THE COMMISSIONER OF INCOME TAXCENTRAL - II vs. ATUL D SHETH

C/TAXAP/1537/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1537 of 2007 With R/TAX APPEAL NO. 1696 of 2007 With R/TAX APPEAL NO. 543 of 2008 With R/TAX APPEAL NO. 544 of 2008

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI

and HONOURABLE MR.JUSTICE B.N. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== THE COMMISSIONER OF INCOME TAXCENTRAL - II Versus MUKESH M SHETH ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 MR.B.S.SOPARKAR, ADVOCATE for MRS SWATI SOPARKAR(870) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 13/06/2018 COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These  appeals   arise   out  of   common   judgment   of Page 1 of 18

C/TAXAP/1537/2007 JUDGMENT the Income Tax Appellate Tribunal.   They have been heard   together   and   are   being   disposed   of   by   this common judgment. 2. We may record facts separately in each appeal. Tax Appeal No.1537 of 2007 3. This appeal is filed by the Revenue against the respondent assessee, an individual­Mukesh M. Sheth. The assessee had filed the return of income for the assessment   year   2001­02.     In   such   return,   the assessee had shown to have received a gift of Rs.1.50 crores from one Bipinchandra Kantilal Bhagat, an NRI based at UAE.  The return was accepted under section 143(1) of  the Income Tax Act, 1961 ('the Act' for short) without scrutiny.  The assessee was subjected to   search   operation   by   the   Income   Tax   department. The Assessing Officer passed block assessment order for   the   block   period   between   01.04.1996   to 12.09.2002.   Main issue discussed by the Assessing Officer in such order was the on­money received by the assessee through sale of land.  Assessing Officer also   examined   whether   this   undisclosed   income   was routed   into   the   assessee's   bank   accounts   through Page 2 of 18

C/TAXAP/1537/2007 JUDGMENT gifts which were non­genuine.  In the block order of assessment   dated   30.09.2004,   the   Assessing   Officer made detailed observations with respect to these two issues.  We would take note of the contents of this order at a later stage.  For the present, it would be sufficient to note that in such order, he had held that the undisclosed income through sale of land was already taxed in the hands of the partnership firm of whom the assessee was the partner and therefore it was not necessary to tax the assessee separately.  He also held some of the gifts to be genuine and the rest as non­genuine. 4. After   this   block   assessment   order   was   passed, the Assessing Officer issued notice under section 147 of   the   Act,   reopening   of   the   assessment   of   the assessee for the same assessment year.   Sole ground in the reasons recorded was of the non­genuineness of the   gifts   received   by   the   assessee   from   the   said foreign   source. The   assessee   contested   the reassessment   proceedings   on   the   various   grounds; principal being that the issue is already examined during the block assessment proceedings and cannot be reexamined   now   when   the   Assessing   Officer   in   the Page 3 of 18

C/TAXAP/1537/2007 JUDGMENT block assessment held the gift to be genuine.  In the present assessment order, any attempt on the part of the Assessing Officer to take a different view would amount to change of opinion and lastly, in any case, the gifts were genuine.  The assessee had established the   genuineness   of   the   transaction,   identity   and creditworthiness of the donor. 5. The   Assessing   Officer  rejected   the   contentions and in the order of reassessment held that the gift was not genuine and taxed the same under section 68 of   the   Act.    Commissioner   of   Income   Tax   (Appeals) reversed the view of the Assessing Officer both on the   ground   of   the   validity   of   the   reassessment proceedings   as   well   as   on   merits.     The   Revenue carried   the   matter   in   appeal   before   the   Tribunal. The Tribunal rejected the appeal confirming the view of   the Commissioner   of   Income   Tax   (Appeals). Thereupon,   the   Revenue   has   filed   the   present   Tax Appeal, in which, at the time of admission, following questions of law were framed: “A. Whether the Appellate Tribunal is right in law and on facts in deleting addition of Rs.1,50,00,000/­ made u/s.68 of the I.T. Act being the disallowance of claim of gift? Page 4 of 18

