Income Tax

Additions under Section 68 can’t be made based on mere suspicion

In the case of Smt. Tapasi Singh Vs ITO (ITAT Kolkata), the assessee provided new capital, which was explained as a gift. She provided tax information for the donors to support her claim of receiving the said gifts. She also provided copies of relevant cheques as well as the donors’ declarations confirming the gifts. To verify the assessee’s claim, the Assessing Officer (AO) issued summons under Section 131 to all donors, requesting their attendance. The question before the ITAT was whether the AO was justified in classifying the assessee’s gifts as unexplained cash credit under Section 68 solely on the basis of doubts and suspicion.

Facts of the case

In this case, the assessee is a person who is in the business of trading sugar, wheat, and refined flour. Her income tax return for the year under consideration was filed on October 26, 2004, and she declared a total income of Rs. 2,15,870. During the fiscal year under consideration, the assessee introduced a fresh capital of Rs. 4,00,000, the source of which was explained as a gift of Rs. 1,00,000 each received from four individuals.

The assessee provided tax information for the donors, as well as copies of appropriate cheques and declarations from the donors confirming the gifts, in support of her claim of receiving the gifts.

The AO issued notices u/s 131 of the Act to all the contributors or donors, requesting their personal attendance, in order to verify the assessee’s claim. The donors, on the other hand, did not show up for their examination by the AO. Even the assessee failed to show up for the AO’s examination because the donors had not been presented.

In light of this failure, as well as the fact that none of the donors were related to the assessee by family, the AO determined that the donors’ identity and creditworthiness, as well as the genuineness of the transactions related to gifts, had not been proven. As a result, he classified all four donations, totalling Rs. 4,00,000, as unexplained cash credits, and added that amount to the assessee’s total income under section 68 in the assessment completed u/s 143(3) via an order dated December 26, 2006.

The concerned assessee filed an appeal before the CIT(A) against the order of the Assessing Officer under section 143(3), and a submission was made on her behalf in writing before the CIT(A) in support of her case that all the gifts received from four donors were genuine.

Contentions by the assessee and AO with regards to section 68

The A.O. asserted that the creditworthiness and genuineness of the transactions could not be established in the absence of any family relations between the assessee and the donors, and thus the said sum of Rs. 4,00,000 was added to the assessee’s total income.

Still, the gifts were presented with account payee cheques dated 20.03.2004 and 25.03.2004, and the Finance Act, 1998 stated explicitly that gifts from non-relatives can be accepted on and from the 1st day of Oct 1998 until the 31st day of Aug 2004, and only after that date did the Finance Act, 2004 limit the acceptance of gifts from non-relatives to Rs. 25,000 only, and any amount above and beyond Rs. 25,000 became be taxable in the hands of the receiver.

Therefore, the assessee contended that it should be within the scope of the law in accepting the gifts of Rs. 1,00,000 each on 20.03.2004 and 25.03.2004, as enumerated by the provisions of the Finance Act, 1998, and thus did not violate the statute.

Moreover, in terms of the transaction’s authenticity, the gifts were made using account payee cheques, which in itself is a third-party verification of the transactions’ authenticity.

And, in terms of the creditworthiness of the persons making the gifts, they were income tax assessees who made the gifts out of their tax-paid accumulated capital, and a copy of their return of income acknowledgements and computation sheets were also enclosed by the assessee for the year under consideration to substantiate this. As a result, the assessee believes that the addition to the tune of Rs. 4,00,000 is illegal and goes beyond the powers conferred by the statute, and it is requested that the same be deleted in order to uphold justice.

However, the CIT(A) did not find merit in the aforesaid submissions made on behalf of the taxpayer. According to the CIT(A), it is important to note that all the four individuals making the donations, filed their Income Tax Returns showing an income of Rs. 52,400 each on the same date, i.e., 08.11.2004. It is difficult to believe that all of the purported donors, who are unrelated, will file their income tax returns on the same date, 08.11.2004, with an identical income of Rs. 52,400. It also defies logic and reason that a person with a limited income of Rs. 52,400 would gift Rs. 1,00,000 to an unrelated person.

For the reasons noted above, the CIT(A) approved the AO’s addition under section 68 of the Income Tax Act by interpreting the gifts claimed to be received by the assessee as unexplained cash credit and relying on relevant judicial pronouncements discussed in the challenged order. After being displeased with the CIT(A)’s decision, the assessee has thereafter filed an appeal with the Tribunal.

Observations by ITAT on Additions made under Section 68

Section 68 of the IT Act is one of the most powerful and debatable provisions of the Income Tax Act^[1]. This provision has resulted in a plethora of judgments, some of which are contradictory, both in favour of Revenue and the assessee.

According to section 68 of the Act, if any sum is discovered credited in an assessee’s books for any previous year, and the assessee provides no explanation about the nature and source of the sum, or his explanation is not satisfactory in the opinion of the Assessing Officer, the sum may be charged to income-tax as the assessee’s income for that previous year. But such additions cannot be made based on mere suspicion.

It is noted that all four donors who presented the gifts in question to the taxpayer during the year under consideration were involved in business, and the business income earned by them was duly declared in the returns of income filed on a regular basis for the year under consideration, as evidenced by photocopies of their IT return acknowledgement letters.

Furthermore, the four donors gave the assessee all of the gifts in question via account payee cheques, and their declarations verifying the gifts delivered to the assessee were also provided on record, together with all pertinent information, including the donors’ Permanent Account Number.

As per the learned counsel for the assessee, the principal responsibility to demonstrate the identity and creditworthiness of the concerned donors, as well as the genuineness of the relevant transactions involving gifts, was therefore duly discharged by the taxpayer by producing the relevant evidence of documentation and without bringing on record any material or proof to disprove or dislodge the assessee’s claim.

As a result, in the opinion of the assessee’s counsel, the authorities were not justified in treating the assessee’s gifts as unexplained cash credit under section 68 of the Income Tax Act solely on the basis of doubts and suspicion. Therefore, to allow the appeal of the assessee, the assessee’s counsel set aside the AO’s addition of Rs. 4,00,000, which was confirmed by the CIT(A) under section 68.

The assessee filed this appeal in response to the order of the Commissioner of Income Tax (Appeals) dated 4^th June 2020, and the only issue involved therein was the addition of Rs. 4,00,000 made by the Assessing Officer and confirmed by the CIT(A) under section 68 of the Income Tax Act by treating the gifts received by the assessee during the year under consideration as unexplained cash credit.

The Kolkata ITAT ruled on appeal that all of the donors who had given the gifts were involved in the business. They had declared their business income on the income tax returns that they had filed on a regular basis. Furthermore, all gifts were made payable to the assessee with account payee cheques. Their declarations confirming the gifts made to the assessee were also made public, including all pertinent information, including the donors’ Permanent Account Number.

Decision

The assessee duly discharged the primary onus of establishing the identity and creditworthiness of the donors, as well as the truthfulness of the relevant transactions involving gifts, by producing the necessary documentary evidence. As a result, the AO was not justified in classifying the assessee’s gifts as unexplained cash credit under Section 68 solely on the basis of doubts and suspicion. In the final result, the appeal of the assessee is allowed under the judgement given on 30 April 2021.

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