Gift addition is not sustainable because the nature of the donor’s relationship has not been established

Facts and issues of the case

This Tax Case Appeal has been filed, challenging the order dated 22.08.2008, passed by the Income Tax Appellate Tribunal, Chennai Bench ‘B’ in ITA No.36/Mds/2007 for the assessment year 2002-2003, by which the assessment made by the Assessing Officer, holding that the NRI gifts were not genuine and confirming the addition of Rs.46,44,150/- as part of the undisclosed income of the assessee, has been upheld by the Income Tax Appellate Tribunal. Aggrieved by the same, the Assessee is before this Cour

It was averred by the Appellant / Assessee that consequent to the search conducted at his residence on 29.09.1995 under Section 132 of the Income Tax Act, 1961 (in short ‘the IT Act, 1961), he was called upon to file a return in Form 2B and the Appellant filed the return indicating his undisclosed income as Rs.35,38,743/-. However, the reply submitted by the Appellant was not accepted by the Assessing Officer on the ground that evidences available on record prove otherwise.

The Appellant further averred that the amount of Rs.46,44,150/- received from Non-Resident Indian as gifts was not accepted by the Assessing Officer in respect of his undisclosed income for the reason that the Assessee had not established the genuineness of the NRI gifts. It was stated that pursuant to the earlier direction of the Tribunal dated 07.07.2005, the process was redone by the Assessing Officer and the Authority, after considering the reply and arguments made by the Assessee, reconfirmed the addition of Rs.46,44,150/- as undisclosed income of the Assessee.

Challenging the said order, the Appellant had preferred an appeal before the Income Tax Appellate Tribunal and the Tribunal in its order impugned herein did not accept the explanation offered by the Assessee and confirmed the order of the Assessing Officer, against which the Appellant has filed the present Appeal before this Court on the ground that there was no opportunity afforded to the Assessee to cross examine the persons, whose depositions were relied upon by the Department for calculating the amount as undisclosed income.

When the Appeal was taken up for hearing at the threshold, it was admitted on the following substantial questions of law:

Whether the Income Tax Appellate order is right in law in confirming the assessment order which has been passed in total violation of principles of natural justice and which smacks of utter violation of rule of audi alteram partem?

Whether the Income Tax Appellate Tribunal is right in law in upholding the assessment order which treated the gifts received by the assessee as sham in nature on the basis of statements collected by the assessing officer from the donors relatives and on which the assessee was never given an opportunity to cross examine?

Whether the Income Tax Appellate Tribunal is right in law in upholding an assessment which has been framed on the basis of statements collected behind the back of the assessee and on which the assessee was not given an opportunity to cross examine despite the observation of the Hon’ble Tribunal while setting aside the original assessment in IT(SS) A.No.2253/Mds/97?

Learned counsel for the Appellant has submitted that there was no incriminating material produced by the Assessing Officer for coming to the conclusion that the NRI gifts were not genuine and the Assessing Officer had failed to provide an opportunity to cross examine the witnesses, thereby there was a violation of principles of natural justice. According to the learned counsel for the Appellant, all the statements have been obtained behind the back of the Appellant, which cannot be relied upon and that the supporting evidence by way of an self serving affidavit has been produced, which ought not to have been accepted by the Authorities concerned.

Learned counsel for the Appellant has further submitted that without collecting any evidence during search, the liability ought not to have been foisted on the appellant. Per contra, learned counsel for the Respondent has vehemently contended that despite specific direction, the Assessee had not produced the donors of the gifts to substantiate his case and all the documents furnished by the Assessee were highly unreliable. It was also contended that in the absence of any oral evidence produced on the side of the Assessee before the Assessing Authority to rebut the evidence of the respondent, the documents collected against him can be construed as an admissible evidence and therefore, the plea of violation of principles of natural justice lacks merit acceptance.

Above all, there was no explanation forthcoming to prove that donors and the assessee are close friends, warranting exchange of gifts out of natural love and affection. It was argued that when the Assessee had failed to defend his case, there was no fault on the part of the respondent in assessing the income of the assessee based on the rule of preponderance of probabilities.Learned counsel for the respondent drew our attention to the provisions of Section 68 of the IT Act, 1961, which is a charging section to state that if a tax payer is unable to prove the nature and source of money received, the money would be taxable under the Income Tax Act.

