Panna S. Khatau vs. ITO (ITAT Mumbai)

(i) Vide sections 56(2)(v) to (vii), provisions recently introduced, provide for receipt without consideration from an unrelated party, except otherwise than in any specified condition, is statutorily presumed to bear the character of income. The same is the second exception to the rule of a capital receipt being not considered as income under the Act and, in that sense, is again a rule of evidence, i.e., as s. 68, etc. The provision/s is harsh on genuine transfers, legislated in view of the propagation and proliferation of ‘gifts’ from unrelated parties. The same, however, is without prejudice to the generality of section 56(1). It would, therefore, be of little consequence even if section 56(2)(vi), the specific provision covering the period under reference, i.e., f.y. 2007-08, is considered as inapplicable in the facts of the case. In fact, section 56(2)(viib), inserted by Finance Act, 2012, duly incorporated in section 2(24) defining income, provides for treating the share premium in excess of the fair market value of the share as income. The apex court in T.V. Sundram Iyengar [1996] 222 ITR 344 (SC) opined in favour of the write back of trade advances as income, de hors the provision of section 56(2), applying the concept of income, consistent with section 2(24), in the facts of the case. The efflux of time, coupled with the write back, so that it was no longer payable, it opined, was sufficient to signify a qualitative change in the nature of the sum as one of receipt of business. The finding of it representing a trade surplus (and, therefore, assessable u/s.28), in view of the trading relationship between the parties, is, though relevant, secondary, in the larger context of the ratio/import of the decision. It may not be of much import in-as-much as it would only alter or impact the head of income under which the income stands to be assessed. The issue before us is not qua the head of income under which the impugned sum would stand to be assessed; it not being even the Revenue’s case that the same is business income, assessing it as ‘income from other sources’ u/s. 56, but as to the nature of the receipt, i.e., if it at all is, or represents, the assessee’s income.

(ii) Section 68 would hold even if the impugned sums represent, as contended by the Revenue, the assessee’s liabilities, assumed in the past, on whatever count. The same no longer representing a liability, there is admittedly a qualitative change therein – its nature transforming from a liability (for goods, services, whatever – which could itself vary over different persons, and remains unspecified) to the assessee’s own money, as signified by the credit to her capital account, which is a fresh credit/s during the year. Both sections 68 and 56(2)(vi) would apply. Qua the latter, the sum of money may have been received earlier, but there is a constructive receipt during the year in-as-much as it is received on own account, while the earlier ‘receipt’ was that by way of incurring a liability for value received (in kind) or even if in the form of money, only for being paid back and, as such, not without consideration. The second receipt, however, is without consideration. Section 68 shall also, as afore-referred, apply in-as-much as there is fresh credit/s in the assessee’s books in the form of credit/s to the capital account. In our view, the particular section is not of much significance considering the amount to be no longer a liability, but accretion the capital during the year, so that even section 56(1) shall hold, quite in the same vein as the hon’ble apex court found the write back to be assessable u/s.28 as business income in the case of T.V. Sundram Iyengar [1996] 222 ITR 344 (SC).

(iii) When an amount, which is stated, claimed and accepted as a payable, is no longer so, the assessee gains to that extent. There is nothing unreal or notional about this gain. It can show that, even so, the same is not chargeable as income or no tax liability is attracted in-as-much as the benefit is not in the nature of income. The assessee offers no such explanation. What is admitted though is that there has been remission/cessation of liability in-as-much as these are no longer payable. Why? No reason is advanced. It is under these circumstances that the law permits the A.O. to draw an adverse inference of it as representing the assessee’s income. As regards the year, there can again be little doubt in the matter. The impugned credit/s, which we have found as a fresh credit/s, is during the current year. The liability was accepted as genuine for and up to the immediately preceding year, while it is no longer payable as at the year-end. The taxable event, in terms of gain, thus, has taken place during the year, even if one considers the passing of the journal entry, recording so, on a particular (single) date in the books, to be a matter of convenience only. It is for these reasons that we find the impugned credit as corresponding and answering to the concept of income under section 2(24) and, further, as standing to fall to be assessed u/ss. 56(1) and 56(2), finding strong support in the decision in the case of T.V. Sundram Iyengar [1996] 222 ITR 344 (SC).