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Case Number
Attorney(S)
  • Mr. Puneet Kansal, Advocate,
Judges
  • J.S Khehar
  • Nawab Singh, JJ.
Acts
  • Section 143(1)(a) of the Income Tax Act, 1961 (for short the Act)
  • Section 15(3) of the Gift Tax Act, 1958.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. Puneet Kansal, Advocate,
Judges
  • J.S Khehar
  • Nawab Singh, JJ.
Acts
  • Section 143(1)(a) of the Income Tax Act, 1961 (for short the Act)
  • Section 15(3) of the Gift Tax Act, 1958.
See more information ...
Smart Summary

Judgment Summary — Nawab Singh, J. (Appeal dated 20.1.2009)

Factual and Procedural Background

The assessee filed the return for assessment year 1999-2000 declaring income of Rs. 1,15,482/-. The original assessment under Section 143(1)(a) accepted the declared income. An investigation by the Assistant Director (Investigation) II, Chandigarh, questioned the genuineness of two gifts (drafts) of Rs. 49,000/- each (total Rs. 98,000/-) said to have been received from Mohinder Singh. A notice under Section 148 was issued and the assessee stated the amounts were gifts given by Mohinder Singh out of love and affection. The assessee produced minimal evidence (a letter from counsel). The Assessing Officer summoned the donor under Section 131, but the donor failed to respond to that summons. The Assessing Officer in an order dated January 30, 2006 treated Rs. 98,000/- as income from undisclosed sources because the assessee failed to prove the genuineness of the gift.

The assessee appealed to the Commissioner of Income Tax (Appeals) (CIT). During that appeal the donor did appear and his statement was recorded (P-4). The CIT examined the evidence and affirmed the Assessing Officer's findings by order dated February 9, 2007. The assessee then appealed to the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, which dismissed the appeal by order dated July 31, 2007. The present appeal by the assessee to the High Court challenges the ITAT order upholding the additions.

Legal Issues Presented

  1. Whether the two gifts totalling Rs. 98,000/- received by the assessee from Mohinder Singh were sham transactions and properly includible in the assessee's income.
  2. What is the true nature and scope of Section 68 of the Income Tax Act, 1961, and in what circumstances it applies to sums found credited in an assessee's books.
  3. Whether the assessee discharged the onus of proving the identity, capacity and source of the donor so as to rebut the prima facie evidence under Section 68.

Arguments of the Parties

Appellant's Arguments

  • The conclusions of the authorities below, including the ITAT, rest on surmises, conjectures and suspicion which cannot substitute for proof or evidence.
  • Improper inferences drawn from proven facts give rise to substantial questions of law.
  • Even if the explanation offered by the assessee is not acceptable, amounts credited cannot automatically be treated as income unless a question is framed and answered that the unexplained cash credit was the income of the assessee (reference to Section 68).
  • Reliance was placed on Murlidhar Lahorimal v. Commissioner of Income Tax (2006) 280 ITR 512 and Sikri and Co. Pvt. Ltd. v. Commissioner of Income Tax (1977) 106 ITR 682 to support the contention that gifts can be proved and that mere credit is not sufficient without proper proof.

The opinion does not set out detailed adversarial submissions by the Revenue side beyond the steps taken by the Assessing Officer, CIT and ITAT to test and reject the claimed gift.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Sumit Dayal v. CIT, 1995 (2) SCC 453 Explains burden and operation of Section 68: where a sum is found credited in the books and the explanation is, in the opinion of the assessing officer, not satisfactory, the credited sum may be charged as income; such credit constitutes prima facie evidence against the assessee and the assessee must rebut it. The Court relied on this authority to explain that once money is credited and the explanation is unsatisfactory, a prima facie case arises against the assessee and the assessee has the onus to rebut; this principle underpinned the finding that the assessee failed to discharge that onus.
Murlidhar Lahorimal v. Commissioner of Income Tax, (2006) 280 ITR 512 Illustrates a case where a claimed gift was upheld because the donor explained source of funds, filed returns and paid gift tax — demonstrating that satisfactory material can establish genuineness of a gift. The Court contrasted that fact pattern with the present case: in Murlidhar the donor had explained the source and paid tax, whereas in the present case the donor's statement and financial position did not support genuineness, so Murlidhar did not aid the assessee.
Sikri & Co. Pvt. Ltd. v. Commissioner of Income Tax, (1977) 106 ITR 682 Holds that where sums are claimed to be borrowed or credited from third parties, the assessee must produce cogent and proper evidence to establish genuineness because such facts are within the assessee's knowledge; failure to do so permits addition under Section 68. The Court observed that this authority supports the proposition that the assessee must prove genuineness; the Court noted that reliance on this case by the appellant was misplaced as it actually reinforces the department's position where no adequate proof is produced.

