Case Law Details
IN THE ITAT LUCKNOW BENCH (THIRD MEMBER)
Vishnu Jaiswal
V/s.
Commissioner of Income-tax (Appeals)
IT APPEAL NO. 336 (LKW.) OF 2011
[ASSESSMENT YEAR 2006-07]
MAY 1, 2012
ORDER
Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order of the ld. CIT(A) mainly on two grounds. One ground is with regard to the addition of Rs. 3.50 lakhs under section 68 of the Income-tax Act, 1961 (hereinafter in short “the Act”) and the other is with regard to the disallowance of telephone expenses of Rs. 5,000 on estimate basis.
2. The farts in brief are that with regard to the addition of Rs. 3.50 lakhs, it is noticed by the Assessing Officer that the assessee has alleged to have received Rs. 3.50 lakhs as unsecured loan from three creditors namely Shri Sant Lal Jaiswal, Smt. Kiran Jaiswal and Shri Dheeraj Jaiswal. The assessee has claimed to have received a loan of Rs. 2.50 lakhs from Shri Sant Lal Jaiswal and Rs. 50,000 each from Smt. Kiran Jaiswal and Shri Dheeraj Jaiswal. The Assessing Officer has noted from the bank accounts of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal that before issuing cheques of the aforesaid loan amount, equivalent amount of cash were deposited in their respective accounts ostensibly to build up a credit balance and to ensure that the cheques are honoured. The source of these cash deposits were not properly explained to the Assessing Officer. Though two loan creditors namely Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal were stated to be assessed to tax, the quantum of income returned by them and after deducting the probable amounts required for their own personal expenses, they were not found to be capable of making such cash savings which could constitute a satisfactory source for cash deposits in their respective bank accounts immediately before issuing cheque purportedly for loan to the assessee. As regards the loan from Smt. Kiran Jaiswal, no detail of bank account was furnished. Being not convinced with the explanation of the assessee, the Assessing Officer has treated the entire unsecured loan of Rs. 3.50 lakhs as unexplained cash credit and made addition of the same under section 68 of the Act.
3. Before the ld. CIT(A), the assessee reiterated his contention that he has placed the relevant evidence on record to prove the identity and creditworthiness of the cash creditors and genuineness of the transaction. From the details of annual income of the three creditors shown in the returns filed before the Department, the ld. CIT(A) has observed that all the three cash creditors have shown very meagre amounts of drawings for household expenses and this attempt seems to project higher cash balances in order to explain the cash deposits in the bank account preceding the alleged advancing of loan. The ld. CIT(A) was not convinced with the financial status of the cash creditors and he formed a view that the alleged cash creditors are non-genuine and accordingly he treated the entire cash credit of Rs. 3.50 lakhs as unexplained and confirmed the addition. The relevant observations of the ld. CIT(A) are extracted hereunder:-
“3. As regards the addition of Rs. 3,50,000/- comprising three unsecured loan credits of Rs. 2,50,000/- in the name of Shri Sant Lal Jaiswal, Rs. 50,000/- in the name of Smt. Kiran Jaiswal and Rs. 50,000/- in the name of Shri Dheeraj Jaiswal, the AO is seen to have examined the creditworthiness of each alleged creditor. The AO noted that while the bank account of Smt. Kiran Jaiswal was never produced for examination the cheques purportedly issued by Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal for the alleged loan by them were preceded by an equivalent amount of cash deposits in their respective bank accounts ostensibly to build-up a credit balance and to ensure that the cheques were honoured. The source of these cash deposits in the bank accounts of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal were not held satisfactorily explained though the source was sought to be attributed to past savings of the respective alleged loan creditors. Though the two loan creditors namely Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal were stated to be assessed to tax, the quantum of income returned by them and after deducting the probable amounts required for their own personal expenses they were not found to be capable of making such cash savings which could constitute a satisfactory source for cash deposits in their respective bank accounts immediately before issuing a cheque purportedly for loan to the appellant. As regards the alleged loan credit from Smt. Kiran Jaiswal no details of bank account were furnished. However the copies of acknowledgments of her returns furnished in the course of these proceedings show an income too meagre to explain any substantial savings which could possibly constitute the source of loan.
3.1 The particulars of income during the last several years for all the three alleged loan creditors indicate nominal income which could not have been sufficient even for the personal expenses of the alleged loan creditors themselves. All of them have at the same time shown very meagre amounts of drawings for household expenses further restricting the scope for savings out of these drawings. The attempt seems to be project higher cash balances retained in order to explain the cash deposits in bank account preceding the alleged advancing of loan. Besides, the incomes claimed to have returned in the past do not substantiate the extent of cash savings inasmuch as no balance sheets showing the actual drawings and cash in hand at the end of the accounting years were ever filed with the returns of income for any accounting year. All the alleged loan creditors are seen to be in regular banking habits and the statements of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal clearly indicate that these two persons operated their respective bank accounts quite frequently.
3.2 In view of the facts discussed above the very capacity of the alleged loan creditors to meet their personal expenses and still make sizable savings is not believable and the possibility of cash accumulation for years together, despite being in the regular banking habits, is too improbable to be accepted. The contention of the appellant that the loan creditors were assessed to tax does not, ipso facto, substantiate their creditworthiness especially in view of meagre amounts of income disclosed by them. The returns claimed to have been filed by them also do not substantiate the accumulation of cash savings as claimed. In the statements prepared and furnished for the alleged loan creditors the drawings have been deliberately kept low in order to project higher savings, even out of nominal incomes, so that the cash deposits in their bank accounts prior to alleged loans, could look credible and explained. These statements are tailor-made only to suit the appellant’s explanation and these statements never formed part of the returns of income for the respective assessment years. A facade of loan transactions through banking channels has thus been created only to make these transactions look genuine.
3.3 The appellant’s contention that the source of deposit in the hands of the loan creditors could not be questioned seems to suggest that funds introduced in the bank accounts of the alleged creditors were beyond the scope of examination of their creditworthiness. The onus to substantiate the creditworthiness of the creditors was on the appellant and this could not be avoided or shifted by taking refuge behind a distorted logic and by relying, out of context, on judicial decisions rendered in different set of circumstances.
3.4 In view of the discussion above the AO was justified in holding the three alleged loan credits as non-genuine and treating the cumulative amount of Rs. 3,50,000/- of these credits as income of the appellant in terms of the provisions of section 68. The addition is therefore confirmed and the appellant’s ground against this addition is dismissed.”
4. The assessee has preferred an appeal before the Tribunal. None was present on behalf of the assessee. The assessee, however, filed written submission. The assessee has also filed copy of bank accounts of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal along with their confirmations. The assessee has filed copy of cash flow statements of the cash creditors to justify the availability of cash. The copy of acknowledgment of return of income is also placed on record. The assessee has also placed reliance upon the following judgments in support of his contention that the assessee is only required to prove the genuineness of the transaction and identity of the cash creditors:-
1. Anand Prakash Agarwal v. Asstt. CIT [2008] 6 DTR 191 (All.)
2. CIT v. Jauharimal Goel [2005] 147 Taxman 448 (All.)
3. S. Hastimal v. CIT [1963] 49 ITR 273 (Mad.)
4. Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam)
5. CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)
6. Sarogi Credit Corpn. v. CIT [1976] 103 ITR 344 (Pat.)
7. CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80F (SC)
8. Asstt. CIT (Investigation) v. Shree Ram Hard Coke & Allied Industries [2003] 1 MTC 780
9. ITO v. M.S. Advance (P.) Ltd. [2005] 188 Taxation 181 (Trib.)
10. Vinod Kumar Bhandari v. Asstt. CIT [2003] 174 Taxation 49 (Trib.)
11. Orissa Corpn. (P.) Ltd.’s case (supra)
12. Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 (Gau.)
