unsecured loan and unpaid interest into equity shares during the year 2011-12 and accordingly issued equity shares certificates in lieu of repayment of unsecured loans and unpaid interest thereon. As submitted by the learned counsel for the assessee, the AO could have at best directed to restrict the claim of TDS in proportion to the income admitted and to allow the balance in the year in which interest income is admitted on receipt basis. Addition of sum received from Smt. P. Shanti Chowdhary, wife of the assessee, in the income as unexplained credit under Section 68 - Held that - All the transactions, namely, gift of ₹ 73,00,000/- made by the maternal aunt of the assessee; loan of ₹ 87,95,724/- received from Dev Singh Palak; loan of ₹ 10,00,000/- advanced by J.V. Sudhakar and repaid by the assessee and the loan of ₹ 14,50,000/- received from the wife of the assessee are genuine and the onus cast on the assessee under Section 68 of the Act has been duly discharged with reference to the identity of his creditors, genuineness of the credits and also the capacity of the creditors to advance the money. The findings rendered by the AO and confirmed by the CIT(A) and the Tribunal, in cases other than the loan advanced by the assessee s wife, and that in respect of the said transaction the findings rendered by the AO and confirmed by the Tribunal, suffer from perversity. - Decided in favour of assessee AO shall restrict the claim of TDS in proportion to the income admitted for the assessment year 2005-06 and allow the balance in the year in which interest income is admitted on receipt basis.

Summary

Issues Involved:
1. Addition of ?73,00,000 as unexplained credit under Section 68.
2. Addition of ?87,95,724 as unexplained loan from Mr. Dev Singh Palak.
3. Addition of ?10,00,000 as unexplained loan from Mr. J.V. Sudhakar.
4. Addition of ?3,05,713 as interest income.
5. Addition of ?14,50,000 as unexplained loan from the assessee’s wife.

Detailed Analysis:

1. Addition of ?73,00,000 as Unexplained Credit:
The assessee received ?73,00,000 as a gift from his maternal aunt, Smt. Mikkilineni Nirmala. The AO, CIT(A), and Tribunal questioned the genuineness of the gift, citing a lack of occasion and doubting the relationship and source of funds. The assessee provided substantial documentation, including bank statements and confirmation letters, proving the transfer of funds from the aunt’s daughter in the USA to the aunt and then to the assessee. The court held that Section 56(2)(v) of the Act, which does not require an occasion for gifts from relatives, was not properly considered. The court found the AO's reasoning flawed and perverse, emphasizing that the identity and relationship of the donor were established, and the gift was genuine.

2. Addition of ?87,95,724 as Unexplained Loan:
The assessee received ?87,95,724 as a loan from Mr. Dev Singh Palak, a family friend residing in the UK. The AO, CIT(A), and Tribunal questioned the genuineness of the loan, doubting the lender's means and the transaction's authenticity. The assessee provided confirmation letters, bank statements, and other documentation proving the lender's identity, creditworthiness, and the transaction's genuineness. The court criticized the AO's reliance on the pattern of the lender's signature and the failure to consider the favorable report from the Foreign Tax Division. The court found the AO's approach prejudiced and the findings of the lower authorities perverse.

3. Addition of ?10,00,000 as Unexplained Loan:
The assessee received ?10,00,000 as a loan from Mr. J.V. Sudhakar, which was repaid within four months. The AO added this amount as unexplained credit, citing the non-appearance of the lender and returned summons. The assessee provided bank statements showing the loan transaction. The court found that the AO failed to consider the overwhelming documentary evidence proving the transaction's genuineness and the lender's creditworthiness. The court criticized the AO's prejudiced approach and found the lower authorities' findings perverse.

4. Addition of ?3,05,713 as Interest Income:
The assessee advanced a loan to M/s. Dakshin Shelters Pvt. Ltd., which credited interest in its books and deducted TDS, but did not pay the interest to the assessee. The assessee, following the cash system of accounting, did not admit the interest income. The AO and Tribunal added the interest income, ignoring Section 145 of the Act. The court held that the assessee was entitled to follow the cash system and that the AO should have restricted the TDS claim proportionately. The court directed the AO to adjust the TDS claim accordingly.

5. Addition of ?14,50,000 as Unexplained Loan from Wife:
The assessee received ?14,50,000 as a loan from his wife, who received the amount as a gift from her father in the UK. The AO questioned the wife's creditworthiness and the transaction's genuineness. The assessee provided confirmation letters, bank statements, and documentation proving the source of funds and the transaction's authenticity. The CIT(A) accepted the explanation, but the Tribunal reversed this decision. The court found the AO's and Tribunal's approach myopic and criticized their undue suspicion. The court held that the transaction was genuine and the onus under Section 68 was discharged.

Conclusion:
The court set aside the Tribunal's orders and allowed both appeals, finding that the assessee had satisfactorily explained the nature and source of the credits. The court directed the AO to adjust the TDS claim proportionately for the interest income. All substantial questions of law were answered in favor of the assessee.