Court's Reasoning and Analysis

The Court first analysed the scope of Section 68 by reference to its language: (i) there must be a sum credited in the books for a previous year; (ii) the assessee must offer an explanation as to nature and source of the credit; and (iii) if the assessing officer, after applying his mind to the material, finds the explanation unsatisfactory, the credited sum may be charged as income. The Court emphasised that the assessing officer's opinion as to unsatisfactoriness must be formed objectively on the material on record and must involve application of mind.

The Court then examined the factual matrix: the assessee claimed two drafts totalling Rs. 98,000/- were gifts from Mohinder Singh. The donor's statement was recorded (P-4), and the Court set out particulars given by the donor: he owned 11–12 acres of agricultural land; stated income of Rs. 2 lacs per annum; household expenses of Rs. 60,000/-; no bank account; limited family; did not know the assessee's family details or age; never visited the assessee's house in Chandigarh; and stated he had not made gifts to others. The Court found these particulars raised doubt about the donor's capacity to make such a gift and the existence of a relationship of love and affection justifying the gift.

The Court observed that mere identification of donor and showing movement through banking channels is insufficient to establish genuineness. Since the claim of gift is within the knowledge of the assessee, the onus is on the assessee to establish (a) identity of the donor, (b) donor's capacity to make the gift and source of the gifted funds, and (c) that the amounts were actually received as a gift. In the present case the donor's financial position and the absence of a credible explanation for such a sizeable gift led the Court to conclude that the gift claim was a subterfuge to avoid tax and that the transactions were not genuine.

The Court considered the authorities relied upon by the assessee. It distinguished Murlidhar Lahorimal on the ground that in that case the donor had explained source and paid gift tax, which is not present here. Sikri & Co. was noted as authority for the principle that the assessee must prove genuineness; the Court observed that the appellant's reliance on that case did not assist because the facts here mirrored the circumstances where the assessee failed to prove the credits.

Holding and Implications

Holding: The appeal is DISMISSED. The Court found no substantial question of law arose. By dismissing the appeal the orders of the Income Tax Officer, the CIT (Appeals) and the ITAT — which treated the gift transactions as not genuine and added Rs. 98,000/- to the assessee's income — stand affirmed.

Implications:

  • The appellant's claim that Rs. 98,000/- was received as gift was held to be not bona fide; the sums were treated as income for assessment year 1999-2000 in accordance with the earlier orders affirmed by this Court.
  • The Court imposed costs of Rs. 30,000/- on the appellant to be deposited within 45 days, failing which the Income Tax Authorities were directed to recover it as arrears of income tax.
  • The Court stated that no new legal principle or substantial question of law was being laid down; the decision applied established principles under Section 68 and the cited authorities to the facts of this case.

(Judge: Nawab Singh; concurred by J.S. Khehar)

Show full summary ...

    Sh. Yash Pal Goel v. The Commissioner Of Income Tax (Appeals), Chandigarh.

    Nawab Singh. J.

    This, assessee's appeal, is directed against the order dated July 31, 2007 passed by Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (ITAT), whereby, two gifts of Rs. 49,000/- each received by the assessee from Mohinder Singh were held to be sham and as such were added to his income for the assessment year 1999-2000.

    2. Facts. The assessee filed the income tax return for the assessment year 1999-2000 on August 30, 1999 declaring an income of Rs. 1,15,482/-. The assessment was made under Section 143(1)(a) of the Income Tax Act, 1961 (for short the ‘Act’) on June 8, 2000 accepting the declared income of the assessee. Subsequently, this assessment order was examined by the Assistant Director of Income Tax (Investigation)II, Chandigarh. The Assistant Director suspecting the genuineness of the gifts received by the assessee-donee from Mohinder Singh, informed the Additional Commissioner of Income Tax Range-I, Chandigarh to re-assess the income of the assessee for the assessment year 1999-2000.

