Dy. CIT v. KDA Enterprises (P) Ltd.

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The Tax Publishers2015 TaxPub(DT) 1471 (Del-Trib) : (2015) 171 TTJ 0001 : (2015) 120 DTR 0163 : (2015) 039 ITR (Trib) 0657 Dy. CIT v. KDA Enterprises P. Ltd. INCOME TAX ACT, 1961 --Income --Capital or revenue receiptGift received from corporate bodies--The appellant is a private limited company engaged in the business of investment. During the year under consideration it received gifts aggregating to Rs. 1,61,86,77,034 from four companies, viz., A P. Ltd., M P. Ltd., T Pvt. Ltd. and O Pvt. Ltd. All the above four companies are shareholders of RI Ltd. (RI) and received dividend income from Reliance Industries. All the above four companies are private limited companies and are governed by their respective memorandum and articles of association. The memorandum of associations of the appellant and all the above four companies provide for receiving/giving of gift respectively. The assessee has claimed that the amount received are gifts received from the said four concerns. It is claimed that the amounts have been received directly from the RI Ltd. on account of the dividend receivable by the said four concerns against their shareholding in the RI Ltd. It is on the directions of the four concerns that their dividend were directly credited to the bank account of the assessee. The assessee also claimed that all the four concerns have passed resolutions in the meeting of the board of directors for making the said gifts and similarly the assessee-company has also passed a resolution by the board of directors for receiving the gifts. It is also claimed that all the four donor concerns are also authorised by the memorandum and articles of association for making such gifts and the assessee-company is authorised for receiving such gifts. Accordingly, the assessee claimed that all the four donor concerns are also authorised by memorandum and articles of association for making such gifts and the assessee-company is also authorised for receiving such gifts. Accordingly, the assessee claimed that the identity of the donor companies, their source of funds for gifts and the nature of transaction are clearly established. Therefore, the assessee has claimed that these receipts are not taxable because these are capital receipts and any such gift is not taxable in case of companies, whereas the AO held that these receipts cannot be categorised as gifts or transactions which are specifically exempt from taxation and further held that these cannot be categorised as dividend income in the hands of the assessee. Hence, these receipts are taxable as income from other sources in the hands of the assessee and accordingly made an addition of Rs. 1,61,86,77,034 to the returned income of the assessee. The assessee has disputed it. Claiming that these are genuine gifts and the amounts received are capital receipts which are not taxable. In view of the above submissions and various judicial pronouncements relied upon, the appellant submits that the gift of Rs. 1,61,86,77,034 received by the appellant from corporate bodies is in the nature of capital receipt and the same cannot be considered as income of the appellant under any provisions of the Act and hence, is not liable to tax. During the course of appellate proceedings above submission of the assessee was remanded by the CIT(A) to the AO vide order under section 250(4) which is as follows : The assessment in this case under section 143(3) is completed vide order by the AO in which the claim of the assessee that it has received Rs. 161.86 crores as gift has been rejected and it has been assessed as income from other sources, which has been disputed by the assessee in the present appeal. After considering the assessment orders, remand reports and the rejoinders filed by the assessee, the CIT(A) deleted the addition made on account of gifts, as such the gifts received by the assessee are capital receipts and not taxable under section 56 or section 28(iv). *Held:* Under the IT Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. The gifts received by the assessee was a voluntary payment made by the donor, without consideration to the assessee. The gift received has nothing to do with the business of the assessee so as to constitute its income from business or a revenue receipt in the nature of income. In view of the judicial pronouncements, the gift of Rs. 1,61,86,77,034 received by the assessee from corporate bodies is in the nature of capital receipt not liable to tax under the provisions of the IT Act. During the appellate proceedings before the CIT(A), the assessee has also filed affidavits from all the four donor companies, certifying the gifts. The assessee has also filed its affidavit for certifying the receipt of gifts. The receipt of gift as well as making of gift are authorised by respective memorandum and articles of association of the companies and the assessee. Gifts have been accepted by the assessee by adopting a resolution by the board of directors. After sending all these documents to the AO, the CIT(A) had called for a remand report