Case Law Details

Case Name : Dwarikadhish Sugar Industries Vs Income-tax Officer (ITAT Lucknow)
Appeal Number : IT Appeal No. 115 (LUCK.) OF 2011
Date of Judgement/Order : 07/05/2012
Related Assessment Year : 2005-06
Courts : All ITAT (7355) ITAT Lucknow (92)

IN THE ITAT LUCKNOW BENCH (THIRD MEMBER)

Dwarikadhish Sugar Industries

V/s.

Income-tax Officer

IT APPEAL NO. 115 (LUCK.) OF 2011

[ASSESSMENT YEAR 2005-06]

MAY 7, 2012

ORDER

Sunil Kumar Yadav, Judicial Member 

This appeal is preferred by the assessee against the order of the ld. CIT(A) on various grounds which are as under:-

1. The Ld. A.O. lower authorities have erred on facts in making/sustaining additions of Rs. 3,30,000/- to the appellant’s income u/s 68 of the IT. Act, 1961, being the amount deposited by under noted persons:-

(i)   Sri Diwas Gupta Rs. 2,00,000/-
(ii)  Smt. Ruchira Gupta Rs. 1,30,000/-

2. On the undernoted facts & in the peculiar circumstances of the present case, the Ld. Lower authorities were not at all justified in making/sustaining addition of Rs. 2,00,000/- deposited by Sri Diwas Gupta as unexplained cash credit u/s 68 of the IT. Act, 1961 in the present case:-

 (i)  That Sri Diwas Gupta had submitted his confirmation that he had given a sum of Rs. 3,50,000/- as loan to the appellant vide cheque No.863263 from his Savings Bank A/c No. 10729 with Allahabad Bank, Lakhimpur Kheri.

(ii)  That a copy of confirmation of statement of account of Sri Diwas Gupta duly signed by him was also placed before the Ld. A.O. in the course of assessment proceedings.

(ii)  That Sri Diwas Gupta is regularly assessed to Income Tax at PAN: AGSPG3966H by A.O. Range 2, Lakhimpur Kheri.

(iii)  That a copy of the bank statement of Allahabad Bank, Lakhimpur Kheri showing the debits aggregating to Rs. 3,50,000/- in his bank a/c was also submitted before the Ltd. A.O.

(iv)  That Sri Diwas Gupta was also produced before the Ld. A.O. on 20/12/2007 who on statement on oath confirmed of giving loan to appellant by accounts payee cheque of Rs. 3,50,000/- detailed above PAN letter, copy of income tax return acknowledgement & income statements.

(v)  That the said Sri Diwas Gupta who was produced before Ld A.O. has confirmed about his source of income and financial capacity.

(vi)  That after submission of above documents and statement on oath no further proper opportunity was provided to the appellant to comply with the reason because of which the ‘Ld . A.O.’ proposed to make the said addition.

(vii)  That the appellant had discharged its onus by proving the identity of the person, the genuineness of the transaction as well as the creditworthiness of the depositor.

(viii)  On the facts stated above, the addition made by the Ld. A.O. is not justified & may kindly be ordered to be deleted.

3.  On the under noted facts & in the peculiar circumstances of the present case, the Ld. A.O. was not at all justified in making addition of Rs. 1,30,000/- deposited by Smt. Ruchira Gupta as unexplained cash credit u/s 68 of the I.T. Act, 1961 in the present case:-

 (i)  That Smt. Ruchira Gupta had submitted his confirmation that he had given a sum of Rs.1,80,000/- as loan to the appellant vide cheque No. 216793 from his Savings Bank A/c No.213379 with Allahabad Bank, Lakhimpur Kheri.

 (ii)  That a copy of confirmation of statement of account of Sri Ruchira Gupta duly signed by him was also placed before the Ld. A.O. in the course of assessment proceedings.

(iii)  That Sri Ruchira Gupta is regularly assessed to Income-tax at PAN: AGSPG3967G by A.O. Range 4, Lakhimpur Kheri.

(iv)  That a copy of the bank statement of Allahabad Bank, Lakhimpur Kheri showing the debit of Rs. 1,80,000/- in her bank a/c was also submitted before the Ld. A.O.

