Case Law Details
ACIT Vs Uppal Jitendra Shah (ITAT Pune)
The Assessing Officer made addition of Rs.16,14,500/- (M/s Arpit Enterprises) and Rs.12,35,500/- (M/s. V.S.N. Trading Co.) disbelieving the genuineness of the credit and brought the tax u/s 41(1) of the Act. During the course of appellate proceedings before the ld. CIT(A) as well as proceedings before us, the assessee had filed credit notes establishing as to how the credit in the name of said two parties came to be made in the books of account of the assessee. The ld. CIT(A) considering the fact that the sundry creditors are not written off in the books of accounts held that the question of invoking provisions of section 41(1) does not arise. It is settled position of law that merely because the credit was outstanding for long time does not lead to conclusion that the sundry creditors are not payable. We find from the material on record that there is a material on record in the form of credit notes issued by the appellant as to how the amount became payable to these parties. This evidence was not reverted by the Department. The submission made by the assessee that these amounts were paid in the subsequent year through banking channel remained uncontroverted. The burden lies upon the Department to establish the cessation of liability before invoking the provisions of section 41(1) of the Act. Apparently, this burden was not discharged by the Revenue, inasmuch as, the amounts of sundry creditors were paid in the subsequent year then there is no scope to invoke the provisions of section 41(1) by the Assessing Officer. Thus, we do not find any illegality and perversity in the order of the ld. CIT(A) to delete the addition made u/s 41(1) of the Act.
FULL TEXT OF THE ORDER OF ITAT PUNE
These are the cross appeals filed by the Revenue as well as the assessee directed against the order of ld. Commissioner of Income Tax (Appeals)- 2, Kolhapur [‘the CIT(A)’] dated 02.06.2017 for the assessment year 2012-13.
2. Briefly, the facts of the case are that the assessee is an individual engaged in the business of wholesale trading in sugar. The return of income for the assessment year 2012-13 was filed on 06.09.2012 declaring total income of Rs.19,60,400/-. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Circle-2, Kolhapur (‘the Assessing Officer’) vide order dated 30.03.2015 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.13,73,82,925/- by holding that the assessee had failed to discharge the onus lying upon him in terms of section 68 of the Act. The Assessing Officer also brought to tax unpaid sundry creditors u/s 41(1) in respect of M/s Arpit Enterprises of Rs.16,14,500/- and in respect of M/s. V.S.N. Trading Co. of Rs.12,35,500/-. The factual background of the above additions is as under :
During the previous year relevant to the assessment year under consideration, the Assessing Officer found that the assessee had received loans from 57 parties aggregating to Rs.13,25,72,525/-. The details of the loan creditors were set out by the Assessing Officer vide page no.3 to 7 of the assessment order. The assessee was called upon to file the requisite details to prove the identity of the sundry creditors as well as creditworthiness and genuineness of the transactions. The assessee had filed complete details as evident from the assessment order as the said details were set out by the Assessing Officer in the assessment order. The Assessing Officer in order to verify the veracity of the particulars filed by the assessee had issued notices u/s 133(6) to the sundry creditors as per details furnished by the assessee. In respect of 23 parties, the notices u/s 133(6) were returned un-served and in respect of balance parties, sundry creditors had complied with the notices u/s 133(6) of the Act. Then the Assessing Officer had taken recourse to issue commission to the Jurisdictional Assessing Officer for recording the evidence from the said parties in exercise of power vested with him u/s 131(1)(d) of the Act. The findings of the respective Jurisdictional Assessing Officers in compliance to the commission were extracted by the Assessing Officer vide para 5.1 of the assessment order. Based on the findings given by the Jurisdictional Assessing Officer, the Assessing Officer observed that in many cases the sundry creditors were not traced by the Jurisdictional Assessing Officer and the sundry creditors had no capacity to advance such loans to the assessee, the Assessing Officer concluded