MEHUL JADAVJI SHAH,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-7(2), MUMBAI

The grounds of appeal

Brief facts of the case as noted by the AO is that he observed that the assessee has received a gift from Smt. Shantaben Damji Shah to the tune of Rs.10 crores. And Smt. Shantaben Shah is the aunt (father’s, brother’s wife) of the assessee Shri Mehul Shah. Further, the AO observed that the donor Smt. Shantaben Shah in turn received Rs. 5,00,00,000/- each from her son Mr. Sanjay Damji Shah and daughter- in-law Mrs. Heena Sanjay Shah. The AO notes that the balance-sheet of both Mr. Sanjay Damji Shah and Mrs. Heena Sanjay Shah reflected the fact of giving gift of Rs.5,00,00,000/- each to Smt. Shantaben Damji Shah.

According to the AO, from a perusal of the bank-statement it reveal that the donor (Smt. Shantaben Shah) received the gift of Rs.5,00,00,000/- each from her son and daughter -in –law on & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah 30.03.2015 and on the same day, she gave gift to the assessee (Shri Mehul Shah) vide cheque nos. 2772 and 2773 from her Bank A/c No. 003110100040516 of Bank of India maintained at Malad (West) Branch, Mumbai.

According to the AO, from the sequence of events, it is discernible that Rs.10,00,00,000/- given by Shri Sanjay D. Shah and Ms. Heena S. Shah was ultimately given to the assessee on the same day (through the Donor/aunt of assessee Smt. Shantaben D. Shah). The AO issued notice asking the assessee as to why the amount of Rs.10,00,00,000/- should not be added to the total income u/s 56(2)(vii) of the Income Tax Act, 1961 (hereinafter “the Act”). Pursuant to the notice, the assessee replied that he had received the gift of Rs.10,00,00,000/- from Smt. Shantaben D. Shah who was his aunt. And since Smt. Shantaben D. Shah is his father’s brother’s wife [i.e. relative as specified u/s 56(2) of the Act] the gift is permissible as per law and the same is not taxable u/s 56(2)vii of the Act. And further the assessee brought to AO’s notice the bank-statement which showed that the gift has been received through banking transaction from the aunt’s bank account, which according to him proved the genuineness, identity and creditworthiness of the donor. And also the assessee submitted the gift deed executed between him and Smt. Shantaben D. Shah, as well documents like copy of the acknowledgment of return of income filed by the donor and copy of relevant pages of bank pass-book of the & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah donor etc. However, the AO was not satisfied with the reply and documents submitted by the assessee.

According to the AO, as per Section 56(2)(vii) of the Act, wherein an individual receives any sum of money without consideration, the aggregate value of which exceeds Rs.50,000/-, needs to be treated as income from other sources. And even though the AO agrees that as per the proviso, this clause shall not apply to any sum of money received from any relative. And in terms of the Explanation (e) to the aforesaid section, the term ‘relative’ is defined “which includes parents, in laws and their spouses and brothers or sister of parent”. However, according to him, son/daughter of “brother/sister” of parents are not included”.

According to the AO, from the transactions which has taken place before the gift was finally passed over to the assessee, it can be seen that gift originated from Mr. Sanjay Damji Shah and Heena .S. Shah who was the son & daughter-in-law of the assessee’s father’s brother and therefore exemption claimed by assessee being a relative is not available to assessee. According to the AO, the gift has been routed through the aunt (of assessee) viz Smt. Shantaben D. Shah which is nothing to but to avoid the income tax u/s 56(2)(vii) of the Act. Further, according to him, the transaction has to be considered as a single transaction i.e. from Mr. Sanjay & Heena of Rs.5 crores each to assessee and the Donor Smt. Santaben the aunt was only a conduit & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah and so the whole transaction was a sham and colourable device to avoid paying legitimate tax; and after citing few case laws, the AO held as under: - “It is manifest that in the instant case that Mr. Sanjay D. Shah and Mrs. Heena Sanjay Shah’s sole intent was to give the amount of Rs.5,00,00,000/- each to Mr. Mehul J Shah and the same has been routed through Ms. Shantaben D. Shah. The bank accounts statements of Heena S. Shah, Shri Sanjay D. Shah, Smt. Shantaben Shah and Shri Mehul J Shah unambiguously reflect and reveal the real intention behind the transaction. Date Particulars Cheque No. Amount Amount Balance Withdrawn Deposited 23.03.2015 True Value ENTP 2770 3,00,000/- 1,32,344 30.03.2015 Usha A Shah - 5,00,00,000 5,01,32,344 30.03.2015 Hemang J Shah 2771 5,00,00,000/- 1,32,344 30.03.2015 Sanjay D Shah 5,00,00,000 5,01,32,344 30.03.2015 Mehul J Shah 5,00,00,000/- 1,32,344 30.03.2015 Heena S Shah 5,00,00,000 5,01,32,344 30.03.2015 Mehul J Shah 5,00,00,000/- 1,32,344 30.03.2015 ECS Oil India 33,070 1,65,414 Ltd. 4.3 In view of the above facts, there is not even an iota of doubt that the amount given by Heena S. Shah and Sanjay D. Shah ultimately reached to the final beneficiary i.e. Mr. Mehul Jadavji Shah. According, a sum of Rs.10,00,00,000/- is hereby added to the total income of Shri Mehul Jadavji Shah as income from other sources under section 56(vii) of the Act. Penalty proceedings under section 271(1)(c) of the Act are initiated for furnishing inaccurate particulars of income.”

