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56[2] *********************Purported gift vs interest free loans!!!!!!!!

Started by CA.BHUPENDRASHAH, June 29, 2008, 10:24:58 AM

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case was represented by CA BHUPENDRA Shah

There exist no provision in section 56(2)(v) of IT Act to treat
loans, which may not be repaid, as income of assessee

A loan transaction has to be treated as a loan transaction only and
it should be examined in the light of provisions of section 68 and
not under provisions of section 56(2)(v).


Chandrakant H. Shah



ITA NO. 3966/MUM/2008

JANUARY 12, 2008


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11. We have considered the submissions made by both the parties,
material on record and orders of the authorities below. It is noted
that the assessee is an individual and aged about 50 years. The
assessee has income from salary and other sources both aggregating
to Rs. 2.62 lakhs. It is also noted that the assessee was received
salary from M/s Nav Bharat Education Society where he is working as
a senior clerk. It is also noted that he has received a sum of Rs.
92,950 as consultation charges from Nirmal Developers to whom he has
rendered consultancy services as Site Supervisor. It is also not in
dispute that 4 concerns from whom the assessee has taken the loan
are the sister/connected concerns and these are engaged in the real
estate development & construction activities. It is also not in
dispute that such loan has been utilized for purchase of residential
flat, constructed by the concern wherein such lenders have direct or
indirect interests. It is also noted that the Assessing Officer,
vide its Notice under section 142(1) dated 6-11-2006 required the
assessee to furnish the copy of the Agreement for Purchase of Flat
along with the sources thereof which was not complied with, hence,
the Assessing Officer issued another Notice on 24-1-2007. The
assessee, vide it's letter dated 13-2-2007, submitted copy of the
Agreement for purchase of flat and also stated that the possession
of the said flat was taken in the Financial Year 2006-07. It was
also stated that payment for purchase of flat was made out of loans
so received and for which confirmatory letters were also submitted.
The Assessing Officer vide its letter dated 23-5-2007 made further
enquiries in respect of the loans taken by the assessee from M/s
Nirmal Lifestyle and M/s Utkanth Trading Corporation which was
submitted by the assessee vide its Letter dated 28-6-2006. The
assessee vides its Letter dated 9-8-2007 also explained to the
Assessing Officer regarding the nature of extra payment to the
builder against the sale consideration of Flat. Thereafter, the
Assessing Officer has not issued any other notice, as is evident
from the 1st paragraph of the assessment order. Thus, the above
chronological evidences show that at no stage, the assessee was made
aware of the intention of the Assessing Officer to make the impugned
addition so that the assessee could have made legal submissions. In
our opinion, if such an opportunity should have been granted by the
Assessing Officer, then, loans to the extent of Rs. 27,70,000 would
not have been added at all under section 56(2)(v) of the Act as
income of the assessee as these were received prior to 1-9-2004 (as
evident from the loan confirmations and bank transactions details
submitted to the Assessing Officer as such provisions have been made
applicable with effect from the above mentioned date. Further to
this manner of completion of the assessment proceedings, the Ld.
Commissioner (Appeals) has also ignored the relevant contentions of
the assessee by holding that these were not raised before the
Assessing Officer, whereas he could have examined the assessment
records to verify claim of the assessee that no opportunity was
given by the Assessing Officer to make these submissions. Thus, in
our opinion, the Ld. Commissioner (Appeals) is not justified in not
deleting the addition to the extent of Rs. 27,70,000. It is also
noted that all these loans have been shown in the Balance Sheet
submitted along with the Return of income as loans and the lenders
have also confirmed the same as such. Thus, in our opinion,
apparently, it is a case of loan transactions and not a case of gift
as held by the Assessing Officer. It is also noted that loan taken
from M/s Utkanth Trading Pvt. Ltd. has been repaid on 27-3-2004,
itself i.e., before passing of the assessment order which is also a
material fact so as to rebut the presumption of the Assessing
Officer that assessee was not under any obligation to repay the
loans and this fact also proves the assessee's claim that no
opportunity was granted by the Assessing Officer to the assessee
before making such addition. We are also of the view that it can
not be a case of assessee's on accounted or undisclosed income being
brought into the hands of the assessee as loans because even
according to Revenue Authorities the assessee is not a person of
sound financial status. We also find that the Assessing Officer has
not made any enquiries from the lenders to ascertain the true nature
of the transactions and to find out as to why these sums were given
without interest. It is also noted that the Assessing Officer has
held that the assessee was not under an obligation to repay the loan
and the ld. Commissioner (Appeals) has also confirmed the addition
for this reason as well as for the reason that the assessee had no
assets/business plans to repay the loan. We are, however, unable to
find any material being brought on record by the revenue to support
these findings, hence, the orders of Revenue authorities appear to
be passed on assumptions and presumptions and, particularly, when
apparently, there exist no provision in the section 56(2)(v) to
treat loans, which may not be repaid, as income of the assessee. In
this regard, we consider it pertinent to refer to provisions of 4(1)
(b) of the erstwhile Gift Tax Act, 1958 which provided for deemed
gift in case consideration for a transfer was not paid or not
intended to be paid and also to provisions of section 4(1)(c) of
that Act which provided for deeming a gift made by the person who
was responsible for the release, discharge, surrender, forfeiture or
abandonment of any debt, contract or actionable claim or of any
interest in property by any person without bonafide reasons to the
extent of value of such release, discharge, surrender, forfeiture or
abandonment. No such kind of situations have been prescribed under
section 56(2)(v) of the Act, hence, if this view of Revenue
Authorities is accepted, then, it would amount to re-writing of
provisions of this section and which is not in the domain of
executive or judicial forum. Hence, in view of above discussion, we
are of the prima facie opinion that this addition is not correct in

