Necessary Documents should be filed to prove bonafide intention when money received from overseas

Brief of the Case

ITAT Kolkata held In the case of Sri Som Dutt v ACIT  that whenever, the money has been received from overseas, then the onus is on the Assessee to prove that all the transactions are bonafide when he is claiming that the amount has been received as Capital Receipt. Also, by not completing all the formalities i.e. filing of proper and genuine documents related to the transaction will render the whole amount as Taxable.

Facts of the Case

The facts of the case are that the AO during the course of assessment proceedings noted that the assessee has credited in his capital account a sum of Rs.4,55,78,880.50 which was received as a sum of one million US Dollars from one Trust which is registered out of India and the said money has been sent from the capital account of the Trust and is to be regarded as a capital distribution to the Assessee. The Assessing Officer subsequently asked for certain more information from the assessee like Nature of Trust and founder, No. of years of association, Duties and obligations as a beneficiary, Purpose for set up, Source of income of the Trust, Identification particulars of the Trust as per 11 Act of the Nation, Names of other beneficiaries, Whether the assessee received gift from the Trust in earlier years and Statement of account of Trust Bank statement.

In respect of some items, the assessee expressed his inability and stated that Trustees of the said Trust are bound by the secrecy laws of their country and, therefore, they are constraint to part with the financial statements of the Trust. There were no identification criteria for the Trust like Permanent Account Number as per the laws of Channel Islands. Subsequently the assessee submitted a letter in which it was explained that Trust was established on 20.07.1993 under the laws of the Island of Jersey and is discretionary in nature. On 28.11.2003, the Trustee exercised its discretion in favour of the assessee, in his capacity as discretionary beneficiary of the Trust, and made a capital distribution to him for a sum of USD 10,00,000. The Assessing Officer noted that the Trust is a Private Discretionary Trust and in fact a Foreign Trust, not coming under the purview of the Indian Income Tax Act; and any fund distributed to any resident of India, therefore, undoubtedly, is chargeable to income-tax in the hands of the resident assessee. The question of capital or revenue receipt is irrelevant as it is income in the hands of receiving party and there is no provision in the Indian Income Tax Act to exempt such receipt. The Assessing Officer have also asked the assessee to produce the financial statements of the Trust to ascertain the nature of the amount received by the assessee but the assessee did not produce these documents. Therefore, it was not ascertainable as to what is the source of income of the Trust, who was the settler of the Trust, who were the beneficiaries. Assessing Officer held that all capital disbursements need not be revenue receipts in the hands of the recipient. The Trust has paid no income tax as per Indian Income Tax Act. There is no evidence on record regarding tax payment in the country of its incorporation. The assessee has not paid any tax abroad. The amount received by the assessee in Switzerland during the year and brought into India can only be treated as income in terms of section 5 of the Income Tax Act, and accordingly he added the sum in the income of the asseessee.

Held by CIT(A)

The ld. CIT(A) upheld the order of AO and dismissed the appeal of the Assesssee. Before the ld. CIT(Appeals), the assessee produced the documents which were not produced before the Assessing Officer like true copy of settlement deed, Trust Ledger and transaction history report and Trust Financial results for the period from 01.04.2003 to 31.03.2004.

Contention of the assessee

The ld. Counsel for the Assessee contended that the Trust Settlement Deed was executed on 20.07.1993 between the assessee as well as Trust. The assessee has paid up a sum of 10000 dollar. It was contended that the settlement has been created in accordance with law of the Island of Jersey. It was further contended that the Trustee is empowered during the Trust Period to pay, appropriate or apply the whole or such part of the income of the Trust fund as the trustees may in their absolute discretion think fit to. It was further contended that the trustees were also authorized to accumulate the interest income of the trust fund and add the accumulation to the capital of the trust fund. It was pointed out that the Trustees were authorized to pay whole or any part of capital of the Trust fund to any of the beneficiaries and accordingly the Trustees have exercised their powers and made the payment to the assessee, i.e. the beneficiary.

Then further the Assessee produced a certificate in which it was mentioned that Trustees of the concerned Trust has remitted USD 10 lakhs to the Assessee on 28.11.2003 to his Bank account New Delhi. This certificate also certified that the said sum has been given out of the capital account of the Trust and is to be regarded as capital distribution. It was further mentioned that the Assessee has been a discretionary beneficiary since the Trust was established together with other discretionary beneficiaries. It was further mentioned in the letter that on 28.11.2003, the Trustee exercised its discretion in favour of the assessee, in his capacity as discretionary beneficiary of the Trust, and made a capital distribution to him in the sum of USD 10 lakh million US Dollars.

