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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
These appeals by the Revenue are arising out of the different order of Commissioner of Income Tax (Appeals)-8, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-8/IT-165&461/14-15 dated 26-08-2015. The assessments were framed by the Deputy Commissioner of Income Tax, Circle- 3(2), Mumbai (in short DCIT) for the assessment year 2010-11 & 2011-12 order dated 26.03.2013 & 27-03-2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only common issue in both the appeals of Revenue is as regards to the order of CIT(A) deleting the addition made by AO being gifts received by one corporate entity from another corporate entity & 5119/Mum2015 through group company treated by AO as income under section 2(24) of the Act and alternatively Revenue also raised that the same is taxable under section 28(iv) of the Act. Further, the Revenue’s grievance is that the same should be added while computing the income under section 115JB of the Act to the book profit. For this issue the Revenue has raised the identical grounds and facts and circumstances in both the years are also identical. Hence, we will take the facts and grounds from AY 2010- 11 in ITA No. 5118/Mum/2015. The grounds raised by Revenue in AY 2010-11 reads as under: -
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 161,86,77,034/- being receipt without consideration, without appreciating the fact that the same was covered under the ambit of and scope of income" u/s. 2(24) of the IT Act, 1961 especially when receipt was from a group company and the overall objective of the group was to do business and earn profits?"
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 161,86,77,034/- without appreciating the fact that a so called gift by a one corporation to another corporation though a group company which is always claimed to be independent for tax purpose, is nothing but an income in the hands of receiving company, in absence of love and affection being there in the case of companies whose objective is to carry out the business activities?"
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in & 5119/Mum2015 holding that the receipt of Rs 161,86,77,034 is not taxable when the same was received without corresponding liability, being recurring and periodical in nature, which is riot specifically exempt under the statute?"
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting addition of Ps. 161,86,77,034/- without appreciating the fact that if such interpretation was to be accepted, it will legalise the transfer of finds from one company to another without any consideration and without payment of taxes by the recipient, which will be against the scheme laid down by the legislature u/s. 2(24) of the IT Act, 1961?
5. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in holding that receipts of Rs. 161,86,77,034/- by the assessee was not taxable u/s. 28(iv) of the IT Act, 1961, without appreciating the fact that same was covered under the ambit and scope of "Benefit" arising from business as contained in that section?"
6. Whether on the facts and circumstances of the case and in law, the Id. CIT(A) was justified in deleting the addition of Rs. 161,86,77,034/- to the book profit u/s. 115JB of the IT Act, 1961 without appreciating the fact that such receipt will have to be taken as income and credited to the P&L A/c as per clause 2(b) & 3(xii)(b) of Part II of Schedule Vi of the Companies Act?" & 5119/Mum2015 3. Brief facts are that the assessee is a private limited company engaged in the business of investment. During the year under consideration it received gifts aggregating to ₹ 161,8677,034/- from four companies viz. Amur Trading Private Ltd. Madhuban Merchandise Private Ltd. Tresta Trading Pvt. Ltd. and Ornate Traders Pvt. Ltd. All the above four companies are shareholder of Reliance Industries Limited [Reliance Industries] and receive dividend income from Reliance Industries. The assessee and all the above four companies are Private Limited companies and are governed by their respective Memorandum and Articles of Associations. The Memorandum of Associations of the assessee and all the above four companies provides for the receiving/giving of gift respectively. The Clause 30 of Memorandum of Associations of the assessee provided as follows:
To make and/or receive donations, gifts or income to or from such persons, institutions or Trusts, whether in cash or any other assets as may be thought to benefit the company or any other object of the company 'w otherwise expedient and also to remunerate any person or corporation introducing or assisting, in any manner the business of the company subject to the applicable provisions of Companies Act, 1956.
Similarly clause 21 of Memorandum of Associations of Madhuban Merchandise Private Limited (one of the above four donor company) provides as follows:
To make and/or receive donations, gifts or income to or from such persons, institutions or Trusts and in such cases and whether of cash or any other assets as may be thought to benefit the company or any other objects of the company or otherwise expedient & 5119/Mum2015 and also to remunerate any person or corporation introducing or assisting, in any manner the business of the company.
The Memorandum and Articles of Association of other donor companies also contain similar such clauses. In pursuance of the power contained under the Memorandum of Associations Madhuban Merchandise Private Limited (one of the four companies) passed an ordinary resolution at the extra ordinary meeting of shareholders for making gift to the assessee. Thereafter the Board of Directors in their meeting held on 09.04.2008 passed a resolution in this regard.
