Kanchan Singh vs Commissioner of Income Tax

Rajes Kumar, J.—By means of the present petition, petitioner has challenged the order of the CIT-I, Lucknow dt. 12th June, 2007 passed u/s 264 of the IT Act, 1961 (hereinafter referred to as "Act"), by which the assessment order passed by the ITO, Lucknow dt. 12th June, 2007 for the asst. yr. 2004-05 has been confirmed and the revision petition of the petitioner has been rejected.

Brief facts giving rise to the present petition are that the petitioner filed the return for the asst. yr. 2004-05 showing the short-term capital loss of Rs. 1,76,957.63p. Along with the return petitioner has filed computation of income and four copies of Resurgent India Bonds (hereinafter referred to as ''bonds''). In the computation of the income, the petitioner had shown the receipt of Rs. 26,78,504 received as a gift in the form of bonds of 40,000 US dollars. The gift was claimed to have been received from Shri Kishore Chhagan Lal Kapadia, an NRI who was living in New Jersy, USA. A sum of Rs. 26,78,504 was found deposited in the said bonds was transferable and were transferred in favour of the petitioner by Shri Kishore Chhagan Lal Kapadia, on 10th July, 1999 by making necessary declarations in this regard on the back of the each bond itself. Petitioner has filed the confirmatory letter dt. 8th Feb., 2006 of Shri Kishore Chhagan Lal Kapadia, duly notarized by Notary Public of New Jersey confirming the gift of 4 such bonds. In the month of Oct, 2003, when the said bonds were matured, a sum of Rs. 26,78,504 was paid, which was equal to 58.829.44 US dollars to the petitioner in view of the declaration of the bonds being transferred and the said amount was deposited in account No. 0119017878 of SBI, Main Branch, Lucknow. The said amount was claimed to be gifted by Shri Kishore Chhagan Lal Kapadia, to the petitioner. During the course of the assessment proceeding, the assessing authority had recorded the statements of the petitioner on 31st Jan., 2006 and on 9th Oct., 2006. It also appears from the perusal of the assessment order that two letters dt. 19th Sep 2006 and 10th Oct., 2006 were sent on the address of Shri Kishore Chhagan Lal Kapadia, given in the confirmatory letter as 83, Fairview Awe, New Jersy, NJ 07306, USA. As per the assessment order, the said letters were returned unserved with the remark "Not deliverable as addressed-unable to forward". It appears that ITO wrote a letter dt. 15th Feb., 2006 to the Chief Manager, SBI, NRI Branch, Mumbai, with the request to provide the copy of letter/document through which the said bonds had been gifted to the petitioner or any other document/letter available on this transfer. Chief Manager, SBI, NRI Branch, Mumbai through his letter dt. 28th Feb., 2006 informed that "The RBI certificate Nos. C041622 to C041625 were transferred by way of gift to Kanchan Singh, by Shri Kishore Chhagan Lal Kapadia, As the above certificates and relative transfer documents were spoiled and destroyed due to flooding of one godown due to heavy rains on 26th July, 2005, we are unable to produce copies thereof. ITO further wrote a letter dt. 18th Sep., 2006 to Chief Manager, SBI, NRI Branch, Mumbai, asking him to procure the related transfer documents from RBI and also furnish copy of return/bank statement so that creditworthiness of Shri Kapadia may be ascertained. Chief Manager, SBI, NRI Branch, Mumbai through his letter dt. 26th Sep., 2006 replied and sent the copy of original application form submitted by Shri Kishore Chhagan Lal Kapadia, and further stated that except this form they do not have any information of Shri Kishore Chhagan Lal Kapadia. It appears that the matter has been referred to the Addl. CIT u/s 144A of the Act, who has expressed his opinion vide letter dt. 8th Dec, 2006. In view of the aforesaid letter of Addl. CIT, ITO held that the gift of Rs. 26,78,504 from alleged donor, Shri Kishore Chhagan Lal Kapadia, whose identity and creditworthiness, assessee failed to establish is nothing else but assessee''s owned money routed through some fictitious person and the same was added in the income of the assessee as income from other sources. In revision, the aforesaid order has been confirmed by the CIT.

