>>CASH CREDIT, UNEXPLAINED INVESTMENTS, ETC.

GIFTS AND CASH CREDITS

Reepal G. Tralshawala.
Chartered Accountant

Provisions of Section 68 apply to credit in books of accounts irrespective of nature of credit as loan or gift. The author has discussed the provisions of section 68 as applied to gifts received credited in books of accounts.

I. Introduction

1.1 The Finance Minister has given one more year to surf on gift tax holidays and enjoy its joys, which are meant for genuine donors and donees. Only the charging section of the Gift Tax Act has been made inoperative with effect from 1st day of October, 1998, hence there may be possibility of deleting sub-section 3 to the charging section 3 of the Gift Tax Act in order to make the Gift Tax Act once again operative, however, it is beyond doubt that the gift tax cannot be made applicable retrospectively.

1.2 The Gift Tax Act is dead for the present. Only its ghost is still there from the past. It is dead after 40 years of existence. What is the legacy it has left behind? How should it be condoled? Should it be remembered for the good it did? Or was it really a wasteful piece of legislative that outlived its utility and prompted the Hon’ble Finance Minister to do away with it? What is the post gift tax scenario? The provisions of sections 68 and 69A vis-à-vis gifts are analysed in this article.

2. Definitions

2.1 Definition of Gift under the Gift Tax Act

‘Gift’ means the transfer by one person to another of an existing movable or immovable property made voluntarily and without consideration in money or money’s worth and includes deemed gifts.

Therefore, from the definition of Gift, the following conditions should be fulfilled in order to satisfy a valid gift. The essential conditions of gift are -

1. There should be a transfer by one person to another.
2. The transfer has to be an existing movable or immovable property
3. The transfer has to be made voluntarily
4. The transfer to be without consideration in money or money’s worth.

2.2 Definition of Gift under the Transfer of Property Act, 1882

Sections 122 to 130 of Chapter VII of the Transfer of Property Act deals with Gifts. Section 122 defines Gift, which reads as under –

Sec. 122: "Gift" is the transfer of certain existing movable or immovable property made voluntarily and without consideration by one person, called the donor, to another, called the donee and accepted by or on behalf of the donee. For a valid gift, acceptance must be made during the lifetime of the donor and while he is still capable of giving. If the donee dies before acceptance, the gift is void.

Thus, it is clear from the definition of Gift under the Transfer of Property Act that, unless the ownership of property or interest in property passes from one person to another and further acceptance of such gift by the donee or on behalf of the donee, there can be no transfer of property, which is the most essential ingredient of a valid gift, which was not an essential condition under the definition of Gift Tax Act. As per section 129 of the Transfer of Property Act, the chapter is inapplicable to Mohammedan law.

2.3 Definition of Gift under the Mohammadan Law

Under the Mohammedan law, sections 201 to 216 of Chapter IV deals with Gifts. The definition of Gift in section 201 of the Mohammedan law is different from the definition of Gift as per the Transfer of Property Act.

Mohammaden law permits gift of property to another during his lifetime, which is called a disposition and also gift by way of will after his death, which is called a testamentary disposition. As regards to quantum of gift, disposition is unfettered while a testamentary disposition is limited to one-third of the net estate. Mohammedan law allows a man to give away the whole of his property during his lifetime, but only one-third of it can be bequeathed by will. A Mohammedan cannot by will dispose of his property to any of his heirs (Sec. 189) nor can he give more than a third share of his property by will to any other person (Sec. 190). But he may transfer his entire property by gift even if the gift has the effect of defeating Mohammedan Law of Succession. A gift may be made to a stranger wholly excluding the heirs.

A gift may be made to a non-Muslim but in such a case the property will after the completion of the gift, be subject to the personal law of the donee and not that of doner. A sadaqah to a non-Muslim would also be valid.

A hiba in favour of a child in the womb is valid if the child is born within six months from the date of the hiba because in that case it is presumed that the child actually existed as a distinct entity in the womb of his
mother.

Under the Mohammedan law, except for agricultural lands, oral transfer by gift does not require registration. It is also not necessary to have a deed of gift in order to make it a valid gift.

As compared to transfer of property Act, which does not require delivery of possession for a valid gift, under the law of Mohammedan, for a valid gift, there has to be a delivery of possession.

3. Gift vis-a-vis cash credits/unexplained money

3.1 A mere receipt of amount shown as Gift whether received in foreign exchange or Indian currency would not be sufficient to relieve recipient of gift from burden of establishing identity, financial capacity of donor and genuineness of gifts.