In pursuance to above, the donor company vide its letter dt. 19.06.2006 had given irrevocable instruction u/s 205 r.w.s. 206 of the Companies Act to Reliance Industries to pay dividend directly to the assessee. The corresponding resolution was also passed by the assessee at the Board Meeting held on 21.11.2009 accepting the gift. The extract of the resolution passed by the assessee is as follow:
'Resolved That the company do accept gift amounting to Ps. 44,50,36,399/- from Madhuban Merchandise Private Limited, the Transferor Company.
Resolved Further That the Company do receive delivery of the same from the Transferor Company for completing the gift.
Resolved Further That Smt. KD. Ambani and Shri D.N. Chaturvedi, Directors of the company, be and are hereby severally authorised to do, perform and execute all acts, deeds, matters and things as may be necessary, proper or expedient to give effect to & 5119/Mum2015 this resolution and for matters connected herewith and incidental hereto.
5. Similar resolutions were also passed by the other four companies in their respective extra ordinary general meetings and board meetings. Consequently, the assessee received gift of Rs.161,86,77,034/- from above four companies during the year, as under:-
The assessee claimed before AO that the gifts received by the assessee from corporate bodies is in the nature of Capital receipt and hence it credited the gift of Rs 1,61,86,77,034/- to Capital reserve Account in its books of accounts.
6. During assessment proceedings the AO raised the query with respect to gift received by the assessee from corporate bodies and the treatment in books of accounts of the assessee and its taxability. In response, the assessee filed all the relevant details before the AO during assessment proceeding. The assessee stated that all the donor companies are shareholders of Reliance Industries Limited and receives dividend income from Reliance Industries. The donor companies had given irrevocable instructions to Reliance Industries to pay dividend directly to assessee. The receipt of dividend was debited to bank account and credited to Capital reserve Account of the assessee. The assessee argued that the Gift is in the nature of ‘capita' receipt and is not required to be credited to Profit and Loss Account'. It claimed that it has prepared & 5119/Mum2015 its books of accounts as per the requirement of the Companies Act - 1956 and same has been audited and approved by the statutory auditor and also adopted by the shareholders in Annual general Meeting. It was stated that since the accounts are prepared as per the companies Act, no adjustment is required to be made to the book profit u/s 115JB of the Act on account of gift received by assessee. But the AO did not accept the contention added gift received of ₹161,86,77,034/- to the total income of the assessee. The AO further added the amount of gift received of Rs.161,8677,034/- to the book profit u/s 1 15JB of the Act. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) deleted the addition by relying on Tribunal’s decision for AY 2009-10 in assessee’s own case by observing in Para 5.1 to 5.11 as under: - “5.1 Ground No. 1 to 5: I have given due consideration to the facts of the case. Ground no. 1 is general is nature and relates to the remaining grounds of appeal therefore it does not require separate adjudication. Essentially, grounds of appeal 2 to 5 relate to treatment of gift amounting to Rs.161,86,77,034/- from four companies viz. Amur Trading Private Ltd., Madhuban Merchandise Private Ltd., Tresta Trading Pvt. Ltd. and Ornate Traders Pvt. Ltd. as income of the appellant.
5.2 Ground No. 6 &7: Relate to crediting of gift of Rs. 161,86,77,034/- to the profit and loss account for the purpose of section 11 5JB.
5.3 Ground No. 8 to 12: These are general in nature and flow from the 2 sets of grounds mentioned above.
ITA No. 5118 & 5119/Mum2015 5.4 At the outset, it is pertinent to note that the facts of this case are identical to those in the case of KDA Enterprises Pvt. Ltd for A.Y. 2009-10 already decided by the Hon'ble 'A' Bench of the Mumbai ITAT vide its order dated 11/3/2015 in whereby appeal filed by the Department was dismissed. Even the donor companies are the same, viz. Amur Trading Private Ltd., Madhuban Merchandise Private Ltd., Tresta Trading Pvt. Ltd. and Ornate Traders Pvt. Ltd.
5.5 The Hon’ble ITAT has summarized the main issue under consideration in its above mentioned order in para 2 & 3. It is mentioned that during the year under consideration i.e. F.Y. 2008-09, the assesse received Rs. 1,61,86,77,034/- from four concerns and claimed it as gifts received from those concerns. It was claimed that the amounts have been received directly from Reliance industries Ltd., on account of dividend receivable by the said four concerns against their share holding in Reliance industries Ltd. On the directions from the four concerns their dividends were directly credited to the bank account of the assesse The assesse also claimed that all the four concerns have passed resolutions in the meeting of Board of Director for making the said gifts and similarly the assessee company has also passed a resolution by the board of directors for receiving the gifts. It was also claimed that all the four donors were 19 authorized by Memorandum and Articles of Association for making such gifts and the donee assesse company is similarly authorized for receiving such gifts. The assesse claimed that the identity of the donor & 5119/Mum2015 companies, their source of funds for gifts and the nature of transaction are clearly established. Therefore, the receipts were not taxable because they were capital receipts. The assessing officer had held that the receipts could not be categorized as gifts or transactions which are specifically exempt from taxation nor could they be considered as dividend income in the hands of the assesse. The Assessing Officer had, therefore, taxed the amount as income from other sources and made the addition of Rs. 1,61,86,77,034/- to the returned income of the assesse. Furthermore, the amount was also added to the book profit u/s. 115JB of the Income Tax Act.