Heard Sri P. Agrawal, learned Counsel for the petitioner, and Sri D.D. Chopra, learned senior standing counsel, appearing on behalf of the Revenue.

Learned Counsel for the petitioner submitted that the Resurgent India Bond could only be purchased by NRI against foreign currency. The bonds were issued on the application of Shri Kishore Chhagan Lal Kapadia, which is clear from the application sent by the Chief Manager, SBI, NRI Branch, Mumbai, in reply to the letter issued by the ITO. The copies of bonds, which are annexure-I to the writ petition also reveal that the bonds had been issued in the name of Shri Kishore Chhagan Lal Kapadia. It was issued against the payment of 40,000 US dollars. The back side of the bonds reveals that it was transferable and was transferred in favour of the petitioner by Shri Kishore Chhagan Lal Kapadia on 10th July, 1999, which has also been confirmed by the Chief Manager, SBI, NRI Branch, Mumbai, in his earlier letter. Therefore, there is no manner of doubt that the bonds were purchased by Shri Kishore Chhagan Lal Kapadia in the year 1998 against the US dollars. He submitted that it is not in dispute that amount of Rs. 26,78,504 was the maturity amount of the four bonds, which were purchased by Shri Kishore Chhagan Lal Kapadia in the year 1998 and were subsequently, transferred in favour of the petitioner. He submitted that after the amendment in the GT Act by the Finance Act (No. 2) of 1991 it was not necessary that NRI could make gift of bonds to the relatives only. He submitted that the petitioner had established beyond doubt, the source of the amount of Rs. 26,78,504. He submitted that though the identity of Shri Kishore Chhagan Lal Kapadia had been fully established beyond doubt, inasmuch as the bonds were issued on his application being NRI he submitted that the letters, which are alleged to have been issued at the given address to Shri Kishore Chhagan Lal Kapadia have not been returned back with the remark that, "he was not traceable" but with the remark "not deliverable as addressed-unable to forward", which does not mean that Shri Kishore Chhagan Lal Kapadia was not traceable and was not residing at the given address. He submitted that after the return of the letters, ITO had not confronted the said fact to the petitioner and even in the statement, no such query was made. He submitted that in the statement, no query relating to the existence of Shri Kishore Chhagan Lal Kapadia was made and his existence has not been doubted. Thus, doubting the identity of Shri Kishore Chhagan Lal Kapadia, is without any material and baseless. He further submitted that the source of the money was fully established, namely, that the deposit was the maturity amount of the bonds, which were purchased in the year 1998 against US dollars. Therefore, so far as the petitioner is concerned, the burden has been fully discharged and, therefore, burden has been shifted to the Revenue to prove that the said amount has not been received by the petitioner from Shri Kishore Chhagan Lal Kapadia and it was her unexplained and undisclosed owned money, which the Revenue has failed to discharge. He further submitted that in any view of the matter the amount of Rs. 26,78,504 cannot be treated as income from other sources in the year under consideration.

Sri D.D. Chopra, learned Counsel appearing on behalf of the Revenue, submitted that the statement of the petitioner clearly reveals that she had met with Shri Kishore Chhagan Lal Kapadia long back, when she was minor and that too occasionally. He submitted that the petitioner was not relative of Shri Kishore Chhagan Lal Kapadia inasmuch as the identity of Shri Kishore Chhagan Lal Kapadia could not be established, therefore, the claim of the gift has rightly been doubted and it has rightly been held that the money, which was found deposited to the extent of Rs. 26,78,504 was not gifted money but was the money of the petitioner, which was routed through fictitious person. He submitted that in fact the addition was not u/s 68 of the Act but was u/s 69 of the Act and the burden lies upon the petitioner to prove the source of the investment for which the petitioner had to prove the identity or the person, from whom the money was received and his creditworthiness, which on the facts and circumstances of the case, the petitioner failed to establish.