    3. Notice was issued to the assessee under Section 148 of the Act. Assessee appeared and submitted that an amount of Rs. 98,000/- was received by him as gift by two drafts of Rs. 48,000/-each from Mohinder Singh. The assessee was asked to prove the genuineness of the gift. Assessee did not lead any evidence except a letter written by his counsel to the Income Tax Officer on January 10, 2006 that Mohinder Singh-donor had gifted an amount of Rs. 98,000/-to the assessee by two drafts on account of love and affection between him (donor) and assessee (donee). The Income Tax Officer issued summons to the donor under Section 131 of the Act to appear before him for the purpose of recording his statement to prove the genuineness of the gift but he failed to respond to the said summons. The Income Tax Officer vide assessment order dated January 30, 2006 (P-3) held that the assessee failed to prove the genuineness of the gift made by Mohinder Singh and treated Rs. 98,000/- as income of the assessee from undisclosed sources assessable to his income.

    4. Aggrieved by the order of the Income Tax Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Chandigarh (for short CIT). During the pendency of the appeal before the CIT, assessee produced the donor. CIT directed Assessing Officer to record his statement. The statement (P-4) of Mohinder Singh was recorded. CIT after examining the entire evidence affirmed the findings of the Income Tax Officer by order dated February 9, 2007 (P-2).

    5. Being dis-satisfied with the orders of the Income Tax Officer and CIT, assessee filed appeal before the ITAT and vide impugned order, the appeal of the assessee was dismissed.

    6. Learned counsel for the appellant-assessee contended that the conclusions drawn by the authorities below including the ITAT were based on surmises, conjectures and suspicion which cannot be substitute for proof or evidence. Improper inference drawn from proven facts gives rise to substantial question of law. It was also argued that even if the explanation offered by the assessee is not acceptable, the amounts credited automatically cannot be treated as an income in the hands of the assessee unless such a question is framed and answered that unexplained cash credit was the income of the assessee. Reference was made to Section 68 of the Act in this regard. To support the point convassed reliance has been placed on (i) Murlidhar Lahorimal v. Commissioner of Income Tax (2006) 280 ITR 512; and (ii) Sikri and Co. Pvt. Ltd. v. Commissioner of Income Tax (1977) 106 ITR 682.

    7. To appreciate the contentions of learned counsel for the assessee, it would be advantageous here to notice Section 68 of the Act which reads as under:-

    “Cash credits---Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the assessing officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.”

    8. The question is what is the true nature and scope of Section 68 of the Act and when and in what circumstances, Section 68 of the Act would come into play? A plain reading of Section 68 shows that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the assessing officer is not satisfactory, it is only then the sum so credited may be charged to income tax as the income of the assessees of that previous year. The expression “the assessee offers no explanation” means where the assessees offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessees. It is true the opinion of the assessing officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the assessing officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.

    9. In Sumit Dayal v. CIT 1995 (2) SCC 453, it was held by Hon'ble Apex Court:-

    “In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee….But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year the same may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee viz. the receipt of money, and if he fails to rebut, the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature.”

    10. Here, in the case in hand, assessee claimed that an amount of Rs. 98,000/- was received by him as gift from Mohinder Singh on account of love and affection by two drafts. Indeed, the amount of Rs. 98,000/- was credited in the account/books of the assessee for the previous year. Mohinder Singh-donor appeared before the CIT. His statement (P-4) was recorded. He belongs to village Kishangarh Pharwahi, Tehsil & District Mansa. He has stated (i) that he was owner of 11-12 acres of agriculture land; (ii) that his income was Rs. 2 lacs per annum; (iii) that his family consists of his wife, son, son's wife and three grand children; (iv) that an amount of Rs. 60,000/- was spent by him on household expenses; (v) that he knew the assessee because assessee's father was running a coal depot at Budhlada; (vi) that he was not aware about the age of the assessee and names of the members of the assessee's family; (vii) that he never visited the house of the assessee at Chandigarh; (viii) that he has no bank account; (ix) that he has never made any gift to his family members or any one else except the assessee. This statement of Mohinder Singh raises question as to whether Mohinder Singh had the capacity to make a gift of Rs. 98,000/- to the assessee who was not his relation and he only knew him through his father and whether the gift was on account of love and affection. The answer is inevitably in negative. A simple identification of the donor and showing the movement of the gift amount through banking channels is not sufficient to prove the genuineness of the gift. Since the claim of gift is made by the assessee, the onus lies on him not only to establish the identity of the person making the gift but also his capacity to make a gift and that it has actually been received as a gift from the donor. Financial position of the donor suggests that he was neither in the capacity to make gift nor having the source from where the gift was made. No reason whatsoever has been assigned for gifting such a huge amount by the donor to the assessee. Donor never visited home of assessee. Where was the love and affection. It was nothing but a subterfuge to avoid income tax. The transactions were not genuine ones.

