When Gift from unknown person is taxable

By | August 20, 2015

Q: When Gift from unknown person is taxable ?

Where donor and donee (assessee) were not known to each other, mere declaration by donor that gift was made out of love and affection was not sufficient; Assessing Officer was justified in treating said gift as income under section 68

HIGH COURT OF DELHI

Pawan Kumar Aggarwal

v.

Income tax Officer

SANJIV KHANNA AND V. KAMESWAR RAO, JJ.

IT APPEAL NO.137 OF 2003

NOVEMBER  27, 2014

Section 68, read with section 64, of the Income-tax Act, 1961

Facts of the Case are

The appellant is an individual and father of minor Aushi Aggarwal, Whose income was to be clubbed in terms of s. 64(1A) of the Act. It is an accepted and admitted position that Aushi Aggarwal had invested Rs. 1 lac and Rs. 5,000 in Prayag Polymers (P) Ltd. on 18th Aug., 1992. The AO called upon the assessee to explain the source of the said deposit made by the minor Aushi Aggarwal. The appellant-assessee, to explain the same, filed and relied upon declaration of gift purportedly executed by one Bhupinder Kumar, resident of Germany, who was maintaining a non-resident external account in Citibank N.A., New Delhi. The said declaration records that gift of Rs. 1 lac has been made out of natural love and affection.  Authorized Representative of the assessee had admitted categorically that there was no relationship between the assessee/Aushi Aggarwal and Bhupinder Kumar.

The assessee also filed a copy of the bank account statement of Bhupinder Kumar, the cheque prepared by Bhupinder kumar for issue of banker’s cheque in favour of Aushi Aggarwal. The said bank had issued a certificate dt. 10th Aug., 1992 certifying that Aushi Aggarwal had been paid an amount of Rs. 1 lac by debit to the non-resident external account of Bhupinder Kumar.

Apellant-assessee claimed the gift should be accepted as genuine because under s. 5(l)(ii)(b) of the GT Act, 1958, it is not necessary or a condition that there should be relationship between the donor and the donee in case of a gift by a non-resident Indian.

The AO, however, did not accept the said explanation for various reasons set out in the assessment order and treated the purported gift of Rs. 1 lac as assessee’s own income from undisclosed sources.

HELD

The GT Act, 1958 is a separate enactment. The said Act, however, is not applicable to gifts w.e.f. 1st Oct., 1998

It was a well accepted principle that income/cash credits which are not satisfactorily explained might be assessed as income.

Creditworthiness of the donor would depend upon the income and earning of the donor and whether and did he have necessary funds. Rarely one finds a poor man giving gifts to a rich and powerful, out of natural love and affection.

Courts have held that where any amount was found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was in the opinion of the AO not satisfactory, the sums so credited could be charged to taxed as income of the assessee for the relevant previous year

Mukul Gupta, Vibhor Garg, Aseem Swaroop and Ms. Suvarna Kashyap for the Appellant. Akash Vajpai and Rohit Madan for the Respondent.

JUDGMENT

Civil Misc. 59 of 2003

Sanjiv Khanna, J. – This is an application for stay.

Learned senior counsel appearing for the appellant-assessee states that he is not pressing the stay application. The same is accordingly dismissed as not pressed.

IT Appeal No. 137 of 2003

This appeal under s. 260A of the IT Act. 1961 (Act, for short) by the appellant-assessee Pawan Kumar Aggarwal impugns the findings recorded by the Tribunal in their order dt. 17th Sept., 2002, relating to the genuineness of the gift of Rs. 1 lac received by the assessee’s minor daughter Aushi Aggarwal. The appeal pertains to asst. yr. 1993-94 and was admitted for hearing vide order dt. 13th April, 2004, on the following substantial question of law :

“Whether the order of the Tribunal in reversing the: order of CIT [sic. CIT(A)] is not perverse ?”

2. As is apparent from the question itself, the finding of the Tribunal is Victual and the issue is whether the aforesaid finding is perverse.

3. The appellant is an individual and father of minor Aushi Aggarwal, Whose income was to be clubbed in terms of s. 64(1A) of the Act. It is an accepted and admitted position that Aushi Aggarwal had invested Rs. 1 lac and Rs. 5,000 in Prayag Polymers (P) Ltd. on 18th Aug., 1992. The AO called upon the assessee to explain the source of the said deposit made by the minor Aushi Aggarwal. The appellant-assessee, to explain the same, filed and relied upon declaration of gift purportedly executed by one Bhupinder Kumar, resident of Germany, who was maintaining a non-resident external account in Citibank N.A., New Delhi. The said declaration records that gift of Rs. 1 lac has been made out of natural love and affection. The assessee also filed a copy of the bank account statement of Bhupinder Kumar, the cheque prepared by Bhupinder kumar for issue of banker’s cheque in favour of Aushi Aggarwal. The said bank had issued a certificate dt. 10th Aug., 1992 certifying that Aushi Aggarwal had been paid an amount of Rs. 1 lac by debit to the non-resident external account of Bhupinder Kumar. The AO, however, did not accept the said explanation for various reasons set out in the assessment order and treated the purported gift of Rs. 1 lac as assessee’s own income from undisclosed sources.