Sections 68 and 69 of the IT Act read as follows:

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 AO, satisfactory, the sum so credited may be charged to Income Tax as the income of the assessee of that previous years.

Unexplained investments-Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the AO, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

u/s 68 of the Act if any sum is found credited in the books of account of the assessee 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 AO satisfactory, the sum so credited may be charged to Income Tax as the income of the assessee of that previous year. Therefore, what has to be enquired into by the assessing authority is about the nature and source of the deposit. If the explanation with regard to nature and source is found unsatisfactory only then the amount so credited may be treated as income.

Sec 68 came up for consideration before the various High Courts. The Courts have held that assessee has to prove three conditions; (1) identity of the creditor; (2) capacity of such creditor to advance money; and (3) genuineness of the transactions, [vide Shankar Industries Vs. Commissioner of Income Tax, Central, ; C. Kant and Co. Vs. Commissioner of Income Tax, ; Prakash Textile Agency Vs. Commissioner of Income Tax, ; Oriental Wire Industries (P.) Ltd. Vs. Commissioner of Income Tax, ; Jalan Timbers Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Korlay Trading Co. Ltd.,

If all the aforesaid three conditions are proved the burden shifts on the Revenue to prove that the amount belongs to the assessee [vide Commissioner of Income Tax Vs. United Commercial and Industrial Co. (P.) Ltd., , M.A. Unneeri Kutty Vs. Commissioner of Income Tax, , SLP dismissed (2001) ITR 23 , Commissioner of Income Tax Vs. Precision Finance Pvt. Ltd.,

It has been held by the various High Courts that the assessee cannot be asked to prove source of source or the origin of origin [vide S. Hastimal Vs. Commissioner of Income Tax, Madras, Tolaram Daga Vs. Commissioner of Income Tax, Assam, Commissioner of Income Tax (Central), Calcutta Vs. Daulat Ram Rawatmull, and Sarogi Credit Corporation Vs. Commissioner of Income Tax,

In the case of Jalan Timbers (supra), the Division Bench of Gauhati High Court held that u/s 68 of the IT Act, the assessee has to prove three important conditions (1) identity of the person (2) genuineness of the transaction and (3) capability of the person giving cash credit. On the explanation being given the assessing authority can reject the explanation by cogent grounds and if the grounds are based on no ground, presumption against the assessee does not arise.

In Smt. Srilekha Banerjee and Others Vs. Commissioner of Income Tax, Bihar and Orissa, the apex Court held that "if there was an entry in the account books of the assessee which showed the receipt of a sum on conversion of high denominations notes tendered for conversion by the assessee himself, it is necessary for the assessee to establish, if asked, what the source of that money was and to prove that it was not income. The Department was not at that stage required to prove anything. It could ask the assessee to produce any books of account or other documents or evidence pertinent to the explanation if one was furnished and examine the evidence and the explanation. If the explanation showed that the receipt was not of an income nature, the Department could not act unreasonably and reject that explanation to hold that it was income. If, however, the evidence was unconvincing, then such rejection could be made. The Department cannot by merely rejecting a good explanation unreasonably, convert good proof into no proof."

In the case of Commissioner of Income Tax, Orissa Vs. Orissa Corporation (P) Ltd., , the apex Court observed as follows:

In this case, the assessee had given the names and addresses of the -alleged creditors. It was in the knowledge of the Revenue that the said creditors were Income Tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices u/s 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence.....

