Case Law Details

Case Name : Commissioner of Income-tax Vs Hindon Forge (P.) Ltd. (Allahabad High Court)
Appeal Number : IT Appeal Defective No. 288 OF 2009
Date of Judgement/Order : 30/07/2012
Related Assessment Year :
Courts : All High Courts (3789) Allahabad High Court (208)

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax

versus

Hindon Forge (P.) Ltd.

IT APPEAL DEFECTIVE NO. 288 OF 2009

JULY 30, 2012

ORDER

1. We have heard Shri Dhananjay Awasthi, learned counsel appearing for the revenue. Shri Suyash Agrawal appears for the respondent-assessee.

2. This Income Tax Appeal has been filed with a delay of 2 days. The delay has been sufficiently explained in the affidavit of Shri Lala Ram, Income Tax Inspector, Circle-I, C.I.T. Office, Ghaziabad and is accordingly condoned. The appeal is treated to be filed within limitation. With the consent of parties, it was heard on the following questions of law, as follows:-

“(1)  Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in deleting the entire addition of Rs. 17, 83, 571/- by holding that the assessee has proved the identity of the creditors, when the Managing Director of the company was the sole trustee of all these eight trusts and all deposits were made in cash and the trusts instead of utilizing these deposits for the aims and objectives of the trusts, loaned out to the assessee company, which proves that these trusts had no independent identity and acted as a tool in the hands of the assessee-company.

(2)  Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in holding that the credit worthiness of 8 trusts was established when the source of funds with all of them was not proved by the assessee, which fact is further fortified by ill placed utilization of trust funds.

(3)  Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in holding that the genuineness of transaction was established when the whole transaction apparently is a colourable device just to hoodwink the revenue. These eight trusts were managed by sole and same trustee, who was also managing and controlling the assessee company and the funds deposited in cash in the trusts were simply taken out by the Managing Director of the assessee company to use in the hands of the company.”

3. For the assessment year 2003-04 the assessee-company filed return declaring income of Rs. 9, 45, 430/- which was processed under Section 143(1) of the Income Tax Act, 1961. The case was picked up for scrutiny after the approval given by the Chief Commissioner of Income Tax, Meerut. Notices were issued under Section 143(2) of the Act, in compliance of which books of account were produced.

4. The AO found that out of unsecured loan of Rs. 31, 77, 839/-during the year, the loans of Rs. 17, 83, 571/- were taken from eight different trusts, namely ‘Satyam Shivam Sunderam Trust’; ‘Lord Shankar Ji Trust’; ‘Lord Krishna Ji Trust’; ‘Lord Vishnu Ji Trust; ‘Lord Ganpati Ji Trust’; ‘Goddess Bhawani Ji Trust’; ‘Lord Hanuman Ji Trust’ and ‘Lord Laxmi Ji Trust’. Mr. Rajesh Kumar Agarwal, the director of the company with 28.88% shareholdings in the company, and with his close relatives Mr. Ankur Agarwal and Smt. Urmila Agarwal-the other directors of the company holding shares in the company, had taken loans from these eight trusts. Shri Rajesh Kumar Agarwal the common managing trustee of all these eight trusts is also managing the assessee-company. The AO found that all the cash deposits in bank account of the trusts were out of petty donations received during the year. The last year’s cash balance was kept as cash in hand in imprest account with trustee and some loans and advances. It was observed that the amount of cash in hand and petty donations, as shown in the balance sheet and Income & Expenditure account, is not by any means sufficient for advancing unsecured loans to the extent as shown by the assessee/trusts. The cash was kept in imprest account and for loans & advances, no evidence was produced. In absence of books of account, the availability of funds with the trusts to advance the same as unsecured loans to assessee company was not established and thus the assessee failed to prove the capacity and genuineness of the transactions. The AO did not accept the genuineness of the unsecured loans of Rs. 17, 83, 571/- and added it back to the income of the assessee. The AO also found an adhoc disallowance of Rs. 1, 00, 000/- on account of machinery repairs with which we are not concerned in this appeal.

5. The CIT(A) in the appeal filed by the respondent-company considered the submissions, and recorded findings as follows:-

“3.4 The submissions of the learned A.R. has been considered. I have also considered the facts brought out by the AO in the assessment order as well as in his reported, referred to above. The facts emerges out from the material on record are as follows:-

  (i)  Shri Rajesh Kumar Agarwal the Director of the Appellant Company is the sole trustee in respect of the 8 trusts.

