Wednesday, 10 October 2012

Whether when assessee actually receives no gifts from NRIs but misdeclares large sums as gifts on capital account, detection of such receipts during a Search is to be treated as undisclosed income - YES: Bombay HC

THE issues before the Bench are - Whether when the assessee actually receives no gifts from NRIs but misdeclares large sums as gifts on capital account, detection of such receipts during a Search is to be treated as undisclosed income; Whether the evidence found during the search can alone be a basis for block assessment; Whether where the gifts received by the assessee are found to be not genuine, then the amounts represented by those gifts become undisclosed income and hence covered under block assessment; Whether the burden of proof is on the assessee in terms of Section 158BB(3) of the Act to satisfy the AO that the so called undisclosed income has already been disclosed in the return of income filed by the assessee and Whether mere mentioning of an amount as capital receipt in the Capital Account would
not amount to a disclosure of income. And the verdict goes against the assessee.
Facts of the case
The
appellant is running health clinics in the name of M/s. Kayakalp International. The appellant's family consists of her husband one Dr. Sohanlal Gupta (Dental Surgeon), her son one Dr. Arunkumar Gupta (a Medical Doctor) and her daughter-in-law one Dr. Renu Gupta (also a Doctor). The entire family of the appellant was residing in Bhattinda, Punjab up to July 1991. However, due to terrorist activities in Punjab, the appellant and her family moved to Mumbai and commenced their health clinic viz. Kayakalp International at Borivali, Mumbai. This business expanded and soon it had established two more clinics in Mumbai at Charni Road, Mumbai in May 1995 and Dadar, Mumbai in November 1995.

On 26.03.1996, a search was conducted u/s 132 of the Act at the three clinics and residential premises of the appellant and her family. Consequent thereto, assessment for block period i.e. from 01.04.1985 to 26.03.1996 were commenced under Chapter XIVB of the Act against the appellant and her said family members. During the course of the search, it was noticed that the appellant and the said others received substantial gifts from certain Non Resident Indians out of their Non Resident External Accounts during the assessment years 1994-95, 1995-96 and 1996-97. Besides, during the course of search, the appellant had offered an amount of Rs.40.98 lacs for taxation during the block period. In the return of Income, the appellant had disclosed an amount of Rs.39.74 lacs as unexplained cash & offered the same for taxation. The AO completed the assessment for the block period 01.04.1985 to 26.03.1996 by an order dated 27.03.1997 u/s 158BA of the Act, determining her total undisclosed income at Rs.2.11 crores. This was computed on the basis of unexplained cash credits, commission received on advertising, unexplained loans, undisclosed investments in properties, gifts from Resident Indians and Non Resident Indians etc.

Being aggrieved, the appellant preferred an appeal against the order dated 27.03.1997. The Tribunal by its order dated 25.02.1999 deleted all additions made to the income by the AO save and except the following two additions: (a) Gifts received from Non Resident Indians from their NRE accounts and cash premium paid thereon aggregating to Rs.4.06 lacs for the assessment year 1994-1995 and 1995-1996; and (b) Commission received from M/s. Chintamani Advertiser aggregating to Rs.2.42 lacs for the assessment year 1993-94 up to 1996-1997.

On further appeal by the Revenue, the High Court held that,

++ so far as, the assessment years 1994-95 and 1995-96 are concerned, it is an admitted position that no assessment u/s 143(3) of the Act had been done for the above two years till the initiation of block assessment proceedings under Chapter XIVB of the Act;

++ where the income has not been disclosed and the same has been revealed during the search proceedings then block assessment as provided under Chapter XIVB of the Act would certainly apply. The meaning of undisclosed income as spelt out u/s 158B(b) is that income which has not been or would not have been disclosed for the purpose of this Act. In the present case, the appellant had not disclosed its income but had incorrectly disclosed the same as gifts received. This is for the reason that gifts are not income, they are received on capital account and can never be subjected to tax. However, during the course of search, it was found that the appellant had incorrectly declared large amounts as gifts, when in fact no such gifts were received from Non Resident Indians. Therefore, where the gifts are found to be not genuine, then the amounts represented by those gifts certainly become undisclosed income. Further, the burden of proof is on the assessee in terms of Section 158BB(3) of the Act to satisfy the AO that the so called undisclosed income has already been disclosed in the return of income filed by the assessee. Mere mentioning of an amount as capital receipt in the Capital Account would not amount to a disclosure of income. This is so, as a capital receipt is not income and consequently not subject to tax;

++ there is a concurrent finding of fact by the AO and the Tribunal that the amounts shown as gifts were not genuine gifts, but were mere credits taken so as to evade payment of income tax. Further, as gifts are not income being a capital receipt and not subject to income tax its disclosure or non disclosure is of no consequence for the purpose of the Act. The AO would normally accept an assessee's return of income along with the accounts showing an amount received as gifts in its capital account. However, it is only on account of search that documents were unearthed / found which showed that the gifts were not genuine, but only a method to convert the appellant's unaccounted money into regular income. Therefore, the non-genuine gifts to the appellant was undisclosed income and covered by the definition provided in Section 158B(b) of the Act;