Learned counsel for the respondent went on to add that the search was conducted under Section 132 of the IT Act, 1961, which empowers an Assessing Officer to seize books of account or other documents from the person from whose custody such documents are found and make copies thereof, or take extracts there form, in the presence of the Authorised Officer or any other person empowered by him in this behalf, at such place and time. In case the person from whom such documents are seized fails to offer suitable explanation, the material evidences collected during search can be taken as a piece of evidence against him so as to foist liability on that person. Learned counsel for the respondent has also contended that wherever it was found that the transaction lacks creditworthiness or bogus one and created only for the purpose of evading payment of tax, the Assessing Officer is entitled to make additions by invoking the charging provision.

Learned counsel for the respondent, with reference to a judgment of the Apex Court in the case of Commissioner of Income Tax vs. P.R.Ganapathy in (2012) 26 Taxmann.com 354 (SC), has advanced his argument, stating that the burden is on the assessee to show that the amount received by purported gifts from the donors was a gift in the legal sense.

Observation by the court

Thus, it was argued by the learned counsel for the respondent that the judgment passed by the Tribunal does not warrant any interference by this Court, as re- appreciation of evidence without proper justification is against the dictum laid down by the Supreme Court (supra). Hence, it was prayed that the present Appeal is liable to the dismissed in limine.Heard the learned counsel on either side and perused the material documents available on record, including various provisions of the Act and judgment relied upon by the parties.

On a conspectus of the facts obtaining in this case, it is seen that there was a search conducted in the premises of the Assessee under Section 132 of the IT Act, 1961 by the Officer to whom authority is given for such a search and seizure. The power of the Officer includes entry and search in any building, place, vessel, vehicle or aircraft in case he suspects that such books of accounts, other documents, money, bullion, jewellery or other valuable article or thing are kept; breaking open the lock of any door,box, locker, safe, almirah, etc., apart from other powers that have been extended to such Officer.

It is the core contention of the respondent that in terms of Section 113 of the IT Act, 1961, the total undisclosed income of the block period, determined under section 158BC, shall be chargeable to tax at the rate of sixty per cent.According to the Appellant / Assessee, the gifts that were taken into consideration for the purpose of charging tax were received from Non-Resident Indians (NRI) and the stand of the Appellant is that such gifts are exempted from payment of tax and the addition of Rs.46,44,150/- by the respondent is illegal and unjustifiable.

However, on the side of the respondent, it was expostulated, contending that most of the gifts were made by the donors residing outside Tamil Nadu and on enquiry with two donors, it came to light that on receipt of commission of Rs.1 lakh, gifts were arranged by them in favour of the assessee. In addition to their depositions, most of the relatives of the assessee had also reiterated the same version, which created doubts in the mind of the respondent in respect of creditworthiness and genuineness of gifts received by the Assessee. Therefore, after proper analysis of books of accounts and other documents, the gifts were subjected to liability of tax, as the appellant had failed to establish his onus.

It is no doubt true that only through search, the evidence has been collected by the respondent and the Assessee had not voluntarily disclosed on his own volition about the receipt of gifts from donors. The plea raised by the appellant that the nature of payment with regard to gifts was established through affidavits filed by donors and therefore, duty is cast upon the respondent to prove the onus, cannot be accepted for the simple reason that the Assessee had received gifts from 29 persons hailing from Kerala and there was no acceptable explanation as to the nature of relationship he had with those persons in the course of business transaction.

Had the appellant given a convincing and believable explanation / reply to the respondent, the question of charging additional tax would not have arisen. That apart, no gifts would be extended to a person after receipt of commission by the donors and the exchange of gifts must be warmhearted and not out of compulsion or demand. Immovable properties acquired at a reduced price (i.e. for inadequate consideration) can be termed as ‘immovable property received for less than its stamp duty value’.

The case of the appellant / assessee regarding receipt of gifts does not fall in anyone of the category mentioned above and as such, the burden is automatically shifted to the assessee to rebut the same, as held by the Supreme Court in the case of CIT vs. P.Mohanakala (supra), which was relied upon by the respondent before the Tribunal. That apart, as per the exact dictionary meaning of the word ‘gift’ is, something voluntarily transferred by one person to another without compensation. A literal meaning of ‘commission’ is, ‘money that one gets for selling something’.

On enquiry with two donors, namely, P.I.Joy and David Mathew, by the respondent, the former had deposed about the arrangement of gifts to the assessee on receipt of commission, whereas the latter had stated that no gift was proffered by him to the assessee. Thus, it is very obvious that the purported gifts received by the assessee are not at all gifts in its real sense. Hence, we are of the view that the order of the Tribunal is perfectly valid and is liable to be upheld.