4. The CIT(A), however, deleted the said addition observing that the aforesaid documents showed that the gift was made by Bhupinder Kumar and it was not necessary that the donor or the donee should have blood relationship. He referred to s. 5(l)(ii)(b) of the GT Act, 1958, to the effect that relationship was not a condition for making a gift by a non-resident Indian. Accordingly, the addition made by the AO was deleted.

5. Revenue preferred an appeal before the Tribunal and has succeeded by the impugned order dt. 17th Sept., 2002. The said order records that during the course of arguments, the Authorized Representative of the assessee had admitted categorically that there was no relationship between the assessee/Aushi Aggarwal and Bhupinder Kumar. Therefore, the Tribunal felt that the assessee in this case had created evidence to cloak his own undisclosed funds as a gift. The CIT(A) had also expressed doubts, but had accepted the gift in view of the documents filed by the assessee. The Tribunal on the said aspect observed that the CIT(A) had ignored the ground reality that gifts were exchanged between known circles and were not made or received from strangers. It was recorded that as per the assessee’s own statement the donor and the donee were strangers to each other.

6. We are not impressed with the contention raised by the appellant-assessee that the gift should be accepted as genuine because under s. 5(l)(ii)(b) of the GT Act, 1958, it is not necessary or a condition that there should be relationship between the donor and the donee in case of a gift by a non-resident Indian. The GT Act, 1958 is a separate enactment. The said Act, however, is not applicable to gifts w.e.f. 1st Oct., 1998. Sec. 5 of the said Act relates to exemption in respect of certain gifts. The provision relied upon by the learned counsel for the assessee reads as under :

“5. Exemption in respect of certain gifts. — (1) Gift-tax shall not be charged under this Act in respect of gifts made by any person-

(i ) of immovable property situate outside the territories to which this Act extends;
(ii ) of movable property situate outside the said territories unless the person-
(a ) xxx
(b ) not being an individual, is resident in the said territories, during the previous year in which the gift is made;”

Our attention is also drawn to cl. (iic), Explanation thereto and cl. (iid) of s. 5(1) of the GT Act, 1958, which for the sake of convenience, are being reproduced below :

“(iic ) being a citizen of India, or a person of Indian origin, who is not resident in India, to any relative of such person in India, of convertible foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder.

Explanation : For the purposes of this clause and cl. (iid),-

(a ) a person shall be deemed to be of Indian origin if he or either of his parents or any of his grand-parents was born in undivided India;
(b ) ‘convertible foreign exchange’ means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any Rules made thereunder;
(c ) ‘relative’ has the meaning assigned to it in cl. (41) of s. 2 of the IT Act;
(d ) ‘resident in India’ shall have the meaning assigned to it in the IT Act;

(iid ) being a citizen of India or a person of Indian origin, who is not resident in India, to any relative of such person in India of property in the firm of any foreign exchange asset as defined in cl. (b) of s. 115C of the IT Act.”

What was highlighted by the senior counsel is that in cls. (iic) and (iid), the word “relative”, which is defined in Explanation cl. (c) has been used, whereas, in s. 5(l)(iid), the legislature conspicuously has not used the word “relative”. It is difficult to accept the said contention. Sec. 5 deals in exemption and stipulation that when gift tax would not be charged. The said provision is of no relevance and application when we examine the question whether the assessee has been able to prove and establish the genuineness of the transaction, i.e. the gift, and establish the source of the entry made in the books of accounts. Admittedly, in the present case the minor daughter of the appellant had made investment of Rs. 1 lac and when the assessee was called upon to explain the source of the deposit/income of her daughter, the assessee had submitted that Aushi Aggarwal had received a gift from a non-resident by the name of Biupinder Kumar.