 (ii)  The ld. A.R. has pointed out that the said trusts are assessed to tax and the AO has informed that the returns of the trusts are not subjected to scrutiny.

(iii)  The AO has also reported that neither the books of account have been produced nor any evidence furnished in respect of the petty charity received.

(iv)  A perusal of bank statement shows that these so called trusts are receiving money in cash on regular basis and identical amount is being given away by cheque.

 (v)  From the entries in the bank pass book apparently there is neither any expenditure shown nor any application of fund towards objective of the trust nor any outgoing towards beneficiary of the trust.

(vi)  The appellant has neither furnished copy of trust deed before AO nor before me to prove the genuine existence of the trusts. Shri Rajesh Kumar Agarwal is the common trustee in respect of all the 8 trusts. Neither the author of the trust, nor the beneficiary, nor the object of the trust has been given.

(vii)  The genuineness and the validity of the trusts remains to be proved.

(viii)  In his report dated 03.03.2008, the AO has observed that “non-production of donation slips/receipts further goes to prove that no donations were received and the entire receipts of donations shown is the Income & Expenditure A/c was mere diversion of income of the assessee company.

(ix)  The learned AR has contended that “for intents and purposes of various trusts constituted under respective Trust Deeds were genuine entities separate and independent from the assessee company.” The observation of the AO, the learned AR pointed out, is based on suspicion, conjecture and surmises. The ld. AR has also contended that the AO has not brought any evidence to prove the falsity of the transaction. It was further argued that suspicion, howsoever, strong cannot taken place of positive evidence.

 (x)  The ld. AR also placed reliance on the following judgments:

(a)  DCIT v. Rohini Builders – 256 ITR 360 (Guj.)

(b)  Murlidhar Lahorimal v. CIT – 280 ITR 512 (Guj.)

(c)  ITO v. M.S. Advance (P) Ltd. ITAT, Amritsar “SMC” Bench..”

6. The CIT(A) thereafter found as follows:-

“On careful consideration of the facts placed hereinabove, it is seen that the diversion theory of the AO apparently has sufficient basis because independent existence of the trusts has not been proved. Neither the Author of the trust, nor the object/beneficiary has been given before the AO or during the appellant proceedings. The accounts of the trusts given does not throw light on independent existence of these trusts. The AO has brought on record various facts, which clearly suggest that Shri Rakesh Kumar Agarwal is the common trustee of these trusts and is also the Director of the appellant company. The fund flow from the trusts to the appellant company through the same person Shri Rakesh Kumar Agarwal has been established. The independent existence of these trusts, however, has not been proved. The AO has rightly pointed out that the Income Tax Returns in respect of these trusts have been processed in summary manner and have not been subjected to scrutiny and hence merely because Income Tax Returns have been filed, it does not conclusively prove genuine and independent existence of these trusts.”

7. The appeal was dismissed.

8. The Income Tax Appellate Tribunal has allowed the appeal with the findings, as follows:-

“8. Considering the facts of the case in the light of these above decisions and decisions cited by both the parties, we are of the view that assessee has discharged the initial onus which lay upon it in terms of S. 68 of the I.T. Act by proving the identity of the creditors, their credit worthiness and genuineness of the transaction in the matter. The assessee has filed copies of the balance sheets and income & expenditure/ac of all the 8 trusts in the paper book. It is not in dispute that the assessee received loans/advances from these 8 trusts through cheques and banking channels. On perusal of the balance sheet of these trusts, we find that these trusts were having initial capital brought from preceding A.Ys which is more than the amount advanced by these Trusts to the assessee. All these 8 trusts are income tax assessee with the same AO (ACIT, Circle-I Ghaziabad) who is also A.O. in the case of the assessee company. The details of the PAN no. of these Trusts are also given in the paper book. All these 8 trusts are therefore assesseed by the same AO who has made addition against the present assessee company. In most of the cases the copy of the intimation u/s 143(1)(a) for the A.Y. in question are filed in the paper book to show that the returns of income of these trusts have been accepted by the same AO. We further find from the balance sheet of these 8 trusts that they have shown loans and advances given to the assessee company in their balance sheet. These facts on record would clearly prove that despite there is objection by the AO that there were deposits in cash in bank account of these Trusts but the fact remained that the opening balances with these 8 trusts were sufficient to advance the loan to the assessee company out of their initial capital which were generated from the preceding A.Y. It is admitted fact that the assessee filed confirmation of all the 8 trusts before the AO. Their copies of bank accounts were also filed and admittedly all the amounts have been advanced to the assessee through cheques and that the details of loans advanced given by these 8 trusts to the assessee company are reflected in the balance sheet for the same A.Y. in question and also certified by the C.A. These balance sheets have been filed with the income tax department and more particularly with the same AO assessing the assessee company. These evidences and material on record clearly prove that assessee had discharged initial onus to prove identity of the creditor, their financial capacity to advance loan and genuineness of the transaction in the matter.