from the AO, therefore, this is no violation of rule 46A also. Thus, it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance. The companies are competent to make and receive gifts and natural love and affection are not necessary requirements. The only requirement for company is to make gifts as per respective memorandum and articles of association, which authorise the company for the same as such gift, capital receipts without considerations are not in the nature of income and hence, the same cannot be charged to tax under the provisions of the IT Act. The assessee received gift of Rs. 161.86 crores from the four companies. The gift so received was claimed as capital receipt, therefore, credited to capital reserve account in its books. [Para 39] During the course of scrutiny assessment, the AO raised query with respect to the gift received from corporate bodies. It was submitted by the assessee that all the donor companies are shareholders of Reliance Industries Ltd. and received dividend income from Reliance Industries. The donor companies had given irrevocable instructions to Reliance Industries to pay dividend directly to the assessee. The receipt of dividend was debited to the bank account and credited to the capital reserve account of the assessee. The assessee submitted that the gift is in the nature of capital receipt and is not required to be credited to 'profit and loss account' of the assessee. The assessee further submitted that it has prepared its books of account as per the requirement of the Companies Act, 1956 and same has been audited and approved by the statutory auditor and also adopted by the shareholders in the annual general meeting of the assessee. Under the IT Act, 1961, what is subjected to tax under the Act is only the 'income' of the assessee and not each and every receipt of the assessee, where the other receipts not in the nature of income are in-tended to tax, the Legislature has specifically made provisions for taxability of such receipts in the statute itself like section 45, sections 56(v), 56(vi), 56(vii), etc. [Para 39] Section 5 of the Act provides for scope of total income chargeable to tax in India on the basis of receipt, accrual and deemed to be received and accrued in India. In view of the above, the charging section of the Act specifically provides for taxation of 'income' of an assessee. For a receipt to be taxable under the provisions of the Act it must necessarily be in the nature of an income or its taxability should have been specifically provided by the statute. Section 2(24) of the Act defines 'income'. The definition of 'income' provided in section 2(24), although an inclusive definition, but it specifically provides the income which are intended to be taxed under the provisions of the Act. Even the income in the nature of capital gains as per section 45, and gifts received as per section 56(2) (v), (vi), (vii), etc., are included in the definition of income. Thus, under the Income-tax Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. [Para 40] As per the provisions of law prevailing during the year under consideration, the gifts received by one corporate body from another corporate body do not come under the ambit of income as contemplated under section 2(24) of the Act or any other provisions of the Act. The gifts received are voluntary payments made by the donors to the assessee. Neither the assessee has any legal right to claim the gift from the donor nor the donors have any legal or contractual obligations to give gift to the assessee. The gifts received by the assessee was a voluntary payment made by the donor, without consideration to the assessee. The gift received has nothing to do with the business of the assessee so as to constitute its income from business or a revenue receipt in the nature of income. [Para 41] From the record, the identity of all the four concerns who have made gifts to the assessee was given along with their name, permanent account number, address and other details and, therefore, the identity of these concerns was proved. With regard to source and capacity also there is no dispute, because the assessee has received these gifts, directly on account of the dividends of donor companies from Reliance Industries Ltd., as per the directions of the donor companies. Even the shareholding of the donor companies in RI Ltd. is not in dispute and, therefore, there is no dispute as far as the identity and capacity/source of gifts are concerned. [Para 43] Suspicion of the AO that the transaction of gift is dubious and to bring into books any unaccounted money is contrary to the facts on record. In so far as admittedly the gifts have been received on account of dividend by the donor companies from the Reliance Industries Ltd. The RI Ltd. have also paid dividend distribution tax, therefore, such money received by the assessee is not unaccounted money. The AO has not brought any evidence on record contrary to the claim of the assessee. Even during the appellate proceedings, the CIT(A) has given opportunity to the AO, in the remand report also, the AO could not rebut the claim of