  (v) That Smt. Ruchira Gupta thru her spouse Sri Manoj Kumar Gupta was also produced before the Ld. A.O. on 20/12/2007 who on statement on oath confirmed of giving loan to appellant by accounts payee cheque of Rs. 1,80,000/- detailed above PAN letter, copy of income-tax return acknowledgement & income statements.

 (vi)  That the said Smt Ruchira Gupta thru her spouse Sri Manoj Kumar Gupta who was produced before Ld A.O. has confirmed about his source of income and financial capacity,

 (vii)  That after submission of above documents and statement on oath no further proper opportunity was provided to the appellant to comply with the reason because of which the ld . A.O.’ proposed to make the said addition.

 (viii)  That the appellant had discharged its onus by proving the identity of the person, the genuineness of the transaction as well as the credit worthiness of the depositor.

(ix)  On the facts stated above, the addition made by the Ld. A.O. is not justified & may kindly be ordered to be deleted.

5. That the A.O. erred on facts and in law in not allowing the appellant proper and sufficient opportunity to have its say or make necessary compliance of the reasons relied by him in making various additions to the appellant’s income in the present case.

6. The income assessed and interest charged are highly excessive and contrary to the facts, law and principles of natural justice and fair play.

7. The appellant prays for permission to modify and / or add any other ground or grounds of appeal as the circumstances of the case might require or justify.

2. This appeal came up for hearing on 9.11,2011, but none appeared on behalf of the assessee. On perusal of record, it is noticed that on the last date of hearing i.e. on 10.10.2011 when the matter was adjourned to 9.11.2011, the Id. counsel for the assessee has taken note of the date of hearing. Despite having knowledge of the date of hearing, none appeared on behalf of the assessee. We, therefore, had no option but to hear the appeal ex parte qua the assessee. Accordingly, the Revenue was heard. The ld. D.R. emphatically placed reliance upon the order of the ld. CIT(A) on all the impugned issues.

3. We have carefully examined the order of the ld. CIT(A) and we find that the ld. CIT(A) has adjudicated all the impugned issues minutely and in detail in his order. Since we find no infirmity in the order of the ld. CIT(A), we confirm his order.

4. In the result, appeal of the assessee is dismissed.

B.R. Jain, Accountant Member – Unable to agree with the order proposed by learned Judicial Member, I proceed to write my own order as under.

2. Having heard learned D.R. ex parte qua assessee and upon perusal of entire material on record, I find that the appellant has taken argumentative grounds assailing the order dated 03/01/2011 passed by learned CIT(A)-I, Lucknow whereby he has sustained addition of unsecured loan amounting to Rs. 2,00,000/- out of Rs. 3,50,000/- raised as loan from Shri Diwas Gupta and sustenance of another addition of Rs. 1,30,000/- out of unsecured loan amount of Rs. 1,80,000/- raised from Smt. Ruchira Gupta. These loans were found credited in the books of account maintained by the appellant for his business of Khandsari Sugar Factory carried in the name of Dwarikadhish Sugar Industries and no defects have been found in the books of account maintained by the appellant. No disallowance is shown to have been made for the interest payable on the aforesaid loans taken by the assessee. The assessment has been completed on the basis of books of account maintained by the appellant.