that the creditworthiness and genuineness of the transactions had not been proved. Thereupon, the assessee was called upon by issuing a show-cause notice 16.03.2015 to prove the identity, creditworthiness and genuineness of the transactions of the loan creditors and produce the loan creditors by 23.03.2015. In response to the show-cause notice, the assessee filed a detailed submission on 23.05.2015 stating that these loans were obtained through mediator, namely, Shri Bharatbhai Sheth of Surat and the sundry creditors were not known personally to him all the loans were received through cheques and the confirmation letters were obtained and filed before the Assessing Officer along with particulars such as PAN Numbers, details of mode of receipt of loans etc and confirmation letters received from those parties were furnished. It was further submitted that if the sundry creditors had not attended enquiry, it does not lead to conclusion that the transactions are not genuine as the loans were already repaid to the said parties placing reliance on the decision of the Hon’ble Gujarat High Court in the case of DCIT vs. Rohini Builders, 256 ITR 360 (Guj.) and the decision of the Hon’ble Supreme Court in the case of CIT vs. Orissa Corpn, (P.) Ltd., 159 ITR 78 (SC). It was further stated that all the loans were repaid in the subsequent period along with interest and even Tax Deduction at Source (TDS) was also made. However, the Assessing Officer had rejected the explanation by stating that the assessee had failed to discharge the initial onus cast upon him to prove the identity, creditworthiness and genuineness of the transactions. Accordingly, he brought to tax a sum of Rs.13,25,72,525/- as unexplained cash credits u/s 68 of the Act. The Assessing Officer also brought to tax credit balance, outstanding in the name of M/s Arpit Enterprises of Rs.16,14,500/- and M/s. V.S.N. Trading Co. of Rs.12,35,500/- by observing that the notices u/s 133(6) were retuned un-served and copies of the contract notes were not filed by the assessee establishing as to how the credit entries came to be shown in the name of the above said two parties.
3. Being aggrieved by the above additions, an appeal was filed before the ld. CIT(A) contending that the Assessing Officer ought not to have made addition on account of sundry creditors loans of Rs.13,25,72,525/- as the assessee had discharged the onus lying upon him by filing the details establishing the identity, creditworthiness and genuineness of the transactions by filing the copy of returns of income, copy of the ledger extract, copy of the confirmations letter, copy of the bank accounts and other details such as PAN Numbers, the said loans were repaid along with the interest after deducting TDS. It is further contended that the outstanding credit balances reflecting in the name of M/s Arpit Enterprises and M/s. V.S.N. Trading Co. could not to be added to the total income on account of cessation of liability u/s 41(1) of the Act, inasmuch as, the said sundry creditors were repaid in the subsequent year and the proof of the payment was submitted. The ld. CIT(A) considering the information filed before the Assessing Officer such as bank statements, affidavits, IT returns, on analyzing of the evidence gathered against all 57 parties from page no.14 to 18 of assessment order observed that out of 57 loan creditors, 33 parties are from Surat, who are not personally known to the assessee since the loan was arranged by the mediator, namely, Shri Bharatbhai Sheth. The ld. CIT(A) also observed that out of 33 sundry creditors from Surat, in the case of 16 parties, the notices u/s 133(6) could not be served and even the Jurisdictional Assessing Officer could not locate such persons at given addresses. Therefore, in respect of 16 creditors, the assessee had failed to discharge the onus to prove the identity itself. Thus, the ld. CIT(A) concluded that the loans received from the said 16 parties are not genuine. Accordingly, the ld. CIT(A) upheld the addition made by the Assessing Officer. As regards to the balance 17 parties, the ld. CIT(A) considering the fact that the assessee had submitted the confirmation letters, bank statements, copies of ITRs and the fact that the summons u/s 131 could be served upon these persons, concluded that the loans received from these 17 parties are genuine. Accordingly, the ld. CIT(A) deleted the addition to the extent of Rs.9,73,72,375/- and upheld the addition of Rs.3,52,00,150/-.