9. The authorities below have rejected the claim of the assessee precisely on the reasons that there were cash deposits in the accounts of the trusts prior to the issue of cheques to the assessee company. However, it is settled law that an assessee could not be asked to prove the source of the source. The assessee could not be directed to prove the source of deposits in its books of accounts. Therefore, objection of the authorities below cannot be sustained. Moreover as noted above the opening capital balances with the 8 trusts were found sufficient out of which loans could have been advanced to the assessee irrespective of the cash deposits in their bank accounts. The authorities below have also noted that the director of the assessee company is also sole trustee of these trusts. Therefore, independent status of the trusts have not been proved. The above objection of the authorities below is also not legally sustainable because assessee is registered under the Companies Act and is a legal entity. All the Trusts are assessed to income tax separately and their returns have been accepted by the AO. Therefore, there is no bar for the M.D. of the assessee company to become trustee in other organizations like the trust in question. The assessee has therefore proved that the assessee company and the 8 trusts are independent legal entities. The authorities below have also noted that books of accounts of the assessee are not produced before them. It was submitted by the assessee that during the A.Y. in question the 8 trusts were having only interest income and no business is carried on by the trusts. Therefore for non-production of the books of the trusts would not be a ground for rejecting the explanation offered by the assessee. If the income tax returns of all the 8 trusts are processed only u/s 143(1)(a) by the same AO, there is no fault on the assessee company in this way. The assessee company can not control the wisdom of the AO whether to process the income tax returns or to make a scrutiny assessment. Such objection would not be valid to reject the claim of the assessee. The authorities below have also noted the transaction appears to be colourable device to avoid payments of taxes. The addition is made u/s 68 of the I.T. Act and the assessee could be directed to explain the nature and source of the deposits/credits in its books of accounts. The assessee has offered explanation to explain credits in its books of accounts. Therefore, such an objection would not be valid. Considering the above discussion and the case laws referred to above, it is clear that since all the 8 trusts are assessed by the same AO, the addition so made by the AO would amount to disputing the roecrds of the Revenue dept. maintained by the AO in respect of the 8 trusts. Such a course of action is not permissible under law. The department thus cannot make adverse inference against the assessee in respect of records maintained in respect of the 8 trusts.

10. Considering the above discussion in the light of the case law relied upon by ld. counsel for the assessee and noted above, we are of the view that the assessee has proved identity of the creditors, genuineness of the transaction and credit worthiness of the creditor. We accordingly set aside the orders of the authorities below and delete the entire addition. As a result ground nos. 1 and 2 of the appeal of the assessee are allowed.”

9. Shri Dhananjai Awasthi, appearing for the revenue, submits that ITAT has committed gross error of law in accepting the genuineness of the transaction in the matter. All the eight trusts, even if their returns were accepted under Section 143(1)(a), were fictitious. In all these eights trusts Shri Rajesh Kumar Agarwal was the common managing trustee. He did not produce the copy of the trust deeds before the authorities to prove the genuineness and existence of the trusts. Neither the author of the trusts nor the object of the trusts was shown. In all the trusts cash amounts were deposited, and on the same day these amounts were transferred to the company managed by Shri Rajesh Kumar Agarwal, by way of cheque. The details of these cash deposits in the trusts and the date of transfer to the assessee-company have been given in the order of AO as follows:-