5.6 The Ld. Commissioner of Income Tax (Appeals) had deleted the above additions and Hon'ble ITAT dismissed the Departmental appeal against the order of Commissioner of Income Tax (Appeals).
5.7 On careful perusal of the above mentioned order of the Hon’ble ITAT, I find that the facts in the instant case are identical to the facts considered and adjudicated by ITAT except for the amounts and the donors involved.
5.8 I find that the Assessing Officer has made the addition of Rs. 161,86,77,0341- in the instant case using the same set of reasoning’s as was given by the Assessing Officer in the case of KDA Enterprises Pvt. Ltd., AY. 2009-10 that was considered by the Hon'ble ITAT. I also find that the contentions of the appellant mentioned above draws upon the order of the Ld. Commissioner of Income & 5119/Mum2015 Tax (Appeals) and the decision of ITAT in that case. Therefore, it is important to recapitulate the main element of the said judgment of the ITAT. The main points of decisions of Hon'ble ITAT are summarized below:
Identity of donors: In para 33 of the order the Hon’ble ITAT observed that once the assessee had given the name, PAN, address and other details “the identity of these concerns were proved.”
2. Source of capacity of the donor: Para 33 of the order also states that there is no dispute regarding source and capacity because gift has been received directly on account of dividend of donor company from Reliance Industries Ltd. as per the directions of the donor companies.
Genuineness of transaction In para 34 & 35 of ITAT order, Hon’ble ITAT found that the gifts have been received on account of dividend from Reliance Industries Ltd., on which Reliance Industries Ltd., has also pad dividend distribution tax. Therefore, such money received by the assesse is not unaccounted money.
4. Motive behind transaction : In para 36 Hon'ble ITAT has observed that the assesse has claimed the amount as gifts and in absence of ability of the A.O. to bring on record any other contrary motive there is no & 5119/Mum2015 alternative but to accept the claim of the assessee that these are gifts"
Absence of gift deed; Para 38 of the order observes there is no such legal requirement for making a gift". Hon'ble ITAT further observes that it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance.
Ability of a company to make a gift : The Assessing Officer in his order at para 5.5.12 has observed that it is not possible for a company to receive a gift". Hon'ble ITAT has dealt with this issue at para 39 of the above mentioned order and stated that the issue is squarely covered by the decision of the coordinate bench in the case of O.P. World Pvt. Ltd., vs. DCIT - and 3841/Mum/2012, Mumbai 'D' Bench, order dated 12/10/2012. In para 40, the Hon’ble ITAT observed "we hold that companies are competent to make and receive gifts and natural love and affection are not necessary requirement. Only requirement for company is to make gifts as per respective memorandum and article of association, which authorize the company for the same.
7. Gifts as income from other sources : The assessing officer has discussed this from para 5.5.2 to 5.5.8. The Hon’ble ITAT has given its findings at para 43 of its order & 5119/Mum2015 wherein it has referred to CIT vs. Groz Beckert Saboo Ltd. - 116 ITR 125 (SC). It has held that gifts received from corporate bodies are in nature of capital receipt not liable to tax under the provisions of the Income Tax Act.
Essential elements in determining whether or not a gift has been made The Hon’ble ITAT at para 49 says that there are three essential elements namely (a) delivery (b) donative intent and (c) acceptance by the done. It also states that all the above essentials have been fulfilled by the assesse and the donors tinder the taxability of the gifts u/s. 28(iv) of the Income Tax Act. Paw 57 of the ITAT order refers to the case of D.P. World Pvt. Ltd., (supra) and states that gifts are capital receipts and they are not taxable either under the head income from other sources or section 28(iv) of Income Tax Act
Taxability of the gift u/s. 68 of the Income Tax Act At para 58. the Hon’ble ITAT observes that the assesse has claimed these receipts as gifts and there is no other contrary fact on record. The identity source and capacity are not in dispute and they have been admitted as explained. The Hon’ble ITAT observed there can be no other doubt in accepting the genuineness of the transactions also
10. Taxability or the gilt u/s. 2(22)(e) of the Income Tax Act This issue has been & 5119/Mum2015 discussed in detail in para 59 & 60 of the order. Hon’ble ITAT has concluded "it is clear that there has to be an advance or loan given by a company to a substantial shareholder with 10% interest or to a concern in which such shareholder is holding not less than 20% of the voting power/shares for taxing such loan u/s. 2(22(e). Whereas, in the case under consideration, there is no common shareholding between the assesse and the oilier four companies who have made the gifts. Therefore, no addition can be considered in the case of the assesse u/s 2(22)(e) of the income Act".
