Gift not unexplained merely because donor holds Low Economic class Ration Card

Lokadri Naidu Vs ITO (ITAT Hyderabad)

The issue under consideration is whether the Ration Card can be considered as a source of determining financial status of assessee and whether gift from person holding Ration Card of Low Economic class can betreated as unexplained Credit under section 68 of Income Tax Act, 1961 ?

In the present case, AO observed that the assessee has disclosed gift received from his father and brother respectively. On query, the Ld. AR furnished confirmation letters from the father and brother of the assessee. However, the Ld. AO opined that since the assessee could not furnish other details like date of gift, nature of gift and the amount available to the donors to offer gifts, the gift transactions cannot be relied upon. Therefore, the Ld. AO treated the amount as the unexplained credit U/s. 68 of the Act and added to the income of the assessee.

ITAT states that they do not find much merit in the orders of the Ld. Revenue Authorities. It is an undisputed fact that both assessee’s father and brother own substantial areas of agricultural land. Therefore, the agricultural income disclosed by them cannot be disputed unless some facts emerged that they have not carried on agricultural activities or have suffered losses in the agricultural activities. Normally farmers do not rely on the banking channel for conducting their day to day activities and do accumulate cash balance. Further, by the class of ration card possessed by the individuals one cannot determine such individuals to belong to people of poor means. It is a generally known fact that on many instances even wealthy farmers possess ration cards of low economic class. Therefore, the Ld. CIT (A)’s observation to hold that the quantum of savings of the assessee’s father and brother cannot be relied upon is not appropriate. Considering the extent of land owned by the assessee’s father and brother, their creditworthiness for accumulating the fund of Rs. 4,50,000/- and Rs. 2,50,000/- respectively cannot be doubted and can be treated as reasonable. Further, the assessee’s father and brother have also confirmed the transaction by furnishing their confirmation statements. In this situation, the addition made in the hands of the assessee being the gift received from his father and brother is not justifiable. Therefore, ITAT hereby set aside the order of the Ld. CIT and further direct the Ld. AO to delete the above stated addition made in the hands of the assessee U/s. 68.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed by the assessee aggrieved by the order of the Ld. CIT (A) in appeal No.60/2015 -16/CIT(A)/TPT, dated 8/12/2000 passed U/s.250(6) r.w.s 143(3) of the Act for the AY 2012-13.

2. The assessee has raised several grounds in his appeal however, the cruxes of the issues are as follows: –

“(i) The Ld.CIT (A) has erred in upholding the order of the Ld. AO who had made addition in the hands of the assessee for Rs. 4,50,000/- and Rs. 2,50,000/- which is actually the gift received from his father and brother respectively invoking the provisions of section 68 of the Act.

(ii) The Ld.CIT (A) has erred in upholding the order of the Ld. AO who had made addition in the hands of the assessee for Rs.3 lakhs which is actually the unsecured loan received from Smt. B. Nirmala invoking the provisions of section 68 of the Act.”

3. The brief facts of the case are that the assessee is an individual engaged as an agriculturist and also in the business of trading in mangoes, filed his return of income for the AY 2012-13 on 26/8/2013 declaring an income of Rs. 5,75,240/ – and agricultural income of Rs. 3,49,500/ -. Thereafter the case of the assessee was taken up for scrutiny and finally assessment was completed U/s 143(3) of the Act on 30/3/2015 wherein the Ld. AO treated the aggregate gift received for Rs. 7 lakhs from his father and brother as unexplained credit U/s. 68 of the Act and also treated the amount of Rs. 3 lakh being the loan received from Smt. B. Nirmala as bogus loan and accordingly added to the income of the assessee.

Ground No:1: Disallowance of gift aggregating to Rs. 7 lakhs:

4. During the course of the scrutiny assessment proceedings, the Ld. AO observed that the assessee has disclosed Rs. 4,50,000/- and Rs. 2,50,000/- as a gift received from his father and brother respectively. On query, the Ld. AR furnished confirmation letters from the father and brother of the assessee. However, the Ld. AO opined that since the assessee could not furnish other details like date of gift, nature of gift and the amount available to the donors to offer gifts, the gift transactions cannot be relied upon. Therefore, the Ld. AO treated the amount of Rs. 4,50,000/- and Rs. 2,50,000/- aggregating to Rs. 7 lakhs as the unexplained credit U/s. 68 of the Act and added to the income of the assessee. On appeal, the Ld. CIT(A) confirmed the order of the Ld. AO because of the following reasons: –

(i) The assessee could not establish that the amount received from his father was out of the income earned from growing sugarcane on the 9.41 acres of agricultural land owned by the assessee’s father as he was unable to furnish the details of the factory where they had sold the sugarcane.

(ii) From the Ration card of the assessee’s father bearing No. WAP105101800224, BPL (white) category; it was apparent that the assessee’s father belongs to below poverty line and of lowest economic strata.

(iii) Though the assessee’s father was holding a bank account the gift given to his son was by cash and not through cheque.