3. In so far as sustenance of addition of Rs. 2,00,000/- out of the total amount of loan raised for Rs. 3,50,000/- from Shri Diwas Gupta, the appellant had placed on assessment record a confirmation of loan to the appellant given by cheque no. 863263 drawn on his Savings Bank account No.107229 with Allahabad Bank, Lakhimpur Kheri. A copy of statement of account as appearing in the books of the appellant was also confirmed by the loan creditor. The said creditor is shown to have been assessed to income tax at PA Number AGSPG 3964H by the Assessing Officer, Range-2, Lakhimpur Kheri. The copy of the bank statement of the creditor with Allahabad Bank, Lakhimpur Kheri from where the cheque for advancing loan to the appellant was issued, was also laid on assessment record. The appellant had also produced the said loan creditor Shri Diwas Gupta before Assessing Officer on 20/12/2007 who in his statement before the Assessing Authority made on oath had confirmed giving of loan of Rs. 3,50,000/- to the appellant by account payee cheque and had also furnished PAN letter, copy of acknowledgement of income tax returns and income statement etc. He is thus found to have given reasonable explanation about the source of income and financial capacity to establish creditworthiness of the amount so advanced as loan to the appellant. It is also not the case of Revenue that facts of source and availability of cash with the loan creditor are in the knowledge of the appellant In this view of the background and documentary information laid on record, the appellant can be said to have discharged the onus that lay upon him u/s 68 of the Act to prove nature and the source of the credit. The Assessing Officer, however, without bringing any contrary material on record and without requiring appellant to adduce further evidence, has failed to discharge the onus that had shifted on the Revenue and unilaterally accepted only part amount to the extent of Rs. 1,50,000/- and added the balance of Rs. 2,00,000/- taking the same to be assessee’s own income routed through the bank account of Shri Diwas Gupta stating that the creditor in his statement before the Assessing Officer did not substantiate the sufficiency of the cash availability out of receipts from freelancing activities and retirement benefits from Bhagwati Sugar Industry by bringing any documentary evidence in that respect. The Assessing Officer is thus found to be venturing into the source of source or origin of origin of the money available in the account of the loan creditor even though the bank account from which the money had come to the account of the appellant was in the name of the loan creditor and stood owned by him besides admitting that the loan made is real to the appellant. The transaction of loan of Rs. 3,50,000/- is a single and inseparable transaction and the loan so obtained is found genuinely raised by the appellant, whereas on the basis of suspicion only the Assessing Officer rejected only a part of such loan amount to the extent of Rs. 2,00,000/-. Furthermore an amount of interest of Rs. 2,014/- on the loan amount of Rs. 3,50,000/-shown as payable at assessee’s paper book page 25 stands allowed as deduction for computing income of the appellant from business. The Assessing Officer also did not have any material on record to show that the appellant had some other source of income which can be said to have not been disclosed to the Revenue or that could lead to any inference that the appellant has routed his own money through the bank account of Shri Diwas Gupta for obtaining loan and crediting the same in his books of account whose correctness has not been doubted by the Assessing Officer himself. Merely because there was cash deposit in the bank account of the loan creditor that by itself did not give jurisdiction to the Assessing Authority or the learned C1T(A) to draw any adverse inference. The learned CIT(A) also without appreciating the legal position in right perspective and putting blinkers to the glaring facts and documents that appellant had brought on record to substantiate identity, creditworthiness and genuineness of the transactions, proceeded to hold that the genuineness of the transaction or creditworthiness of the transaction in this case has not been established and thus erred in reaching findings contrary to facts and sustained the addition of Rs. 2,00,000/- without any justifiable reason or cause of such a genuinely raised loan by the appellant.