7. The Tribunal in the impugned order has not specifically referred to s. 68 of the Act, but when we notice and read the order of the AO, he has specifically recorded that the addition of Rs. 1 lac was being made as the assessee had not been able to prove and establish the source of the income/deposit of the minor Aushi Aggarwal and accordingly the said amount should be treated as income from undisclosed source. On the said aspect, the AO has referred to the scrutiny of the bank account in the name of Aushi Aggarwal in Canara Bank, which was opened on 14th Aug., 1992 with deposit of Rs. 5,100 and thereafter a cheque of Rs. 1 lac was deposited on 18th Aug., 1992. On the same date itself, two cheques were issued in favour of Prayag Polymers (P) Ltd. During the course of assessment proceedings, the assessee was asked to prove and establish the donor’s capacity to make the gift, relationship between the assessee and Bhupinder Kumar and also to produce a copy of assessment order made by the tax authorities of the country in which Bhupinder Kumar was residing. These details were required to establish and show genuineness of the transaction relating to the gift. The AO has recorded that this information was not furnished. The AO has further recorded that apparently there was no blood relationship between the donor and the assessee/donee and the donor had not been produced for examination. The capacity of the donor was also not proved and established. Accordingly, the AO held that medium of gift was a conduit for funnelling his own undisclosed money. The CIT(A) has only relied upon s. 5(l)(ii)(b) of the GT Act, 1958 to hold that the addition could not be sustained. He, however, accepted that the relationship between the donor and the donee had not been established. As far as production of assessment order in respect of the donor was concerned, it was observed that Bhupinder Kumar was not liable to be taxed in India and, therefore, production of assessment order was not relevant. He also observed that onus of proof was discharged by the assessee by disclosing identity, capacity, source and confirmation from the donor.

8. Possibly, some of the information/confirmation may not have been possible for the appellant-assessee to procure, but the close relationship, not necessarily blood relationship, between the parties could have been asserted and fortified. Genuineness of the transaction has to be examined by not only taking into consideration the papers/documents, which were executed, but surrounding circumstances are also relevant. These aspects are of significance and importance, when genuineness of a transaction is in issue. A gift is a voluntary act, by a person who out of love and affection transfers money, moveable or immoveable asset to another person. Element of personal and close relationship between the two is the motivating factor as the donor parts with and transfers what belongs to him to someone, whom he/she loves and cares. This mandates and requires a close association between the donor and the donee, except where gifts are made for charity and philanthropic purposes. In the present case, the appellant merely relies upon the form of declaration by Bhupinder Kumar that the gift was made out of love and affection. However, it was accepted and admitted before the Tribunal that the donor and donee/assessee were not known to each other. Thus, the statement in the declaration of gift regarding love and affection was apparently a mere formal proclamation. It was a wrong and incorrect assertion. Assessee does not plead past relationship and why and for what reason the said Bhupinder Kumar felt the urge and desire out of love and affection to make a gift to Aushi Aggarwal, the minor daughter of the appellant-assessee. The assessee could have explained and shown that the said Bhupinder Kumar was known, to him, but his contention was that he was not required to show and establish the relationship. Mere fact that the amount paid had emanated from the bank account of Bhupinder Kumar would not be suffice in the facts of the present case.

9. It is not necessary for the Revenue to show and prove how the assessee in this case through a conduit had transferred and brought into books of account, undisclosed income under s. 68 of the Act. In fact, this section casts a burden on the assessee to show genuineness of the transaction by establishing identity of the person from whom the payment was received, the source of payment, which necessarily need lot be confined only to the details of the bank account from which payment was made but also corroborating and surrounding circumstances. This has always been the legal position, even prior to insertion of s. 68 of the Act. It was a well accepted principle that income/cash credits which are not satisfactorily explained might be assessed as income. Even long prior to the introduction of s. 68 in the statute book, Courts have held that where any amount was found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was in the opinion of the AO not satisfactory, the sums so credited could be charged to taxed as income of the assessee for the relevant previous year. See. 68 was inserted in the Act only to provide statutory recognition to a principle which had been clearly adumbrated in judicial decisions. The whole history of the introduction of ss. 68 to 69D of the Act and the judicial decisions bearing thereupon clearly establish the proposition that these sections are only clarificatory and that even otherwise an addition can be made towards income from undisclosed sources. [See CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80F (SC), Yadu Hari Dalmia v. CIT [1980] 126 ITR 48/4 Taxman 525 (Delhi), J.S. Parkar v. V.B. Parkar [1974] 94 ITR 616 (Bom.), Nanak Chandra Laxman Das v. CIT[1983] 140 ITR 151/[1982] 9 Taxman 252 (All.)].Likewise, creditworthiness of the donor would depend upon the income and earning of the donor and whether and did he have necessary funds. Rarely one finds a poor man giving gifts to a rich and powerful, out of natural love and affection.

10. In the present appeal, we are considering whether the order passed by the Tribunal is perverse. The test of perversity is whether a reasonable person conversant with the legal provisions would have reached to the conclusion or finding under challenge. If the reasoning and the finding of the Tribunal is plausible, we would not interfere. This test is not satisfied in the present case.

11. Keeping in view the aforesaid position, we do not find that the order passed by the Tribunal is perverse. Accordingly, the question of law is answered in favour of the respondent-Revenue and against the appellant-assessee. The appeal is disposed of No. costs.

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