the assessee on the basis of any contrary evidence on record. Hence, the claim of the assessee cannot be rejected merely on the basis of doubt or suspicion. [Para 45] With regard to the AO's objection regarding motive behind the transaction, the AO has stated in paragraph 8 of the assessment order that it could not ascertain the exact nature or motive behind the transaction because of limited time and resources available, whereas the case was remanded to the AO by the CIT(A) and an opportunity was again given with the specific direction to find out the nature and motive behind these transactions or gifts, whereas, the AO could not find out any other motive behind such transactions and merely stated in the remand report that the assessee has not furnished any clear and distinctive motive with regard to these transactions and the exact nature and motive is best known to the assessee. But, merely blaming the assessee that it is not furnishing the correct motive is putting the cart before the horse. [Para 47] With regard to the AO's objection regarding gift deed, it was found that the AO has held that these transactions cannot be treated as gifts because there are no gift deeds and because they have not been specifically accepted, whereas, there is no such legal requirement for making a gift. Even by simple delivery the gift can be made of an amount or cheque or other movable property. Whereas, in the case of the assessee, letters certifying the gifts with corresponding resolution of their board have been furnished before the AO. During the appellate proceedings before the Commissioner (Appeals), the assessee has also filed affidavits from all the four donor companies, certifying the gifts. The assessee has also filed its affidavit for certifying the receipt of gifts. The receipt of gift as well as making of gift are authorised by respective memorandum and articles of association of the companies and the assessee. Gifts have been accepted by the assessee by adopting a resolution by the board of directors. After sending all these documents to the AO, the Commissioner (Appeals) had called a remand report from the AO, therefore, this is no violation of rule 46A also. Thus, it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance. [Para 48] Coming to the contention of the AO that the company cannot make a gift and that there is a lack of natural love and affection in case of gift by the company. This issue is squarely covered by the decision of the co-ordinate Bench in the case of DP World P. Ltd. v. Dy. CIT ITA Nos. 3627 and 3841/Mum/2012, Mumbai 'D' Bench, order dated 12-10-2012 (2013) 140 ITD 694 (Mum). [Para 49] The companies are competent to make and receive gifts and natural love and affection are not necessary requirements. The only requirement for company is make gifts as per respective memorandum and article of association, which authorise the company for the same. The assessee and the donor companies are authorised in this regard for receiving and making gifts respectively by their memorandum and articles of association. The position regadingt the competency of corporate entites to make and receive gifts has also been upheld. [Para 50] Furthermore, as per section 56(2) (viia) and 56(2) (viib), gift of certain kind of shares received by a company in which the public are not substantially interested are taxable and, therefore, it is clear that the Income-tax Act, itself provides that companies can receive gifts, of course, gifts of only shares of certain kind received by certain category of companies are taxable. (The provisions of section 56(2)(viia) and (viib) are applicable with effect from June 1, 2010 and April 1, 2013 respectively). Therefore, it cannot be said that the assessee could not have received such gifts from other companies. It is also clear from the Transfer of Property Act that companies can receive and make gifts and there is no requirement of any natural love and affection for making or receiving a gift by companies. Even the Income-tax Act by way of section 56(2)(viia) and 56(2)(viib) provides that gifts of certain kind of shares are taxable in the hands of certain category of companies. [Para 51] The AO has assessed the amount of gifts received under the head 'Income from other sources' holding that the assessee has failed to prove that the amount received is exempt from taxation. Though no specific reason has been given by the AO for assessing it under the head 'Income from other sources', but it is clear from the discussion and decision of the AO that it has been assessed under the head 'Income from other sources' because it was found not taxable under any other head of income, therefore, was assessed under the residuary head of income, i.e., 'Income from other sources'. Gift, capital receipts without considerations are not in the nature of income and hence, the same cannot be charged to tax undr the provisions of the IT Act. [Para 52] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2015 TaxPub(DT) 1471 (Del-Trib) : (2015) 171 TTJ 0001 : (2015) 120 DTR 0163 : (2015) 039 ITR (Trib) 0657

Dy. CIT v. KDA Enterprises P. Ltd.