13. Addl. CIT v. Bahri Bros. (P.) Ltd. [1985] 154 ITR 244/22 Taxman 3 (Pat.)
5. The submission of the assessee was that once the assessee has received unsecured loan through cheque and the creditors have confirmed advancement of loan, the initial onus which lay upon the assessee to prove the genuineness of the transaction and identity and creditworthiness of the creditors is discharged. The assessee is not required to prove the source of deposits in the accounts of the cash creditors. Since the assessee has discharged his primary onus, the addition on account of unexplained cash credit is not called for.
6. The ld. D.R., on the other hand, contended that in the case of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal, the cash was deposited in their respective accounts just before few days from the date of issuance of cheques by them. He has also invited our attention to the return of income of Smt. Kiran Jaiswal with the submission that in the relevant assessment year she has declared annual income of Rs. 16,200 only. She has not filed copy of bank account to explain the source of deposits. Out of this total income of Rs. 1,16,200, she is required to make drawings to meet out the household expenses. Once the household expenses are allowed, nothing is left out for the creditor to advance the loan to the assessee. The ld. D.R. also drawn our attention to the cash flow statements filed in the cases of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal with the submission that in these cash flow statements, the household drawings were shown at Rs. 24,800 during assessment year 2006-07 which could not be sufficient to meet the household expenses even for a poor person. Since the assessee could not prove the creditworthiness of the creditors, the Revenue has rightly treated the unsecured loan as unexplained cash credit and made addition in the hands of the assessee.
7. Having given thoughtful consideration to the rival submissions and from the careful perusal of the orders of the lower authorities, we find that in the case of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal the assessee has filed bank statements before the Assessing Officer wherefrom it was noticed that the cash equivalent to the amount of loan was deposited in the bank account before issuing the cheques to the assessee. Source of deposits were not properly explained by the assessee. With regard to Smt. Kiran Jaiswal, she has declared annual income at Rs. 1,16,200 in the return filed in the relevant assessment year. Except this acknowledgment of return of income, no other evidence was filed before the Assessing Officer to prove the creditworthiness of the creditor. We have also carefully examined the cash flow statements of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal wherefrom it is noticed that the household drawings were shown nominal only with an intention to generate capital. In the impugned assessment year the household expenses in the case of Shri Sant Lal Jaiswal was shown at Rs. 24,800 and in the case of Smt. Kiran Jaiswal it was shown at Rs. 28,300. From the details available on record, we are of the view that the creditors are not financially sound to give advances or loan to the assessee. Since the creditworthiness of the creditors are not proved, we find ourselves in agreement with the order of the ld. CIT(A) who confirmed the addition made by the Assessing Officer under section 68 of the Act. We have also carefully examined various judgments referred to by the assessee and we find that nowhere it has been held that the assessee is only required to prove the identity of the creditors and genuineness of the transaction. The basic ingredients which are required to be proved by the assessee in order to justify the receipt of unsecured loan are three. One is genuineness of the transaction, second is identity of the cash creditor and the third is creditworthiness of the creditor. Since, in the instant case, the loan transactions are undertaken through banking channel, its genuineness cannot be doubted and since the cash creditors were produced before the Assessing Officer along with their identity proof, the identity can also not be doubted. Besides proving these ingredients, the assessee is also required to place relevant evidence to prove the creditworthiness of the creditors. While examining the creditworthiness of the creditor, the Assessing Officer is also required to examine the surrounding circumstances about the fund movements in the account of the cash creditors. In the instant case, no doubt the assessee has proved the genuineness of the transactions and identity of the creditors, but so far as creditworthiness of the creditors are concerned, the assessee is required to place some evidence on record to establish that the cash creditors were having sufficient funds to advance loan to the assessee. In the instant case, prior to advancing the loan to the assessee, equivalent amounts were deposited in their bank accounts and nothing has been brought on record from where cash creditors have got substantial amount for deposit, as their annual income were very meagre. In the light of these facts, we agree with the findings of the ld. CIT(A) in this regard and accordingly we confirm the addition.
8. The next ground is with regard to the disallowance of Rs. 5,000 which was made by the Assessing Officer on account of telephone expenses on adhoc basis for possible personal usage of telephone. In this regard, the Assessing Officer noted that the assessee has claimed a total sum of Rs. 72,128 under the head “telephone expenses” which is very excessive in comparison to the preceding year’s expenses of Rs. 33,571 under this head. The Assessing Officer formed a view that there may be personal usage of telephone and he accordingly disallowed Rs. 5,000 on adhoc basis.
9. In appeal, the ld. CIT(A) confirmed the same finding no force in the submissions of the assessee.
10. Now the assessee is before the Tribunal with the submission that the telephone was installed in the business premises of the assessee and therefore there is no personal use.
11. Having given thoughtful consideration to the rival submissions and from a careful perusal of the orders of the lower authorities, we are of the view that though the telephone was installed at the business premises, but its personal usage cannot be ruled out. We are, however, of the view that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) is on higher side. We accordingly restrict the disallowance to Rs. 2,000. Accordingly the disallowance is reduced from Rs. 5,000 to Rs. 2,000.
12. In the result, appeal of the assessee is partly allowed.
B.R. Jain, Accountant Member – Unable to agree with the order proposed by learned Judicial Member, on sustenance of addition u/s 68 for three cash credits, I proceed to write my own order.
2. In this case the appellant has taken an argumentative ground as under:
“The learned CIT (Appeals) has confirmed the additions made by the learned Assessing officer (AO) to the income of the appellant the Rs. 3,50,000/- being the amount of unsecured loans taken by the appellant i.e. Rs. 50,000/- from Smt. Kiran Jaiswal wife of the brother of the appellant, Rs. 2,50,000/- from Sri Sant Lal Jaiswal the father of the appellant & Rs. 50,000/- from Dheeraj Jaiswal the cousin brother of the appellant. The above additions have been made on the ground that the loan gives creditworthiness was in doubt in the opinion of the learned AO as well as CIT(A). The appellant neither asked to produce the loan givers nor he examined on oath by issuing notice individually. The appellant on his part fully co-operated in the case/proceedings and produced the confirmations from all of them, bank accounts of Sri Sant Lal Jaiswal & Sri Dheeraj Jaiswal while the third Smt. Kiran Jaiswal bank account could not be produced due to computerisation in the bank old ledgers has been removed and inspite of several requests to bank it could not furnish the account copy to the appellant. However, Smt. Kiran Jaiswal filed return of income every year. All the three loans cheques had been deposited in bank account of the appellant. Thus, transactions were through account payee cheque and through bank transactions.
Also, it has been held by the Allahabad High Court in CIT v. Jauharimal Goel [2006] 192 Taxation 68 (All.); 147 Taxman 448 (All.) that the assessee cannot be asked to prove source of source or the origin of origin money. It has been held in Nemi Ghana Kothah v. CIT 264 ITR 254 (Gau.) which has also been relied by Hon’ble CIT Appeals-I in the Appeal No. CIT(A)-I/Lko/06-07/01 that once the assessee discloses the sources from which he had received the loans the burden under section 106 of the Evidence Act is discharged it is not the burden of the assessee to prove the creditworthiness of the sources of the creditors or to find out the source of money of his creditor. Similarly in Tola Ram Daga v. CIT [1966] 59 ITR 632 (Assam) the court has held that “In the account of the firm deposit made by the party the genuineness and regularity of the account has not been challenged the account are relevant any prima facie proof of entry and correctness thereof under section 34 of the Evidence Act to require the firm to adduce the source of depositors from where the deposit was made not required under the law.” The Supreme Court in CIT v. Orissa Corporation (P) Ltd. [1986] 159 ITR 78 (SC) has held that if the assessee has given names and addresses of the creditors and it was in the knowledge of the revenue that the said creditors were being assessed to tax, the onus on the revenue to pursue the matter with the creditors. The ITAT Delhi in Vinod Kumar Bhandari v. ACIT [2008] 174 Taxation 49 (Trib) has held that non-presence of the creditors before Assessing Officer should not be the sole reason for invoking section 68.
The I.T.A.T, Allahabad has held in Anand Prakash Agarwal v. Asstt. CIT [2008] 6 DTP (All. – Trib) 191 that where donors were having sufficient funds in their bank and gifts were made through banking channel as well as confirmation of donors was received by Assessing Officer, the gifts received by assessee from non-relatives could not be added under any provisions of I.T. Act, 1961.”
