Case Law Details
ITO Vs Inder Jaggi (ITAT Raipur)
ITAT Raipur held that tax implication of the gift transaction shall arise in the year in which the said asset will be sold/transferred. Thus, addition based on the notional / fictitious entry of asset made in books of account unjustified.
Facts- The assessee is an individual have filed his return of income (ROI) for the AY 2017-18, electronically, on 07.11.2017, declaring total taxable income of Rs.8,90,050/-. During the year under consideration, the assessee was engaged in the business through three proprietorship firms namely Siddhi Vinayak Baxi Motors, Siddhi Vinayak Purti Gas and Taxi Owners United Transport Company. Case of the assessee has been selected for limited scrutiny under “CASS”, statutory notices u/s 143(2) and 142(1) along with questionnaire were issued. In response, assessee made compliances from time to time. During the assessment proceedings, on the basis of submission and evidence of the case, the Ld. AO has observed that an addition on account of unexplained income u/s 68 of the I.T. Act is required to made in the case of assessee.
CIT(A) vacated the addition made by AO. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that the notional / fictitious entry of asset made by the assessee in his books of account cannot be the basis for determining the cost of acquisition either at any stage, the cost of acquisition has to be decided under the prescribed provisions of Act u/s 49(1) r.w.s. 55(2) or relevant provisions prevailing at the time of sale or transfer of the property.
Held that we concur with the decision of Ld. CIT(A) of deleting the addition observing that the tax implication of the gift transaction shall arise in the year in which the said asset will be sold/transferred. In fact, the cost of acquisition shall be arrived at in terms of the provisions of law which are applicable at the relevant time of sell / transfer of the said property, without any influence drawn from the accounting treatment of asset and entries nationally made by the assessee in his books of accounts.
FULL TEXT OF THE ORDER OF ITAT RAIPUR
The captioned appeal is filed at the instance of the department challenging the order of Commissioner of Income Tax Appeal, NFAC, Delhi (in short “Ld. CIT”), under section 250 of the Income Tax Act, 1961 (in short “The Act”), dated 26.03.2024, for the Assessment Year 2017-18, which in turn arises from the order of Income Tax Officer, Ward-3(1), Raipur (in short “Ld. AO”), passed u/s 143(3) dated 11.12.2019.
2. The grounds of appeal raised by the department read as under:
1. “Whether on points of law and on facts & circumstances of the case, the Id. CIT(A) was justified in deleting the addition of Rs.80,33,600/- made by the AO u/s 68 of the Act?”
2. “Whether on points of law and on facts & circumstances of the case, the Id. CIT(A) was justified in deleting the addition of Rs. 80,33,600/- by ignoring the facts as brought on record by the AO that the assessee has manipulated his books of account and increased his capital by 80,33,600/-?”
3. “Whether on points of law and on facts & circumstances of the case, the Id. CIT(A) was justified in deleting the addition of Rs.80,33,600/-, thereby without considering and distinguishing the ratio of the judgment of the cases such as Rameshwar Prasad Bagla 68 ITR 653(Allahabad) & Homi vs CIT 41 ITR 135, 142 by (Supreme Court) wherein it is stated that the totality of circumstances must be considered in a case of circumstantial evidence & the totality of the circumstances has to be taken into consideration and the combined effect of all those circumstances is determinative of the question as to whether or not a particular act is proved ?”
4. The order of the Id. CIT(A) is erroneous both in law and on facts.
5. Any other ground that may be adduced at the time of hearing.
3. The brief facts of the case culled out are that, the assessee is an individual have filed his return of income (ROI) for the AY 2017-18, electronically, on 07.11.2017, declaring total taxable income of Rs.8,90,050/-. During the year under consideration, the assessee was engaged in the business through three proprietorship firms namely Siddhi Vinayak Baxi Motors, Siddhi Vinayak Purti Gas and Taxi Owners United Transport Company. Case of the assessee has been selected for limited scrutiny under “CASS”, statutory notices u/s 143(2) and 142(1) along with questionnaire were issued. In response, assessee made compliances from time to time. During the assessment proceedings, on the basis of submission and evidence of the case, the Ld. AO has observed that an addition on account of unexplained income u/s 68 of the I.T. Act is required to made in the case of assessee. While making such addition, Ld. AO observed as under:
3. Addition on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961:- During the year under consideration assessee is proprietor of three firms namely Siddhi Vinayak Baxi Motors, Siddhi Vinayak Purti Gas and Taxi Owners United Transport Company. Under the proprietorship firm of Taxi Owners United Transport Company, assessee has increased his capital by Rs. 80,33,600/- and he has claimed this as gift from father. Therefore, assessee was asked to explain this and to furnish supporting evidences in this regard. On perusal of the details, furnish by the assessee, it is found that assessee was gifted on 30.11.2010 a house property by his father and the fair market value for the purpose of stamp duty valuation of the property is Rs.80,33,600/-. Assessee has stated that this property, comprising land and building, was originally purchased by Grandfather of assessee Late Shri Hari Kishan Jaggi almost fifty years back and the grandfather of the assessee gifted one fourth of the property to the father of the assessee Shri Nanak Jaggi long back and his father has gifted the same property to the assessee during under consideration.