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of the AO on the same reasoning as given by AO. Further according to the Ld. CIT(A), the gift is given on some special occasion out of love and affection; and since no such & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah occasion has been pointed out by the assessee for receiving the gift; and since the donor received the money on the same day and passed on the same to the assessee also on the same day on 30.03.2015, it casts doubts that the entire transactions have been engineered to avoid tax and after citing the decision of the Hon’ble Supreme Court in case of Sumati Dayal Vs. CIT 1995 214 ITR 801 (SC) and also in the case of Durga Prasad More 82 ITR 540, the Ld. CIT(A) confirmed the action of the AO. Aggrieved, the assessee is before us.

We have heard both the parties and perused the records. We note that the assessee has filed his return of income on 30.09.2015 declaring total income of Rs.16,96,22,840/-. The AO noted that the assessee has received a gift from Smt. Shantaben D. Shah to the tune of Rs.10,00,00,000/-; and Smt. Shantaben Shah is the aunt of assessee (father’s brother’s wife). The AO Further noted that the donor Smt. Shantaben Shah had received a gift of Rs.5,00,00,000/- each from her son and daughter-in-law (Mr. Sanjay Damji Shah and Ms. Heena S. Shah). It is noted that AO has not doubted about the sum of Rs.10,00,00,000/- having been received by the assessee from the donor Smt. Shantaben Shah on 30.03.2015. However, taking note that the donor Smt. Shantaben Shah (i.e. on the same day on 30.03.2015 had received Rs.10,00,00,000/- i.e. of Rs.5,00,00,000/- each from his son and daughter-in-law) was of the opinion that Smt. Shantaben D. Shah (donor) has been used as a pass through entry to avoid the income tax u/s 56(2)(vii) of the Act and so made an addition of Rs.10,00,00,000/-. & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah u/s 56(vii) of the Act as Income from other sources. On appeal, the Ld. CIT(A) confirmed the action of the AO by observing that there was no special occasion for giving such a gift to the assessee. Therefore, he also on the same reasoning as that of AO confirmed the addition of Rs.10,00,00,000/-. This action of Ld. CIT(A) is impugned before us and we have to examine the legality of the addition confirmed u/s 56(2)(vii) of the Act. Therefore let us have a look at the relevant provisions of law u/s 56 of the Act. F- Income from other sources Income from other sources. 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”. Namely: - (i)……….. (ia)……….. (ib)……… (ic)………. (id)………. (ii)……….. (iii)…….. (iv)…… (v)…………. (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 [but before the 1st day of April, 2017 (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah (b)………… (i)……. (ii)………. Provided further that this clause shall not apply to any sum of money or any property received- (A) From any relative; or (b) on the occasion of the marriage of the individual; or (c )…….. (d)…….. (e)………. (f)……… [(e)] ‘relative’ means,- (i) in case of an individual – (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (D) brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; (G) spouse of the person referred to in items (B) to (F); and