3. Briefly, the facts are that the appellant derives income from trading of battery, its parts and invertors etc. The return of income was filed declaring an income of Rs. 1,45,1207-. During the course of assessment proceedings, the Assessing Officer noticed assessee to have received unsecured loans aggregating to Rs. 3,50,000/- as under:
| 1. Shri Sant Lal Jaiswal | Rs. 2,50,000/- |
| 2. Shri Dheeraj Jaiswal | Rs. 50,000/- |
| 3. Smt. Kiran Jaiswal | Rs. 50,000/- |
3.1 The Assessing Officer required the assessee to prove the identity, capacity and creditworthiness of the lenders. In response thereto, the assessee furnished written reply. In his reply the assessee stated that Smt. Kiran Jaiswal is his sister-in-law i.e. wife of his brother and filed return of income regularly with Income Tax Officer, Ward-2, Faizabad. Shri Sant Lal Jaiswal is his father and Shri Dheeraj Jaiswal is a relative. The confirmation letters from all the creditors were laid on assessment record. It was also stated that all these persons have given unsecured loans interest free through account payee cheques which have been deposited in the bank account of the assessee. The assessee also furnished copies of bank accounts of the two lenders namely Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal. From the perusal of the bank account of these two creditors, the Assessing Officer noticed that there are cash deposits 1 to 7 days before the date of giving of loan to the assessee. He, therefore, required the assessee to explain the source of these cash deposits in the lenders bank account. The assessee, in response thereto, submitted that Shri Sant Lal Jaiswal has been assessed to tax since assessment year 1998-99 and furnished a chart showing capital savings of Rs. 3,21,100/- up to the year under consideration. The Assessing Officer considering the earning for assessment year 2005-2006 in the range of Rs. 30,000/- to Rs. 40,000/- was of the opinion that such amount would hardly be sufficient for any saving after meeting personal expenses of the creditor. As the said creditor could not have saved the amount equivalent to that deposited in cash in his bank account for the year under consideration, he entertained the view that creditworthiness of Shri Sant Lal Jaiswal is not proved so for as amount of loan of Rs. 2,50,000/- to the assessee is concerned. He took this amount as diversion of assessee’s undisclosed income to the account of Shri Sant Lal Jaiswal in cash and then taking the same as loan from him through cheque and accordingly added the same u/s 68 of the I.T. Act, 1961.
3.2 As regards Shri Dheeraj Jaiswal, the cash deposit of Rs. 50,000/- in his bank account on 06/06/2005 i.e. just one day before giving loan, the assessee explained that the said deposit was made by the creditor in his account of his own past savings. As the assessee failed to substantiate the source of cash deposit of Rs. 50,000/- in the bank account of Shri Dheeraj Jaiswal, the Assessing Officer took that the creditworthiness of Shri Dheeraj Jaiswal is not proved.
3.3 As regards loan of Rs. 50,000/- from Smt. Kiran Jaiswal, the assessee furnished only a declaration from her claiming the immediate source of loan as deposit in her saving bank account No. 1042 with Bank of Baroda, Niyawan Branch, Faizabad. As the assessee did not furnish any evidence regarding the deposit made in the bank account of the creditor, the Assessing Officer took that the creditworthiness of Smt. Kiran Jaiswal is also not proved.
3.4 Vide internal para 6 of his order, the Assessing Officer formed opinion that the creditworthiness of the loans aggregating to Rs. 3,50,000/- from the above named three persons is not found to be genuine as their creditworthiness is not proved.
4. In appeal, the learned CIT(A) was of the opinion that the particulars of income during last several years for all the three alleged loan creditors indicate nominal income which could not have been sufficient even for the personal expenses of these loan creditors and as very meagre amount of drawing for household expenses have been declared by them, the scope of availability of saving with them was restricted. The attempt to show low drawing was taken to project availability of higher cash balance so as to explain the cash deposit in their bank accounts preceding the alleged advancing of loans to the appellant. The cash savings in the past with these creditors is also not substantiated as the balance sheet showing the actual drawing and cash in hand was not filed with the returns of income by them for any accounting year. The loan creditors were seen to be in regular banking habits and statement of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal clearly indicated that these two persons operated their respective bank account quite frequently. The learned CIT(A) in the light of their income vis-a-vis personal expenses, did not believe possibility of cash accumulation with them. The contention of the appellant that the loan creditors were assessed to tax was not taken to substantiate their creditworthiness in view of meagre amount of income disclosed by them. Since they have kept their drawings low in order to project higher savings so as to explain cash deposits in their bank account prior to giving of loans was taken as a statement tailor-made and a facade of loan transaction through banking channels to make these transactions look genuine. The learned CIT(A) thus entertained the view that the onus to substantiate creditworthiness of the creditors was on the appellant but merely because the monies have come to the appellant from their own bank accounts being rested on distorted logic was not taken to have been discharged. Accordingly, he found Assessing Officer justified in holding the three alleged loan credits as non-genuine and treating the accumulation amount of Rs. 3,50,000/- of these credits income of the appellant in terms of provisions of section 68 of the Act.
5. None attends on behalf of the assessee. At the time of hearing, the learned D.R. has been heard ex parte qua assessee with reference to written submissions on record.
6. The assessee in his written submissions, laid on record, has submitted as under:
“That the leaned CIT(A) has made addition of the unsecured loan credits of the appellant amounting to Rs. 3,50,000/- which is contested before your honour as per grounds of appeals as well as the following judicial decisions:
(i) That the Hon’ble ITAT, Allahabad has held in Anand Prakash Agarwal v. Asstt. CIT [2008] 6 DTR (All. – Trib.) 191 that where donors were having sufficient funds in their bank and gifts were made through banking channel as well as confirmation of donors was received by Assessing Officer, the gifts received by assessee from non-relatives could not be added under any provisions of IT Act, 1961.
(ii) That the Hon’ble Allahabad High Court in CIT v. Jauharimal Goel [2006] 192 Taxation 68 (All.) has observed that at page 75 it has been held by the various High Courts that the assessee cannot be asked to prove source of source or the origin of origin (vide S. Hastimal v. CIT [1963] 49 ITR 273 (Mad.), Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam), CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC); Sarogi Credit Corpn. v. CIT [1976] 103 ITR 344 (Pat.).
(iii) That in the case of CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78, the Apex Court observed as follows:
“In this case, the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were Income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence……….”
(iv) That in the case of ACIT (Investigation) v. Shree Ram Hard Coke & Allied Industries [2003] 1 MTC 780 the Hon’ble I.T.AT. Lucknow held that the assessee had discharged his burden by proving the identity of the depositors, the genuineness of the transactions and capacity of the creditors since he had given the confirmatory letters, affidavits, GIR number etc. of the depositors. The Assessing Officer was not justified in holding that the assessee was under an obligation to prove the source of the source.
(v) That in ITO v. M.S. Advance (P.) Ltd. [2005] 188 Taxation 181 (Trib), the money was kept by creditors at home & they deposited in bank the same at the time of giving loans. On facts & circumstances the Tribunal upheld the order of CIT(A) deleting the additions.
(vi) That the Hon’ble I.T.A.T. Delhi in Vinod Kumar Bhandari v. ACIT [2003] 174 Taxation 49 (Trib.) has Held that the source could not be enquired by the Department, the loan transactions having been confirmed by the creditor, confirmed copies of accounts and copy of affidavits have been filed, the transaction through account payee cheque and creditor being assessed to tax, the transaction to be treated as genuine. The Hon’ble Tribunal accordingly deleted the addition of cash credits as well as interest claimed thereon. Supreme Court in the case of CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 (SC), has also considered the similar issue wherein it was held that if the assessee has given news and addresses of the creditor and it was in the knowledge of Revenue that the said creditor were being assessed to tax, the onus is on the Revenue to pursue matter with the creditor. Also the Delhi ITAT observed at (page 54) the decision of the Patna HC in the case of Sarogi Credit Corporation reported in 103 ITR 344 (Pat.) had observed as under:
“Once the identity of the third party is established before the ITO and other such evidence are prima facie placed before him pointing to the fact that the party is not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the third party obtained the money or how or why he came to make an advance of the money as a loan to the assessee. Once such identity is established and the creditors as in the present case, have pledged their oath that they have advanced the amounts in question to the assessee, the burden immediately shifts onto the department to show as to why the assessee’s case could not be accepted and as to why it must be held that the entry through purporting to be in the name of a third party, still represented the income of the assessee from a suppressed source. And, in order to arrive at such a conclusion, even the department has to be in possession of sufficient and adequate materials.”
(vii) That the Guwahati High Court in Nemi Chand Kothari v. CIT [2004] 136 Taxman 213, has held that a harmonious construction of section 106 of the Evidence Act and section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditor nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the assessee. It is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction, which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, since, these aspects may not be within the special knowledge of the assessee.
(viii) That the very fact that all the transactions were entered into between the parties through account payee cheques makes the question of identity of creditors fall into oblivion and it becomes absolutely irrelevant – Addl. CIT v. Bahri Bros. (P.) Ltd. [1985] 154 ITR 244 (Pat.)”
7. On the other hand the learned D.R. contends that both the authorities below have given a concurrent finding that the unsecured loans from the aforesaid three creditors are not genuine. This finding is found recorded in internal para 3.4 of the impugned order of learned CIT(A). Since the loans are not genuine, addition made u/s 68 of the Act upheld by learned CIT(A) needs no interference.
8. After hearing learned D.R. ex parte qua assessee with reference to his written submissions on record, it is found that the learned CIT(A) in operative para 3.4 of the impugned order has recorded a finding that the three loan creditors are non-genuine. The Assessing Authority also in the operating paragraph 6 of the assessment order, took these three unsecured loans as non-genuine as the creditworthiness of the loans was not proved. It thus is apparent that both the authorities considered the three loans aggregating to Rs. 3,50,000/- as non-genuine. There, however, is no material on record with the authorities below that there was any other source of income not disclosed to the department by the appellant from which there could be any undisclosed income enabling him to divert the same to the bank account of Shri Sant Lal Jaiswal in cash and taking the same as loan from him through cheque. Likewise there is no such material of making deposit of assessee’s own money in bank account of other two creditors as well. The appellant has laid on record the confirmation from all the three creditors namely Shri Sant Lal Jaiswal, Shri Dheeraj Jaiswal and Smt. Kiran Jaiswal. Their assessment particulars as well as copies of acknowledgment for filing income tax return of each of them for several years in the past had been laid on record. Copies of bank account of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal had also been placed on assessment record while details of bank account of Smt. Kiran Jaiswal showing her bank account No. 1042 with Bank of Baroda, Niyawan Branch, Faizabad from where the money had come to the bank account of the appellant as loan had been furnished to the Assessing Officer. The appellant thus, had established that the unsecured loans from the aforesaid three creditors are real and genuine receipt as loan from each of them through account payee cheques coming from their respective bank accounts having no nexus with any income or own money of the appellant before it reached his bank account as loan to him. Merely because these loan creditors have disclosed low drawings out of their real income disclosed to the income tax department and balance of the earnings were deposited in their respective accounts could not be treated as a facade or tailor-made statement to accommodate the appellant. The facts reveal that the cash deposits in their bank account before giving loan to the appellant is out of the known and identified source of each of them and the money so appearing in their account genuinely owned and belonged to them and not to the appellant. Merely because there were cash deposits in their bank accounts, an adverse inference could not be drawn. Under these peculiar facts and there being a real receipt of amount as loan by the appellant from these three creditors, the assessee can be said to have explained the credit entries and established that the unsecured loans so raised from third parties by him are genuine as also the onus that lay upon him u/s 68 of the Act stood duly discharged after he had furnished the aforesaid information which he could do as a borrower. He was under no obligation to prove source of source nor origin of origin after the appellant had established the real source of such receipts as loans. It is an admitted position of law that once the assessee explains the credit entry and brings evidence to show that the entry is related to a third party and that credit was that of the third party, the burden would shift to the Assessing Officer to prove that it is not true. The Income Tax Officer thus has to establish that the entry was not real but was pseudonymous. This burden in the present case in appeal, however, has not been discharged by the Assessing Authority before making addition u/s 68 of the Act nor he has established that the entry was not real but was pseudonymous. This finds support from the judgment by Hon’ble Assam High Court in the case of Nabadwip Chandra Roy v. CIT [1962] 44 ITR 591 and has also been followed in the case of Tolaram Daga (supra) at page 638 as under:
“All that could be said to follow from this decision is that once the assessee explains the credit entry and brings in evidence to show that the entry related to a third party and that credit was that of that third party, the burden would shift to the Income-tax Officer to prove that this is not true. For instance it would be open to the Income-tax Officer in such a case to establish that the entry was not real but was pseudonymous.”
8.1 The appellant as pointed out earlier, has explained that the immediate source of loan to him is from the savings of the aforesaid three creditors coming from their respective bank accounts, yet the revenue’s case is not that the appellant had knowledge of the source from which the deposit was made by the said three creditors in their respective bank accounts. The mere fact that the third party i.e. the three creditors are appellant’s relatives, does not ipso facto make the assessee come into the knowledge of the source from which the cash has been realized by them for making deposit in their respective bank accounts. Under the law, in the absence of specific proof of that knowledge, it cannot be assumed that the assessee has the knowledge in question within the meaning of section 106 of the Indian Evidence Act. To require the appellant, therefore, to adduce proof of the source from which the deposit was made by these three creditors in their bank accounts, cannot be placed on him which is neither required nor justified by law. This view finds support from the judgment rendered by Hon’ble Assam High Court in the case of Tolaram Daga (supra) and relevant passage at page 635 as under clarifies this position:
“At the outset, we have to point out that there is no substance in the contention that the sources from which the money was realised by the third party are within the special knowledge of the petitioner as the depositor happens to be his wife. Whether he has knowledge at all of the source of the money deposited by the third-party is a matter which has to be decided on evidence. The mere fact that the third party making the deposit happens to be the wife of the assessee does not ipso facto make the assessee come into the knowledge of the sources from which the money was realised. Under law, in the absence of specific proof of that knowledge, it cannot be assumed that the assessee has the knowledge in question within the meaning of section 106 of the Evidence Act. In order to rely on this section, which lays down that when any fact is especially within the knowledge of any person, the burden of proving that fact is upon him, it must be established first that the person has special knowledge of that fact, having regard to the circumstances of the case. As illustration (b) to the section shows, when A is charged with travelling on a railway without a ticket, the burden of proving that he had a ticket is on him, obviously, because it is he alone that would have special knowledge regarding the possession of the ticket. The instant case is by no means a parallel and, in our opinion, section 106 of the Evidence Act cannot, therefore, be invoked in aid.”
8.2 Proceeding further and admittedly also the principle embodied u/s 68 of the Act is only a statutory recognition of what was always considered to be the law based on Rule of Evidence that it is for the tax payer to prove the genuineness of the borrowings or other credits in his books, since the relevant facts are exclusively in his knowledge. Section 68 of the I.T. Act, 1961 incorporates only a Rule of Evidence placing the onus to prove on the assessee. The Expression “nature & source” has to be understood together as a requirement of identification of source and the nature of the source so that the genuineness or otherwise can be inferred. In Kale Khan Mohammad Hanif v. Commissioner of Income-tax [1963] 50 ITR 1 (SC), it was pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. The law after 68 is not different. If the prima facie inference on the fact is that assessee’s explanation is probable, as I also find in the present case, that the amount of borrowings in real terms had come from the aforesaid three loan creditors and are genuine receipts as loans, the onus can be said to have shifted on Revenue.