LORD SHANKER JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

10,000/-

29.4.2002

10,000/-

14.08.2002

20,000/-

14.8.2002

20,000/-

19.8.2002

1,10,000/-

19.8.2002

1,10,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

15,000/-

10/01/03

15,000/-

GODDESS BHAWANI JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

15,000/-

29.4.2002

15,000/-

14.08.2002

20,000/-

14.8.2002

20,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

20,000/-

10/01/03

20,000/-

GODDESS LAXMI JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

15,000/-

29.4.2992

15,000/-

14.08.2002

15,000/-

14.8.2002

15,000/-

24.8.2002

1,20,000/-

24.8.2002

1,20,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

20,000/-

10/01/03

20,000/-

LORD GANPATI JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

15,000/-

29.4.2002

15,000/-

14.08.2002

15,000/-

14.8.2002

15,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

20,000/-

10/01/03

20,000/-

LORD HANUMAN JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

15,000/-

29.4.2002

15,000/-

14.08.2002

20,000/-

14.8.2002

20,000/-

24.8.2002

30,000/-

24.8.2002

30,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

20,000/-

10/01/03

20,000/-

LORD KRISHNA JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

14.08.2002

15,000/-

14.8.2002

15,000/-

24.8.2002

40,000/-

24.8.2002

40,000/-

04/01/03

6,000/-

04/01/03

6,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

15,000/-

10/01/03

15,000/-

LORD VISHNU JI TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

17.4.2002

15,000/-

17.4.2002

14,000/-

29.4.2002

10,000/-

29.4.2002

10,000/-

14.08.2002

15,000/-

14.8.2002

15,000/-

19.8.2002

1,00,000/-

19.8.2002

1,00,000/-

24.8.2002

18,000/-

24.8.2002

18,000/-

08/01/03

30,000/-

08/01/03

30,000/-

10/01/03

15,000/-

10/01/03

15,000/-

SATYAM SHIVAM SUNDERAM TRUST

Date of cash deposit

Amount

Date of transfer to Hindon forge

Amount

10/08/02

2,75,000/-

10/08/02

1,75,000/-

14.08.2002

80,000/-

14.8.2002

80,000/-

24.8.2002

22,000/-

24.8.2002

22,000/-

10. Shri Dhananjai Awasthi submits that under Section 68 of the Act, 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 of the same or the explanation offered by him is not satisfactory in the opinion of A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year. He submits that the burden is upon the assessee to explain the nature and source from which the credits were obtained. In this case the AO and CIT(A) have found after making investigation that it was Mr. Rajesh Kumar Agarwal, who was the director of the assessee-company and was managing of all the eight trusts. He had created these trusts for money laundering. He kept on depositing the cash amounts in the trusts and thereafter transferring the same on the same date to the company. All the dates of donations and loan taking from these trusts are the same. The assessee did not produce the trust deeds; the object and the beneficiaries of the trusts. In the entire transactions Shri Rajesh Kumar Agarwal was the author, donor and the beneficiary. He could not explain satisfactorily to the assessing officer that these trusts were genuine and give explanation about the genuineness of the credits in the accounts of the assessee company.

11. Shri Suyash Agrawal, on the other hand, submits that the respondent-assessee is not required to prove the source of the source. There was no dispute that all the eight trusts were subjected to assessments and that they were not called for any scrutiny. Their returns were accepted under Section 143(1)(a) of the Act. Their PAN numbers also given the the balance sheets were produced. It was not denied that these trusts had the capital, which were carried forward to the next year and that funds in their account were genuine. The Income-tax department has not taken any action against the trusts and thus under Section 68, after having proved the nature and source of the credits, it was not open to the AO to question the genuineness of the transactions. The assessee had proved the source of the credits on which the burden shifted on the revenue to prove that these transactions were not genuine. Such a burden is to be discharged, if the trusts were not genuine and transactions were not made through channels of the bank. He has relied upon Deputy Commissioner of Income-Tax v. Rohini Builders [2002] 256 ITR 260 against which, according to Shri Suyash Agrawal, the Special Leave Petition was dismissed. He has relied upon the judgment to establish that when the assessee has discharged the initial onus, which lay on it in terms of Section 68 of the Act by proving the identity of creditors by giving their complete address, permanent account numbers, copy of the assessment orders and their capacity, the genuineness of the transactions cannot be doubted and the amount could not have been added to the income of the company. Shri Suyash Agrawal has also relied upon the judgment in Anil Rice Mill v. CIT [2006] 282 ITR 236 in which this Court also held that in case of cash credits, the assessee has to prove three things: (1) identity of the creditor; (2) capacity of such creditor to advance money; and (3) genuineness of the transactions. If all these are proved the burden shifts to the revenue to prove that the amounts belonged to the assessee. The Court held in paragraphs 11 to 20 as follows:-

“11 The Apex Court in the case of Commissioner of Income Tax v. United Trading And Construction Co [2001] 247 ITR 819 has only held that there is nothing in Section 24 of the Finance (no 2) Act which prevents the Income Tax Officer, if he is no satisfied with the explanation of the assessee about the genuineness of sources of amounts found credited in his books to add them to the assessee’s income amount in spite of these having already been made the subject matter of the declaration made by the depositors/creditors. There is no quarrel about the preposition of law laid down by the Apex Court which was relating to the case of declaration of the income under the Voluntary Disclosure Scheme introduced by the Finance (No. 2) Act, 1965′

12. Section 68 and 69 of the Income Tax Act reads as follows:

“68 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 years.