C/TAXAP/1537/2007 JUDGMENT B. Whether the Appellate Tribunal was right in   law   and   on   facts   in   holding   that proceedings u/s.148 are bad in law?” Tax Appeal No.1696 of 2007 6. This   appeal   also   involves   the   same   assessee Mukesh   M.   Sheth   and   concerns   his   return   for   the assessment   year   2000­01,   in   which   also,   he   had declared having received gift of Rs.50 lakhs from the same   NRI   Bipinchandra   K.   Bhagat.     This   return   was also initially accepted under section 143(1) of the Act.  After the block assessment order in his case, notice   of   reopening   was   issued.     The   Assessing Officer   taxed   the   said   sum   of   Rs.50   lakhs   under section 68 of the Act holding the gift to be non­ genuine.  Like in the earlier case, the Commissioner of Income Tax (Appeals) and the Tribunal reversed the view of the Assessing Officer.  Hence this appeal, in which,   following   substantial   questions   of   law   were framed: “A. Whether the Appellate Tribunal was right in law and on facts in deleting addition of Rs.50,00,000/­ made u/s.68 of the I.T. Act being the disallowance of claim of gift? B. Whether the Appellate Tribunal was right in   law   and   on   facts   in   holding   that proceedings u/s.148 are bad in law?” Page 5 of 18

C/TAXAP/1537/2007 JUDGMENT Tax Appeal No.543 of 2008 7. This appeal is filed by the Revenue against the assessee   Atul   D.   Sheth.     For   the   assessment   year 2000­01, in the return filed, the assessee had shown to   have   received   a   gift   of   Rs.50   lakhs   from   his mother­in­law   Bhartiben   Kotak.     The   return   was accepted   under   section   143(1)   of   the   Act.     This assessee   was   also   subjected   to   search   operations leading   to   the   Assessing   Officer   framing   block assessment, in which, like in the previous cases, he examined   the   question   of   on­money   receipts   which would have been routed to his accounts through gifts. After the block assessment order was passed, notice of reopening of assessment came to be issued giving rise   to   the   reassessment   order   in   which,   the Assessing Officer made addition of the gift amount under section 68 of the Act holding the gift to be non­genuine.   Like in the previous cases, here also the  Commissioner   of   Income   Tax   (Appeals)  and   the Tribunal reversed the order of the Assessing Officer. In the Tax Appeal filed by the department, following questions were framed: “A. Whether the Appellate Tribunal was right in law and on facts in deleting addition of Page 6 of 18

C/TAXAP/1537/2007 JUDGMENT Rs.50,00,000=00  made u/s.68  of the I.T.Act being the disallowance of claim of gift? B. Whether the Appellate Tribunal was right in   law   and   on   facts   in   holding   that proceedings   under   Section   148   are   bad   in law?” Tax Appeal No.544 of 2008 8. This   appeal  filed  by   the  Revenue   concerns  the assessee Atul D. Sheth for the assessment year 2001­ 02, during which, he had disclosed having received gift of Rs.2.10 crores approximately from his mother­ in­law.     These   proceedings   also   followed   the   same pattern as in the previous case giving rise to the present   appeal.     In   the   Tax   Appeal,   following questions were framed: “A. Whether the Appellate Tribunal was right in law and on facts in deleting addition of Rs.2,10,75,000=00 made u/s.68 of the I.T.Act being the disallowance of claim of gift? B. Whether the Appellate Tribunal was right in   law   and   on   facts   in   holding   that proceedings   under   Section   148   are   bad   in law?” 9. Appearing   for   the   Revenue,   learned   counsel Mrs.Bhatt   vehemently   argued   that   the   Tribunal committed   an   error   in   declaring   the   reassessment proceedings to be invalid and holding that the gifts were   genuine.     She   submitted   that   sizable   amounts Page 7 of 18