8.3 Undisputedly the loan creditors in this case are the bank accountholder in their respective banks in their own name and are sole owner of the credits appearing in their bank account from where they issued cheques to the appellant. For the proposition that a Bank Account holder himself is the ‘owner’ of ‘credits’ appearing in his account (with the result that he himself is accountable to explain the source of such credits in whatever way and form, the same have emerged) support can be derived from section 4 of Bankers Book Evidence Act 1891 which reads as under:-
“4. Mode of proof of entries in bankers’ books
Subject to the provisions of this Act, a certified copy of any entry in a bankers’ book shall in all legal proceedings he received as prima facie evidence of the existence of such entry, and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every cases where, and to the same extent as, the original entry itself is now by law admissible, but not further or otherwise.”
8.4 Following the said legislation, the coordinate bench of ITAT Allahabad vide its judgment and order dated 11.2.2008 in the case of Anand Prakash Agarwal’s (supra) has held as under:-
“The question that remains to be decided now is whether the subject matter of transfer was the asset belonging to the transferor/donors themselves. There is enough material on record which goes to show that there were various credits in the bank accounts of the donors, prior to the transaction of gifts, which undisputedly belonging to the respective donors themselves, in their own rights. No part of the credits in the said bank accounts was generated from the appellant and/or from its associates, in any manner. The certificates issued by the banks are construable as evidence about the ownership of the transferors or their respective bank accounts, as per s.4 of the Bankers’ Books evidence Act 1891, which read as under:
“4. Where an extract of account was duly signed by the agent of the bank and implicit in its was a certificate that it was a true copy of an entry contained in one of the ordinary books of the bank and was made in the usual and ordinary course of business and that such book was in the custody of the bank, it was held admissible in evidence. Radheshyam v. Safiyabai Ibrahim AIR 1988 Bom. 361 : 1987 Mah. 725 : 1987 Bank J 552.”
In view of the position of law as discussed above, it is always open for a borrower to contend, that even the “creditworthiness” of the lender stands proved to the extent of credits appearing in his Bank Account and he should be held to be successful in this contention.
9. Keeping with the principle referred to above and by specifically relying on the decision of Hon’ble Apex Court in the case of Orissa Corpn. (P) Ltd. (supra) the Hon’ble Gujarat High Court, in the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360/[2003] 127 Taxman 523, has held that onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case, the Assessing Officer is dissatisfied about the source of ‘cash deposited in the bank accounts of the creditors’, the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). In arriving at this conclusion, the Hon’ble Court has further stressed the presence of word “may” in section 68. Relevant observations at pages 369 and 370 of this report are reproduced hereunder:-
“Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue’s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69.
Further, we may point out that section 68 under which the addition has been made by the Assessing Officer reads as under:
“68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the words “shall be charged to income-tax as the income of the assessee of that previous year”. The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall”. Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570.”
Against the said decision of Hon’ble Gujarat High Court the special leave petition filed by the revenue has also been dismissed by the Hon’ble Apex Court.
10. In the case of Nemi Chand Kothari (supra), the Hon’ble Guahati High Court has given a further twist to the issue of onus on assessee under section 68, by holding that the same should be decided by taking into consideration the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are in his knowledge. The Hon’ble Court in the said case held that, once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge. In this view, the Hon’ble Court has laid down that section 68 of Income-tax Act, should be read along with section 106 of Evidence Act. The relevant observations at page 260 to 262, 264 and 265 of the report are reproduced herein below:-
“While interpreting the meaning and scope of section 68, one has to bear in mind that normally, interpretation of a statute shall be general, in nature, subject only to such exceptions as may be logically permitted by the statute itself or by some other law connected therewith or relevant thereto. Keeping in view these fundamentals of interpretation of statutes, when we read carefully the provisions of section 68, we notice nothing in section 68 to show that the scope of the inquiry under section 68 by the Revenue Department shall remain confined to the transactions, which have taken place between the assessee and the creditor nor does the wording of section 68 indicate that section 68 does not authorize the Revenue Department to make inquiry into the source(s) of the credit and/or sub-creditor. The language employed by section 68 cannot be read to impose such limitations on the powers of the Assessing Officer. The logical conclusion, therefore, has to be, and we hold that an inquiry under section 68 need not necessarily be kept confined by the Assessing Officer within the transactions, which took place between the assessee and his creditor, but that the same may be extended to the transactions, which have taken place between the creditor and his sub-creditor. Thus, while the Assessing Officer is under section 68, free to look into the source(s) of the creditor and/or of the sub-creditor, the burden on the assessee under section 68 is definitely limited. This limit has been imposed by section 106 of the Evidence Act which reads as follows:
“Burden of proving fact especially within knowledge.—When any fact is especially within the knowledge of any person, the burden of proving that fact is upon him.”
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“What, thus, transpires from the above discussion is that white section 106 of the Evidence Act limits the onus of the assessee to the extent of his proving the source from which he has received the cash credit, section 68 gives ample freedom to the Assessing Officer to make inquiry not only into the source(s) of the creditor but also of his (creditor’s) sub-creditors and prove, as a result, of such inquiry, that the money received by the assessee, in the form of loan from the creditor, though routed through the sub-creditors, actually belongs to, or was of, the assessee himself. In other words, while section 68 gives the liberty to the Assessing Officer to enquire into the source/source from where the creditor has received the money, section 106 makes the assessee liable to disclose only the source(s) from where he has himself received the credit and IT is not the burden of the assessee to prove the creditworthiness of the source(s) of the sub-creditors. If section 106 and section 68 are to stand together, which they must, then, the interpretation of section 68 are to stand together, which they must, then the interpretation of section 68 has to be in such a way that it does not make section 106 redundant. Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been. eventually, received by the assessee. It, therefore, further logically follows that the creditor’s creditworthiness has to be Judged vis-a-vis the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, for, these aspects may not be within the special knowledge of the assessee.”
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“…If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep the same in the bank, the said amount cannot be treated as income of the assessee from undisclosed source. In other words, the genuineness as well as the creditworthiness of a creditor have to be adjudged vis-a-vis the transactions, which he has with the assessee. The reason why we have formed the opinion that it is not the business of the assessee to find out the actual source or sources from where the creditor has accumulated the amount, which he advances, as loan, to the assessee is that so far as an assessee is concerned, he has to prove the genuineness of the transaction and the creditworthiness of the creditor vis-a-vis the transactions which had taken place between the assessee and the creditor and not between the creditor and the sub-creditors, for, it is not even required under the law for the assessee to try to find out as to what sources from where the creditor had received the amount, his special knowledge under section 106 of the Evidence Act may very well remain confined only to the transactions, which he had with the creditor and he may not know what transaction(s) had taken place between his creditor and the sub-creditor. …..”
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“In other words, though under section 68. an Assessing Officer is free to show, with the help of the inquiry conducted by him into the transactions, which have taken place between the creditor and the sub-creditor, that the transaction between the two were not genuine and that the sub-creditor had no creditworthiness, it will not necessarily mean that the loan advanced by the sub-creditor to the creditor was income of the assessee from undisclosed source unless there is evidence, direct or circumstantial, to show that the amount which has been advanced by the sub-creditor to the creditor, had actually been received by the sub-creditor from the assessee. …..”
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“Keeping in view the above position of law, when we turn to the factual matrix of the present case, we find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. Thereafter the burden had shifted to the Assessing Officer to prove the contrary. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure, as a corollary, could not have been and ought not to have been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub-creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from undisclosed sources merely on the failure of the sub-creditors to prove their creditworthiness.”
11. Further, in the case of CIT v. S. Kamaljeet Singh [2005] 147 Taxman 18 (All.) their lordships, on the issue of discharge of assessee’s onus in relation to a cash credit appearing in his books of account, has observed and held as under:-
“4. The Tribunal has recorded a finding that the assessee has discharged the onus which was on him to explain the nature and source of cash credit in question. The assessee discharged the onus by placing (i) confirmation letters of the cash creditors; (ii) their affidavits; (iii) their full addresses and GIR numbers and permanent account numbers. It has found that the assessee’s burden stood discharged and so, no addition to his total income on account of cash credit was called for. In view of this finding, we find that the Tribunal was right in reversing the order of the AAC, setting aside the assessment order.”
