Whether gift of IMD certificates can be equated with gift of money, even when former is not freely exchangeable and transferable like money - NO: ITAT

THE issues before the Bench are - Whether the gift of IMD certificates can be equated with gift of money, even when the former is not freely exchangeable and transferable like money; Whether in view of this, section 56(2)(V) & (Vi) can be applied to such gift of IMD certificates and Whether provisions of section 56(2)(V) can be applied to a situation where the IMD certificates have been gifted before September 1, 2004, but proceeds are matured thereafter. And the verdict goes against the Revenue.

Facts of the case

Assessee received gift in the form of IMD of face value of USD 1,50,000 from Mrs Hansa Agarwal, NRI, residing at Sharjah

on 25.9.2005. Thereafter, the assessee prematurely encashed the said IMD on 5th October, 2005 and received maturity amount of USD 2,22,452 equivalent to INR 98,56,827. The AO stated that the assessee utilized the unaccounted income of Group Company to obtain a non-genuine gift. The AO also contended that gift of IMDs was equivalent to gift of money and thus invoked the provisions of section 56(2)(v) and made an addition to the total income of the assessee. The AO made the additions on the ground that the status of IMDs with the facility of premature encashment available was on par with the legal status of a bank fixed deposit and held that treating the bank fixed deposits as not money would be an absurd interpretation and would defeat the very purpose of the enactment. In respect of the interest on the IMDs, the AO held that, that when a-gift was brought to tax u/s 56(2)(v), taxing the principal amount and exempting interest would be a travesty of law.

On appeal before the CIT(A), it was contended that assessee had received gift of IMDs and that the provisions of section 56(2)(v) were not applicable to gift received in kind. Assessee contended that complete details of the gifts were furnished before the AO to establish the genuineness of gift and creditworthiness of the donor. The assessee further submitted before the CIT(A) that section 56(2)(v) applied only in a case where any money was given without consideration. That IMDs due to its nature and the terms and conditions attached to, IMDs, though convertible into money, was not money. It was argued by the assessee that IMDs at best could be treated at par with any other property which can be converted into money but by itself they cannot be treated as money and that they were not freely exchangeable as money and lacked all the characteristics of money in terms of free transferability and acceptability.

The assessee also referred to the recent amendment made by Finance Act, 2009 by way of introduction of clause (vii) in subsection (2) of section 56 whereby gifts in kind have also been brought within the purview of section 56(2). The said amendment was introduced prospectively w.e.f. 01.10.2009 and therefore, the same cannot be applied to the assessee. It was finally argued that similar issues on identical facts have been considered by the Tribunal in the case of ACIT vs. Haresh N Mehta for the AY 2006-07 in favour of the assessee. CIT(A) deleted the addition made by the AO.

Having heard the parties, the Tribunal held that,

+ we find substance in the submission of A.R. that grounds of appeal of the assessee herein are identical save and except the amount. We observe that the Tribunal by its order dated 31.1.2012 after considering the orders of authorities below and relying on the decision of co-ordinate Bench in the case of ACIT vs. Anuj Agarwal, and also the decision of ITAT Vizag Bench in Sri Sarad Kumar Babulal Jain vs ITO order dated 11.8.2011 dismissed the appeal of department by confirming the order of CIT(A) wherein it was held that:["The gift deed dt. 19th July, 2002 records the fact that the gift was already completed prior to that date by delivery of IMD bonds by the donor to the donee. As rightly held by the CIT(A), gift would be complete in the financial year 2002-03 within the meaning of ss. 122 and 123 of the Transfer of Property Act, 1882, Provisions of s. 56(2)(v) applied only to gift in or after 1st Sept, 2004. The fact that maturity proceeds were received by the assessee during the previous year relevant to asst. yr. 2006-07 cannot be the basis to apply provisions of s. 56(2)(v). There is also force in the submissions of the counsel for the assessee that prior to introduction of S. 56(2)(vii) by the Finance Act, 2009, w.e.f. 1st Oct., 2009, gifts in kind were outside the purview of s. 56(2)(v) or (vi). The expression used in s. 56(2)(v) and (vi) is “where any sum of money” exceeding Rs. 25,000 is received by an individual from any person. Considering the fact that in the present case, what was given without consideration was only IMD certificates, provisions of s. 56(2)(v) or (vi) could not have been invoked by the AO........"];

+ since the facts issue of the case before us are identical to Haresh N Mehta and respectfully following the decision of co-ordinate bench in the case of Haresh N Mehta, we uphold the order of CIT(A) and reject the grounds of appeal taken by department