4. In the case of Smt. Ruchira Gupta also the appellant had submitted a confirmation stating that she has given a loan of Rs. 1,80,000/- vide cheque No. 216793 drawn on her Savings Bank Account No. 213379 with Allahabad Bank, Lakhimpur Kheri. She has also given a confirmed statement of account as appearing in the books of the assessee and the same was laid on the record of the Assessing Authority. The assessee has also brought on record that Smt. Ruchira Gupta has regularly been assessed to tax at PA Number AGSPG 3969G by the Assessing Officer, Range-4, Lakhimpur Kheri and copy of her bank account from where the aforesaid cheque was issued was also laid on assessment record. Her Husband Shri Manoj Gupta appeared on 20/12/2007 before the Assessing Authority and made a statement on oath that his wife has given loan to the appellant amounting to Rs. 80,000/- and also placed on record a copy of PAN letter, copy of acknowledgement of income-tax return and income statement etc. to substantiate the genuineness of the loan given to the assessee and established her source of income and financial capacity in that regard. The creditor also explained that the loan has been advanced out of realization of her old loans from Bhagwati Sugar Industries and Annapurna Bhandar. The creditor is thus found to have given reasonable explanation about the source of income and financial capacity to establish creditworthiness of the amount so advanced. It is also not the case of Revenue that the facts of source and availability of cash with the loan creditor are in the knowledge of the appellant. In this view of the background and documentary information laid on record, the appellant can be said to have discharged the onus that lay upon him u/s 68 of the Act to prove nature and the source of the credit. The Assessing Officer however, without bringing any contrary material on record and without requiring the appellant to adduce further evidence has failed to discharge the onus that had shifted to Revenue and unilaterally accepted only a part amount to the extent of Rs. 50,000/-and added the balance of Rs. 1,50,000/- taking the same to be assessee’s own income routed through bank account of Smt. Ruchira Gupta stating that the creditor could not furnish documentary evidence to substantiate cash deposit in her bank account that it was a recovery of loan from Bhatwati Sugar Industries and Annapurna Bhandar. The Assessing Officer is thus found to have ventured into the source of source or origin of origin of the money available in the account of the loan creditor even though the bank account from which the money had come to the account of the appellant was in the name of the loan creditor and stood owned by her besides confirming that the loan made to the appellant is real. Furthermore, the transaction of the loan of Rs. 1,80,000/- was a single and inseparable transaction and the loan so given is found given genuinely to the appellant whereas on the basis of suspicion only the Assessing Officer rejected only a part of such loan amount to the extent of Rs. 1,30,000/- despite the fact that the whole amount of Rs. 1,80,000/- was interest bearing loan on which interest of Rs. 1,213/-as is apparent from the assessee’s paper book page 35 was payable as on 31/03/2005 and stood allowed as deduction for computing business income of the assessee. The Assessing Officer thus had no material on record to show that the appellant had some other source of income which can be said to have not been disclosed to the Revenue or that could lead to inference that the appellant has routed his own money through the bank account of Smt. Ruchira Gupta for obtaining loan and crediting the same in his books of account whose correctness has not been doubted by the Assessing Officer himself. Merely because there were cash deposits in the account of loan creditor, that by itself could not give jurisdiction to the Assessing Authority or to the learned CIT(A) to draw any adverse inference. The learned CIT(A) also without appreciating the legal position in right perspective and putting blinkers to the glaring facts and documents that appellant had brought on record to substantiate identity, creditworthiness and genuineness of the transactions, proceeded to hold that the genuineness of the transaction or creditworthiness of the transaction in this case has not been established and thus erred in reaching findings contrary to facts and sustained the addition of Rs. 1,30,000/- without any justifiable reason or cause of such a genuinely raised loan by the appellant.

5. The aforesaid findings are supported by the legal position decided by various courts and the Tribunal as under:

5.1 Hon’ble Assam High Court in the case of Nabadwip Chandra Roy v. CIT [1962] 44 ITR 591 (Assam) and as also been followed in the case of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam) at page 638 states 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.”

5.2 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 especial 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 especial 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.”

5.3 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.”

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 v. ACIT [2008] 6 DTR (All) (Trib) 191 at page 207 & 208 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 construabte 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.”

5.4 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.

5.5 In the case of Nemi Chand Kothari v. CIT [2003] 264 ITR 254/[2004] 136 Taxman 213 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 alongwith 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.”

** ** **

“What, thus, transpires from the above discussion is that while 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.”

** ** **

“…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 welt 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……….”

** ** **

“In other words, though under section 68, an Assessing Officer is free to show, with the help of the inquary 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 ………”

** ** **

“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 Agarwalia. 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 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.”

5.6 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.”

5.7 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. Jauharimal Goel [2005] 147 taxman 448 (All.) 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 Corporation 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 Labh Chand Bohra v. ITO [2010] 189 Taxman 141 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 judgement of Hon’ble Supreme Court, in Dauiat 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 judgment 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 Dauiat 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)”

5.8 There is no responsibility on the assessee to show that the money has come from the accounted sources of the lender. Reference may 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 (MP).

5.9 Furthermore, the Hon’ble Punjab & Haryana High Court also in CIT v. Ram Narain Goel [1997] 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.”

5.10 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 (Guj) 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.

5.11 This Bench of the Tribunal in the case of Dr. Anil Kumar Chandani v. Income-tax Officer in I.T.A. No.23/Lkw/10 and Seth L. M. Hospital v. Income-tax Officer in I.T.A. No.66/Lkw/10 vide its order dated 17/11/2011, on the similar facts where the appellant has discharged the onus that lay upon him, has deleted the addition made u/s 68 of the Act.

