In the assessment order dated 28th February 1997 the Assessing Officer (‘AO’) noted that the Assessee continued to derive its business income, as in the earlier years, from trading in gold and diamond ornaments. It was noted by the AO, inter alia that the balance sheet of the Assessee showed the receipt of unsecured loans of Rs. 38 lakhs and a sum of Rs. 1,01,007 on account of interest accrued on the above amount. The Assessee was asked to furnish the evidence regarding identity, creditability and genuineness of the source of its income.
Pursuant thereto, the Assessee disclosed that the amount was borrowed from Tom Investment Limited (‘TIL’), 9, Ezra Street, Calcutta. The acknowledgement of the return filed by TIL showed that it had returned an income of Rs. 2,904 in the AY in question and a loss of Rs. 18,677 in the AY 1996-97 which created doubts about TIL’s the creditworthiness. Accordingly, TIL was asked to furnish the source of its lending.
The Authorised Representative (‘AR’) of TIL attended the proceedings and intimated that the amount lent to the Assessee had in turn been borrowed from M/s. Tuq Credits Limited (‘TCL’), the address of which was the same as TIL, i.e., 9, Ezra Street, Calcutta. The AR of TIL was then requested to prove the genuineness and credibility of TCL. However, the AR of TCL expressed his difficulty in furnishing that information. Thereafter, summons were issued under Section 131 of the Act to TCL asking it to furnish, inter alia, certificate of incorporation, its PAN/GIR No and ward/circle/range, audited copies of the balance sheet, profit & loss account and auditor’s report for the period ending 31 st March 1994, 31st March 1995 and 31st March 1996, bank statement showing the lending of money to TIL, confirmation of the parties and their complete addresses, if any, from whom further loans have been obtained.
The letter containing the summons sent by registered post (speed post) to TCL was received back unserved with the remarks ‘not available.’ The AO then concluded that TCL was not a genuine party which could have lent the money to TIL, which in turn lent the said amount to the Assessee. It was, therefore, concluded that “the entire chain of lending and borrowing is bogus.” From the chart of lending to the Assessee and from the confirmation given by TIL it was noted by the AO that the cheques issued by TCL were later than the dates on which the cheques were issued by TIL in favour of the Assessee. This, according to the AO, further corroborated the fact that the transactions were not genuine. Accordingly, a sum of Rs. 38 lakhs as unsecured loan was treated as unexplained income of the Assessee under Section 68 of the Act. A sum of Rs. 1,01,007 shown as interest payable on the said loan was also disallowed as an expenditure. The income of the Assessee was computed as Rs. 52,84,439.
An appeal was filed by the Assessee before the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. By an order dated 24th October 1997 the CIT (A) allowed the Assessee’s appeal and held that as long as TIL had confirmed the loan advanced by it to the Assessee, the Assessee had discharged the onus on it under Section 68 of the Act to prove the identity, genuineness and creditworthiness of the creditor. It was further found that repayments had also been made by the Assessee to TIL of the borrowed amount by cheques and tax at source of Rs. 30,171 had been deducted from the interest payment of Rs. 1,31,178. By its letter dated 27th and 31st January 1997 TIL had clarified the facts pertaining to the said loan. The CIT (A) found that the following documents were also placed before the AO:
