Confirmation letter by creditor establishes only identity & not creditworthiness & genuineness

A. Godwin Maria Visuvasam Vs. ITO (ITAT Chennai)

Merely furnishing of confirmation letter by a creditor, as it again well settled, does not would at best only establish identity of the creditors. There was nothing on record establishing creditworthiness of the creditors and/or genuineness of impugned loans and advances in the instant case. Therefore, AO was justified in making addition under section 68.

Full Text of the ITAT Order is as follows:-

This is an Appeal by the Assessee directed against the Order by the Commissioner (Appeals)-I, Coimbatore (‘Commissioner (Appeals)’ for short) dated 14-3-2014, partly allowing the assessee’s appeal contesting its assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 30-12-2009 for assessment year (assessment year) 2007-08.

The facts of the case are that the assessee, an individual in civil construction business (through his proprietary concern, M/s. Goodwin Constructions), was found in the course of the assessment proceedings to have an aggregate outstanding credit balances of Rs. 29,50,300 in the balance sheet of Goodwin Constructions as at the year-end under the account head ‘Advance from customers’, of which Rs. 24 lacs was received during the current year from various persons, as under: —

(Amt. in Rs.)

The assessee explained it to be unsecured loans as well as advances from customers, received in cash. However, he did not furnish any evidence qua any of these loans and advances, except the rent advance of Rs. 2.50 lakhs (Sr. No.3), toward which a copy of the lease agreement dated 1-5-2006 (entered into between the assessee and the said payer- advancer) was adduced. Accepting the same, the balance Rs. 21.50 lacs was regarded as unexplained cash credit and deemed as the income, assessing it at Rs. 24,55,580 as against the returned income of Rs. 3,05,580 (vide return of income filed on 11-10-2007 copy on record).

In appeal, there was no response by the assessee despite being afforded several opportunities, constraining the learned Commissioner (Appeals) to decide the appeal ex parte, albeit on merits. There being no improvement in the assessee’s case, the impugned addition was confirmed vide order dated 7-3-2011 copy on record). In further appeal to the Tribunal, the assessee contended that on account of some mistake between the assessee and his counsel, Shri K. Srinivasan, FCA, he was kept in the dark, and was not even aware of the (first) appellate proceedings, about which he came to know only on the receipt of the show cause notice dated 8-3-2012 by the assessing officer (AO). And that, therefore, another opportunity be afforded to him in the interest of justice. The same was accordingly allowed by the tribunal, setting aside the impugned order for fresh adjudication, further directing the assessee to cooperate by not taking any adjournment, vide its order dated 20-12-2013 (copy on record). In the second round before the learned first appellate authority, he decided the same admitting additional evidences sought to be relied upon by the assessee, who was represented by another counsel, Shri C. Ramachandran, FCA, partly allowing the assessee’s appeal by confirming the impugned addition, i.e., to the extent of Rs. 13.50 lacs, so that, aggrieved, the assessee is in second appeal.

3. Before me, the assessee’s case, relying on the decision in CIT v. Orissa Corpn. (P) Ltd. (1986) 159 ITR 78 was that he had by furnishing the confirmation letters by the loanees- advancees (copy on record), discharged the onus cast on him by law. No adverse inference could have been under the circumstances drawn by the assessing officer, who has not brought any contradictory material on record. The Revenue, on the other hand, would insist on the nature and source of the impugned credits being not satisfactorily explained, so that it was justified in treating the same as unexplained and, accordingly, to bring the same to tax under section 68.

4. I have heard the parties, and perused the material on record.

4.1 Section 68 reads as under:–

‘Cash credits.

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 same has been explained by the Hon’ble Apex Court per a series of decisions, from some of which we may quote as under: —

Sumati Dayal v. CIT (1995) 214 ITR 801

‘In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. But, in view of section 68 of the Income Tax Act, 1961,where any sum is found credited in the books of the assessee for any previous year the same may be charged to income Tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut the said evidence, it can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably.’ (See pp. 804H, 805A-C).

Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC)

‘Whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case.’

‘Where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income Tax Officer is entitled to draw the inference that the receipts are of an asses sable nature.’

‘Where the explanations of the assessee as regards amounts shown in the account books of a firm of which he was a partner, as credits from him, were rejected as untrue: Held, that it was open to the Income Tax Officer and the Appellate Tribunal to hold that they represented the concealed income of the assessee.’

CIT v. P. Mohanakala (2007) 291 ITR 278

‘A bare reading of section. 68 of the Income Tax Act, 1961 suggests that (i) there has to be credit of amounts in the books maintained by an assessee; (ii) such credit has to be of a sum during the previous year; and (iii) either (a) the assessees offers no explanation about the nature and source of such credit found in the books; or (b) the explanation offered by the assessee, in the opinion of the assessing officer is not satisfactory. It is only then that the sum so credited may be charged to Income Tax as the income of the assessee of that previous year. The expression “the assessee offers no explanation” means where the assessee offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. The opinion of the assessing officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the assessing officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.’

‘In cases where the explanation offered by the assessee about the nature and source of sums found credited in the books is not satisfactory there is, prima facie, evidence against the assessee, viz., the receipt of money, the burden is on the assessee to rebut the same, and if he fails to rebut it can be held against the assessee that it was a receipt of an income nature.’

‘The burden is on the assessee to take the plea that, even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature.’

Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC)

‘It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Income Tax Act. In the absence of such proof, the Income Tax Officer is entitled to treat it as taxable income.’

The law in the matter is thus well settled, and the primary onus to prove a credit, explaining the nature and source thereof satisfactorily is on the assessee. Further, as explained, the same is on the parameters of identity, capacity and genuineness, by leading relevant materials, is on the assessee. It is only thereupon that the assessee can be said to have discharged the burden of proof on it, which then shifts to the assessing officer/assessing authority. Further, the decision as to whether the credit has been, under the facts and circumstances, satisfactorily explained or not, is essentially one of fact, even as clarified in Orissa Corpn. (P) Ltd. (supra).

4.2 Coming to the facts of the case, the observations and findings by the learned Commissioner (Appeals) qua each of the impugned credits, which are under challenge, are as under: —

A. Shri Arokiyasamy (Rs. 2,50,000)

‘The addition of Rs. 2,50,000 received as loan from appellant’s father Shri Arokiyasamy. During the course of appellant proceedings, the appellant submitted that his father is having explainable source of income and-also filed the confirmation letter. As seen from the confirmation letter, Shri Arokiyasamy stated that he paid Rs. 2,50,000 from 2006-07 on various dates by cash to help his son in the construction business. The appellant has not filed any evidence regarding the source of the Father. As seen from the confirmation letter, his father is a retired teacher and paid the amounts from the gratuity and pension savings in the past years. The appellant was asked to furnish the details of bank account of the father and prove the sources. As seen from the Syndicate Bank Account details filed by the appellant, Shri Arokiyasamy was receiving pension of Rs. 7,800 per month. Apart from that there was no other credits in the bank account. There were no cash withdrawals to prove that he has advanced an amount of Rs. 2,50,000 to his son. The mode of receipt of loan is by cash and the sources of the father could not be proved with any evidence. The addition made by the assessing officer is CONFIRMED.’

B. Shri G.K.Ganesan (Rs. 2 Lakhs)

‘As regards addition of Rs. 2 lakhs made by the assessing officer on the amount advanced by Shri G.K. Ganesan. The appellant during the course of appellate proceedings filed a confirmation letter from Shri G.K. Ganesan. As seen from the confirmation letter, an amount of Rs. 2 Lakhs was paid as advance for the renovation work of the residential house of Shri Ganesan. In the confirmation letter it was stated that Shri Ganesan paid Rs. 2 Lakhs on 2-3-2007 by cash and Shri Godwin has not done any work, upto 31.03.2007 and kept as advance. He subsequently completed the work in the next year. The Authorized Representative was asked to furnish any receipts issued by Shri G.K. Ganesan along with the nature of work carried out. The Authorized Representative was also asked to file any invoices raised by the appellant in the name of Shri G.K. Ganesan. The appellant could not furnish any details apart from the confirmation letter. In view of this the addition made by the assessing officer is CONFIRMED.’

C. Shri Subramanian (Rs. 7 Lakhs)

‘It is regarding the addition made by the assessing officer for a sum of Rs. 7 lakhs on account of unexplained credits received from Shri Subramaniam. The assessing officer in the assessment order stated that the appellant has not filed any confirmation letter except filing copy of the agreement dated 7-9-2006. According to the assessing officer the agreement does not show any particulars regarding advance made, date of advance and also mode of advance. During the course of appellate proceedings, the appellant filed the agreement dated 7-9-2006 wherein some payment details were recorded. Surprisingly these payment details were not available when the same agreement was filed before the assessing officer. As seen from the scribbling on the agreement the payments were received in 2006 and 2007. The appellant could not furnish any further evidence for the amount of Rs. 7 Lakhs. The Authorized Representative was asked to furnish all evidence’s regarding the nature of work done along with invoice raised by the appellant. The appellant could not furnish any documentary evidence apart from the agreement as discussed above. Even the agreement filed, there appears to be no payment details in the copy filed with the assessing officer and during the course of appellate proceedings the copy of the agreement shows same payment details. Due to lack of any supplementary evidence and also the difference in the agreement filed before the assessing officer and before me, the payment details as shown in the agreement cannot be considered as conclusive proof. In view of that the addition made by the assessing officer is CONFIRMED.’

D. Miss Judith, Shri Robin Paul Joseph & Shri Robin Paul Joseph (Rs. 1 lakh each)

‘It is regarding the addition of Rs.2 lakhs made by the assessing officer on account of advance received from Miss Judith and Shri Rabin Paul Joseph. During the course appellate proceedings, the Authorized Representative filed confirmation letter from Miss Judith and Shri Robin Paul Joseph, Shri Robin Paul Joseph in his confirmation letter submitted that alteration work was carried out in his residential house by Shri Gadwin Maria Visuvasam and he has advanced an amount of Rs. 2 lakhs, of which Rs. l Lakh on 1-1-2007 and Rs. l Lakh on 2-3-2007. However, the work was done to the tune of Rs. l Lakh and the balance was kept as advance. The Authorized Representative submitted that Shri Rabin Paul Joseph is out of the country. The appellant has not filed any further evidence regarding the nature of work carried out by the appellant and also invoice raised for Shri Rabin Paul Joseph. In the absence of further evidence the addition of Rs.1 Lakh is CONFIRMED. Regarding Miss Judith, it is submitted that Rs. 2 Lakhs was given as advance by Miss Judith and Rs. l Lakh worth work was done for the preparation of drawing, estimate and approval work. The appellant could not furnish any evidence to prove that advance was received from Miss Judith. The appellant could not furnish the invoice raised or any other documentary evidence to prove that the advance was received from Miss Judith. In view of this the addition made by the assessing officer is CONFIRMED.’