11.1 Having stated so, this addition also puzzles us as to what
would happen in the case of genuine loans given and taken in the
normal course of commercial practice or on account of social
considerations. To put it in other words, if a interest free loan
cannot be added under section 68, then, such loan should be added as
income of the recipient under section 56(2)(v) of the Act which also
means that there would not be any difference between capital receipt
liability and revenue liability/receipt. This type of addition also
leads to a situation of having two provision for charging one type
of income i.e., the Legislature has provided two charging Sections
i.e., Section 68 and 56(2)(v) which can not be so as in that case
the legislation would have made the provisions of 56(2)(v) either of
overriding nature by stating that "not-withstanding anything
contained in Section 68" or by providing for applicability of
provisions of Section 56(2)(v) in any other manner, in case
provisions of Section 68 could not be invoked. In this regard, we
are further of the opinion that when a specific provision exist in
law for particular thing, then, that thing is liable to be examined
there under only and if that item cannot be taxed under that
provision, then, that thing cannot be charged to tax under other
provisions of the Act. For example, if an item falls under the
head "profits and gains of business or profession" but if the same
cannot be taxed there-under for any reason, then, that cannot be
taxed under any other head. Surprisingly, in present case, it is
not that provisions of 68 were not applicable at all, hence, the
Assessing Officer invoked the provisions of section 56(2)(v). On
the contrary, the Assessing Officer has made necessary enquiries in
that regard and the Assessing Officer has not made addition under
section 68 for the reason that all the requirements of that section
i.e., identity; creditworthiness and genuineness of transactions
have been proved. Hence, in our view, a loan transaction has to be
treated as a loan transaction only and it should be examined in the
light of provisions of Section 68 and not under provisions of
Section 56(2)(v) of the Act and for this reason alone, this addition
is liable to be deleted.

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Mon Feb 9, 2009 10:23 pm

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section 56[2][v] ******* gift vs loan *** bhupendra shah
this case was represented by CA BHUPENDRA Shah There exist no provision in section 56(2)(v) of IT Act to treat loans, which may not be repaid, as income of...  CABHUPENDRASHAH
   10:24 pm