69. Unexplained investments.- Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by It in for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”

13. Under Section 68 of the Act if any sum is found credited in the books of account of the assessee 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 maybe charged to income-tax as the income of the assessee of that previous year. Therefore what has to be enquired into by the Assessing Authority is about the nature and source of the deposit. If the explanation with regard to nature and source is found unsatisfactory only then the amount so credited may be treated as income.

14. Section 68 came up for consideration before the various High Courts. The Court has held that assessee has to prove three conditions; 1) identity of the creditor; 2) capacity of such creditor to advance money; and 3) genuineness of the transactions; (vide Shankar Industries v. CIT, Central, (Calcutta), 114 ITR 689, C. Kant And Co. v. CIT-III, West Bengal, 126 ITR 63, Calcutta, Prakash Textile Agency v. CIT-III, West Bengal, 121 ITR 890, Calcutta, Oriental Wire Industries (P) Ltd. v. CIT, 131 ITR 688 Calcutta, CIT v. Baishnab Charan Mohanty, 212 ITR 199 Orissa, Jalan Timbers v. CIT, 223 ITR, 11 Gauhati and CIT v. Korlay Trading Co. Ltd., 232 ITR 820 Calcutta.

15. If all the aforesaid three conditions are proved the burden shift on the revenue to prove than the amount belong to the assessee. (vide CIT v. United Commercial And Industrial Co. (P) Ltd. 187 ITR 596, Calcutta, M.A. Unneeri Kutty v. CIT, 198 ITR 147 SLP dismissed 2001 ITR (ST) 23, CIT v. Precision Finance Pvt. Ltd., 208 ITR 465.

16. It has been held by the various High Courts that the assesses can not be asked to prove source of source or the origin of origin (vide S. Hastimal v. CIT, Madras, 49 ITR 273 Madras, Tolaram Daga v. CIT, Assam, 59 ITR 632, Assam. CIT v. Daulat Ram Rawatmull, 87 ITR 349 SC, Sarogi Credit Corporation v. Commissioner of Income Tax, 103 ITR 344 Patna.)

17. In the case of Jallan Timbers v. CIT reported in 223 I.T.R, 11, the Division Bench of Gauhati High Court held that under Section 68 of the Income Tax Act, the assessee has to prove three important conditions (1) Identity of the person (2) Genuineness of the transaction and (3) capability of the person giving cash credit. On the explanation being given the assessing authority can reject the explanation by cogent grounds and if the ground are based on no ground, presumption against the assessee does not arise.

18. In Sreelekha Banerjee v. CIT reported in 43 ITR page 112, Apex Court held that “if there was an entry in the account books of the assessee which showed the receipt of a sum on conversion of high denominations notes tendered for conversion by the assessee himself, it is necessary for the assessee to establish it asked, what the source of that money was and to prove that it was not income The Department was not at that stage required to prove anything. It could ask the assessee to produce any books of account or other documents or evidence pertinent to the explanation if one was furnished and examine the evidence and the explanation. If the explanation showed that the receipt was not of an income nature, the Department could not Act unreasonably and reject that explanation to hold that it was income. If however. the evidence was unconvincing, then such rejection could be made The Department cannot by merely rejecting a good explanation unreasonably, corvert good prod into no proof.