    11. To recapitulate, Section 68 of the Act provides that where any sum is found credited in the books of the assessees for any previous year the same may be charged to income tax as the income of the assessees of the previous year if the explanation offered by the assessees about the nature and source of such sums found credited in the books of the assessees is in the opinion of the assessing officer not satisfactory. Such opinion formed itself constitutes a prima facie evidence against the assessees relating to the receipt of money, and if the assessees fails to rebut the said evidence the same can be used against the assessees by holding that it was a receipt of an income nature as held in Sumit Dayal's case (supra).

    12. Authorities relied upon by learned counsel for the appellant have been perused.

    13. In Murlidhar Lahorimal's case (supra) the assessee filed a return of income showing a sum of Rs. 50,000/- as gift received. The donor had filed a return of gift in respect of the gift of Rs. 50,000/- and the assessment came to be completed under Section 15(3) of the Gift Tax Act, 1958. The donor produced evidence in support of the source from which the funds for making the gift were available with him. Hon'ble Gujarat High Court taking into consideration that the donor had explained the source of income and had also paid the gift tax, held that the assessee had proved the amount received by gift.

    14. In Sikri and Company Private Limited's case (supra), Hon'ble Calcutta High Court held that Section 68 of the Act is a statutory recognition and where certain sums of money were claimed by the assessee to have been borrowed from certain persons, it was for the assessee to prove by cogent and proper evidence that these were genuine borrowings as the facts are exclusively within the knowledge of the assessee. In that case, the assessee claimed that it had borrowed Rs. 3,10,000/- in all from nine creditors. The Income Tax authorities found that assessee could not establish the genuineness of these credits and added the amount of Rs. 3,10,000/- as income from undisclosed sources. Summons under Section 131 of the Act were issued by the Income Tax Officer to nine creditors to appear with their books but the summons could not be served as the alleged lenders were not traceable at the addresses given by the assessee. The assessee did not give any further information whether those lenders could be traced anywhere else. There was no other evidence adduced by the assessee showing the position of the alleged creditors and their financial ability. The alleged creditors had made confession before the respective Income Tax Officers who were assessing them that they had never lent these money. Though these allegations were not made in any proceeding in which the assessee was a party but those statements were brought to the notice of the assessee who was given an opportunity to contradict or bring evidence contrary thereto. Notwithstanding, the assessee did not lead any evidence and as such the conclusion reached by the Income Tax Officer was upheld by Hon'ble Calcutta High Court.

    15. So far as the first authority is concerned, in the said case, assessee succeeded in proving the genuineness of the gift received by him by leading evidence which was found satisfactory and was accepted by the Income Tax authorities.

    16. As regards the second authority is concerned, it is not understandable as to why the same has been relied upon by learned counsel for the appellant because in this authority itself it has been stated that it is the assessee who has to prove the genuineness of the amount received by him. As has been observed earlier, in the instant case, assessee has failed to prove the genuineness of the gift, capacity of the donor to make the gift, the source from where the gift is made and the relation between the donor and the donee. So, these authorities do not in any manner support the point convassed in the context of the nature and circumstances of the present case. Hence, no benefit can be derived by the assessee on the strength of these authorities.

    17. The so-called gift set-up by the appellant was not bona-fide transaction. The unscrupulous use every gimmick to avoid paying income tax. If the State exchequer is made the target of deceit and the Revenue comes down, the development of the country will be a casualty. It is reprehensible that some citizens spend on litigation and unnecessarily bring matters before Courts than to pay tax on their income. The tendency needs to be discouraged and curbed. This Court is constrained to feel that the department of Income Tax has unnecessarily been dragged in this litigation and time of the Court has also been wasted. Therefore, Rs. 30,000/- is imposed as costs on appellant. The amount shall be deposited by the appellant within 45 days from today failing which the Income Tax Authorities shall recover it from him as arrears of income tax.

    18. In view of above, no question of law much less any substantial question of law has arisen for consideration by this Court. Resultantly, the appeal is dismissed.

    (Nawab Singh)

    Judge

    (J.S Khehar)

    Judge

    20.1.2009

    SN

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    Comments

    Sh. Yash Pal Goel v. The Commissioner Of Income Tax (Appeals), Chandigarh.
    (Jan 20, 2009)