12. Furthermore in the matter of discharge of ‘onus’, an assessee (in whose books of account credit appears) is not required to prove source of the ‘source’. Reference can usefully be made to the following case laws:-
“(i) The Hon’ble Allahabad High Court vide its judgment and order dated 15.4.2005 in the case of CIT v. Jauhari Mal Goel reported in [2006] 201 CTR (All.) 54 has held as under:-
11. It has been held by the various High Courts that the assessee cannot be asked to prove source of source or the origin of origin vide S. Hastimal v. CIT [1963] 49 ITR 273 (Mad.), Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam), CIT v. Daulat Ram Rawatmull [1972] CTR 411 : [1973] 87 ITR 349 (SC), Sarogi Credit Corpn. v. CIT 1975 CTR (Pat.) 1 : [1976] 103 ITR 344 (Pat).”
(ii) In a later decision, the Hon’ble Rajasthan High Court vide its judgment and order dated 28.4.2008 in the case of Labhchand Vohra v. ITO reported in [2008] 219 CTR (Raj.) 571 has taken the following view in this respect :-
“Examining the present case even on these parameters, first requirement is not relevant. So far as second requirement is concerned, there is no doubt about initial burden being on the assessee. So far as third requirement is concerned, obviously if the explanation is not satisfactory, then it is added. Then fourth requirement is, that the firm has to establish that the amount was actually given by the lender Fifth requirement is about genuineness and regularity in maintenance of the accounts, obviously of the assessee, and it is not the finding, that the accounts were not regularly maintained. Then sixth requirement is that if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by s.68 can be invoked, in the present case, so far as 6th requirement is concerned, it is very much there in existence, inasmuch as the amount has been advanced by account payee cheques, through bank, and is duly supported by documentary evidence, as well as the evidence of the two lenders, and that satisfies the 2nd requirement also, about the discharge of burden on the part of the assessee to prove identity and genuineness of the transaction. So far as capacity of the lender is concerned, in our view, on the face of the judgment of Hon’ble Supreme Court, in Daulat Ram’s case (supra), and other judgments, capacity of the lender to advance money to the assessee was not a matter which could be required of the assessee to be established, as that would amount to calling upon him to establish source of the source. In that view of the matter, since this part of the judgement runs contrary to the judgment of the Hon’ble Supreme Court, in Daulat Ram’s case (supra), while this Court in a subsequent judgment in Mangilal’s case (supra) relying upon Daulat Ram’s case (supra), has taken a contrary view, we stand better advised to follow the view, which has been taken in Mangilal’s case (supra)'”
13. It also needs emphasis that the difficulties in proving an explanation is a fact which cannot be ignored. It however, now is an admitted position that where a credit or borrowing is shown to have come from a person other than the assessee, like in the present case before me, there is no further responsibility on the assessee to show that it has come from the accounted sources of the lender. Reference may also be had to the judgment by Hon’ble M.P. High Court in the case of CIT v. Metachem Industries [2000] 245 ITR 160/2001] 116 Taxman 572. Furthermore, the Hon’ble Punjab & Haryana High Court also in CIT v. Ram Narain Goel [1997] 224 ITR 180/92 Taxman 259 has entertained the view that the assessee was not supposed to prove the source of the loans. This is so apparent from the following passage:
“……….The Tribunal correctly took the view that the assessee was not supposed to prove the source of the loans. Suspicion, howsoever strong, cannot take the place of evidence or proof. On these facts, the question, as sought to be referred, is declined.”
14. The Hon’ble Gujarat High Court in recent judgment in the case of CIT v. Micro Melt (P.) Ltd. [2010] 327 ITR 70/[2009] 177 Taxman 35 has entertained the view that the genuineness of the transaction and the identity of the depositor having been established, deletion of addition made by learned CIT(A) u/s 68 of the Act was justified. Besides the view entertained by Jurisdictional High Court in the case of S. Kamaljeet Singh (supra) and Jauharimal Goel (supra), even this Bench of the Tribunal in the case of Dr. Anil Kumar Chandani v. ITO in I.T.A. No. 23/Luck./10 and Seth L.M. Hospital v. ITO in I.T.A. No. 66/Luck/10 vide its order dated 17/11/2011, on the similar facts, has deleted the addition made u/s 68 of the Act.
15. Keeping in view the overall conspectus of the case, I find that the appellant has proved the identity, creditworthiness of all the three credits which effected the genuineness of the transaction and had come as loans genuinely advanced by three creditors namely Shri Sant Lal Jaiswal, Shri Dheeraj Jaiswal and Smt. Kiran Jaiswal has thus proved the genuineness of the transaction as well. He was under no obligation to prove further source of availability of cash with such creditors. He thus can be said to have discharged the onus that lay upon him u/s 68 of the Act in proving nature and source of the three cash credits appearing in his accounts. In the absence of any contrary material having been brought on record by the Revenue and the Assessing Authority having failed to discharge the onus that had shifted to him, I find no justification in the decision taken by learned CIT(A). I, therefore, set aside his findings as well as decision in sustenance of addition aggregating to Rs. 3,50,000/-. In this view of the matter and considering consistent view taken by various High Courts as well as this Tribunal, allow the grounds raised in appeal by the assessee.
16. In the result, the appeal by the assessee stands partly allowed.
(THIRD MEMBER) ORDER
D. Manmohan, Vice-President (MZ) (As a Third Member) – On account of difference of opinion between the Members constituting ITAT “B” Bench, Lucknow, the Hon’ble President nominated me to resolve the difference of opinion arising out of respective orders passed by the Members of the Division Bench. It may be noticed that the ld. Judicial Member passed the initial order wherein addition of Rs. 3,50,000/-made by the Assessing Officer u/s 68 of the Income-tax Act, 1961 was confirmed but the ld. Accountant Member having passed the dissent order, to resolve the difference, each Member framed a separate question; as per ld. Judicial Member, the question reads as under :
“1. Whether addition can be made on account of unexplained cash credit under section 68 of the Income-tax Act where the creditor is failed to explain the source of cash deposited in his account before issuance of cheque of loan amount in favour of the assessee in order to prove his creditworthiness?”
Ld. Accountant Member, on the other hand, framed the following question with a request to the Hon’ble President to nominate the Third Member to resolve the issue of difference:
“Whether on the peculiar facts and circumstances and in law the appellant has discharged the onus that lay upon him about the creditworthiness of the transaction of loan credits aggregating to Rs.3.50 lacs and deletion of additions u/s 68 of the I.T. Act. justified?”
2. The Hon’ble President has directed me to resolve the difference by reframing the question, if necessary. Accordingly, at the time of hearing, the parties were directed to suggest a comprehensive question which covers the issue arising out of the orders passed by the ld, Judicial Member as well as the ld. Accountant Member. The following revised question was agreed to by both the parties:
“Whether on the facts and in the circumstances of the case the addition made by the AO and confirmed by CIT(A), u/s 68 of the Act, referable to unexplained cash credits, deserves to be upheld or deleted?”
3. Facts necessary for disposal of the issue are set out briefly:
Assessee was carrying on the business as wholesale trader of invertors, batteries etc. During the previous year relevant to the assessment year 2006-07, the assessee claimed to have received a sum of Rs.3,50,000/-from (a) Smt.Kiran Jaiswal- Rs. 50,000/-, (b) Shri Sant Lal Jaiswal-Rs. 2,50,000/-, and (c) Shri Dheeraj Jaiswal -Rs. 50,000/- in the form of unsecured loans. Though the return of income was processed u/s 143(1) of the Act, case having been selected for scrutiny, the Assessing Officer called for certain details based on which it was found that the assessee has shown an amount of Rs. 3,50,000/- in the form of interest free loans through account payee cheques, which have been deposited in the Cash Credit account of the assessee. The Assessing Officer called upon the assessee to prove the identity, genuineness and the creditworthiness of the lenders. In compliance thereto it was submitted that Smt. Kiran Jaiswal is the wife of his brother and filed returns of income regularly with the Income-tax Officer, Ward-2, Faizabad, Shri Dheeraj Jaiswal is related to the assessee and Shri Sant Lal Jaiswal is father of the assessee. Confirmation letters of all the abovementioned persons were placed on record. The assessee furnished copies of the bank accounts of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal.