Addition of the amount of gilt while computing book profit tits. 115B: The Hon'ble ITAT has discussed this issue from para 62 to 67 of their order. Their final conclusion is noted in para 68 which is reproduced below:
'68. In view of the above discussion, assertions made by Ld. AR and DR if kept in juxtaposition of the observation of the AC vis- á-vis findings recorded by the CIT(A) in the impugned order, an irresistible conclusion is that the amount of gift so received is neither taxable as income from other sources u/s. 56 nor as capital gain nor as income u/s. 2(22)(e) nor as. 115JB of the income Tax Act. The detailed finds recorded by the CIT(A) are as per material on record, which do not require any interference on our part. & 5119/Mum2015 Accordingly, we do not find any infirmity in the order of CIT(A)
5.9 As can be seen from the facts of the instant case, the issues involved and the circumstances to be examined are identical to those which were before Hon’ble ITAT in its decision in ITAT Order No. 2662/M/2013 dated 11/3/2015 which has been extensively referred to above. I find that the Assessing Officer has not brought any new findings of fact or question of law that would differentiate the instant case from the one already adjudicated by the Hon’ble ITAT. In the absence of such factors of differentiation, ratio laid down by the Hon’ble ITAT has to be respectfully followed.
5.10 Accordingly, grounds of appeal 2 to 5 are allowed and the Assessing Officer is directed to delete the addition of Rs. 161,86,77,034 as income from other sources.
5.11 Similarly, grounds of appeal 6 & 7 are allowed. The addition of Rs.161,86,77,034 for the purpose of book profit u/s 115JB is deleted.'"
8. We find from the Tribunal exactly on identical facts and circumstances in for AY 2009-10, in assessee’s own case vide order dated 11-03-2015 has extensively dealt with this issue and finally deleted the addition while computing under normal provisions and also deleted the addition while computing the book profit under section 115 JB of the Act by observing in para 47 to 68 as under: - “47. Now, coming to the observation of the AO to the effect that a company being an artificial person cannot not make gift. Even the taxing statue has & 5119/Mum2015 recognized that the gift can be given by a company. In this connection the relevant provisions of Gift Tax Act, 1958 (now repealed) provided as under:
a) Section 2(iii) of the Gift Tax Act, 1958 defines ―(iii) "assessee" means a person by whom gift-tax or any other sum of money is payable under this Act, and includes- (a) every person in respect of whom any proceeding under this Act has been taken for the determination of gift-tax payable by him or by any other person or the amount of refund due to him or such other person; (b) every person who is deemed to be an assessee under this Act:
(c) every person who is deemed to be an assessee in default under this Act;" b) Section 2(xviii) of the Gift Tax Act, 1958 defines "(xviii) "person" includes a Hindu undivided family or a company or an association or a body of individuals or persons whether incorporated or not; c) Section 2(vii) of the Gift Tax Act, 1958 defines "(vii) the expressions "company'; "Indian company" and "company In which the public are substantially interested" shall have & 5119/Mum2015 the meanings respectively assigned to them under section 2 of the Income-tax Act d) Section 2(17} of the Income-tax Act, 1961 defines "(17) "Company" means - (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association 01' body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (II of 1922), or which is 01' was assessable or was assessed under this Act as a company or any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company Provided that such institution, association 01' body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971 or on or alter that date) as may be specified in the declaration"
We are aware of the fact that provisions of Gift Tax Act, even though repealed, clearly has recognized the company a Juridical person as a & 5119/Mum2015 donor and made it an assessable entity under the Act. It is amply clear that the legislature in its wisdom wherever thought fit has provided by even through taxing statutes that a Company can make/receive gift. Thus, the observations of the AO in assessment order are erroneous and without any authority of law.