4.3 To begin with, none of the findings by the learned Commissioner (Appeals), sought to be challenged, have been rebutted before me. How, then, could the same be reversed or even modified, i.e., unless the same are shown to be imbued with some infirmity? There is nothing on record toward establishing the credit- worthiness of the creditors and/or genuineness of the impugned credits. Mere furnishing of a confirmation letter by a creditor, as it again well settled, does not prove the credit; the same would at best only establish the identity of the creditors, i.e., given that the Revenue has not required the assessee to prove the signatures on the confirmation letters, so that the same may be regarded as accepted. There is, as afore-said, no whisper of the capacity or genuineness of the loans or advances. Where claimed as advances against work done, the assessee has, despite being required to, which the Revenue is in fact not obliged to call for, furnish any evidence toward the work done for the concerned creditors nor of the invoices raised on them during the relevant year or even subsequently, which would normally follow as a matter of course. The assessee failed to furnish the bank pass-book even in the case of his father, who was found to be in receipt of a monthly pension of Rs. 7800 only. Why, he has already extended a loan, in no insubstantial sum, to the assessee in the preceding year. The assessee’s whole case is unsubstantiated and without any merit (refer para ). Under the circumstances, I do not consider it necessary to dwell on each of the impugned credits separately, issuing separate findings qua each, as is normally to be the case and, relying on the decision in CIT v. K.Y. Pilliah (1967) 63 ITR 411 (SC), endorse that by the learned Commissioner (Appeals). Why, a perusal of the record itself reveals several further inconsistencies, to some of which, so as to highlight the assessee’s conduct and explanations, reference is made hereinafter. The reliance on the decision in Orissa Corpn. (P) Ltd. (supra) is, again, misplaced. None of the confirmations in the present case bear the Permanent Account Numbers (PAN) of the creditors. In the facts of that case, the name of the assessee did not appear in the list of the beneficiaries (of accommodation entries) in which the creditors where purportedly engaged in, confirmations from whom clearly reflected their income tax numbers. Why, the assessee respondent made it abundantly clear to the Revenue that all it’s attempts to produce the creditors, who had been repaid, had failed, and that it may summon them. The said case law in no manner supports the case of the Revenue.

4.4 Before parting with this order, as afore-stated, I may set forth some observations, underscoring the assessee’s case. The assessee’s balance sheet reflects the following advances (Schedule-II thereto):–

This is completely in contrast with the unsecured loans and advances furnished by the assessee during the course of assessment proceedings (refer para 2), as also the letter dated 29-12-2009, copy of which is on record, and the relevant part of which reads as under:–

With reference to the above, we our-self explain that the break up of our unsecured loan and advance received from customers is listed below.

That is to say, the assessee has nowhere explained the said difference in-as-much as it is only the sum actually credited in its accounts that need to be explained. No doubt, the ledger accounts of the relevant creditors are on record, and which are in agreement with the breakup of the loans as provided subsequently, but then it is only the assessee who can explain as to how its balance sheet, which purports to reflect its state of its affairs as at the year-end per its accounts, discloses a separate and different set of figures, including their profiling. In this regard, it is notable that all the loans/advances are received in cash, without as much as a cash receipt being issued, so the assessee could, at any time, change a creditor, or the amount ascribed to him, to suit himself. The Revenue is equally to blame for not questioning the assessee in this respect, which clearly undermines, nay, castigates, the assessee’s case, who only could explain the said differences. Another anomaly observed is that the assessee’s stand before the Tribunal is of being unaware of the appellate proceedings before the first appellate authority (in the first round), and of having become aware of the same only on the receipt of the show cause notice dated 8-3-2012 by the assessing officer. This is in complete disagreement with the proceedings as recorded by the learned Commissioner (Appeals) at para 4 of his order (dated 7-3-2011), which in its relevant part reads as under: —

‘The case was posted for hearing on 15-4-2010, 3-6-2010, 6-11-2010, 8-12-2010, 21-12-2010 and 5-1-2011. In respect of these hearing notices, the appellant filed stereotyped adjournment letters on 8-12-2010, 21-12-2010 and 5-1-2011 with the same verbatim that Authorized Representative is not well hence we our self request you to adjourn the appeal. Subsequent to the adjournment, the appellant has not appeared for any of the hearing. In view of this, the appeal is decided on merits.’

It may also be necessary to bring certain other inconsistencies observed on record. While the tribunal per its order dated 20-12-2013, in the first round, states of the assessee having returned agricultural income at Rs. 1.25 lakhs for the current year, there is no such disclosure either in the computation of income nor the income tax computation forming part of the assessment order dated 30-12-2009, column 2 of which (qua agriculture income) is left blank.

4.5 In view of the foregoing, I find no merit in the assessee’s case and, consequently, no reason to interfere with the impugned order.

5.In the result, the assessee’s appeal is dismissed.