INCOME TAX ACT, 1961

--Income --Capital or revenue receiptGift received from corporate bodies--The appellant is a private limited company engaged in the business of investment. During the year under consideration it received gifts aggregating to Rs. 1,61,86,77,034 from four companies, viz., A P. Ltd., M P. Ltd., T Pvt. Ltd. and O Pvt. Ltd. All the above four companies are shareholders of RI Ltd. (RI) and received dividend income from Reliance Industries. All the above four companies are private limited companies and are governed by their respective memorandum and articles of association. The memorandum of associations of the appellant and all the above four companies provide for receiving/giving of gift respectively. The assessee has claimed that the amount received are gifts received from the said four concerns. It is claimed that the amounts have been received directly from the RI Ltd. on account of the dividend receivable by the said four concerns against their shareholding in the RI Ltd. It is on the directions of the four concerns that their dividend were directly credited to the bank account of the assessee. The assessee also claimed that all the four concerns have passed resolutions in the meeting of the board of directors for making the said gifts and similarly the assessee-company has also passed a resolution by the board of directors for receiving the gifts. It is also claimed that all the four donor concerns are also authorised by the memorandum and articles of association for making such gifts and the assessee-company is authorised for receiving such gifts. Accordingly, the assessee claimed that all the four donor concerns are also authorised by memorandum and articles of association for making such gifts and the assessee-company is also authorised for receiving such gifts. Accordingly, the assessee claimed that the identity of the donor companies, their source of funds for gifts and the nature of transaction are clearly established. Therefore, the assessee has claimed that these receipts are not taxable because these are capital receipts and any such gift is not taxable in case of companies, whereas the AO held that these receipts cannot be categorised as gifts or transactions which are specifically exempt from taxation and further held that these cannot be categorised as dividend income in the hands of the assessee. Hence, these receipts are taxable as income from other sources in the hands of the assessee and accordingly made an addition of Rs. 1,61,86,77,034 to the returned income of the assessee. The assessee has disputed it. Claiming that these are genuine gifts and the amounts received are capital receipts which are not taxable. In view of the above submissions and various judicial pronouncements relied upon, the appellant submits that the gift of Rs. 1,61,86,77,034 received by the appellant from corporate bodies is in the nature of capital receipt and the same cannot be considered as income of the appellant under any provisions of the Act and hence, is not liable to tax. During the course of appellate proceedings above submission of the assessee was remanded by the CIT(A) to the AO vide order under section 250(4) which is as follows : The assessment in this case under section 143(3) is completed vide order by the AO in which the claim of the assessee that it has received Rs. 161.86 crores as gift has been rejected and it has been assessed as income from other sources, which has been disputed by the assessee in the present appeal. After considering the assessment orders, remand reports and the rejoinders filed by the assessee, the CIT(A) deleted the addition made on account of gifts, as such the gifts received by the assessee are capital receipts and not taxable under section 56 or section 28(iv). Held: Under the IT Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. The gifts received by the assessee was a voluntary payment made by the donor, without consideration to the assessee. The gift received has nothing to do with the business of the assessee so as to constitute its income from business or a revenue receipt in the nature of income. In view of the judicial pronouncements, the gift of Rs. 1,61,86,77,034 received by the assessee from corporate bodies is in the nature of capital receipt not liable to tax under the provisions of the IT Act. During the appellate proceedings before the CIT(A), the assessee has also filed affidavits from all the four donor companies, certifying the gifts. The assessee has also filed its affidavit for certifying the receipt of gifts. The receipt of gift as well as making of gift are authorised by respective memorandum and articles of association of the companies and the assessee. Gifts have been accepted by the assessee by adopting a resolution by the board of directors. After sending all these documents to the AO, the CIT(A) had called for a remand report from the AO, therefore, this is no violation of rule 46A also. Thus, it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance. The companies are competent to make and receive gifts and natural love and affection are not necessary requirements. The only requirement for company is to make gifts as per respective memorandum and articles of association, which authorise the company for the same as such gift, capital receipts without considerations are not in the nature of income and hence, the same cannot be charged to tax under the provisions of the IT Act.