From a perusal of the aforesaid provision of law (section 56(2)(vii) of the Act), it is clear that if an assessee (individual or HUF) receives from any person or persons after first day of October, 2009 but before the first day of April, 2017 any sum of money, without consideration, the aggregate value of which exceeds of Rs.50,000/-, in such an event the aggregate value of such sum, shall be chargeable to income tax under the head income from other sources. However, it can seen that as per the fourth proviso to sub-clause (vii) of sub-section (2) of Section 56 of the Act, the clause (vii) shall not apply to any sum & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah received by an assessee from any relative. So the claim of the assessee is that it has received Rs.10,00,00,000/- from the relative and therefore the gift he received from the donor who is a relative wont fall in the teeth of Section 56(2)(vii) of the Act. So now we need to examine as to whether Smt. Shantaben D. Shah (Donor) qualifies to be a relative as per the explanation given for relative as per clause (vii) of Section 56(2) of the Act. It is undisputed that the donor in this case, is the assessee’s father’s brother’s wife (this fact both AO and Ld. CIT(A) agrees). We note that as per the meaning given to relative u/s 56(2)(vii) of the Act means an assessee’s/individuals (A) spouse of the individuals (B) brother or sister of individual (C) brother or sister of the spouse of the individual; (D) brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; & (G) spouse of the person referred to in items (B) to (F); and (ii) in case of a Hindu undivided family, any member thereof;

Coming to the case in hand, we note that the donor in this case Smt. Shantaben Shah will fall in (D) read with (G) supra, because Smt. Shantaben D. Shah is the spouse of the brother of the father of the assessee. Therefore, the donor according to the meaning given by the statute, satisfy as a ‘relative’ for this purpose of Section 56(2)(vii) of the Act and thus the fourth proviso of clause (vii) of Section 56(2) comes in aid of the assessee and therefore sub-clause (vii) of Section & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah 56(2) of the Act is not attracted per-se in respect of the gift received by assessee.

It is further noted that even though the AO accepted the fact that the donor is a ‘relative’ of the assessee and therefore, the gift given by the donor cannot be brought to tax u/s 56(2)(vii) of the Act, however according to him, since the donor received Rs.10,00,00,000/- on the same day (i.e.30.03.2015) from her son and daughter-in-law and on the very same day she has transferred the amount to assessee, he was of the opinion that the donor has been used only as a pass through entry for avoiding the income tax u/s 56(2)(vii) of the Act and the Ld. CIT(A) concurred with the very same reasoning as well as he was of the opinion that there was no special occasion for the donor to have given such a gift to the assessee. So he confirmed the action of the AO to tax the same u/s 56(2)(vii) of the Act, which impugned action of the authorities below cannot be countenanced.

We note that only issue which AO found to tax the gift of Rs.10 crores was that the donor (Smt shantaben) received the amount of Rs.10,00,00,000/- from her son and daughter-in-law on the same day i.e. 30.03.2015 and the same was transferred to the assessee on the very same day. Merely because the money came into the donors account on 30.03.2015 and on the same day it was transferred to the assessee cannot be the only basis for drawing adverse inference against the assessee and bringing to tax the gift given by a relative u/s & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah 56(2)(vii) of the Act. Coming to the observation of the Ld. CIT(A) that there must have been special occasion for the gift and since there was no such occasion, he doubted the gift also cannot be accepted because the Parliament has specifically provided for exemption in respect of gifts received by an individual on occasions like marriage which is already exempt u/s 56(2)(vii) of the Act.

Further, it has to be borne in mind that when there is sum credited in the books of the assessee, the AO is empowered to ask for the nature and source of the credit entry; and the assessee is duty bound to prove the nature and sources of it [i.e. identity, creditworthiness and genuineness of the creditor]. In this case, the assessee has proved the identity of the donor by producing the income tax returns of the donor; and has proved the genuineness of the gift by producing the gift deed executed between the donor and the assessee; and it is a fact that the entire transaction has happened through banking channel. Coming to the creditworthiness of the donor, we note that the assessee had filed the balance-sheet/financial of the donor which fact is evident from the acknowledgement made by the AO that balance- sheet of the donor reflects that Rs.10,00,00,000/- has been gifted to the assessee. It was also brought to our notice that the donor Smt shantaben as well as her son (Mr. Sanjay Damji Shah) and his wife (Ms. Heena S. Shah) are all assessed to tax by the same AO as that of the assessee. Thus we note that the donor Smt shantaben, her son Mr. Sanjay Damji Shah as well as her daughter-in-law Heena.S.Shah & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah and the assessee are assessed under the jurisdiction of the same AO and therefore in this case, it is noted that the assessee has discharged the burden casted upon him by producing the income tax return of the donor, gift deed, and bank statement reflecting the transfer of Rs.10 cr to assessee.

In such a scenario, the action of the AO/Ld. CIT(A) in bringing to tax Rs.10,00,000,000/- cannot be countenanced. And therefore, the assessee succeeds.And therefore, we allow the appeal of the assessee and direct the deletion of the addition made u/s 56(2)(vii) of the Act.