5.12 In view of the findings that the appellant has proved the identity, creditworthiness and genuineness of both the loan credit transactions and had discharged the onus to prove nature and source as envisaged by Section 68 of the Act and having regard to the consistent view taken by various High Court and the Tribunal thereon, I do not find any justification in the order of learned CIT(A) in sustaining the additions. Setting aside his findings and decision, I allow the grounds raised in appeal.

5.13 In the result the appeal by assessee stands allowed.

Third Member Order


D. Manmohan, Vice-President (As a Third Member) – Addition of Rs. 3,30,000 made by the AO under section 68 of the : Act having been confirmed by the learned CIT(A), assessee preferred an appeal before the Appellate Tribunal. The learned Judicial Member upheld the order of the learned CIT(A) whereas the learned Accountant Member dissented from the order passed by the learned Judicial Member and they have also framed separate questions for opinion of the Third Member.

2. When the questions were placed before the Hon’ble President he was pleased to nominate me as Third Member with a direction to reframe the question, if necessary, to bring out the point of difference ” and to resolve the difference accordingly.

3. Both the parties have agreed that the following reframed question would focus the issue in dispute in its correct perspective”

“Whether on the facts and in the circumstances of the case, the addition made under section 68 of the Act be confirmed or deleted?”

4. The facts necessary for the disposal of the matter are set out in brief. The assessee firm is engaged in the business of manufacture of sugar. In respect of the previous year relevant to AY 2005-06 assessee declared a total income of 71,31,930/-. Upon taking up the case for scrutiny the AO examined the books of account, etc. wherein it was noticed that the assessee maintained books of account, vouchers, etc. which were also audited. They were examined on test check basis and the gross profit and net profit was compared to the results of the previous years. The AO noticed that the profit declared for this year is comparatively positive and hence it does not call for adverse comments. In other words, the trade results of the assessee are not disturbed.

5. However, the AO noticed that the assessee obtained loans of 73,50,000/- from Shri Diwas Gupta and 1,80,000/- from Smt. Ruchira Gupta. He further noticed that in the SB A/c of Shri Diwas Gupta cash deposits were made from 21.06.2004 to 30.02.2005 totalling to 3,25,000/- and against the accumulated balance of 3,62,817/-, a cheque of 3,50,000/- has been cleared on 26.02.2005, which is the loan advanced to the assessee firm. Similarly, in the case of Smt. Ruchira Gupta, cash deposits of 1,30,000/- have been made to her SB A/c of Allahabad Bank on different dates between 06.08.2004 to 18.01.2005 and from the accumulated balance Smt. Ruchira Gupta advanced a sum of 1,80,000/-. When asked about the source of the cash deposits, Shri Diwas Gupta stated that the amount received upon retirement from Bhagwati Sugar Mills, where he was a partner earlier, and also out of the income received by him as freelancer, were deposited in the bank account. His claim of receipts from free lancer and on retirement from Bhagwati Sugar Mills were not accepted by the AO, though he admitted that he withdrew a sum of 2,13,000/- from his SB A/c. during the period June 2004 and February 2005. He observed that Shri Diwas Gupta did not have the capacity to advance a sum of 3,50,000/-. However, capacity of Shri Diwas Gupta was accepted to the extent of 1,50,000/- and the balance was sought to be added under section 68 of the Act on the ground that it is assessee’s own income routed through the bank account of Shri Diwas Gupta.

6. Similarly he disbelieved the statement of Smt. Ruchira Gupta with regard to the loan of Rs. 1,80,000/- though provisions of section 68 were invoked to make an addition of Rs. 1,30,000/- only on the ground that assessee’s own income was routed though the bank account of Smt. Ruchira Gupta.

7. The learned CIT(A) affirmed the order of the AO without considering the contention of the assessee that the creditors are regularly assessed to income tax and the amount was advanced by them through cheque and hence no case was made out by the AO to make the impugned addition.

8. Further aggrieved, assessee preferred an appeal before the Tribunal. None appeared on behalf of the assessee during the course of hearing and hence the Tribunal chose to dispose of the appeal ex parte, qua assessee, though on merits. The learned Judicial Member observed that the assessee raised many grounds which are more in the form of arguments and he extracted the relevant grounds wherein it was contended that the creditors were regularly assessed to income-tax, copy of the bank statements submitted before the AO and the creditors were produced before the AO, who on statement of oath confirmed having given the loan (in the case of Smt. Ruchira Gupta Shri Manoj Kumar Gupta, husband of the creditor appeared before the AO, who confirmed on oath that she has given the loan to the assessee by account payee cheque). It was contended that, in the peculiar circumstances, the assessee discharged its onus by proving the identity of the persons, genuineness of the transactions as well as creditworthiness of the depositors.

