Case Law Details
CA Sandeep Kanoi
In the case of Ghisulal S. Jain(HUF) Vs. CIT, ITAT Mumbai has confirmed the addition in respect of loan received by the Assessee in the cases in which Loaner has given the loan to Assessee after depositing the cash in his bank account and on failure to establish creditworthiness of the Loaner. It further held that merely because the transactions have taken place through banking channels, is not sufficient to establish that the loans taken by the assessee are genuine. The onus is on the assessee to prove the nature and source of the amount found credited in the books of the assessee. The Hon’ble Kerala High Court in the case of ITO vs. Diza Holding (P) Ltd. (supra) has held that furnishing of particulars is not enough and the payment by way of account payee cheque is also not conclusive.
Further in respect of Loan received by the Assessee from Loaner out of loan received by the Loaner it was held that assessee cannot be asked to prove the source of source or the origin or origin. ITAT has relied on the judgments of Hon’ble Allahabad High Court has also held in the case of Zafa Ahmad Khan & Co. vs. CIT [2013 30 taxmann.com 267].
Relevant Extract of the Case are as follows :-
1. In ground no. l of the appeal, the assessee has disputed the confirmation of the addition u/s 68 on account of claim of loan from the following persons.
a) Damyanti S Jain Rs.1,00,000/-
b) Shri Nalinbhai A Shah Rs.2,50,000/-
c) Kirtibhai C Shah Rs.2,50,000/-
d) Renudevi Makharia Rs.4,00,000/-
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Total Rs.10,00,000/-
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2. The Assessing Officer made assessment u/s 143(3) of the Income-tax Act on 29/12/2006 assessing total income of Rs.15,91,520/-, which interalia includes a sum of Rs.10,00,000/- being loans treated u/s 68 as income of the assessee.
3. The Assessing Officer has stated that in order to verify the genuineness of the loans, the assessee filed confirmations and the same have been obtained and placed on record. He has stated that notice u/s 133(6) was issued and stated his findings as under:
a) In respect of loan from Smt. Damyanti S. Jain , he has stated that she advanced loans of Rs.1,00,000/-(wrongly stated by the Assessing Officer Rs.2,50,000/-) to the assessee. That on perusal of bank statement, it is seen that she deposited in cash of Rs.1,00,000/- prior to issue of cheque in favour of M/s Raj Sales, proprietorship firm of the assessee. He has stated that in the absence of details of cash deposited, the same is treated as income of the assessee u/s 68 of the Income-tax Act.
b) In respect of loan from Smt. Renudevi Makharia, the Assessing Officer has stated that she advanced loan of Rs.4,00,000/-. Since no documentary evidence in respect of payment of loan of Rs.4,00,000/- is filed, he treated it as income of the assessee u/s 68 of the Income-tax Act.
c) In respect of loan from Shri Nalinbhai Amrutlal Shah, the Assessing Officer has stated that he advanced loan of Rs.2,50,000/- to the assessee. However, prior to issue of cheques in favour of the assessee i.e. M/s Raj Sales, Cash of Rs.1,50,000/- was deposited into the account on 27/03/2004 (four entries) and Rs.1,00,000/- was shown as transfer from the account of family members, who have deposited cash in their accounts and the same was transferred to the account of the loan creditor and thereafter cheques were issued in favour of the assessee’s firm. In view of above he treated loan of Rs.2,50,000/- as income of the assessee u/s 68 of the Income-tax Act.
d) In respect of loan from Shri Kirtibhai Chandulal Shah, the Assessing Officer has stated that he advanced loan of Rs.2,50,000/- to the assessee. However, prior to issue of cheques in favour of the assessee i.e. proprietary concern M/s Raj sales, Rs.1,00,000/- and Rs.1,50,000/- were transferred to the account from the accounts of family members of the creditors, who deposited cash in their accounts and the same were transferred to the account to the loan creditors and thereafter cheques were issued in favour of M/s Raj Sales. Therefore, the AO treated the said loan of Rs.2,50,000/-as income of the assessee u/s 68 of the Income-tax Act.
In view of the above, the Assessing Officer considered the aggregate loans of Rs.10,00,000/- as income of the assessee u/s 68 of the Income Tax Act. Being aggrieved, assessee filed appeal before the First Appellate Authority.
4. The ld. CIT(A) has stated that the assessee filed a paper book and contended that necessary confirmations from the loan creditors were furnished before the Assessing Officer. That all the creditors are filing returns of income and they confirmed the loans given to the assessee. It was argued that assessee was not supposed to know source of source. The ld. CIT(A) has stated that the assessee submitted necessary particulars in the paper book, and the said paper book was forwarded to the Assessing Officer. That the Assessing Officer submitted his remand report. In the remand report, the Assessing Officer stated that loans were not satisfactorily explained by the assessee. The ld. CIT(A) has stated the extract of remand report in the impugned order which is as under:-
(1) In respect of claim of loan from Damyanti S. Jain, it is stated that the cash of Rs.1,00,000/-was deposited in her bank account on 08/05/2003 and out of the cash deposit amount of Rs.1,00,000/- cheques were issued to assessee’s proprietary concern M/s Raj Sales on 09.05.2003. Therefore, the genuineness of the said transaction is not proved. That the total income of Smt. Damyanti S. Jain for A.Y. 2004-05 is Rs.32,210/-. Hence her creditworthiness is also not proved.
(ii) In respect of claim of loan of Rs.2,50,000/- from Shri Nalinbhai A. Shah, it is stated that an amount of Rs.1,50,000/- was deposited in cash on 27/03/2004 in bank account of loan creditor Shri Nalinbhai A. Shah and on the same day cheque was issued to the assessee. Further deposit of Rs.1,00,000/- is shown as transferred from the account of family members being saving bank account nos. 8264 and 8297, who deposited cash in their accounts on 29/03/2004 and transferred that amount to the account of the loan creditor. Thereafter the cheque was issued in favour of the assessee’s proprietary concern M/s Raj Sales on the same day i.e. 29.03.2004. It is further stated in the remand report that Shri Nalinbhai A. Shah filed a return of income for A.Y. 2004-05 declaring income of Rs.52,560/- and his capital is of Rs.2,58,742/-. Hence, genuineness of the said loan and creditworthiness of Shri Nalinbhai A. Shah could not be proved.
(iii). In respect of claim of loan of Rs.2,50,000/- from Shri Kirtibhai C. Shah, it is stated that prior to the issue of cheques in favour of assessee’s proprietary concern M/s Raj Sales, Rs. 1,00,000/- and Rs.1,50,000/- were transferred to the account of the loan creditor from his family members accounts and earlier they deposited cash in their accounts before transferred to the account of the loan creditors. Thereafter the loan creditor issued cheques to M/s Raj Sales. It is further stated that the total income of the Shri Kirtibhai C. Shah for A.Y. 2004-05 is Rs.53,650/-. Hence the genuineness and creditworthiness of the loan creditor is not proved.
(iv). In respect of claim of loan of Rs.4,00,000/- from Smt. Renudevi Makharia, it is stated that a copy of bank statement was furnished which shows that amount of Rs.4,00,000/- was received by Smt. Renudevi Makharia on the same day on which she issued cheque in favour of M/s Raj Sales of Rs.4,00,000/-. It is stated that she filed return of income for. A.Y. 2004-05 declaring total income of Rs.36,230/-. Hence, genuineness of the loan and creditworthiness of loan creditor is not proved.
5. The ld. CIT(A) has stated that copy of the said remand report was communicated to the assessee and the assessee reiterated that he had filed requisite confirmations of the loans given to the assessee and all the loan creditors are filing returns of income. It was also reiterated that assessee is not supposed to explain the source of creditor’s source. Hence, the assessee has explained the genuineness of the loans and no addition is to be made.
6. The ld. CIT(A) did not agree with the contention of the assessee. He has stated that the claim of the assessee lacks credence. He has stated that in cases of two creditors there were cash deposits of equivalent amount prior to issuance of the loan cheque. In another case of a creditor (Kirtibhai C. Shah) equivalent amounts were transferred from family member’s bank account, who deposited cash in their accounts and in the case of another creditor (Smt Renudevi Makharia) equivalent amount was transferred from other account immediately preceding to issuance of cheque of equivalent amount to the assessee. The ld. CIT(A) has stated that creditworthiness of the loan creditors is not proved and accordingly he has confirmed the action of the Assessing Officer. Hence, assessee is in further appeal before the Tribunal.