Since we have decided the merits of the addition, the legal issue raised by assessee as per ground no 2 is not decided being academic.

At the outset, the Ld. AR of the assessee submitted that the Ld. CIT(A) erred in confirming the action of the AO levying penalty of & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah Rs.3,39,90,000/- u/s 271(1)(c) of the Act because the notice issued prior to levy of penalty itself was bad in law.

To buttress this point, he drew our attention to page no. 55 of the P.B wherein we note that the notice u/s 274 r.w.s. 271 of the Act dated 04.12.2017 is found placed. From a perusal of the same, we note that both the faults/charges i.e. have “concealment of income” or “furnishing inaccurate particulars of such income” Meaning the assessee was in the dark as to what kind of fault he has committed against which the AO proposed to levy penalty. By having both the faults shown in the show cause notice or in other words without striking out the inapplicable fault/charges, the assessee was unable to know for what fault/charge, the assessee is being proceeded against with for levy of penalty. Therefore, according to the Ld. AR, the penalty notice dated for AY 2012-13 placed at page 55 as well as another notice issued dated 14.02.2019 placed at page no. 56 of the P.B (both handed over) are bad in law. And therefore, the penalty levied is vitiated.

Per contra, the Ld. CIT-DR could not controvert this legal submission made by the Ld. AR. In such circumstances and taking note of the show cause notice issued placed at page no. 55 & 56 of the P.B, we find force in the submission of the Ld. AR that the notices issued priorto levy of penalty is bad in law and holds that the show cause notices dated 04.12.2017 and 14.02.2019 issued u/s 274 r.w.s. & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah 271(1)(c) of the Act are bad in law for not specifying the fault/charge against which the assessee was being proceeded against which for levy of penalty u/s 271(1)(c) of the Act. Therefore, the penalty issued in pursuance to the same is also bad in law. For that, we rely on the decisions of the Full bench of the Hon’ble Jurisdictional of High Court in the case of Mohd. Farhan A. Shaikh Vs. DCIT (2021) 434 ITR 1 (Bombay) dated 11.03.2021 wherein their Lordships has held that the show cause notice issued prior to levy of penalty without specifying the fault/charge against to which the assessee is being proceeded against would vitiate the penalty itself. And thus the Hon’ble Court upheld the view of the division bench order in the case of PCIT Vs. Goa Dourado Promotions (P.) Ltd. (Tax Appeal No.18 of 2019, dated 26.11.2019) and held that the contrary view taken by another division bench in the case of CIT Vs. Smt. Kaushalya (1995) 216 ITR 660 (Bom) does not lay down the correct proposition of law.

As noted (supra), we find that the specific fault/charge against which the assessee was called upon to explain vide the notice dated 04.12.2017/14.02.2019 (page 55&56 paperbook) did not explicitly convey to the assessee for which fault/charge the assessee is being proceeded against for levy of penalty u/s 271(1)(c) of the Act. Resultantly, the show cause notices are found to be defective/invalid, and therefore held to be bad in law as held in similar/identical cases wherein the Tribunal has held that when the notice itself was found invalid, the penalty levied pursuant thereto is also bad in law and & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah deleted the penalty. For that we note the decision of the Hon’ble Karnataka High Court in the case of CIT vs Manjunatha Cotton and Ginning Factory reported in (2013) 359 ITR 565 (Kar) and the Department’s SLP against it has been dismissed by the Hon’ble Supreme Court. We also find that Hon’ble Karnataka High Court in the case of CIT Vs. SSA’s Emerald Meadows, reported in (2016) 73 taxmann.com 241 (Kar) endorsed the same view in Manjunatha Cotton and Ginning Factory (supra) and held as under:- “3. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Assessing Officer under section 274 read with Section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’), to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of CIT Vs. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565/218 Taxman 423/35 taxmann.com 250(Kar). 4. In our view, since the matter is covered by judgment of the Division Bench of this Court, we are of the opinion, no substantial question of law arises in this appeal for determination by this Court. The appeal is accordingly dismissed.”

Respectfully following the judicial precedents as well as the binding decision of the Full bench decision of the Hon’ble jurisdiction High Court’s in the case of Mohd. Farhan A. Shaikh (supra), we direct the deletion of the penalty levied in this case. Moreover as noted & 1380/Mum/2021 A.Ys. 2015-16 Mehul Jadhavji Shah (supra) on quantum appeal, we have given relief to the assessee, so penalty does not survive any way.

In the result, the appeal of the assessee regarding of partly allowed. Order pronounced in the open court on this 10/10/2022.