Three elements are essential in determining whether or not a gift has been made, a) delivery. b) donative intent,' and c) acceptance by the donee. All the above essentials stated by the AO are duly been fulfilled by the assessee and all the four donor of gifts. With respect to delivery of gift, the dividend has actually been received by the assessee in its bank account which conclusively prove the delivery of the gift from donor to donee. With respect to intent of donor, all four donors have passed a resolution in the meeting of shareholders and board of Directors that they intend to transfer the dividend on shares of Reliance Industries held by them to the assessee donee as gift. Thus, the donative intent to transfer the dividend as gift is clear from the resolution passed by the donors. With respect to acceptance by the donee, the assessee has duly passed a resolution in the meeting of shareholder and board of directors duly conveying their acceptance of the gift. Thus all the essential requisites of gifts stated by the AO in assessment order have been duly fulfilled by the assessee and no adverse conclusion can be drawn in the case of the assessee. & 5119/Mum2015 50. We found that the AO has relied on the decision reported at 214 ITR 801, 82 ITR 540, 207 ITR 89. All these decisions are distinguishable on facts. In the instant case, the gift received by the assessee is in the nature of capital receipt duly supported by documentary evidence and hence cannot be deemed as revenue receipt liable to tax. Thus, all the case laws relied upon by the AO in the assessment order has no relevance to the case of the assessee and are distinguishable on facts.
We had gone through the decision relied on by the AO in case of Sumati Dayal Vs. CIT, 214 ITR 801(SC), wherein Hon’ble Supreme Court has considered the surrounding circumstance and applied the test of human probabilities in deciding the case wherein the assessee has won few jackpots of horse racing in the year whereas she has no knowledge of horse racing.
In case of CIT Vs. Durga Prasad More [82 ITR 540] (SC), Hon‘ble Supreme Court found that assessee claimed certain income to be the income of his wife however he was unable to explain from what source she built up that amount: under such circumstances the hon'ble supreme court held that the income tax authorities are entitled to look into the surrounding circumstances to find out the reality.
In case of CIT Vs. L.N Dalmia [207 ITR 89](Calcutta), the hon'ble high court found that the assessee generated a paper loss which is capable of carried forward and set off against the future profit and thus would provide a cushion against the future & 5119/Mum2015 gain. The Hon'ble High Court found that though the loss is a paper loss but it had a far reaching effect on the tax liability in future years of the therefore and therefore held that the loss was a capital loss.
Thus, it is clear that facts of the above cases and the question of law decided by the Hon'ble courts has no application to the assessee‘s case.
The AO has assessed the amount of gift so received as income from other sources u/s.56 of the I.T.Act. Taxation of gift u/s. 56 of I.T. Act as income from other sources, may be considered with reference to the following two aspects: i) whether gift received by the assessee- company is taxable as gift u/s. 56 of the I.T. Act and ii) whether such gifts are taxable under the head "income from other sources" as the residuary head of income, because it may not be taxable under any other head of the income.
The A.O. has assessed it under the head "income from other sources" holding that assessee has failed to prove that the amount received is exempt from taxation. Though no specific reason has been given by the A.O. for assessing it under the head income from other sources, but it is clear from the discussion and decision of the A.O. that it has been assessed under the head "income from other sources" because it was found not taxable under & 5119/Mum2015 any other head of income, therefore, assessed under the residuary head of income, "income from other sources."
It is only with the amendment of section 56 w.e.f. 1/4/05 by Finance (No.2) Act, 2004, by introducing clause (v) in sub-section 2 of section 56 that receipt of gifts by an individual and HUF became taxable in the hands of the donee, whereas, gifts received by any other person remained out of tax net. Whereas, with the introduction of clause (viia) and (viib) in sub-section 2 of section 56 w.e.f. 1/6/2010 and 1/4/2013 respectively, gift of only shares of certain category of companies by certain category of companies have become taxable and any other gift received by any company through any other mode, i.e. cash, cheque, listed shares or other kind of properties, other than the said certain category of shares is not taxable till date, under any provisions of the Income Tax Act. Even the legislative history shows that gifts received by companies other than certain kind of shares by certain category of companies mentioned under section 56(2)(viia) and (viib) are not taxable under Income-tax Act or any other Act. During the period, when Gift Tax Act was in existence, gifts by companies as well as by any other person were taxable under the Gift Tax Act only and there was no provision for taxing gifts under the Income-tax Act. Therefore, gifts were not separately taxed under any provisions of the Income- tax Act during the period when the Gift Tax Act was in existence and the question of taxing the gifts separately under Income-tax Act, did not arise. When the Gift Tax Act was repealed in 1998, & 5119/Mum2015 legislature indicated its intention that the gifts will be no more taxable under the Gift Tax Act, but nc corresponding change was made under the Income- tax Act and, therefore, taxability of gift remained outside the tax net for a long time until section 56(2) was amended for bringing tax on gifts received by individuals and HUFs with certain conditions with effect from 01.04.2005. Therefore, legislature again indicated its intention that certain gifts received by individuals and HUFs only will be taxed under the Income-tax, in the hands of the recipient, but gifts received by companies or any other person other than individuals and HUFs were not brought under the tax net. With the passage of time, it was realized that certain kind of transactions of transfer of certain kind of shares by certain category of companies only further need to be taxed and accordingly the - legislature brought provisions of section 56(2)(viia) and 56(2)(vilb) of Income-tax Act in the statute with effect from 01/06/2010 and 01.04.2013 respectively, but any other gift by companies or any other person other than individual and HUF still left outside the tax net.