7. During the course of hearing, the ld. AR reiterated the above facts. In connection with the claim of loan from Smt. Damyanti S Jain, ld. AR referred page 41 of the paper book which is a copy of the confirmation letter given by her directly to the Assessing Officer, as is evident from the stamp appearing on the said letter. He submitted that page no. 43 to 44 is the copy of bank statement evidencing that the said loan was taken by the assessee by an account payee cheque. In respect of loan from Smt. Renudevi Makharia of Rs.4,00,000/-, the ld. AR submitted that she also gave confirmation to the Assessing Officer vide letter dated 29.12.2006 pursuant to notice u/s 133(6) of the Act and a copy of the same is placed at page 45 of the paper book. He further referred page 52 of the paper book confirming the loan to the assessee of Rs.4,00,000/- with the bank details and also the payment of interest to her in respect of the said loan. He further submitted that she received the said amount from an account payee cheque from her debtor and the said cheque was deposited in her account and thereafter the cheque was issued to the assessee and referred page 49 of the paper book which is a copy of the bank slip for depositing the cheque of Rs.4,00,000/- in the account of Smt Renudevi Makharia. The ld. AR submitted a copy of the bank statement which is placed at page 48 of the paper book. He further submitted that the copy of capital account of Smt. Renudevi is also palced at page 50 of the paper book evidencing that she received Rs.4,00,000/-from Rajkumar Sajjankumar by an account payee cheque which was deposited in her account on 27/02/2004 and thereafter the cheque was issued to the assessee. In respect of loan from Shri Nalinbhai A Shah, ld. AR referred page 53 of the paper book which is a copy of the confirmation letter dated 29/12/2006, addressed to the Assessing Officer pursuant to notice issued u/s 133(6) of the Act confirming giving loan of Rs.2,50,000/- to the assessee. The ld. AR submitted that in reply of a enquiry raised by the Assessing Officer, the said loan creditor also filed his reply explaining the source of the amount given to the assessee and a copy of the said letter is placed at page 54 to 55 of the paper book. The ld. AR referred page 58 of the paper book which is a copy of the bank statement and submitted that the said loan was given by account payee cheque. He further submitted that a copy of the balance sheet of the loan creditor (Nalibhai A. Shah) is also placed at page 57 of the paper book and at page 59 of the paper book confirmation letter, confirming the loan to the assessee as well as receipt of interest thereon is placed. In respect of loan from Shri Kirtibhai C Shah, the ld. AR referred page 60 of the paper book and submitted that he also confirmed to the Assessing Officer vide letter dated 29/12/2006 pursuant to the notice u/s 133(6) of the Act of giving loan to the assessee. He further submitted that he also explained the source of the said loan to the AO vide his letter dated 27/12/2006 copy placed at pages 61-62 of the paper book. He further submitted that the copy of the statement of bank summary was also filed before the Assessing Officer along with balance sheet giving the details of the loans of the loan creditors, copies placed at pages 63-64 of the paper book respectively. He submitted that the bank statement was also filed and copy is placed at page 65 of the paper book. He further submitted that the loan creditor also confirmed the loan and receipt of interest, copy of it is placed at 66 page of the paper book.
8. The ld. AR further submitted that the said loans were repaid in subsequent assessment years by account payee cheques. He further submitted that the assessee paid interest on the said loans and the said interest was allowed by the department in the assessments made u/s 143(3) of the Act. The ld. AR submitted that the assessee filed requisite details not only establishing the identity of the loan creditors but also filed requisite documents to explain the genuineness of the transactions that the loan were taken by account payee cheques. He further submitted that all the loan creditors were assessed to tax, hence their creditworthiness was established by the assessee. He further submitted that the assessee is not required to prove/to establish source of source of the loan creditors and to substantiate his submission claim placed reliance on the following cases.
a). Decision of Hon’ble Bombay High Court in the case of Orient Trading Company Ltd. vs. CIT 49 ITR 723.
b). Decisions of Hon’ble Delhi High Court in the case of CIT vs. Dwarikadhish Investment (P.) Ltd. [2010 194 taxmann 43] and CIT vs. Diamond Products Ltd. [2009 177 taxmann 331]. c). Decision of Hon’ble Allahabad High Court in the case of CIT vs. Jauharimal Goyal [2005 147 taxmann 448].