4. Vide order-sheet entry dated 7.10.2008, the assessee was required to explain the source of cash deposits in the lenders’ bank account. In response thereto, it was submitted that Shri Sant Lal Jaiswal is assessed to tax since 1998-99 and furnished income/expenditure chart wherein accumulated capital savings of Rs. 3,21,100/- was shown. Similarly, a perusal of the bank accounts of Shri Dheeraj Jaiswal and Smt.Kiran Jaiswal showed cash deposits in their bank accounts immediately before advancing the amount to the assessee.
5. The AO observed that the income/ expenditure chart in the case of Shri Sant Lal Jaiswal is devoid of authenticity. In this regard he noticed that Shri Sant Lal Jaiswal earned income in the range of Rs. 37,000/- to Rs. 48,000/- which, in his opinion, is hardly sufficient for any saving after meeting his personal expenses. In the year under consideration Shri Sant Lal Jaiswal would not have saved an amount of Rs. 2,50,000/- which was shown to have been deposited on 10.6.2005/- in two instalments of Rs. 1,30,000/- and Rs. 1,20,000/- in his bank account. The AO therefore concluded that the creditworthiness of Shri Sant Lal Jaiswal is not proved. Thereupon he inferred that it is diversion of assessee’s undisclosed income to Shri Sant Lal Jaiswal in cash in taking the same as loan from him through cheque.
6. With regard to the cash deposit in the name of Shri Dheeraj Jaiswal, the AO noticed that a sum of Rs. 50,000/-was deposited in his bank account on 6.6.2005 i.e. just one day before the date of loan. Though it was stated by the assessee that past savings of Shri Dhreeraj Jaiswal was deposited in his bank account, since assessee failed to furnish any evidence and could not substantiate the source of cash deposit of Rs. 50,000/- in the bank account of Shri Dhreeraj Jaiswal, the creditworthiness of Shri Dhreeraj Jaiswal was held to be not proved. Similarly, with regard to the loan of Rs. 50,000/- by Smt. Kiran Jaiswal, the AO stated that the immediate source of loan was deposit in her bank account but it was not supported by any evidence and hence creditworthiness of Smt. Kiran Jaiswal cannot be said to have been proved. The AO thus concluded that the creditworthiness of loan, totalling to Rs. 3,50,000/-, from the abovementioned three persons is not genuine since creditworthiness is not proved.
7. Before the ld. CIT(A), it was contended by the assessee that the source of deposit in the hands of the loan creditors could not be questioned since the payments were made by account payee cheques and creditors were identified. The ld. CIT(A) rejected the contention of the assessee on the ground that the onus to substantiate the creditworthiness of the creditors is on the assessee and this cannot be shifted by taking refuge behind a distorted logic. While analysing the facts and circumstances of the case the ld. CIT(A) observed that ail the alleged loan creditors are seen to be in regular banking habits and they were operating their accounts frequently and all of them have shown meagre amount of drawings for household expenses. In fact, copies of acknowledgment of their returns shows that they do not have substantial income so as to save substantial amount which could have possibly constituted the source of loan. Thus the attempt of showing meager drawings seems to be to project higher cash balances in order to explain the cash deposited in their bank accounts. The mere fact that the loan creditors were assessed to tax does not ipso facto substantiate the creditworthiness especially when meagre amount of income was disclosed by them. The statements of creditors are tailor-made only to suit the assessee’s explanation and, in substance, it is a facade of loan transactions through banking channels created only to make these transactions look genuine. Accordingly the addition made by the AO was confirmed by the ld. CIT(A).
8. Aggrieved by the order passed by the AO as well as ld. CIT(A), the assessee preferred an appeal before the Tribunal wherein it was contended that the assessee was neither asked to produce loan givers nor were they examined on oath by issuing notices individually. The assessee has fully cooperated in the proceedings and produced confirmations from the parties, bank accounts of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal were produced. Bank account of Smt.Kiran Jaiswal could not be produced due to computerisation in the bank old ledgers and in spite of several requests bank could not furnish the account copy. However, the fact remains that Smt. Kiran jaiswal was assessed to tax every year and all the three loans were received by cheques and deposited in the assessee’s bank account. Since the parties are identified, transactions were through account payee cheques and having furnished declaration that amount was advanced by them all the three ingredients provided u/s 68 of the Act are satisfied add the assessee cannot be asked to prove the source of source or origin of origin. In other words, the initial onus that is placed upon the assessee stands proved and no addition can be made in the absence of proper inquiry by the AO.
9. When the case was listed for hearing none appeared on behalf of the assessee. However, written submissions were placed on record. Therefore, the ITAT “B:” Bench Lucknow disposed of the matter ex parte, qua the assessee by taking into consideration the submissions made in writing on behalf of the assessee and also the oral arguments advanced by the ld. DR. The ld. Judicial Member observed that in the case of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal, the assessee has filed bank statements before the AO but source of deposits in their respective bank account were not properly explained by the assessee. With regard to Smt. Kiran Jaiswal though she had declared annual income of Rs. 1,16,200/- for the year under consideration, except the acknowledgment of return of income no other details were filed to prove the creditworthiness of the creditor. The ld. Judicial Member further observed that the cash flow statements of Shri Sant Lal Jaiswal and Shri Dheeraj Jaiswal showed low household drawings to generate more capital balance. In the impugned assessment year, household expenses in the case of Shri Sant Lal Jaiswal was shown at Rs. 24,800/- and in the case of Smt. Kiran Jaiswal it was shown at Rs. 24,300/-. The ld. Judicial Member thus concluded that creditors were not financially sound to advance any amount to the assessee. In other words, creditworthiness of the creditors could not be proved thereby provisions of section 68 get attracted. The assessee has to prove not only the identity of the cash creditors but also creditworthiness and genuineness of the creditors. In the instant case loan transactions having taken place through banking channels, its genuineness cannot be doubted and cash creditors having been produced before the AO along with their identity proof, identity of the parties cannot be doubted. However, the assessee has to prove the third ingredient. In the instant case, the creditworthiness of the creditors could not be proved to the hilt. Hence the AO is required to examine the surrounding facts and circumstances i.e., about the fund’s movement in the account of the cash creditors, in order to arrive at a proper conclusion. The assessee is required to place some evidence on record to establish that the cash creditors were having sufficient funds. In the instant case prior to advancing the loan to the assessee equivalent amounts were deposited in their bank accounts and nothing has been brought on record to prove the source of source of such deposits. He, therefore, upheld the order passed by the ld. CIT(A) on this issue.
10. Since the ld. Accountant Member was unable to agree with the proposed view taken by the Ld. Judicial Member, dissenting order was passed wherein he observed that unsecured loans were advanced through account payee cheques and there is no dispute with regard to the genuineness and identity of the creditors. He further observed that the amount has been received by account payee cheques and the parties having accepted the loan transactions initial onus that was thrust upon the assessee stood discharged and information which is within the personal knowledge of the cash creditors cannot be asked to be provided by the assessee. In other words, the AO is under obligation to bring on record some material to show that the lenders are not creditworthy. The ld. Accountant Member has passed a detailed order by taking into consideration several case law. He observed that unless the AO makes out a case that the assessee might have earned undisclosed income in the year under consideration, merely because the three ingredients listed in section 68 are not satisfied addition cannot be made automatically, in view of the expression ‘may’ used in section 68 of the Act. Even otherwise, the ld, Accountant Member was of the opinion that the assessee has proved the creditworthiness of the creditors and it is not for the assessee to prove the source of source. He thus concluded that the addition made by the AO u/s 68 is not in accordance with law.