This issue has also been discussed by ITAT in the case of D.P. World Pvt. Ltd. (supra) and it has been held such gifts are capital receipts and they are not taxable either under the head income from other sources or section 28(iv) of Income Tax Act. The relevant portion of the decision is reproduced below :-
"19. The AO has applied the provisions of Sec. 56 and treated the value of the flats as & 5119/Mum2015 income under the head 'Income from other sources' and the Ld. CIT(A) has made the addition u/s. 28(iv) of the Act by treating the Stamp Duty value as income from profit and gains from business and profession.
We have carefully considered both the provisions. Let us first examine the provisions of sec.28(iv) of the Act relied upon by the CIT(A).
28. Profits and gains of business or profession. --The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession ,- - (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;"
In our humble opinion, the transaction is of a gift which is a capital receipt in the hands of the assessee and therefore it cannot be said to be a case of any benefit or perquisite arising from business. The contention of the Ld. Departmental Representative that by the said transaction the assessee has derived benefit and such benefit has arisen from the business connection of the donor and the donee, cannot be accepted as no direct nexus has been 'established by any tangible material brought on record by the Ld. CIT [A]. Simply because both the donor and the & 5119/Mum2015 donee happened to belong to the same group cannot ipso facto establish that they have any business dealings. As we have held that it is a case of a valid gift which is to be treated as capital receipt in the hands of the assessee, in the absence of any specific provision taxing a Gift as a deemed business income, provisions of sec.28(iv) cannot be applied on the facts of the case. The CIT[A] erred in taxing the value of the stamp duty as income under sec.28(iv) of the Act.
Now let us examine the provisions of sec 56 of the Act relied upon by the AO.
56. Income from other sources. --(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."
A plain reading of the above provision show that not every receipt is taxable under the head ' Income from other sources ' but only those which can be shown as 'Income ' can be brought to tax under this head , if it does not fall directly under other heads of income specified in sec. 14 of the Act.
The legislature keeping in mind the Tax Planning done by the Tax Payers by resorting to Gifts, which cannot be termed as Income , & 5119/Mum2015 made certain amendments by introducing clause (v] to sec. 56(2) which reads as under: v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, ***but before the 1st day of April, 2006, the whole of such sum:
However such amendment did not take care of the transactions involved in the instant case. The legislature further brought amendments as under:
(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,--
(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 ;
(b) any immovable property, - - i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value & 5119/Mum2015 of such property as exceeds such consideration ; (c) any property, other than immovable property, -- i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; ii) (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:
Provided that where the stamp duty value of immovable property as referred to in sub- clause (b) is disputed by the assessee on grounds mentioned in sub -section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub- clause (b) as they apply for valuation of capital asset under those section.
Even this amendment did not cover the issues involved in the present appeal . The legislature, in its wisdom, further & 5119/Mum2015 strengthened the provisions of sec. 56(2) by making the following amendments: viia) where a firm or a company not being a company in which he public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested, - (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.- For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii) ; & 5119/Mum2015 The above amendment covers the issues involved in the present appeal but the legislature in its wisdom made it applicable for the transactions effected after the 1st day of June, 2010.
Certain lacuna may have still remained to be addressed therefore the legislature did not stop here but went on to make further amendments by inserting clause (viib) as under .
(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received— i) by a venture capital undertaking from a venture capital company or a venture capital fund ; or ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation.-- For the purposes of this clause,-- & 5119/Mum2015 (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed ; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; However this amendment has no direct bearing on the facts of the case in hand.
Thus, we have considered the application of the provisions of sec. 28(iv) and sec 56 (i) & [2] from all the possible angles on the facts of the case, in our humble opinion the transaction involved in the present appeal is nothing but a Gift and thus it is a capital receipt not taxable under the alleged provisions of the Act. Therefore, the Assessee Succeeds and Revenue fails. Issues involved in this ground are decided in favor of the assessee and against the Revenue."