The assessee relied on the Judgement of Hon’ble Supreme Court in CIT v. Kamalini Khatau reported in 209 ITR 101 (SC) where it was held that regarding a Discretionary Trust if the profits/income is distributed within the accounting year and received by the beneficiary would be subject to assessment in his hands and tax thereon would be recoverable from him. The accumulated income cannot be regarded to be part of the income. Thus it was contended that its only income earned during the year which is received for the beneficiaries can be taxed in the hands of the beneficiaries. Any amount received out of the accumulated income cannot be taxed in the hands of the beneficiaries. Then, in the case of Commissioner of Wealth Tax v. Estate of Late HMM Vikramsinhji of Gondal reported in (2014) 363 ITR 679 (SC) for the proposition of the law that in the case of a Discretionary Trust executed outside India for the beneficiaries in India, income not distributed to the beneficiaries in the relevant accounting years is not assessable during the impugned assessment year. Then, in the case of H.H. Maharaja Shri Jyotindrasinhji v ACIT reported in (2010) 326 ITR 594 (SC) that in case of a Discretionary Trust executed in UK for benefit of persons in India, if the trustees in UK do not distribute income to beneficiaries in the relevant accounting years and trustees are assessed in UK, the income from trusts is not assessable in the hands of beneficiaries in India. Thus it was contended that in the case of a Discretionary Trust if the amount has been paid to the beneficiary out of the capital fund, it cannot be assessed in the hands of the beneficiaries until and unless it has arisen as income in the hands of the Trust during the year.

Contention of the Revenue

The ld. Counsel for the Revenue contended that the assessee did not file document before the Assessing Officer. Some documents were filed for the first time before the CIT(A). The assessing officer did not have any occasion to examine these documents to ascertain the genuineness of the trust deed. Also, the accounts relate only to the year and it is not being approved or authenticated by any person. They were not audited. The accounts for the earlier year were not filed so as to justify whether the amount has been paid to the assessee out of the capital funds. Even neither the minutes nor copy of the Resolution was filed so as to justify the payment being made to the Assessee as beneficiary out of the capital fund. Initially the Trustee was a different and subsequently the assessee has claimed that the Trustee is some another trust. The onus is on the assessee to prove that he has received the money out of the capital funds. On the basis of the documents filed by the assessee, it cannot be said that the assessee has discharged his onus.

Held by Hon’ble ITAT

The Hon’ble ITAT while going through the confirmation along with the covering letter noted that the covering letter dated 28.11.2003 has been written by some different trust which has been claimed to have become trustee of the Trust w.e.f. 08.08.2003. Also, it has not been proved that whether the accounts for the Trust got audited by the Trustee or not and why the copy of the audited accounts duly approved by the Trustees were not filed.

After going through the relevant clauses in the Deed, the Hon’ble Tribunal noted that whenever there is change in the trusteeship a memorandum has to be endorsed and has to be permanently annexed to the Settlement Deed stating the names of the trustees for the time being and it has to be signed by the persons named as a trustee so that any person dealing with the Trust may rely upon such memorandum. But in this case, it has not been done. In view of this fact, it was held that the assessee has not discharged his onus that how (BVI) Limited had become the trustee of the said Settlement. It is a case where, the assessee could not prove that the trusteeship of M/s. HSBC Republic Trust Company (BVI) Limited. Therefore, the certificate issued by M/s. HSBC Republic Trust Company (BVI) Limited, cannot be accepted as an evidence in this regard. This certificate cannot be relied and on the basis of the certificate it cannot be said that the assessee has discharged his onus that the amount received by the assessee is out of the Discretionary Trust and out of the capital fund of the Trust distributed to the assessee during the impugned assessment year. The accounts although has not been audited and has not been approved by the trustee except that certified true copy has been signed as a trustee on behalf of M/s. HSBC Trust Company (BVI) Limited. Even no date has been mentioned about the accounts have been signed or approved by the trustees. When assessee makes a claim that the amount received by him is a capital receipt and has been paid out of the capital fund, the onus is on the assessee to prove that the amount has been paid by the Discretionary Trust out of the capital fund. In a case where the assessee claims that the money has come out of a source out of India, heavy onus lies on the assessee to adduce evidence and prove that the money has come from outside India not as an Income but as a Capital receipt specially when the assessing officer does not have any jurisdiction over the source country. The credit of the amount was found in the books of the assessee, therefore , the assessee is bound to prove the nature and source of the credit. In the absence of approval of the accounts by the trustee in a meeting and also without mentioning the date when these accounts have been approved, it was held that these accounts cannot be accepted as an evidence that the assessee has received the funds out of the capital funds. Whether the Trust is a genuine Trust and has complied with all the legal requirements of the country in which it has been incorporated cannot be ascertained. The bonafide of the Trustee itself, is not proved. Also the nature of the activities being carried out by the Trust was not explained. On the basis of the evidence filed by the assessee, the genuineness of the Trust, the trustee as well as the money being withdrawn out of the capital funds is not proved. Also, the Assessing Officer, could not examine the information, which was desired by him for the purpose of making the assessment, The Hon’ble Supreme Court in the case of Kale Khan Mohammad Hanif v CIT reported in [1963] 50 ITR 1 has laid down vide order dated 08.02.1963 that “the onus of proving the source of a sum of money found to have been received by the assesese is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Income Tax Act. In the absence of such proof, the Income Tax Officer is entitled to treat it as taxable income”. It is a case where the assessee even though claimed that the amount received by him is a capital receipt and has arrived out of a Discretionary Trust, the Trust in which the assessee is a beneficiary, but the assessee could not adduce the evidence to discharge his burden, the case of the assessee is duly covered by the decision of the Hon’ble Supreme Court referred to supra.

Also, it cannot be said that the onus is on the assessing officer to prove that the assessee has earned the income outside India. It will be the mockery of the Indian Income Tax Act and every body just filing the documents which were out side the domain of the assessing officer can claim that the onus is on the assessing officer to prove that the assessee has received revenue receipts.

Accordingly, the appeal of the assessee was dismissed.