11. When the matter was listed before me, the ld. Counsel appearing on behalf of the assessee submitted that the assessee was running a proprietary concern engaged in the business of purchase and sale of invertors, batteries etc. During the course of assessment proceedings the assessee has produced books of account alongwith supporting bills/vouchers which were examined by the AO. It is not the case of the Revenue that in this line of business, the assessee would have earned more income than what was declared. No undisclosed income was found during the course of assessment proceedings. Under the circumstances, while considering the source of cash credits under section 68 of the Act AO has to strictly adhere to the conditions stipulated therein in order to invoke the deeming provisions. As per the said provisions the initial burden is upon the assessee to prove the identity, genuineness of transaction and creditworthiness of the creditors. Even if one of the ingredients are not satisfied the statute empowers the AO to treat the cash credit as unexplained. However, merely because a cash credit is treated as unexplained it cannot automatically be added to the income of the assessee. The expression ‘may’, used an section 68 of the Act, enjoins upon the AO the judicial discretion to consider the circumstances of the case before making an addition u/s 68 of the Act. At the outset, he submitted, even if it is presumed that the creditworthiness of the creditors is not proved, in the absence of any finding that the assessee would have earned higher income from any specified source, addition u/s 68 cannot be made in the routine manner, in the light of the decision of the Hon’ble Apex Court in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC). The ld. Counsel adverted our attention to the written submissions, paper book and case law placed in the paper book in support of his contention that the initial onus placed upon the assessee stood discharged by proving identity and genuineness of the creditors and also proved source of source i.e. the fact that amount was advanced by respective parties by way of account payee cheques and confirmed by them, was placed on record. In the absence of any cross-verification by the AO addition cannot be made in the hands of the assessee. Source of deposits in the personal bank account of the creditors is not within the personal knowledge of the assessee and hence the AO has to make proper investigation. In the instant case, the parties were not examined by the AO and hence invoking the provisions of section 68 of the Act, in the circumstances of the case, is not in accordance with law. He strongly relied upon the decision of the Tribunal, Lucknow Bench in Shree Ram Hard Cock & Allied Industries (supra), wherein the Lucknow Bench observed that upon proving the identity of depositors and genuineness of the transaction by furnishing affidavits, GIR numbers etc., the initial onus placed upon the assessee stood discharged and if the AO has any doubt with regard to the creditworthiness/capacity of the creditors he has to examine the creditors and in the absence of any documentary evidence brought on record it cannot be concluded that the assessee has not proved the creditworthiness. The fact that all the transactions were entered into between the parties through account payee cheques makes the question of the identity fall into oblivion and it is not upon the assessee to prove that the creditor had creditworthiness since money, reflected in the bank account of third party cannot be called into question; as per Section 4 of Bankers Book Evidence Act, 1891, amount credited in the bank account of the third party has to be taken as a sufficient evidence to prove the ownership of the amount in the hands of the third party and even though the section 68 of the Act is a deeming provision, the AO has to examine the creditors to cross-verify the source. In the instant case the AO has not made such effort and merely assumed that the assessee is under an obligation to prove the source of creditors. He thus strongly relied upon the order passed by the ld. Accountant Member. .
12. Ld. DR, on the other hand, submits that the case law relied upon by the assessee are distinguishable on facts. He relied upon the decision of the Ahmedabad ‘SMC Bench of the Tribunal in Rajubhai S. Patel v. ITO ITA No.888/Ahd/2011 (AY: 2003-04) order dated 30.8.2011 in support of his contention that the onus is upon the assessee to prove the creditworthiness of the creditors and in the event of not discharging the onus, the provisions of section 68 can automatically be invoked by the AO. The ld. Sr. DR strongly relied upon the order passed by the ld. Judicial Member.
13. I have carefully considered the rival submissions and perused the record. I have also gone through the case law relied upon by both the parties. It is not in dispute that Shri Sant Lal Jaiswal is assessed to tax from the assessment year 1998-99 onwards. Similarly, other creditors were also assessed to tax and the amount was advanced by them through account payee cheques. The ld. Judicial Member as well as ld Accountant Member admitted that the identity and genuineness of the cash credits cannot be doubted. In paragraph 7 of the order passed by the ld. Judicial Member, he observed in this regard as under :
“Since, in the instant case, the loan transactions are undertaken through banking channel, its genuineness cannot be doubted and since the cash creditors were produced before the Assessing Officer along with their identity proof, identity can also not be doubted “
The difference is only on the limited issue i.e. while examining the creditworthiness of the creditors whether the AO is required to examine the cash creditors or he is required to examine the surrounding circumstances about the fund’s movement in the account of the cash creditors. The ld. Judicial Member was of the opinion that in the bank account of the cash creditors deposit was made either on the same day or few days before the date of advancing the loan. The AO can take into consideration the surrounding circumstances such as the income declared by the cash creditors in their respective returns, the annual withdrawals etc. to come to a conclusion that they had no creditworthiness to advance the loan to the assessee.
14. On the other hand, the ld. Accountant Member observed that going by the so-called surrounding circumstances would amount to widening the jurisdiction of the AO in the matter of invoking the deeming provisions, which is not permissible under the Act,
15. The AO should not have come to any conclusion without examining the cash creditors; The assessee cannot be aware of the source of creditors, which would be within the personal knowledge of the creditors, Mere doubt with regard to the creditworthiness should not automatically reflect in disbelieving the case of the assessee to make addition u/s 68 of the Act without showing that the assessee would have earned more income from any specific source, in the light of the expression “May” used in section 68 of the Act. In the instant case, the AO examined the books of account but did not make any comment on possibility of earning of any additional income from trading business or from any other source and thus addition cannot be made in a routine manner.
16. Few facts are necessary to be born in mind to appreciate this issue. Shri Sant Lal Jaiswal was assessed to tax since 1998-99 and he has prepared a chart showing capital balance of Rs. 3,21,100/- up to the assessment year 2005-06. It is not in dispute that Shri Sant Lal Jaiswal’s annual income is in the range of Rs. 37,000/- to 48,000/-. Nothing has been brought on record to show that Shri Sant Lal Jaiswal has maintained a particular lifestyle which would not allow him to save any amount out of his earnings; Such question can best be answered by the persons who has lived a particular lifestyle. A fact which is in personal knowledge of the third party cannot be expected to be proved by the assessee. When the assessee has furnished bank statements of the cash creditors, in my considered opinion, the initial burden placed upon the assessee can be said to have been discharged and if there is any doubt with regard to the creditworthiness, the AO should have directed the assessee to produce the creditors or would have examined the creditors directly and in the absence of taking such recourse, the AO was not justified in taking an adverse inference with regard to the creditworthiness of the creditors. As rightly pointed out by the ld. Accountant Member, provisions of section 68 should be read in conjunction with section 106 of the Evidence Act. In the peculiar facts and circumstances of the case, I am of the view that the assessee has discharged the initial burden of proving identity, genuineness of transactions and also creditworthiness of the three creditors by producing their respective bank accounts. Entry in the pass book of a third party can be taken as a primary evidence in proof of the fact that loan was advanced by third party. Thus, the initial onus shifts onto the Revenue to prove that the creditors lack creditworthiness and to come to such conclusion, the assessee cannot be asked to produce any evidence which is within the personal knowledge of the third party. In the instant case, the AO did not examine the parties and proceeded on the assumption that creditors would not have saved any money to advance the loan. In the circumstances of the case I hold that the view taken by the ld. Accountant Member is in accordance with law. In other words, it is not a fit case to make addition u/s 68 of the Act. The Registry is directed to place the matter before Regular Bench for deciding the appeal in conformity with the majority opinion.
ORDER
Sunil Kumar Yadav, Judicial Member – Pursuant to the majority view, the addition of Rs. 3.50 lakhs made under section 68 of the Income-tax Act, 1961 is not sustainable. Therefore, the order of the ld. CIT(A) confirming the addition is set aside and addition of Rs. 3.50 lakhs is hereby deleted.
2. In the result, appeal of the assessee is allowed.