Now, we examine taxability of gift u/s.68 of the IT Act. Section 68 deals exclusively with the subject of cash credits and places burden of proof squarely on the tax-payer, where he either offers no explanation or his explanation is unsatisfactory as to the nature and source of such cash credits. In such & 5119/Mum2015 cases, it is for the assessee to prove the identity of the person from whom the money is received and his capacity/source of payment and the genuineness of the transaction. Therefore, in the case of the assessee also, it is expected from the assessee to prove all the three elements. The identity of the donors and the source/capacity are not in dispute and they have been admitted as explained, as discussed earlier in this order. The assessee has claimed these receipts as gifts and there is no other contrary fact on record, therefore, there can be no other doubt in accepting the genuineness of the transactions also.
With regard to the taxability of gift u/s.2(22)(e), we found that Any loan or advance paid to a substantial shareholder with 10% interest in the company or to a concern in which such substantial shareholder has substantial interest (20%) is taxable to the extent of accumulated profits u/s. 2(22)(e) of Income-tax Act. It is all the more relevant because A.O. has discussed and described in detail in the remand report, shareholding pattern of the assessee and other companies. Section 2(22)(e) reads as follows:
Dividend includes, (a) …..
……….
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum, (whether as & 5119/Mum2015 representing a part of the assets of the company or otherwise) [made alter the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; ……..
……… Explanation 3, - For the purposes of this clause; a) ―concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous, beneficially entitled to not less than twenty per cent of the income of such concern." & 5119/Mum2015 60. It is clear that there has to be an advance or loan given by a company to a substantial shareholder with 10% interest or to a concern in which such shareholder is holding not less than 20% of the voting power/shares for taxing such loan u/s. 2(22)(e). Whereas, in the case under consideration, there is no common shareholding between the assessee and the other four companies who have made the gifts. Therefore, no addition can be considered in the case of the assessee u/s. 2(22)(e) of Income-tax Act.
The AO has also added the amount of gift received while computing book profit u/s.115JB by holding that it should be credited to the profit and loss account as an item of exception nature. As per our considered view there is no merit in AO‘s contention. The Supreme Court in the case of Appollo Tyres (supra) has observed that while looking into accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with respect to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by the Companies Act, scrutinized and certified by the statutory auditors, approved by the shareholders and filed before the Registrar of the Companies who has statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In the case of Apollo Tyres the question raised before the Hon‘ble Supreme Court was: & 5119/Mum2015 (i) Can an AO while assessing a company for income-tax under s. 115J of the IT Act question the correctness of the P&L a/c prepared by the Respondent-company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Sch. VI to the Companies Act"
The Honible Supreme Court in the case of Apollo Tyres(supra) thus observed as under.
"The above speech shows that the IT authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that s. 115J, was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, s. 115J makes the income reflected in the companies books of accounts as the deemed income for the purpose of a assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of & 5119/Mum2015 the company. While so looking into the accounts of the company, an AO under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and. will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the AO to re scrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. In our opinion, reliance placed by the Revenue on sub-s. (IA) of s. 115J of the IT Act in support of the above contention is misplaced. Sub-s. (IA) of s. 115J does not empower the AO to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to & 5119/Mum2015 us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers. the authority under the IT Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of s. 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income- tax both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in s. 115J that "income of the company as accepted by the AO. In the absence of the same and on the language of s. 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO & 5119/Mum2015 thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J."
Respectfully following the decision of the Hon‘ble Supreme Court as discussed above, we hold that the AO while computing income u/s.115J has only power to examine whether the books of accounts are satisfied by the authorities under the Companies Act as having been maintained in accordance with the Companies Act.
Thus, the AO has limited power of making increase or reduction as provided in the Explanation to the said Section. Furthermore, the Explanation to section 115JB of the Act is applicable only if the item of expense or income is debited or credited to the Profit & Loss Account. However, when the item of expense or income is not debited or credited to the Profit & Loss Account, Explanation to section 115JB of the Act cannot apply and hence no adjustment is required under that section to the books profit. In the case of the assessee gift of Rs.161,86,77,034/- was received from corporate bodies were not credited to the Profit & Loss Account and hence no adjustment is required to the book profit declared by the assessee u/s 115JB of the Act.
Similar issue has come up before the jurisdiction Honble Bombay high Court in the case of CIT Vs. M/s Akshay textiles & Agencies Pvt. Ltd & 5119/Mum2015 (304 ITR 401] wherein the hon'ble Bombay High Court has held as under:
C. Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct in upholding the order of the CIT(A) in holding that the capital gains of Rs.19,74,489 are not to be taken into account while computing the profits liable to be taxed under s. 115JA of the IT Act, 1961 and that the decision of the Bombay High Court in CIT vs. Veekaylal Investment Co. (P) Ltd. (2001) 166 ITR (Bom) 96 : (2001) 249 ITR 597 (Bom) was not applicable ?
Insofar as question "C", our attention is invited to the judgment of the Supreme Court in Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC). The question framed therein which is similar to the question "C" has been answered in favour of the assessee and against the Revenue. In the light of that the question of law as framed would not arise."