Section 55(2)(b)(ii) stipulates that where the capital asset became the property of assessee under a gift and the capital asset became the property of the previous owner before 01.04.1981, cost of acquisition is the cost of the asset to the previous owner or the fair market value of the asset as on 01.04.1981. This is at the option of the assessee. Since, the property was acquired under gift by the father of the assessee long back which may be before 01.04,1981, in absence of option given by the assessee, the cost of the property in the hands of assessee is treated as Nil because the cost of property in the hands of previous owner i.e., assessee’s father is Nil.
However, assessee has claimed the value of the property at Rs. 80,33,600/- in his balance sheet and accordingly, has raised his capital by this amount which is not correct. On being asked to explain as to why not increase in capital should be treated as unexplained cash credit, assessee has furnished as under: –
“Assessee has capitalized his asset in the books of account and the fair market value being Rs. 80,33,600/- and stamp duty of Rs. 1,22,600/- totalling to an amount of Rs. 81,56,200/-. We further submit that section 55(2) r.w.s 49(1) of the Income Tax Act, 1961 is attracted in the year which the capital asset is sold/ transferred. During the year A.Y. 2017-18, assessee has only acquired the asset and not sold/ transferred. Therefore, valuing the asset at the fair market value is the accounting treatment in the audited books of account. Tax implication of the gift transaction shall arise in the year in which the said asset is sold/ transferred. Therefore, the difference amount should not treated as unexplained cash credit. “
Assessee’s above submission has carefully perused but no merit is found. This is so because whenever assessee sells this property he will claim cost of this property as Rs. 80,33,600/- because cost of the property has already been shown to be Rs. 80,33,600/- in his balance sheet. Once assessee has booked this asset at Rs. 80,33,600/- in his books of account, this amount only will be claimed as cost of acquisition. Because even if at the time of sale of the property, if provisions of section 55 of Income Tax, 1961 are applied and cost of the property in the hands of previous owner is taken at Nil, assessee would certainly claim cost of the property at Rs. 80,33,600/- in F.Y 2016-17 in the form of improvement cost because his books of account will only show this amount as the cost of the property in F.Y. 2016-17.
Thus, it is found that assessee has manipulated his books of account and increased his capital by Rs. 80,33,600/- without any basis for his certain benefit in future. Hence, since assessee’s books of account have been credited by Rs. 80,33,600/- in the form of increase in capital and the same has been found to be unsubstantiated and so unexplained, this amount of Rs. 80,33,600/- is held to be the unexplained cash credit u/s 68 of the Income Tax Act, 1961 and accordingly, is added to the returned income of the assessee.
This addition of Rs.80,33,600/- is taxed u/s 115BBE of the Act.
4. Aggrieved with the aforesaid addition by the Ld. AO, assessee preferred an appeal before the Ld. CIT(A), wherein the addition made by the Ld. AO has been vacated by the Ld. CIT(A) with the following observations:
5.5 I have perused the both AO’s observation and appellant’s submission before the AO and also before me. The observation of the AO in my considerate opinion does not hold good here. First of all the appellant has not transferred the property in question but has shown in his balance sheet as per the market value of the property and the same does not give any benefit to him in the year under consideration. Secondly, invoking of section 68 of the Act is misplaced as the said increase in valuation does not comes under the purview cash credit u/s 68 of the Act. For the shake of clarity Section 68 is reproduced below:-
Cash credit-
“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:
[Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
1. The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
2. Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.]”
5.6 It Is evident from this provision that section 68 can only be applied if there are any ‘sum’ found credited in the assessee’s books of accounts that the assessee cannot provide satisfactory explanations for the same or the explanation so offered is not found satisfactory by the AO. The money that is referred to as ‘Sum’ is the amount that is entered into the account books through cash, cheque or draft, A transfer of entries between heads cannot be regarded as a sum credited in the account books for the purpose of section 68 of the IT Act. The appellant appears to have only made adjustment entries and received no cash or check for the transaction.