9. He further submitted that if the assessee received the amount by cheques and the payments were also made by cheques through assessee’s bankers, the creditors have given confirmation letters mentioning their income tax file number, the Assessing Officer was not justified to treat the said loans as income of the assessee from undisclosed sources and referred the decision of CIT vs. Sahibganj Electric Cables Pvt. Ltd. 115 ITR 408. The Ld. AR submitted that once the assessee has discharged his burden by proving the identity of the loan creditors, the genuineness of the creditors and also the capacity of the creditors to give loans, the said loans cannot be treated as undisclosed income of the assessee. The ld. AR submitted that the addition of aggregate amount of Rs10,00,000/- made u/s 68 of the Income tax Act be deleted.
10. On the other hand, the ld. DR supported the orders of the authorities below. The ld. DR submitted that merely because the transaction had taken place by account payee cheques is not sufficient to establish that the loans are genuine particularly when the cash were deposited in the bank accounts of the loan creditors just before issuing cheque to the assessee. He relied on the decision of the Hon’ble Kolkata High Court in the case of CIT vs. United Commercial 85 Industrial Co. Pvt. Ltd. 187 ITR 596. He further submitted that the creditors are not men of sufficient means to advance loan to the assessee and therefore their creditworthiness could not be proved. He submitted that the burden is on the assessee to offer a satisfactory explanation and the source of cash deposited in the accounts of the creditors before issuing to the assessee. The ld. DR also relied on the decisions of the Hon’ble Kerala High Court in the cases of ITO vs. Diza Holding (P) Ltd. 255 ITR 573 and the case of Oceanic Products Exporting Co. vs. CIT 241 ITR 497. The ld. DR submitted that on perusal of the bank statement it could be seen that all the loan creditors had meager balance before depositing the amount in their accounts and of giving loans to the assessee. Hence their creditworthiness could not be proved. He submitted that the order of the ld.CIT(A) be confirmed.
11. We have carefully considered the orders of the authorities below and the submissions of ld. Representatives of the parties. There is no dispute to the fact that the assessee is required to establish not only the identity of the loan creditors but also to prove genuineness of the loan transactions as well as creditworthiness of the loan creditors. We agree with the ld. DR that merely because the transactions have taken place through banking channels, is not sufficient to establish that the loans taken by the assessee are genuine. The onus is on the assessee to prove the nature and source of the amount found credited in the books of the assessee. The Hon’ble Kerala High Court in the case of ITO vs. Diza Holding (P) Ltd. (supra) has held that furnishing of particulars is not enough and the payment by way of account payee cheque is also not conclusive. It is a fact that the assessee is not required to prove the source of source of the amount found credited in the accounts of loan creditors as held by the Hon’ble Delhi High Court in the case of Dwarik Dwarikadhish Investment (P.) Ltd. (supra) and CIT vs. Diamond Products Ltd. (supra). The Hon’ble Allahabad High Court has also held in the case of Zafa Ahmad Khan & Co. vs. CIT [2013 30 taxmann.com 267] that the assessee cannot be asked to prove the source of source or the origin or origin.
12. Considering the case of the assessee before us in the light of the decisions cited by the ld. Representatives of the parties and the the documents placed on record, we discuss as to whether the loans are genuine or not as under:
i). In respect of claim of loan from Smt. Damyanti S. Jain, there is no dispute to the fact that she issued cheque to the assessee and also confirmed of giving loan to the assessee. However on perusal of the bank statement placed at pages 42-44 of the paper book, we observe that she deposited cash on 08/05/2003 and issued cheque to the issue on 09/05/2003. No details of the source of cash available with the assessee have been placed on record. It is also not in dispute that her income was only Rs.32,210/-. Considering the above facts we agree with the ld. DR that merely because the transaction has taken place by way of an account payee cheque, does not establish the creditworthiness of the loan creditor Smt. Damyanti S. Jain. On the facts and in the circumstances, we agree with ld. CIT(A) that assessee has not been able to prove her creditworthiness. Therefore, we uphold the order of the ld. CIT(A) in considering the said claim of loan of Rs.1,00,000/- as not genuine and same has rightly been considered as income of the assessee from undisclosed sources by the authorities below.