Similarly, Honble Bombay High Court in the case of Kinetic Motor co. Ltd. Vs. Dy. CIT (262 ITR 330) has observed that it is not open for the AO to make any adjustment to the book profits beyond what is authorized by the definition given in Explanation to section 115J of the Income Tax Act, if the accounts are certified by the auditors. The decision of jurisdictional Hon'ble ITAT, Mumbai in the case of The DCIT Vs. M/s Arundhati Traders & 5119/Mum2015 Pvt. Ltd & Ors in [ITA No. 6293/Mum/2006 & others] wherein the Hon'ble Tribunal has observed as under:
`21. Where the accounts are prepared and certified by the auditors, which in-turn are approved/adopted by the shareholders of the company and are filled before the Registrar of the Companies, the Assessing Officer has no powers of disturbing the profits of business as held by the Honble Supreme Court in Appollo Tyres Ltd. Vs. CIT (Supra). Only power of the Assessing Officer is to make: suitable adjustments to the profits of business under the Explanation to section 115JB of the Act. The said adjustments are relatable to the profits and gains of business carried on by the assessee. Any gain arising on sale of investments, though taxable, may necessarily be not routed through Profit & Loss Account. We uphold the order of CIT(A) that no adjustments on account of gain on sale of units of mutual fund is to be made while working out the book profits under Section 115JB of the Act. The grounds of appeal raised by the revenue are dismissed."
In the instant case, undisputed facts are that the assessee has prepared Profit & Loss Account as per Part II and III of Schedule VI of the Companies Act and considered the same profit as base for computing the book profit u/s 115JB of the Act. However the AO did not accept the contention of the assessee and proceeded to add gift received from & 5119/Mum2015 corporate bodies of Rs.161,86, 77, 034/- in the nature of capital receipt to the book profit computed u/s 115JB of the Act.
It is also not disputed that the long-term capital gain earned by the assessee is included in the net profit determined as per P&L a/c prepared as per Part II and Part III of Sch. VI to the Companies Act. In other words, it is not the case of the assessee that the capital gain earned by the assessee was not included in the net profit determined as per P&L a/c of the assessee prepared under the Companies Act. As per the audited accounts of the assessee, the statutory auditors have reported that amongst others, that in their opinion, the P&L a/c and the balance sheet are in compliance with the Accounting Standards referred to in subs. (3C) of s. 211 of the Companies Act, and further reported that the balance sheet and P&L a/c read together with the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted. As per audited P&L a/c, the assessee has included long- term capital gain. In the Notes on accounts, it is nowhere mentioned and claimed that though the long-term capital gain is included in the P&L a/c but it is not includible in the net profit in terms of provisions of Part II and Part III of Sch. VI to the Companies Act or the accounting principles accepted under the Companies Act. Hence, it is not a case of the assessee that the long-term capital gain was not includible in the P&L a/c prepared in terms of Sch. VI to the Companies Act. Only in the & 5119/Mum2015 computation of book profit under s. 115JB of the Acts the assessee claimed exclusion of long-term capital gain which is exempt under s. 47(iv) of the Act. It is due to fact that the assessee claimed deduction of long-term capital gain from book profit by virtue of being exempted income in the normal provisions of the Act and not because of the reason that the same was not includible in P&L a/c prepared under Part II and Part III of Sch. VI to the Companies Act. In the circumstances, when the assessees themselves have included the capital gains arising from sale of subsidiary in the profit and loss, the same cannot be excluded under any of the Explanations under s. 115JB.
In view of the above discussion, assertions made by ld. AR and DR if kept in juxtaposition to the observation of the AO vis-à-vis findings recorded by the CIT(A) in the impugned order, an irresistible conclusion is that the amount of gift so received is neither taxable as income from other sources u/s. 56 nor as capital gain nor as income u/s.2(22)(e) nor u/s.115JB of the I.T. Act. The detailed findings recorded by the CIT(A) are as per material on record, which do not require any interference on our part. Accordingly, we do not find any infirmity in the order of CIT(A).
9. From the above order of the Tribunal in for AY 2009-10, it is clear that there is no factual difference in these two years and the facts of AY 2009-10. Even the learned CIT DR also admitted that there is no factual difference but he stated that the Revenue has filed appeal against the order of this Tribunal and has not accepted & 5119/Mum2015 the same. In view of the above, we are of the view that the issues in regard to these appeals are squarely covered in the given facts and circumstances and hence, we confirm the orders of CIT(A) and dismiss these two appeals of Revenue.
In the Result, the appeals of the Revenue are dismissed.
Order pronounced in the open court on 28-02-2018.