C/TAXAP/1537/2007 JUDGMENT were credited in the accounts of the assessees' by way of gifts.  There was no occasion for the donors to have made such large gifts. 10. Counsel   submitted   that   original  assessment   was without   scrutiny.     It   was   therefore   open   for   the Assessing   Officer   to   reopen   the   assessment   after recording   proper   reasons.     In   this   context,   she relied   on   the   judgment   of   this   Court  in   case   of Jayant   Security   &   Finance   Ltd.   v.   Assistant Commissioner of Income­tax, officer Circle, reported in [2018] 91 taxmann.com 181 (Gujarat). 11. In   the   context   of   genuineness   of   the   gifts, counsel relied on following judgments: I. In case of Commissioner of Income­Tax v. P. Mohanakala  reported  in  [2007]  291 ITR 278 (SC). II. In   case   of  Laxmandas   Sujandas   Dalpat   v. Income­Tax Officer,  reported in  [2016] 381 ITR 283 (Guj). III. In case of  Kaushal H. Patel v. Income­Tax Officer,  reported   in  [2014]   365   ITR   383 (Guj). IV. In   case   of  Rajeev   Tondon   v.   Assistant Page 8 of 18

C/TAXAP/1537/2007 JUDGMENT Commissioner   of   Income­Tax,  reported   in [2007] 294 ITR 488 (Delhi). 12. On the other hand, learned counsel Shri Soparkar opposed the appeal contending that the entire issue of   genuineness   of   the   gifts   was   examined   by   the Assessing   Officer   in   the   block   assessment proceedings, majority of the gifts were held to be genuine.   This was after detailed inquiry where the statements of the donors were also recorded.  It was thereafter simply not permissible for the Assessing Officer   to   examine   the   same   question   again   in   the regular assessment proceedings.  He further submitted that   even   otherwise   the   gifts   were   genuine.     The Commissioner of Income Tax (Appeals) and the Tribunal have   come   to   concurrent   findings   which   cannot   be stated to be perverse.  The donors were foreign based NRIs.   The transaction of money was through banking channels.  Identity of the donors was not in doubt. The donors had appeared before the Assessing Officer and confirmed the gifts.  Their creditworthiness was also duly established.   Counsel relied on following judgments: I. In case of Commissioner of Income­tax­V, v. Page 9 of 18

C/TAXAP/1537/2007 JUDGMENT Mahendra   A.   Patel,  reported   in  [2013]   33 taxmann.com 231 (Gujarat). II. In   case   of  Commissioner   of   Income­tax­VI, v.   Heena   Sharma,  reported   in  [2013]   33 taxmann.com 176 (Gujarat). III. In case  of  Commissioner  of Income­tax,  v. Pragati Co­operative Bank Ltd., reported in [2005] 149 Taxman 149 (Guj.). IV. In   case   of Murlidhar   Lahorimal v. Commissioner   of   Income­tax reported   in [2006] 153 Taxman 451 (Gujarat). 13. We may first examine the question whether in the present assessment proceedings it was open for the Assessing   Officer   to   test   the   genuineness   of   the gifts.   Since   facts   of   all   four   cases   are substantially similar, we may refer to one such case of the assessee­Mukesh M. Sheth for the assessment year   2000­01.     As   noted,   in   his   case,   the   return filed was accepted without scrutiny.   Subsequently, he   was   subjected   to   search   operations.     Block assessment   was   carried   out   for   the   block   period between   01.04.1996   to   12.09.2002.     In   such   block assessment   proceedings,   the   Assessing   Officer examined   two   principal   issues   whether   the   assessee Page 10 of 18

C/TAXAP/1537/2007 JUDGMENT had received as a partner of a firm on­money through sale of land and whether this amount was routed in his account through bogus gifts.   In the order of assessment dated 30.09.2004, he held that during the search   on   12.09.2002,   incriminating   details   of   on­ money receipts on the sale of plots in one of the sales of Sheth group was found.  However, since the entire on­money has been taxed in the hands of the firm in which the assessee is the partner, it was not taxed again in his hand.  He thereupon proceeded to examine the question of investment of such on­money receipts.     He   considered   the   assessee's   contention that the gifts were genuine.   In this respect, he came to the following conclusions: “GIFTS RECEIVED (I) NRI gift from Bipin Bhagat 2,00,00,000 (ii)   Gifts   from   National   Shroff, Rajkot 33,50,000 Gift from Ramagauri C Bhakhda 14,00,000 2,47,50,000 Less : Gifts examined and found genuine (i) NRI gift from Bipin Bhagat 2,00,00,000 (ii) Gifts from Sister in law 14,00,000 (iii) Gifts from brother and sister in law through National Shroff 6,75,000 2,20,75,000 Balance   gifts   through   National Shroff 26,25,000 Page 11 of 18