The apex Court in the case of Commissioner of Income Tax, Ernakulam Vs. P.K. Noorjahan (Smt), while interpreting similar language used in Section 69 has held as follows:

Shri Ranbir Chandra, the learned Counsel appearing for the Revenue has urged that the Tribunal as well as the High Court were in error in their interpretation of Section 69 of the Act. The submission is that once the explanation offered by the assessee for the sources of the investments is found to be unacceptable the only course open to the ITO was to treat the value of the investments to be the income of the assessee. The submission is that the word ''may'' in Section 69 should be read as ''shall''. We are unable to agree. As pointed out by the Tribunal, in the corresponding clause in the Bill, which was introduced in Parliament, the word ''shall'' had been used but during the course of consideration of the Bill and on the recommendation of the Select Committee, the said word was substituted by the word ''may''. This clearly indicates that the intention of Parliament in enacting Section 69 was to confer a discretion on the ITO in the matter of treating the source of investment which has not been satisfactorily explained by the assessee as the income of the assessee and the ITO is not obliged to treat such source of investment as income in every case where the explanation offered by the assessee is found to be not satisfactory. The question whether the source of the investment should be treated as income or not u/s 69 has to be considered in the light of the facts of each case. In other words, a discretion has been conferred on the ITO u/s 69 of the Act to treat the source of investment as the income of the assessee if the explanation offered by the assessee is not found satisfactory and the said discretion has to be exercised keeping in view the facts and circumstances of the particular case.

Section 68 of the Act has been recently considered by the apex Court in the case of Commissioner of Income Tax Vs. P. Mohanakala, , the apex Court held as follows:

The question is what is the true nature and scope of Section 68 of the Act ? When and in what circumstances would Section 68 of the Act come into play ? A bare reading of Section 68 suggests 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 AO 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 assessees offer 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 that the opinion of the AO 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 AO 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.

Both, in the case of Sections 68 and 69 of the Act, the assessee has to prove the nature and source of the deposit or investment, as the case may be. As held by the various High Courts and apex Court, to prove the nature and source, the assessee has to prove the identity of the person, the genuineness of the transaction and capacity to pay.

It may be mentioned here that prior to amendment by Finance Act (No. 2) of 1991, NRI could make gift of bond only to relatives but by the Finance Act (No. 2) of 1991. This restriction has been taken away. After Finance (No. 2) Act of 1991, Section 5(iiie) of the GT Act, 1958 reads as follows:

Section 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:

(iiie), being an individual who is a non-resident Indian, of property in the form of the bonds specified under Sub-clause (iid) of Clause (15) of Section 10 of the IT Act:

Provided that where an individual, who is a non-resident Indian in any previous year in which the bonds are acquired, becomes a resident in India in any subsequent year, the provisions of this clause shall apply in respect of the gifts of property referred to in this clause in such subsequent year or any year thereafter.

Explanation : For the purposes of this clause, the expressions

(a) ...

(b) ''non-resident Indian'' shall have the meaning assigned to it in Clause (e) of Section 115C of the IT Act.

In the aforesaid cases, the apex Court held that each case depends upon the facts of the said case. It has been further held that the opinion of the assessing authority for not accepting the explanation offered by the assessee 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 authority is required to be formed objectively with reference to the material available on record.

In the present case, Addl. CIT has doubted the genuineness of the gift mainly on the ground that the assessee in his statement stated that she met donor when she was in Class VI or VII at her grand parents'' place. After that she did not meet him. The identity of the person is not established because he is not available on a given address. On record there is one declaration dt. 8th Feb., 2006 stating that he made this gift of Rs. 40,000 dollars to Ms. Kanchan Singh, but the donor is not available for confirming the same on the address given in the declaration nor is the donee aware of his present address. In these circumstances, it is held that the identity of the donor is doubtful. What is the source of these forty thousand dollars, what are the assets and liabilities; nothing is known even to the donee, i.e., the beneficiary. On the basis of the aforesaid letter of the Addl. CIT, the ITO held that the gift of Rs. 26,78,504 from the alleged donor. Shri Chhagan Lal Kapadia, whose identity and creditworthiness assessee failed to establish is nothing else but assessee''s own money routed through some fictitious person and the same is added in the income of the assessee as income from other sources. This view of the assessing authority has been confirmed by the CIT in revision.