19.In the case of Commissioner of Income Tax v. Orissa Corporation P. Ltd. reported in 159 I.T.R., 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 assesses. Their Index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under Section 131 at the instance of the assesses 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 any thing further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, [hen it could not he said that such a conclusion was unreasonable or perverse or based on no evidence, “

20. The Apex Court in the case of CIT v. P.K. Noorjahan (Smt) while interpreting similar language used in Section 69 has held as follows:

“Shri Ranbir Chandra, the learned counsel appearing for the Revenue has urged that the Tribunal as well as the High Court were in error in their interpretation of Section 69 of the Act, The submission is that once the explanation offered by the assessee far the sources of the investments are found to be unacceptable the only course open to the Income Tax Officer was to treat the value of the investments to be the income of the assessee. The submission is that the word “may” in Section 69 should be read as “shall”. We are unable to agree. As pointed out by the Tribunal, in the corresponding clause in the Hill, which was introduced in Parliament, the word “shall” had been used but during the course of consideration of the Bill and on the recommendation of the Select Committee, the said word was substituted by the word “mar”. This clearly indicates that the intention of Parliament in enacting Section 69 was to confer a discretion on the Income Tax Officer In the matter of treating the source of investment which has not been satisfactorily explained by the assessee as the income of the assessee and the Income Tax officer is not obliged to treat such source of investment as income in every case where the explanation offered by the assessee is found to be not satisfactory. The question whether the source of the investment should he treated as income or not under Section 69 has to he considered in the light of the facts of each case. In other words, a discretion has been conferred on the Income Tax Officer under Section 69 of the Act to treat the source of investment as the income of the assessee if the explanation offered by the assessee is not found satisfactory and the said discretion has to be exercised keeping in view the facts and circumstances of the particular case.”

12. In the present case, we find that the assessee could not prove the genuineness of the transactions before the assessing officer. The identity of the creditor (the eight trusts) in the present case was that of the assessee himself. Shri Rajesh Kumar Agarwal-the managing director of the assessee-company, with majority shareholdings along with his close associates, was the common managing trustee of all the trusts. He did not produce the trust deeds, its objects, and the beneficiaries of the trusts to establish that though the trusts were registered, there were beneficiaries other than him and his associates. The capacity of the creditors was built up by the assessee himself as he could not explain the sources for which he has received the money. It was found by the AO and the CIT(A), that the trusts were receiving cash donations, which were transferred on the same date to the company. The dates of donations to the trusts and advance of loans by the trusts to the assessee are the same. In the absence of the trust deeds, the object of the trusts and its beneficiaries, the conclusions drawn by the AO and CIT(A) that the trusts were fictitious trusts and were created only for the purpose of creating the capital of the company, is a finding of fact with which the Tribunal interfered only on inferences in law. The law is to be applied on facts. The principles of law are not to be applied in isolation, devoid of facts to upset the findings of the adjudicating officer and the appellate authority.

13. In the absence of accounts of the trusts and its scrutiny by the Income Tax department in any of the assessment years in which these trusts had filed returns, it could not be proved by the assessee that the trusts had any other sources of fund, or that it had given credits to any other person or company. The manner, in which the trusts were spending the amounts received by way of donations, created strong doubt on the genuineness, which was not clarified and removed by the assessee. The findings of the AO, are that the trusts were nothing but instruments of which Shri Rajesh Kumar Agarwal, who was transferring his own money, or the moneys of the company which he had deposited by cash to the company. The genuineness of the transactions were thus not established at all and thus there was no question of shifting the burden under Section 68 of the Act on the revenue.

14. In UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 the Supreme Court held as follows:-

“We may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. Commissioner of Income tax [1996] 222 ITR 83 at 850 where referring to Mcdowell’s case [1985] 154 ITR 148 (SC), the Court observed:

“The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuinness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in Mc. Dowell’s case (1958) 154 ITR 148 (sc). The ratio of any decision has to be understood in the context if has been made. The facts and circumstances which lead to Mc Dowell’s decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.

This accords with our own view of the matter.”

15. In the present case, we have no doubt that Shri Rajesh Kumar Agarwal has created these trusts and was depositing the amount in cash to be given to the company as loans. He did not produce the trust deeds, the author of the trusts or beneficiaries of the trusts. The method and manner, in which he was depositing the amount in the accounts of the trusts, and was transferring the same on the same day by way of cheques to the company, of which he was majority shareholdings along with his associates, clearly establishes that he was playing a fraud with the revenue, and thus the AO and CIT(A) fully justified in finding that the burden of proof did not shift on the revenue and in adding to the amount to the income of the assessee. Where the source is the assessee himself, he is required to prove the source of the source to verify the transactions.

16. On the facts and circumstances, we find that the ITAT grossly erred in law in allowing the appeal and reversing the judgment of CIT(A) and AO. The questions of law are decided in favour of revenue and against the assessee. The department will compute the tax accordingly. It will be open to the Income Tax department to proceed against the trusts in accordance with the law.

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