3.2 The recipients would have to furnish necessary evidence such as the income earned by the donor, financial status at the time of making the gift, complete address of the donor and the most important ingredient being the relationship between the donor and the donee. It would be further required to explain the circumstances under which the gift was made so as to prove the genuineness of gifts.

3.3 In Elite Developers vs. DCIT (Nag) 73 ITD 379, the Tribunal held that in case of gift, where identity is established, creditworthiness is evidenced and genuineness of transaction is proved by the gift deeds, bank certificates, account payee cheques and statement of donees, then gifted money cannot be treated as unexplained cash credit.

3.4 In Deepak Kumar Agrawal vs. ITO [2000] 110 Taxman 233 (Jab.) (Mag.), the Tribunal held that where the donor was neither an income-tax assessee nor related to the donee and also did not have capacity of giving the gift, the amount so received in the guise of gift was rightly treated as undisclosed income of the assessee.

3.5 In Jaikishan R. Agarwal vs. ACIT (Pune) 66 TTJ 704, it was held that Gifts received by children on birthdays, festive occasions and on family functions is customary. There is no need to disbelieve the gifts and therefore addition of it is unjustified.

3.6 In Dy. CIT vs. Anil Kumar [1997] 58 TTJ 340 (Del), the gift was received by way of account payee cheque, the statement of the donor was recorded who confirmed the gift and gift tax was also paid. The Tribunal held that the evidence on record showed that the burden, which lay upon the assessee to prove the genuineness of the gift, was discharged and the burden has thus shifted on to the department to show that the gift made was bogus and non-genuine. No material had been brought on record to prove this except raising suspicion that the donor had no permanent source of income. The suspicion, however strong it might be, cannot be the basis of rejection of assessee’s claim unless it was supported by material on record.

Gift from Non-Residents

3.7 Section 5 of the Gift Tax Act restricted the extent of gifts that can be made by Non-residents.

Now, that the gift tax barrier is removed, the gifts can be made even by a foreigner to any person in India, even though the donee is not a relative.

3.8 In respect of gifts from abroad, the contention that the FEMA authorities had accepted the receipt from abroad as
genuine, the same would not establish the genuineness of the gift from the Income tax point of view.

3.9 The Hon’ble Delhi High Court in CIT vs. Mrs. Sunita Vachani 184 ITR 121 has held that even though it may be surprising as to how large sums of money are received by a family in India by way of Gifts from strangers from abroad, unless there is something more tangible than suspicion, it will be difficult to regard the moneys received in India from abroad as representing the income of the assessee in India.

3.10 However, the Delhi Tribunal in D.C. Rastogi (HUF) vs. ACIT 57 ITD 295, after considering the Delhi High Court decision (supra), have held that the onus lies on the assessee to establish identity, capacity of donor and genuineness of transaction. Mere fact of receipt of money in foreign exchange would not relieve the burden cast upon the assessee. The Tribunal held that it is a well-established principle of law that in the case of cash credits the onus is on the assessee to establish the identity and the capacity of the creditor as also the genuineness of the transaction. Similar is the position in regard to gifts. In fact, the degree of proof in the case of a gift would be heavy.

Though there is no bar for the strangers to make gifts to persons in India, yet it would be necessary for the assessee to explain the circumstances under which the gift was made so that the genuineness of such gifts could be verified. It was common knowledge that havala business is in vogue in India and elsewhere and the mere fact that the money had been received in India in foreign exchange from abroad would not be sufficient to absolve the assessee of the burden of establishing the identity, as well as the financial capacity of the donors and the genuineness of the gifts.

As regards the gifts received by the minors from the donors who were the employees of the father, though there was no bar for the employees to make gifts to the children of their employers, yet the burden of the assessee in such circumstances would be heavier than the burden to be discharged in other cases.

Regarding the gift from an NRI, the mere fact that the amount was stated to be out of an NRI bank account would not be sufficient to establish the financial capacity of the donor, which could be examined only from the copy of the bank account and from any financial statement/bank statements establishing the capacity of the donor.

It was therefore held that section 68 of the Income-tax Act was invoked correctly deeming the receipts to be income from undisclosed sources.

Thus, from the decision of the Delhi Tribunal, it is beyond doubt that the burden of proving the gift to be genuine is placed upon the assessee, which onus has become much more heavier after the ceasing of the charging section of the Gift Tax Act.

3.11 In Jawahar Lal Oswal vs. ACIT [1999] 71 ITD 324 (Chd), the tribunal after considering the decisions of CIT vs. Mrs. Sunita Vachani [1990] 184 ITR 121 (Del); D.C. Rastogi (HUF) vs. ACIT [1996] 57 ITD 295 (Del); McDowell & Co. Ltd. vs. CIT [1985] 154 ITR 148 (SC) and many other decisions, laid down the following principles:

• The provisions of section 68 or 69A are applicable whether funds have come from abroad or they have emanated in India.

• All the three conditions namely identity, financial capacity and genuineness of the transaction have to be fulfilled but considering –

• The allegation based entirely upon suspicion, surmises and conjectures have no room while invoking a deeming provision, which assumes position different from what is obvious.

• It is not necessary to show that a person had been making gifts in the past to prove the genuineness of the gift in question, since on the facts of a case a single gift by a donor may be found genuine whereas a number of them by the same person may not satisfy the test of genuineness. Each gift has to be tested on its own facts.

• The revenue cannot pick and choose a few facts to express an adverse opinion and it is necessary for them to appreciate all the facts together as also the evidence to arrive at a conclusion.

• The statement recorded of the donor has to be read as a whole and conclusions drawn and revenue cannot pick and choose from the statement so as to draw an adverse opinion.

• The preparation of the drafts for the same bank and having consecutive serial numbers was in the realm of doubt not leading to any adverse view. Dollar being a more stable currency and easily convertible than Pound Sterling, no adverse influence could be drawn on the ground that UK residents sent gift in dollars.

• Non-attending of the marriage by the alleged donors could not be viewed adversely as even their attending would not have converted a non-genuine event into a genuine one as this had to be tested on numerous other facts and considerations.

• The provisions of section 68 were not attracted to entries in the bank pass-book in the light of the judgment of the Bombay High Court in CIT vs. Bhaichand H. Gandhi [1983] 141 ITR 67.

• The contention that section 68 addition be treated as one made under section 69A, could not be accepted since the considerations in both the sections are different, the first not being a deeming section and the second being so. The element of suspicion and doubt has to be ruled out while applying a deeming provision.

3.12 In Dr. (Mrs.) Renu Gupta vs. DCIT 66 TTJ 625 (Mum), the Tribunal held that the addition in respect of gift received was justified when the assessee had failed to prove the genuineness of gift, to produce the NRI donor or his Indian address, to explain intimate relationship with donor and the husband of assessee admitted that gifts were all benami gifts secured with own money by payment of premium. Further, entry of gifted amount was not passed through the bank.

3.13 The Hon’ble Mumbai Tribunal in P.M. Mehta vs. ITO having ITA No. 136/B/86 order dtd. 27-8-1987, BCAJ page 655 have laid down the precise limits of the powers of the Assessing Officer and the burden of proof, which the assessee is required to discharge for proving the foreign gifts. According to the Tribunal:

• the Assessing Officer is not justified in making a roving inquiry into the entire financial affairs of the donors relating to several years.

• However, the Assessing Officer is justified in making an enquiry into the question whether the amount which is said to have been gifted really belonged to the donor and whether the amount has in fact, been gifted to the donee.

• For that purpose, the Assessing Officer is entitled to ascertain as to whether the donor on the date of the alleged gift has a particular amount to his credit in his account in the bank and whether from that amount the gift has been made.

• The Assessing Officer is entitled to make investigation to rule out the possibility of the assessee’s own money being deposited in the bank account of the donors and being returned to the assessee.

Frequency of receipt of Gift

3.14 Where the assessee has credited amount in the accounts as Cash Credits, the burden is on the assessee to prove the genuineness of the transaction in order to establish that the said cash credits did not represent income. The Hon’ble Supreme Court in Sumati Dayal vs. CIT 214 ITR 801 laid down the principle that where the transactions appeared, prima facie, to be wild and contrary to statistical theories and experience of frequencies and probabilities and applying the test of human probabilities, if the genuineness of the claim is not established, it would represent income of the assessee. Therefore, frequent gifts shown by the assessee may lead to heavy burden on the assessee to prove and establish the genuineness of the transaction.