9. The learned Judicial Member observed that the learned CIT(A) has adjudicated the impugned issue minutely and therefore no interference is called for.

10. However, the learned Accountant Member passed a separate order wherein he highlighted that there is no basis for invoking provisions of section 68 of the Act since the assessee has proved the identity, genuineness and creditworthiness of the creditors and the AO had, in fact, admitted part of the sum as loan received from the creditors and thus he was not justified in assuming that only a part of such loan was not given by the creditors. Furthermore, interest on the loan amount was shown as payable in assessee’s books and it was allowed as deduction which shows that the factum of taking loan from the aforementioned creditors was not disputed by the AO. The learned Accountant Member further noticed that the AO did not have any material on record to show that the assessee had some other source of income which can be said to have not been disclosed to the Revenue so as to draw an inference that the assessee has routed his own money through the bank account of the creditors. He observed that the assessee having discharged the initial burden placed upon it by proving the identity, genuineness and creditworthiness of the creditors, it is not for the assessee to prove the source of income and thus he dissented from the view taken by the learned Judicial Member; under section 106 of the Evidence Act an assessee cannot be expected to prove such facts which are not within his personal knowledge and which are within the knowledge of a third party (the creditors herein). He also observed that the expression “may”, used in section 68 of the Act, gives discretion to AO to make an addition only in deserving cases; even in an unlikely event of non-acceptance of the explanation with regard to creditworthiness, the impugned amount need not automatically be treated as, deemed income of the assessee unless there is some material on record to show that assessee has earned some other income which could have been routed through the bank accounts of the third parties. In his opinion the impugned addition made under section 68 of the Act deserves to be set aside and thus he has dissented from the view taken by the learned Judicial Member.

11. Therefore a reference was made to the Hon’ble President under section 255(4) of the Income-tax Act, 1961 to nominate a Third Member to resolve the difference of opinion. Thus the matter was listed before me.

12. I have heard the learned counsel, appeared on behalf of the assessee, as well as the learned D.R. in this regard and carefully perused the record. The learned counsel adverted my attention to pages 25 and 35 of the paper book to submit that the assessee paid interest on the loan advanced by the aforementioned two persons and the same was accepted by the AO. If the interest paid is accepted as deduction it has to be assumed that the loan was given by the respective parties and if there is any dispute with regard to the source from which the third party has given the loan, addition can, at best, be made in the hands of the third party; unsatisfactory explanation by third parry cannot be the sole basis for making an addition in the hands of the assessee under section 68 of the Act. In the present case section 106 of the Evidence Act comes to the aid of the assessee inasmuch as a person can be required to prove such facts which are within his personal knowledge and not otherwise. The learned counsel admitted that in the P & L Account the gross interest payable was debited and bifurcation was not available but the fact remains that no disallowance was made referable to pro rata interest on the amount disallowed by the AO. He also adverted my attention to page 33 of the paper book to submit that in the statement given by Shri Diwas Gupta it was stated that he had earned income as a freelancer and reflected such income in his income tax returns filed. He has also stated that he maintains a simple life and resides in the ancestral house. Similarly the amount received by Smt. Ruchira Gupta was also explained in the statement given by her husband.

13. It could thus be seen that the source of deposits was explained by the creditors and amount was advanced through their respective bank accounts. Under the circumstance the assessee is not supposed to establish the source of source. It was also contended that in the case of Shri Diwas Gupta a single cheque for Rs. 3,50,000/- was given by the creditor. Acceptance of a part of the amount indicates that the identity and genuineness of the creditor is not in dispute and there is sufficient explanation for creditworthiness of the creditor. Similarly in the case of Smt. Ruchira Gupta a single cheque was given for a sum of Rs. 1,80,000/- out of which Rs. 50,000/- was accepted which also shows that even the creditworthiness is explained by the creditor. In fact in the case of Smt. Ruchira Gupta a loan of Rs. 5,00,000/- given to Shree Annapurna Bhandar was stated to have been returned on 29.01.2005 and the AO could have examined the correctness of the statement instead of making an addition on mere suspicion. The learned counsel adverted my attention to page 2 of the assessment order to highlight that the AO examined the books of account and found the trade results to be correct and there is nothing on record to suggest that the assessee had any other source of income which could have been routed through the creditors in the form of loan. Such being the case the learned Judicial Member was not justified in holding that provisions of section 68 of the Act can be invoked. He thus strongly relied upon the order passed by the learned Accountant Member. He has also referred to a separate paper book filed by the assessee which contains detailed arguments which were taken note of by the learned Accountant Member.