(iv) The source of the gift from the assessee’s brother was also stated to be from the agricultural income earned out of his 5.11 (approx) acres of Agricultural Land. In the case of the brother it was observed that he was earning Rs. 80,000/ – per Acre however, his father was earning only Rs 40,000/ – per acre which does not appear to be appropriate. Moreover, the details of the factory where the sugarcane was sold was not furnished.

(v) The assessee’s brother also holds ration card, from which it is apparent that he also belongs to the below poverty Line and of the lowest strata of the economic class.

(vi) Assessee’s brother also holds a bank account however he has gifted to his brother by cash and not by cheque.

5. Before us the ld. AR reiterated his arguments made before the Ld. Revenue Authorities on the earlier instances and prayed for deleting the addition while as the Ld. DR argued in support of the orders of the ld. Revenue Authorities and requested for confirming their orders.

6. After healing both sides, we do not find much merit in the orders of the Ld. Revenue Authorities. It is an undisputed fact that both assessee’s father and brother own substantial areas of agricultural land. Therefore, the agricultural income disclosed by them cannot be disputed unless some facts emerged that they have not carried on agricultural activities or have suffered losses in the agricultural activities. Normally farmers do not rely on the banking channel for conducting their day to day activities and do accumulate cash balance. Further, by the class of ration card possessed by the individuals one cannot determine such individuals to belong to people of poor means. It is a generally known fact that on many instances even wealthy farmers possess ration cards of low economic class. Therefore, the Ld. CIT (A)’s observation to hold that the quantum of savings of the assessee’s father and brother cannot be relied upon is not appropriate. Considering the extent of land owned by the assessee’s father and brother, their creditworthiness for accumulating the fund of Rs. 4,50,000/- and Rs. 2,50,000/- respectively cannot be doubted and can be treated as reasonable. Further, the assessee’s father and brother have also confirmed the transaction by furnishing their confirmation statements. In this situation, the addition made in the hands of the assessee for Rs. 4,50,000/ – and Rs. 2,50,000/- being the gift received from his father and brother is not justifiable. Therefore, I hereby set aside the order of the Ld. CIT and further direct the Ld. AO to delete the above stated addition aggregating to Rs. 7 lakhs made in the hands of the assessee U/s. 68.

Ground No.(ii): Disallowance of unsecured loan of Rs. 3 lakhs:

7. During the course of scrutiny assessment proceedings, the Ld. AO observed that the assessee has received an amount of Rs.3. lakhs from Smt. B. Nirmala as loan. Since the assessee agreed to offer it as income the Ld. AO made the addition of Rs. 3 lakhs by treating it as bogus loan. When the matter cropped up before the ld. CIT (A) on examining the facts he observed that the assessee had furnished a confirmation statement from Smt. B. Nirmala before the Ld.AO. It was also revealed that the loan was obtained through cheque. However, the assessee did not produce the entire bank account of Smt. B. Nirmala in order to rule out the possibility of the cash being deposited by the assessee in the bank account of B.Nirmala to facilitate cheque payment to the assessee, therefore the Ld.CIT(A) doubted the genuineness of the transaction. Smt. B. Nirmala also possessed ration card belonging to the lowest economic strata and was engaged in the activity of running a small shop and was never assessed to tax. Further, it was observed from the bank statement that the repayment of loan by way cheque to Smt. B. Nirmala was instantly withdrawn from the bank account. From the above facts, the Ld. CIT (A) agreed with the views of the Ld. AO in confirming the addition of Rs. 3 lakhs in the hands of the assessee being the amount stated to be received from Smt. B. Nirmala as loan.

8. At the outset, I do not find merit in the order of the Ld. Revenue Authorities. From the facts of the case it is apparent that Smt. B. Nirmala is engaged in the activity of running a small shop. Therefore, she has some source of income. Further, possessing ration card of low economic strata does not categorically prove that the assessee does not have any resources to earn reasonable income or financially unsound. Moreover, apparently the entire transactions are made through the banking channel. Accumulating an amount of Rs. 3 lakhs by an individual engaged in a small business activity is not an unrealistic factor. Keeping in view of the facts and circumstances of the case I am of the considered view that the loan transaction cannot be treated as bogus. Therefore, I hereby set aside the order of the Ld. CIT (A) on this issue and further direct the Ld. AO to delete the addition of Rs. 3 lakhs made in the hands of the assessee being the loan received from Smt. B. Nirmala.

9. Before parting, it is worthwhile to mention that this order is pronounced after 90 days of hearing the appeal, which is though against the usual norms, I find it appropriate, taking into consideration of the extra-ordinary situation in the light of the lock – down due to Covid-19 pandemic. While doing so, I have relied in the decision of Mumbai Bench of the Tribunal in the case of DCIT Vs. JSW Ltd. In ITA No.6264/M/2018 and 6103/M/2018 for AY 2013-14 order dated 14th May 2020.

9. In the result, appeal of the assessee is allowed. Pronounced in the open court on the 24^th July, 2020.