Natural Love and affection – How far vital for making Gifts

3.15 One of the most important ingredients of a valid gift as seen above is that the same must be without any consideration either into money or moneys worth. Therefore, natural love and affection may become vital for discharging the burden of proving the genuineness of the gift. Everyone of us know that in today's world of hatred and people running after money, it is a very difficult proposition to prove that the gift is received from a person with whom there is no relationship or a total stranger. The decision of the Delhi High Court in Sunita Vachani supra, is watered down to a great extent by the decision of the Delhi Tribunal in D. C. Rastogi supra, hence, the ratio laid down that gifts could be received from strangers may not hold good without proving the circumstantial evidence for receipt of gift.

3.16 In R.K. Syal vs. ACIT (Chd) 66 TTJ 656, it was held that where in respect of NRI Gifts affidavits of donor affirming the gifts were filed, the assessee has discharged its initial onus and offered a satisfactory explanation before the AO with reference to the NRI gifts received by him. The NRI gifts made cannot be rejected merely on the ground that there was no occasion or relationship for making the same. Thus, the elements of close relationship and occasion relate to the realm of human probability are in the nature of circumstantial evidence which may have to be looked into if the direct evidence relating to making of gifts is found wanting. It cannot be ignored that these elements of close relationship and occasion are not legally necessary, though they lend credence to the NRI gifts made by the donors. A person may develop love and affection spontaneously for any person or for any cause and may like to part with bulk of his sources in the form of money and make a gift. In such circumstances, the person making the gift cannot be found fault with and the gift cannot be treated as non-genuine only on the basis that the donor is not related to the donee and there is no occasion for making the gift.

3.17 In Ashwani Kumar Garg vs. Assessing Officer [1998] 97 Taxman 271 (Asr.) (Mag.), the assessee received gift from the wife of his friend. The Tribunal held that simply because there was no relationship it could not be assumed the gift could not be given to a friend in the time of need. In the modern society friendship is more valuable than relationship.

Gifts received by minors and introduced in partnership firm

3.18 One of the common modes of introduction of cash credits in the books of the partnership firm is through the minor children of the partners by giving explanations that the minors had received gifts on various occasions. How far the same is feasible in the eyes of the law would depend on facts of each case.

3.19 In Dy. CIT vs. Punjab Kirana Bhandar [1998] 64 ITD 92 (Jab), it was held by the Tribunal that the creditworthiness of the minor creditors, who had no source of income, was not established for the following reasons:

• the minors had filed returns of income disclosing incomes of Rs. 80,000/- to
  Rs. 90,000/- in each case which was stated to be from gifts received from relatives on different occasions. It could not be presumed that the guardians were ignorant about the law that gift is not income, even after that if they file the return, offering the so-called gift as income, it would show that there was a purpose to be served behind it, namely to create evidence of the availability of funds in the hands of the minor;

• in the absence of any evidence, it could not be accepted that the minor creditors had received any substantial gifts. Moreover, normally it is not one-way traffic. The parents of the minor have to reciprocate the same by giving
  some presents in cash or kind to the children of donors. No withdrawals was shown by the parents for giving gifts to others;

• gift is not always received in cash. Many a times, it is in kind, namely, in the form of toys, clothing, etc., for children. Even when the gift is received in cash, mostly it is spent by the children;

• has there been any substantial savings out of the amount of gift received by children, it would have been deposited from time to time in the bank account or with the firm in which their parents were partners. The claim of keeping cash to the tune of Rs. 90,000/- by one child was beyond human probabilities.

3.20 In Roopchand Manoj Kumar vs. CIT [1999] 235 ITR 461 (Gauhati), the High Court held that where explanation of cash creditors, who were minor girls, was that loan was accumulation of income on account of customary gifts in Hindu society received by minor girls, and genuineness of transaction and identity of creditors were established, addition of cash credits in the firm could not be said to be justified. It further held that there is no requirement of law that the amount should have been paid by way of cheque.

3.21 In Thaparsons vs. ITO [1997] 94 Taxman 281 (Chd.) (Mag.), certain sum was credited in the books of account of the firm in the name of the minor son of the partner of the firm. The Tribunal held that the explanation that credits represented gifts and shagans received at the time of various ceremonies connected with birth and mundan was customary in the Hindu society and can be accepted as reasonable and addition on account of such credits be deleted.

4. Tailpiece

The abolition of the charging section of the Gift Tax Act has placed heavy burden on the assessees to prove the genuineness of the transaction of the gifts. The benefits derived by way of gift-tax holiday may become bereft for the want of the necessary ingredients of proving the gift.

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