14. On the other hand, the learned D.R. submitted that the assessee had at no point of time submitted that it had paid interest on the loans. At any rate the assessment order is silent on the issue. Therefore, when the AO has not specifically considered availability of interest, mere non-disallowance, if any, cannot be made the basis to highlight that the loans are genuine. He also submitted that section 68 of the Act is a deeming provision and the Legislature in its wisdom deems cash credits in the books as unexplained i.e., prima facie burden is on the assessee to prove not only the identity and genuineness of the creditors but also the creditworthiness of the creditors. The initial onus placed upon the assessee was not discharged in the instant case. In fact none appeared on behalf of the assessee before appellate Tribunal during the course of hearing the appeal by the Division Bench. He thus strongly relied upon the order passed by the leaned Judicial Member.

15. I have carefully considered the rival submissions and perused the record. At the outset it may be noticed that the AO has given a categorical finding that the trade results of the assessee are correct, which implies that the assessee has not earned any additional income from the sugar business. It is also necessary to notice that the assessment was completed on 31.12.2007 whereas the details of the credits were called for vide letter dated 14.12.2007 and the case was fixed for hearing on 18.12.2007. Assessee produced five persons, whose statements were taken. Vide order sheet entry dated 18.12.2007 the counsel of the assessee was required to produce Shri Madhuresh Gupta, Managing Partner of the firm, who appeared on 20th December and his statement was taken on that day. At that stage the case was adjourned to 27.12.2007 and the assessee was called upon to produce the creditors to prove the source of deposits and host of other details. It appears that the assessee was expected to produce such information within 48 hours. Therefore on 29.12.2007 assessee addressed a letter to the Income-tax Officer, Range 2(1), Lucknow, wherein it was submitted that in the case of Shri Diwas Gupta and Smt. Ruchira Gupta, details of their income tax returns, etc. were produced and because of short notice any further information can be obtained by the AO.

16. The fact that the AO had accepted part of the loans indicates that the AO not only accepted the identity and genuineness of the creditors but also the creditworthiness of the creditors. However, he chose to disallow a part of the loan without bringing on record any material to show that the assessee had any other source of income which could have been routed in the from of loan given by a third party. The fact that the assessment was completed in hurry is apparent because the investigation commenced on 18.12.2007 and the assessment came to be made on 31.12.207. The creditors have explained the source of their deposits which in effect means that the sources were explained by the creditors. The AO has not pointed out how the explanation is not convincing and merely proceeded to invoke provisions of section 68 of the Act, that too for a part of the loan. Since the assessment was made in hurry it is not specifically mentioned as to whether the interest on the loan was allowed or not but the fact remains that the relevant material placed before the Bench indicates that the assessee claimed interest payable on their loans and there was no specific disallowance in the assessment order which implies that the interest was allowed by the AO. Thus. considering the overall circumstances of the case, I am of the view that the learned Accountant Member was justified in holding that the initial onus placed upon the assessee stood discharged in the instant case and in the absence of any material to prove that the source explained by the creditors is not genuine the AO was not justified in calling upon the assessee to prove the source of source. I therefore agree with the view taken by the learned Accountant Member and answer the question accordingly.

17. The matter will now be placed before the regular Bench for passing consequential order in accordance with the majority decision.

ORDER

Sunil Kumar Yadav, Judicial Member

As per majority view, the order of the ld. CIT(A) is set aside and the addition made under section 68 of the Income-tax Act, 1961 of Rs. 3.30 lakhs is hereby deleted.

2. In the result, appeal of the assessee is allowed.

Download Judgment/Order

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