C/TAXAP/1537/2007 JUDGMENT It shows that a substantial amount of gift is from non relatives, without any occasion of such gesture, without any reciprocation by the assessee and for no valid substantial reason.  Though the donors have admitted of extending gifts to the assessee for various reasons, but it is noticed that they are on relatively lower financial plan than that of the assessee and the reasons shown by them are   general   in   nature.     It   is   also   seen that,   a   number   of   local   gifts   are   routed through   a   local   financier   viz.,   National Shroff   whose   partner   Shri   Ranjitsinh Vaghela,   on   different   occasions   gave contradicting statements. Hence it indicates that the assessee has received on money. Nevertheless,   the   on­money   aspect   has already   been   discussed   and   taxed   in   the hands   of   the   firm   M/s.Silver   Stone Corporation,   hence,   no   addition   is   made again in respect of the gift.” 14. Few things need to be culled out from this order at   this   stage.     Important   is   that   the   Assessing Officer while framing the block assessment seem to have   accepted   some   of   the   gifts   as   genuine. Remaining   gifts   were   found   to   be   non­genuine   and tracing the trail to the undisclosed income of the assessee through sale of land. 15. After   this   order   was   passed,   the   Assessing Officer   desired   to   reopen   the   assessment   of   the Page 12 of 18

C/TAXAP/1537/2007 JUDGMENT assessee for the said assessment year 2001­02 on the ground   that   the   gifts   were   non­genuine.     Section 158BA   of   the   Act   pertains   to   assessment   of undisclosed income as a result of search.   Relevant portion of which reads as under: “158BA.   Assessment   of   undisclosed   income   as   a result of search (1) Notwithstanding   anything   contained   in   any other  provisions   of  this   Act,  where  after  the 30th   day   of   June,   1995   a   search   is   initiated under   section   132   or   books   of   account,   other documents or any assets are requisitioned under section 132A in the case of any person, then, the   Assessing   Officer   shall   proceed   to   assess the   undisclosed   income   in   accordance   with   the provisions of this Chapter. (2) The   total   undisclosed   income   relating   to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or   years   to   which   such   income   relates   and irrespective   of   the   fact   whether   regular assessment for any one or more of the relevant assessment years is pending or not. [Explanation.­ For the removal of doubts, it is hereby declared that­ (a) the   assessment   made   under   this   Chapter shall be in addition to the  regular  assessment in respect of each previous year included in the block period. (b) the   total   undisclosed   income   relating   to the   block   period   shall   not   include   the   income assessed in any regular assessment as income of such block period; (c) the  income  assessed  in this  Chapter  shall Page 13 of 18

C/TAXAP/1537/2007 JUDGMENT not be included in the regular assessment of any previous year included in the block period.” 16. For our purpose, explanation clauses (b) and (c) are important.   In order to avoid any doubt, these clauses   provide   that   the   total   undisclosed   income relating to the block period shall not include the income assessed in any regular assessment as income of   such   block   period   and   conversely   the   income assessed in this chapter i.e. the block assessment, shall not be included in the regular assessment of any   previous   year   including   the   block   period. Therefore once a question of the genuineness of the gift was already examined by the Assessing Officer in the block assessment proceedings, it was thereafter not   open   for   him   in   the   regular   assessment   to undertake   the   very   same   scrutiny.     In   the   block assessment,   the   Assessing   Officer   proceeded   on   the basis that whatever the on­money income the assessee has received, was routed through the bogus gifts.  We are   informed   that   during   such   block   assessment proceedings,   the   Assessing   Officer   had   carried   out detailed inquiry with respect to the gifts.  In fact, the donors were summoned, they appeared before the Page 14 of 18