++ the second contention of the appellant is that a block assessment can only be carried out in respect of documents found during the search and it is not open to the AO to rely upon the documents and/or evidence other than those found during the course of the search for the purposes of assessment under Chapter XIVB of the Act. The submission is that the evidence found during the search can alone be a basis for block assessment. According to Mr. Jhaveri the authorities under the Act have been influenced by the confessional statement made by the Appellant's son and husband to the FERA authorities on 06.11.1996 & 07.11.1996 respectively to the effect that the gifts were not genuine and they paid a premium of 8% to receive the gifts from Non Resident Indians. However, the statement made before the FERA authorities were withdrawn / retracted on the next day have not been relied upon. In any event, it is his contention that the statements made under FERA were made after over 6 months from the date of the search and therefore, was not evidence which was found during the course of search and therefore could not be relied upon for block assessment under Chapter XIVB of the Act;

++ this submission ignores the fact that u/s 158BB(1) of the Act, an AO has to compute the undisclosed income for the block period in accordance with the provision of the Act on the basis of evidence found, as a result of a search or other documents or materials available with the AO and relatable to such evidence. In the present case, the evidence in the form of confirmatory letters, deeds of gifts etc. were found during the course of search. The authorities on examination of the confirmatory letters and surrounding circumstances reached a prima facie view that the gifts were not genuine. A notice dated 27.06.1996 u/s 158BC of the Act was accordingly issued. Thereafter, before the assessment for the block period could be completed, the AO came across the confessional statement made by the appellant's husband and son under FERA stating that the gifts were not genuine. Therefore, the statements made under the FERA and its retractions are relatable to the confirmatory letters given by the donors of the gifts found during the search of the appellant's premises. The confessional statement is certainly relatable to the evidence found during the course of the search;

++ consequent to the amendment in 2002 to Section 158BB of the Act documents and/or information available with the AO and relatable to evidence found during the search is certainly evidence which can be used to compute the undisclosed income for the block period;

++ infact while introducing the amendment by Finance Act, 2002 the CBDT issued a circular dated 27.08.2002 explaining the need for the amendment. In this case the statement and the retraction thereof to the FERA authorities is certainly relatable to evidence found during the search and could be considered to compute the undisclosed income;

++ lastly, it was submitted on merits that the evidence found during the course of the search viz. copies of confirmatory letters from the donors of the gifts, copies of passport of the Non Resident Indian’s donors of the gifts and their NRE account singly or together do not indicate reason enough to record the conclusion that the gifts were not genuine. Mr. Jhaveri submits that the entire case against the appellant is as on the basis of suspicion, conjectures and unwarranted inferences;

++ Mr. Jhaveri submits that two confirmatory letters from the donors to members of Gupta family were prepared by the appellant and her family for production before the Income Tax Authorities when called upon to substantiate the genuineness of gifts. Therefore, they were all typed on the same typewriter and are identically worded. However, as pointed out by the Tribunal, this was a position taken by the appellant for the first time only in rejoinder before it to meet the objections of the department;

++ one more fact which must be borne in mind is that most of the donors are seamen and none of them was produced before the Assessing Authority at the time of assessment to establish the genuineness of the gifts. In matters such as these all facts are within the knowledge of the appellant and therefore the department is not expected to prove its case with mathematical precision but a degree of probability of a prudent man taking into account the probable behavior of a reasonable man along with surrounding circumstances. In fact Parliament realizing the difficulty for the Revenue to prove its case to the hilt provided u/s 158BB(3) of the Act that the burden of proving to the satisfaction of the AO that any income had already been disclosed is on the assessee. Further, sub section (2) of section 158BB in terms provided that section 68 of the Act relating to cash credits would apply to block assessment and in such cases also it is for the assessee to satisfactorily explain to the AO, the source of the credit found in the books of an assessee. In matter such as these where all the facts are within the knowledge of the assessee alone it is impossible for the revenue to prove the breach of law on the part of the assessee beyond reasonable doubts;

++ the alleged gifts which appeared to be real are infact not real, particularly, if one takes into account the surrounding circumstances and applies the test of human probabilities. It is most unlikely in the normal course of human conduct for a family to receive gifts in excess of over Rs.35 lacs from persons who are not related in any manner to the assessee or her family. Similarly, while considering the order of the Tribunal, one is not required to examine the same through a microscope so as to discover a minor lapse here or there so as to use it as a peg on which one can raise a question of law. The Apex Court in the matter of Homi Jehangir Gheesta v. CIT, reported in 60 ITR page 135 observed that where the circumstances are such that the only proper inference one can draw is that receipt has to be treated as a income in the hands of the assessee such inferences are one of fact and not of law. In the present case, if all the circumstances are taken together it certainly establishes that the alleged gifts received by the appellant-assessee were nothing but a modes operandi to convert her cash income into regular income. In such circumstances, no fault can be found with the order of the Tribunal while considering the material found during the course of the search and particularly the identical letters written by the donors.

No comments:

CBDT issues second round of frequently asked questions in relation to Direct Tax Vivad Se Vishwas Scheme, 2024

  This Tax Alert summarizes Circular No. 19/2024 dated 16 December 2024 (VSV 2- December Circular) issued by the Central Board of Direct Tax...