The assessee received gift of Rs. 161.86 crores from the four companies. The gift so received was claimed as capital receipt, therefore, credited to capital reserve account in its books. [Para 39] During the course of scrutiny assessment, the AO raised query with respect to the gift received from corporate bodies. It was submitted by the assessee that all the donor companies are shareholders of Reliance Industries Ltd. and received dividend income from Reliance Industries. The donor companies had given irrevocable instructions to Reliance Industries to pay dividend directly to the assessee. The receipt of dividend was debited to the bank account and credited to the capital reserve account of the assessee. The assessee submitted that the gift is in the nature of capital receipt and is not required to be credited to 'profit and loss account' of the assessee. The assessee further submitted that it has prepared its books of account as per the requirement of the Companies Act, 1956 and same has been audited and approved by the statutory auditor and also adopted by the shareholders in the annual general meeting of the assessee. Under the IT Act, 1961, what is subjected to tax under the Act is only the 'income' of the assessee and not each and every receipt of the assessee, where the other receipts not in the nature of income are in-tended to tax, the Legislature has specifically made provisions for taxability of such receipts in the statute itself like section 45, sections 56(v), 56(vi), 56(vii), etc. [Para 39] Section 5 of the Act provides for scope of total income chargeable to tax in India on the basis of receipt, accrual and deemed to be received and accrued in India. In view of the above, the charging section of the Act specifically provides for taxation of 'income' of an assessee. For a receipt to be taxable under the provisions of the Act it must necessarily be in the nature of an income or its taxability should have been specifically provided by the statute. Section 2(24) of the Act defines 'income'. The definition of 'income' provided in section 2(24), although an inclusive definition, but it specifically provides the income which are intended to be taxed under the provisions of the Act. Even the income in the nature of capital gains as per section 45, and gifts received as per section 56(2) (v), (vi), (vii), etc., are included in the definition of income. Thus, under the Income-tax Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. [Para 40] As per the provisions of law prevailing during the year under consideration, the gifts received by one corporate body from another corporate body do not come under the ambit of income as contemplated under section 2(24) of the Act or any other provisions of the Act. The gifts received are voluntary payments made by the donors to the assessee. Neither the assessee has any legal right to claim the gift from the donor nor the donors have any legal or contractual obligations to give gift to the assessee. The gifts received by the assessee was a voluntary payment made by the donor, without consideration to the assessee. The gift received has nothing to do with the business of the assessee so as to constitute its income from business or a revenue receipt in the nature of income. [Para 41] From the record, the identity of all the four concerns who have made gifts to the assessee was given along with their name, permanent account number, address and other details and, therefore, the identity of these concerns was proved. With regard to source and capacity also there is no dispute, because the assessee has received these gifts, directly on account of the dividends of donor companies from Reliance Industries Ltd., as per the directions of the donor companies. Even the shareholding of the donor companies in RI Ltd. is not in dispute and, therefore, there is no dispute as far as the identity and capacity/source of gifts are concerned. [Para 43] Suspicion of the AO that the transaction of gift is dubious and to bring into books any unaccounted money is contrary to the facts on record. In so far as admittedly the gifts have been received on account of dividend by the donor companies from the Reliance Industries Ltd. The RI Ltd. have also paid dividend distribution tax, therefore, such money received by the assessee is not unaccounted money. The AO has not brought any evidence on record contrary to the claim of the assessee. Even during the appellate proceedings, the CIT(A) has given opportunity to the AO, in the remand report also, the AO could not rebut the claim of the assessee on the basis of any contrary evidence on record. Hence, the claim of the assessee cannot be rejected merely on the basis of doubt or suspicion. [Para 45] With regard to the AO's objection regarding