The question for consideration is whether the authorities below are justified in doubting the genuineness of the transaction of the gift and even assuming that the transaction of the gift would be doubtful whether the assessee has failed to prove the nature and source of the amount of Rs. 26,78,504 which was found credited in the bank account of the assessee which was admittedly the maturity amount of the bond standing in the name of Sri K.C. Kapadia, as required u/s 69 of the IT Act and whether the said amount can be treated as the income of the assessee for the year under consideration ?

Having regard to the facts and circumstances, we are of the view that the assessing authority was not justified in treating the amount of Rs. 26,78,504 as an income of the assessee from other sources in the year under consideration.

The reasons for arriving at a conclusion are as follows:

Four Resurgent India Bonds of 10,000 US dollars each were purchased on 1st Oct., 2003 on the application of Sri K.C. Kapadia, which is established from the application sent by the Chief Manager, SBI, NRI Branch, Mumbai.

Such bonds could be purchased only by NRI against the foreign currency. Admittedly, the bonds were purchased against US dollars. Thus, the source of the money for the purchase of the bond, being US dollars is outside India.

The bonds reveal that they were transferable and, accordingly, they were transferred in favour of the assessee by Sri K.C. Kapadia.

As a result of transfers of such bonds in favour of the assessee, the assessee received the maturity amount from the SBI and credited in her account. Letter of the Chief Manager, SBI, NRI Branch, Mumbai, dt. 28th Feb., 2006 confirms the transfers by way of gift to the assessee by Sri K.C. Kapadia.

Undisputedly, in purchasing the four bonds the investments were made on 1st Oct., 1998 and not in the year under consideration and in the year under consideration, namely, in the asst. yr. 2004-05 only the maturity amounts of the bond were received.

Thus, so far as the year under consideration is concerned, the source and nature of deposit are fully established and the query with regard to the investment made in purchasing the bonds could be made only in the financial year 1998-99 relevant to the asst. yr. 1999-2000 and not in the year under consideration.

After the amendment in Section 5(iiie) of the GT Act by the Finance (No. 2) Act of 1991, gift could be made to the person other than relatives also. The omission of the word ''relative'' in the section shows that the amendment was made to promote the gift by NRI to the persons other than relatives to encourage inflow of foreign money in India through gifts.

Sri K.C. Kapadia, by confirmatory letter dt. 8th Feb., 2006 duly notarized by Notary Public of New Jersey, has confirmed the gift of four such bonds. The letters written by the assessing authority were returned unserved with the remark "Not deliverable as addressed unable to forward" does not mean that Sri K.C. Kapadia, was not traceable and was not in existence. There may be so many reasons that the letter could not be delivered. Merely because the assessee could not tell any other address of Sri K.C. Kapadia, it cannot be inferred that Sri K.C. Kapadia was/is not in existence and his identity is doubtful.

The application moved by Sri K.C. Kapadia for the purchase of four bonds with the SBI, the issue of the bonds in the name of Sri K.C. Kapadia against US dollars is by itself an evidence to proof the identity of Sri K.C. Kapadia.

In the facts and circumstances and the reasons given above, we are of the view that there is no reason to doubt the genuineness of the gift by Sri K.C. Kapadia to the assessee. In any view of the matter, the assessee was able to establish the nature and source of the money. The nature and source of the money found deposited in the bank account of the assessee were the maturity amounts of the four bonds which were purchased by Sri K.C. Kapadia on 1st Oct., 1998. Therefore, so far as year under consideration is concerned, the nature and source are fully established. There is no evidence to show that the deposit in the bank account was the income from other sources of the assessee for the year under consideration.

In view of the above, the impugned order of the CIT, dt. 12th June, 2007 is liable to be set aside and it is held that that ITO has erred in treating the maturity amount of Rs. 26,78,504 of the four Resurgent India bonds as an income from other sources in the asst. yr. 2004-05.

In the result, writ petition is allowed.

The impugned order of the CIT dt. 12th June, 2007 is set aside. There shall be no order as to costs.