The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹24.06 lakh made in respect of a gift received by a taxpayer from his grandmother, holding that there is no requirement that a gift must be made only through a gift deed.
The bench of T. R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) found that the taxpayer had submitted documents explaining the sources from which his grandmother was said to have made the gift, along with an affidavit from his uncle confirming it.
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The Bench ruled on the assessment of the taxpayer’s civil construction business. It held that an assessment made on a best-judgment basis does not automatically prevent the tax authorities from making separate additions for unexplained gifts or creditors.
At the same time, the Tribunal found that the Assessing Officer’s disallowance of 25% of direct expenses lacked a reasonable basis and sent the issue back for fresh determination. The question of unexplained sundry creditors was also remanded for recalculation.
The dispute concerned the assessment year 2016–17. The taxpayer, a civil contractor, had declared an income of ₹54.16 lakh. Following a scrutiny assessment, the Assessing Officer assessed his income at approximately ₹4.45 crore.
The assessment included additions of ₹24.06 lakh for an unexplained gift, ₹74.36 lakh for disallowed expenses and ₹2.93 crore for unexplained sundry creditors.
On appeal, the Commissioner of Income Tax (Appeals), or CIT(A), upheld the gift and expense additions. The CIT(A) granted partial relief on the sundry creditors, deleting ₹1.88 crore of the addition and retaining approximately ₹1.05 crore.
Both sides approached the Tribunal: the department challenged the relief granted for sundry creditors, while the taxpayer filed a cross-objection against the additions.
The taxpayer said he had received ₹24,06,121 from his grandmother before her death. He submitted an affidavit from his uncle, who stated that the amount came from three sources: ₹9,27,121 from agricultural income, ₹5,54,000 from a loan returned by a contractor and partnership firm, and ₹9,25,000 from the sale proceeds of plots.
To support the explanation, the taxpayer submitted land records relating to agricultural income, a notarised agreement concerning the sale of a plot and tax audit reports of the contractor firm.
The CIT(A) had rejected the explanation, noting, among other things, that the affidavit did not state the dates or mode of the gift. The appellate authority also questioned the absence of a gift deed and a documented money trail for the claimed loan repayment.
The Tribunal, however, observed that the documents submitted to explain the grandmother’s sources had not been found false. It also noted that the taxpayer’s uncle had confirmed the gift on oath and explained its sources.
“There is no requirement of a gift being given only by way of a gift deed,” the Bench said. It concluded that, on the evidence before it, the source of the gift had been adequately explained and directed deletion of the ₹24,06,121 addition.
The taxpayer argued that, because he had not produced his books and vouchers and the Assessing Officer had disallowed part of his expenses, the books had effectively been rejected. He contended that the officer should therefore have estimated business income under the best-judgment provisions.
The Tribunal did not accept the argument that the books had been rejected, expressly or by implication. It said that, since the books were not produced before the Assessing Officer, the officer could not examine their correctness or completeness and identify defects in them for the purpose of rejecting them under Section 145(3).
The Bench nevertheless held that, given the taxpayer’s non-compliance during the assessment proceedings, the Assessing Officer had to assess income on a best-judgment basis under Section 144.
The Assessing Officer had disallowed 25% of the taxpayer’s direct expenses of approximately ₹2.97 crore, resulting in an addition of ₹74.36 lakh. The taxpayer argued that the resulting profit rate was commercially unreasonable for a civil contractor.
The Tribunal found that the disallowance had been made without a reasonable basis. It restored the issue to the Assessing Officer to determine taxable business profits using a reasonable and justifiable method.
The taxpayer also argued that, once income was estimated under a best-judgment assessment, no separate additions could be made for the gift and sundry creditors.
The Tribunal rejected that broader argument. It held that a best-judgment assessment does not, by itself, bar separate additions for items such as unexplained gifts or credits. Whether a particular addition is justified must still be examined on its facts.
The Assessing Officer had treated ₹2.93 crore as unexplained sundry creditors. The CIT(A) reduced the addition after considering the taxpayer’s trial balance and evidence relating to a bank overdraft secured against fixed deposits.
The Tribunal agreed that the established bank overdraft should not be treated as a sundry creditor arising from day-to-day business activity. It found no fault with the CIT(A)’s decision to use ₹3.28 crore as the figure for sundry creditors arising during the year.
However, because the Tribunal had sent the business income and expense calculation back to the Assessing Officer, it also directed the officer to recalculate any unexplained creditors after determining the expenses that could reasonably be attributed to the business.
The department’s appeal against the ₹1.88 crore relief was dismissed. The taxpayer’s cross-objection was partly allowed for statistical purposes, with the gift addition deleted and the expense and creditor issues remanded.
The Tribunal also condoned a three-day delay in filing the cross-objection, accepting that the delay was neither intentional nor deliberate.
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