C/TAXAP/1537/2007 JUDGMENT Assessing Officer and the statements were recorded, in   which,   they   owned   up   the   gifts   and   also   cited reasons for giving such lavish gifts.  The Assessing Officer having come to definite conclusion in this respect after such detailed inquiry, it can be safely concluded that these amounts of gifts were part of the block assessment proceedings and could therefore not have been made part of the regular assessment all over   again.     Whether   in   such   assessment,   the Assessing Officer had found the gift to be genuine or non­genuine   is   of   no   consequence.     Once   the   gifts were   assessed   in   the   block   assessment   proceedings, could   not   be   subject   matter   of   assessment   in   the regular assessment. 17. In the present case, as noted, some of the gifts were   held   to   be   genuine.   Allowing   the   Assessing Officer   to   examine   the   same   issue   in   the   regular assessment and as in the present case, leaving the possibility of coming to conclusion that the gifts were not genuine, would give rise to two conflicting opinions of the authority of the same rank, and as in the present case, at times by the same officer. Page 15 of 18

C/TAXAP/1537/2007 JUDGMENT 18. For the above noted reasons which are somewhat different from those adopted by the  Commissioner of Income   Tax   (Appeals)  and   the   Tribunal,   we   do   not propose   to   interfere   with   the   Tribunal's   final verdict.     This   is   not   a   classical   case   where   an assessment   previously   framed   without   scrutiny   is sought   to   be   reopened,   nor   it   is   the   case   where original assessment was after scrutiny, in which, the Assessing   Officer   had   examined   certain   issues, expressed his opinion which is the subject matter of reopening   bringing   the   principle   of   change   of opinion. 19. There   is   yet   another   supplementary   reason   why the Revenue, in any case, cannot succeed.   If the Revenue's   proposition   is   that   the   assessee   had received   on­money   through   sale   of   land,   which   was introduced   in   the   assessees'   accounts   through   non­ genuine gifts, the Revenue having attempted to tax the on­money receipts, could not have taxed the gifts again with the aid of section 68 of the Act. 20. On the question of genuineness of the gifts, the Tribunal has made certain observations.   Since, in Page 16 of 18

C/TAXAP/1537/2007 JUDGMENT our   opinion,   this   issue   was   not   germane   in   the regular assessment, though sought to be examined by the Assessing Officer, we would not make conclusive observations   in   this   respect.   Nevertheless,   a   few remarks may not be out of place. As is well settled, whenever any cash is found credited in the account of the   assessee,   the   onus   lies   on   the   assessee   to establish

the

source,

genuineness

and creditworthiness.   In   the   present   case,   we   are prepared to proceed on the basis that the assessee had established the identity of the donor and his or her creditworthiness. When however, large amounts are stated   to   have   been   gifted,   that   too   by   a   person having   no   blood   relation   with   the   assessee,   the question of genuineness of the gifts would require closer scrutiny. If the assessee does not point out any special occasion for a lavish gift being received from   such   a   source,   the   burden   to   establish   the genuineness of the gift cannot be lightly taken to have been discharged. The crux of the judgments cited by Mrs.Bhatt noted above is that the nature of gift and its genuineness would call for case wise scrutiny and the answer would depend on range of facts and Page 17 of 18

C/TAXAP/1537/2007 JUDGMENT attendant circumstances.  No single formula of rigid application can be laid down.   We are compelled to make   these   observations   because   in   rather   peculiar and somewhat perplexing set of facts, in our opinion, the   Tribunal   has   made   superficial   observations   and mechanically accepted the genuineness of the gifts. In view of our conclusions, with respect to the first issue, we leave this question at this stage. 21. In   the   result,   we   express   our   common   opinion with respect to all appeals as under: I. In facts of the present case, it was not open for   the   Assessing   Officer   to   examine   the question of genuineness of the gifts in regular assessment   for   which   he   has   resorted   to reopening of assessments. II. We express no conclusive opinion on the question of genuineness of the gifts per­se. 22. All Tax Appeals are dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) ANKIT SHAH Page 18 of 18