5.7 Furthermore, the AO made an addition in this case regarding the possibility of something happening in the future, but it was misconceived. It is not possible to make additions based on the fear of future events.
5.8 The Hon’ble Calcutta High Court in the case of Jatia Investment Company vs. CIT, 206 ITR 718, has held that if there was no real cash entry on the credit side of the cash book, but, merely a notional or fictitious cash entry is there, there is no real credit of cash to its cash book and, therefore, the question of inclusion of the amount of the entry as unexplained cash credit cannot arise.
5.9 Based on the observations mentioned earlier, the facts and circumstances of the case, and in accordance with the judicial precedents mentioned above, I am of the view that the AO erroneously invoked the provisions of section 68 of the Act in this case.
5.10 Regarding application of section 55(2) the appellant submitted inter alia that said section read with section 49(1) of the Income Tax Act, 1961 is attracted in the year in which the capita/ asset is sold/transferred. During the AY 2017-18, the assessee has only acquired the asset and not so/d/transferred it. Therefore, valuing the asset at the fair market value is the accounting treatment in the audited books of accounts. The tax implication of the gift transaction shall arise in the year in which the said asset will be sold/transferred. Therefore, the difference in amount should not be treated as unexplained cash credit’. I find merit in the said arguments of the appellant. Considering the discussion made above, I am of the considerate view that the addition of Rs. 80,33,600/- u/s 68 of the Act is not as per law and accordingly delete the same. The ground of appeal is, thus, allowed.
5. Since appeal of the assessee is allowed by the Ld. CIT(A), by deleting the addition made by Ld. AO, granting relief to the assessee, aggrieved thereby the department has preferred the present appeal before us.
6. At the very outset, Ld. Sr. DR, Shri Satya Prakash Sharma, on behalf of the revenue have reiterated the facts of the case and have raised the contention regarding no justification in the decision of Ld. CIT(A), while deleting the addition made by the Ld. AO under Section 68 of the Act. It was the submission by Ld. Sr. DR that Ld. CIT(A) was not justified in deleting the addition ignoring the facts which were brought on record by the Ld. AO, that the assessee had manipulated his books of accounts and increased his capital by the said amount. Ld. Sr. DR further placed his reliance on the case of Rameshwar Prasad Bagla 68 ITR 653(Allahabad) & Homi vs CIT 41 ITR 135, 142 by (Supreme Court), wherein it is stated that the totality of circumstances must be considered in a case of circumstantial evidence & the totality of the circumstances has to be taken into consideration, the combined effect of all those circumstances is determinative of the question as to whether or not a particular act is proved.
7. Backed by aforesaid submission, it was the prayer of revenue that the Ld. AO has rightly made the addition anticipating that the assessee will sell the impugned property, claiming the cost of acquisition of property at Rs.80,33,600/-, as he had already shown the said amount in his balance sheet. It is the submission that once the assessee has adopted the value of asset in his books of accounts, such amount will be claimed as cost of acquisition in future. Ld. Sr. DR further reiterating the facts from the order of Ld. AO had submitted that the assessee is manipulating his books of account by increasing his capital by Rs.80,33,600/- without any basis for his benefits of future, and such transaction is found to be unsubstantiated and unexplained, therefore, the addition made u/s 68 of the Act, deserves to be sustained. With such submissions, Ld. Sr. DR requested to set aside the order of Ld. CIT(A) and upheld the order to Ld. AO.
8. In rebuttal, Ld. AR, Mr. Sakshi Gopal Aggarwal, CA Authorized Representative of the assessee have submitted before us a written submission, the same for the sake of clarity has been extracted as under:
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9. Backed by aforesaid written submissions, Ld. AR argued that Ld. CIT(A) had rightly appreciated the facts of the case, wherein the issue in hand has been decided in favour of the assessee on two counts:
(i) That if there was no real income in cash and no cash and check transaction, no entry on the credit side of Cash book, but merely a notional entry or fictitious entry is there, the question of inclusion of the amount of entry as unexplained cash credit cannot arise.
(ii) Application of provisions of section 56(2) r.w.s 49(1) of the Income Tax Act is triggered in the year in which capital asset is sold / transferred. Whereas, in the present case during the relevant AY2017-18, the assessee has only acquired the asset and not sold/ Transferred it. Valuing asset at the Fair Market Value (FMV) is the accounting treatment in the audited books of accounts. The tax implication of the gift transaction shall arise only in the year of sale / transfer of such asset. Such accounting treatment in books of account cannot be treated as unexplained cash credit as per law under the provisions of section 68.