motive behind the transaction, the AO has stated in paragraph 8 of the assessment order that it could not ascertain the exact nature or motive behind the transaction because of limited time and resources available, whereas the case was remanded to the AO by the CIT(A) and an opportunity was again given with the specific direction to find out the nature and motive behind these transactions or gifts, whereas, the AO could not find out any other motive behind such transactions and merely stated in the remand report that the assessee has not furnished any clear and distinctive motive with regard to these transactions and the exact nature and motive is best known to the assessee. But, merely blaming the assessee that it is not furnishing the correct motive is putting the cart before the horse. [Para 47] With regard to the AO's objection regarding gift deed, it was found that the AO has held that these transactions cannot be treated as gifts because there are no gift deeds and because they have not been specifically accepted, whereas, there is no such legal requirement for making a gift. Even by simple delivery the gift can be made of an amount or cheque or other movable property. Whereas, in the case of the assessee, letters certifying the gifts with corresponding resolution of their board have been furnished before the AO. During the appellate proceedings before the Commissioner (Appeals), the assessee has also filed affidavits from all the four donor companies, certifying the gifts. The assessee has also filed its affidavit for certifying the receipt of gifts. The receipt of gift as well as making of gift are authorised by respective memorandum and articles of association of the companies and the assessee. Gifts have been accepted by the assessee by adopting a resolution by the board of directors. After sending all these documents to the AO, the Commissioner (Appeals) had called a remand report from the AO, therefore, this is no violation of rule 46A also. Thus, it cannot be said that these amounts are not gifts merely on the basis that there are no gift deeds or acceptance. [Para 48] Coming to the contention of the AO that the company cannot make a gift and that there is a lack of natural love and affection in case of gift by the company. This issue is squarely covered by the decision of the co-ordinate Bench in the case of DP World P. Ltd. v. Dy. CIT ITA Nos. 3627 and 3841/Mum/2012, Mumbai 'D' Bench, order dated 12-10-2012 (2013) 140 ITD 694 (Mum). [Para 49] The companies are competent to make and receive gifts and natural love and affection are not necessary requirements. The only requirement for company is make gifts as per respective memorandum and article of association, which authorise the company for the same. The assessee and the donor companies are authorised in this regard for receiving and making gifts respectively by their memorandum and articles of association. The position regadingt the competency of corporate entites to make and receive gifts has also been upheld. [Para 50] Furthermore, as per section 56(2) (viia) and 56(2) (viib), gift of certain kind of shares received by a company in which the public are not substantially interested are taxable and, therefore, it is clear that the Income-tax Act, itself provides that companies can receive gifts, of course, gifts of only shares of certain kind received by certain category of companies are taxable. (The provisions of section 56(2)(viia) and (viib) are applicable with effect from June 1, 2010 and April 1, 2013 respectively). Therefore, it cannot be said that the assessee could not have received such gifts from other companies. It is also clear from the Transfer of Property Act that companies can receive and make gifts and there is no requirement of any natural love and affection for making or receiving a gift by companies. Even the Income-tax Act by way of section 56(2)(viia) and 56(2)(viib) provides that gifts of certain kind of shares are taxable in the hands of certain category of companies. [Para 51] The AO has assessed the amount of gifts received under the head 'Income from other sources' holding that the assessee has failed to prove that the amount received is exempt from taxation. Though no specific reason has been given by the AO for assessing it under the head 'Income from other sources', but it is clear from the discussion and decision of the AO that it has been assessed under the head 'Income from other sources' because it was found not taxable under any other head of income, therefore, was assessed under the residuary head of income, i.e., 'Income from other sources'. Gift, capital receipts without considerations are not in the nature of income and hence, the same cannot be charged to tax undr the provisions of the IT Act. [Para 52]