ii). In respect of claim of loan from Shri Nalinbhai A. Shah of Rs.2,50,000/-, we observe that on perusal of the bank statement placed at page 58 of the paper book that three amounts of Rs.49,000/- each were deposited in the bank account of the loan creditor on 27/03/2004 and on the same day, cheque of Rs.1,50,000/-was issued to the assessee. We observe that prior to the said deposit, there was only a balance of Rs.3,500/- in the said account and thereafter also there is no transaction of deposit/withdrawal save and except the transfer of two amounts of Rs. 50,000/- each on 29/03/2004 and withdrawal of Rs.1,00,000/- in the same day by way of giving loan to the assessee. In so far as deposit of cash of Rs.49,000/- on three occasions on the same day, we observe that the said loan creditor has not been able to give any explanation save and except furnishing extract of bank summary. It is stated that same were miscellaneous loans which were taken from relatives and family members but there is no details placed on record. For the reasons mentioned in respect of the loan of Smt. Damyanti S. Jain, we are of the considered view that the loan of Rs.1,50,000/- which was given out of cash deposit in the bank account of the loan creditor cannot be considered as genuine loan as the assessee has not placed any document on record to prove the creditworthiness of the loan creditor in respect thereof. However, in respect of loan of Rs.1,00,000/- which was given to the assessee on 29/03/2004, we observe that the said loan was given by Shri Nalinbahi A. Shah to the assessee after transferring of two amounts of Rs.50,000/- from another account and therefore the assessee cannot be expected to go into the origin of origin of the transfer of the said amount in the account of the loan creditor from another account to establish the genuineness of the loan transaction. Such loan of Rs.1,00,000/- has not been given to the assessee out of cash deposit by the loan creditor. We are of the considered view that in respect of said loan of Rs.1,00,000/- given by Shri Nalinbhai A.Shah the cases relied upon by ld. DR are not applicable. On the other hand the ratio of the decisions of the Delhi High Court and the decision of the Hon’ble Allahabad High Court in cases (cited supra) apply. That the assessee has established that the transaction is genuine and has established the creditworthiness of the loan creditor, in respect of giving loan of Rs.1,00,000/- to the assessee as there was a sufficient credit balance in the bank account of the loan creditor to give loan to the assessee. In view of above we confirm the addition of Rs.1,50,000/- out of the loan of Rs.2,50,000/- given by Shri Nalinbhai A. Shah to the assessee and delete the balance amount of Rs.1,00,000/-.
iii). In respect of claim of loan from Shri Kantibhai C. Shah of Rs.2,50,000/-, we observe that the said loan was given to the assessee note out of the cheque deposited in his bank account by his loan debtors, as is observed from the bank statement placed at page 63-65 of the paper book. Since, the assessee has established that there was sufficient balance in the account of Shri Kirtibhai C.Shah to give loan of Rs.2,50,000/- to the assessee, the assessee has established not only the identity of the loan creditor but also the genuineness of the transactions. The fact that the said amount was received in the account of the loan creditor from the account of family member of the loan creditors who deposited cash in their accounts and from where the family members of the loan creditors received the cash is not to be established by the assessee to prove the creditworthiness of the loan creditor. If the Assessing Officer is not satisfied about the creditworthiness of the family members of loan creditor of the assessee, he could make addition in the hands of the loan creditor and/or the family members who deposited the said amount in cash in their account but the same could not be added in the hand of the assessee. Hence, the said addition of Rs.2,50,000/- is deleted as the assessee has given requisite explanation with documentary evidence to establish not only the creditworthiness and identity of the loan creditor but has also established the genuineness of the transaction.
iv). In respect of claim of loan of 4,00,000/- from Smt. Renudevi Makharia, we observe from the bank statement that she received the cheque and it was deposited in her account and thereafter loan was given to the assessee by account payee cheque. The Assessing Officer has not disputed the above facts nor the Assessing Officer has brought any material on record that the said cheque of Rs.4,00,000/- received by her and deposited in her account was not genuine cheque. Further she has also confirmed of giving loan to the assessee and the said loan was stated to be returned by the assessee by account payee cheque; as contended before us. Considering the above facts and material on record, we hold that the assessee has established not only the creditworthiness and identity of the said loan creditor Smt. Renudevi Makharia but has also established genuineness of the transaction. Hence, we delete the said addition of Rs. 4,00,000/- as the said loan is genuine loan and the assessee has furnished the requisite documents in regard thereto.
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