10. With the aforesaid submissions, it was the prayer of Ld. AR that the issue has been properly deliberated and dealt with by the Ld CIT(A), he placed his strong reliance on the findings by the Ld CIT(A), thus requested to uphold the same.
11. We have considered the rival submission, perused the material available on record and case laws relied upon by the revenue. The undisputed facts of the present case state that, during the year under consideration, the assessee was gifted with a property in his favour on 30.11.2016 by his father, The gift deed was registered and the fair market value for the purpose of stamp duty value of the subject asset was determined at Rs.80,33,600/-. The Gifted property comprises of land and building, which is originally purchased by assessee’s grandfather almost 50 years back, 1/4th portion of the property has traversed through the hands of grandfather, who gifted the same to assessee’s father and father in turn has gifted the same to the assessee. On being queried regarding the applicability of section 55(2)(b)(ii), assessee responded before the Ld. AO that the property was received by the assessee under a gift and in such as case, wherein the previous owner has acquired property before dated 1.4.1981, cost of acquisition is cost of the asset to the previous owner or the fair market value as on 1.4.1981, whichever is opted by the assessee.
12. Ld. AO observed that in absence of any option chosen by the assessee, the cost of acquisition of property in hand the assessee is treated as NIL. Ld. AO further observed that since the assessee has recorded the value of this property as his asset in his audited books of accounts at Rs.8,33,600/-, resultantly, the capital of the assessee is increased to that extent. Therefore, he treated the same as unexplained cash credit. The response of the assessee was not found acceptable by the AO, that the provisions of Section 55(2) r.w.s. 49(1) of the Act are not applicably in the present case, such provisions can only be triggered in the year in which the capital of asset is sold / transferred, whereas during the relevant assessment year assessee has only received the subject property as gift from his father. However, we find force in such contentions of the assessee, which further elaborated by the Ld AR that only valuing the asset at fair market value in the books of accounts cannot bring the same under the scope of section 68 of the Act. Though, Ld. AO does not find the reply of assessee tenable in the eyes of law, he disputed with his conviction that when in future the asset is sold the assessee will take benefit of cost of acquisition on the basis of amount recorded in his audited books of accounts, but we cannot subscribe to such a futuristic anticipation of the Ld. AO, which is not in conformity to the mandate of law. We may herein observe that the notional / fictitious entry of asset made by the assessee in his books of account cannot be the basis for determining the cost of acquisition either at any stage, the cost of acquisition has to be decided under the prescribed provisions of Act u/s 49(1) r.w.s. 55(2) or relevant provisions prevailing at the time of sale or transfer of the property. So, AO’s futuristic observations is found to be extraneous, unnecessary and misplaced at this stage.
13. Coming to the two-faced decision by Ld CIT(A), the first finding qua receipt of real cash, cheque or draft is very subjective and absolutely depended on facts of each case, therefore, we cannot concur with the same in general, but in present case the same being a notional entry can be accepted. The second aspect on which the addition has been deleted is found to be correct, wherein, Ld. CIT(A) had given his approval to the contention of the assessee that the tax implication on the transaction will come into play only in the year in which the asset is actually sold / transferred, therefore, at this juncture, no addition can be made presuming that the assessee will be benefitted in future merely on account of accounting entries in the books.
14. Regarding, reliance placed by the department on the case of as Rameshwar Prasad Bagla 68 ITR 653(Allahabad) & Homi vs CIT 41 ITR 135, 142 by (Supreme Court) that the circumstance must be looked into in totality to determine whether particular act is proved or not. The judgment referred cannot rescue the contentions of the revenue, as in present case the transaction of sale / transfer, which is the prerequisite condition for invoking the provisions of section 55(20 r.w.s. 49(1) is admittedly missing, so no further circumstantial analysis needs to be performed.
15. In view of facts and circumstances, we concur with the decision of Ld. CIT(A) of deleting the addition observing that the tax implication of the gift transaction shall arise in the year in which the said asset will be sold/transferred. In fact, the cost of acquisition shall be arrived at in terms of the provisions of law which are applicable at the relevant time of sell / transfer of the said property, without any influence drawn from the accounting treatment of asset and entries nationally made by the assessee in his books of accounts.
16. Resultantly, the ground of appeal raised by the revenue in the present appeal based on events that will take place in future are found to be bereft of merits and devoid of any convincing substance to be admitted.
17. Resultantly, the appeal of the department stands dismissed, in terms of our aforesaid observation.
Order pronounced in the open court on 27/08/2024.
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