As regards to the addition u/s 41(1), the ld. CIT(A) taking note of the fact that the appellant could file the credits notes, ledger accounts, bank statements and the particulars of payment made in the subsequent financial year had concluded that there is no cessation of liability and, accordingly, directed the Assessing Officer to delete the addition made on account of M/s Arpit Enterprises of Rs.16,14,500/- and M/s. V.S.N. Trading Co. of Rs.12,35,500/- u/s 41(1) of the Act.
4. Being aggrieved by that part of the order of ld. CIT(A) confirming the addition of Rs.3,52,00,150/-, the assessee is in appeal before us in ITA No.1954/PUN/2017. Being aggrieved that part of the order of ld. CIT(A) deleting the addition of Rs.9,73,75,375/-, which is against the Revenue, the Revenue is in cross appeal before us in ITA No.1893/PUN/2017.
5. We shall take up the assessee’s appeal in ITA No.1954/PUN/2017.
ITA No.1954/PUN/2017 – Assessee :
6. The assessee raised the following grounds of appeal :-
“1] The learned CIT(A) erred in confirming the addition u/s 68 in respect of the 16 loan creditors amounting to Rs.3,52,00,150/- on the ground that the assessee had failed to establish the identity, creditworthiness and the genuineness of these creditors.
2] The learned CIT(A) erred in holding that since the notices u/s 131 / 133(6) could not be served on these 16 loan creditors, the identity of these creditors remained to be establish and therefore, the A.O. was justified in making the addition u/s 68 in respect of these creditors.
3] The learned CIT(A) failed to appreciate that the assessee had submitted the confirmations of the above 16 creditors along with relevant documentary evidences in the form of return of income, bank statement, etc. etc. and therefore, there was no question of holding that the identity of these creditors was not established and accordingly, the addition made u/s 68 is not justified at all.
4] The learned CIT(A) erred in not appreciating that the loans taken from these 16 creditors amounting to Rs.3,52,00,150/- were genuine and interest was also paid on the said loans and TDS was also deducted thereon and therefore, there was no reason to hold that the loans taken from these 16 persons were non genuine.
5] The learned CIT(A) ought to have appreciated that simply because the notices u/s 131/ 133(6) could not be served on the above persons did not mean that the loans taken from them by the assessee were non genuine particularly because of the fact that the assessee had submitted their confirmations along with supporting documentary evidences and therefore, the addition made may kindly be deleted.
6] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
7. The ld. Counsel appearing on behalf of the assessee submits that in respect of 16 sundry creditors which are held to be non-genuine by the ld. CIT(A), the assessee had discharged the onus cast upon him in terms of the provisions of section 68 by filing the documentary evidence in form of return of income, bank statements, PAN Numbers of all 16 sundry creditors. Mere fact that the notices u/s 133(6) and summons u/s 131 could not be served, it does not lead to conclusion that the sundry creditors are bogus especially in the light of fact that the loans were repaid through banking channel along with interest after deduction of tax deducted at source in the subsequent assessment years. It is further submitted that the assessee is not required to explain the source of source of credits placing reliance on the decision of the Hon’ble Bombay High Court in the case of Gaurav Triyugi Singh vs. ITO, 423 ITR 531 (Bom.). It is further submitted that proviso to section 68 has been inserted by the Finance Act, 2012 w.e.f. 1.4.2013 and has no application to the assessment year prior to assessment year 2013-14.
8. On the other hand, ld. Sr. DR submits that very fact that the summons u/s 131 could not be served because of sundry creditors were not traceable by the Jurisdictional Assessing Officer at the given address by the assessee goes to prove that the identity of the sundry creditors was bogus, when identity of the sundry creditors was not proved, the question of creditworthiness and genuineness of the transactions does not arise. He further submitted that the assessee had failed to discharge the onus cast upon him in terms of the provisions of section 68 of the Act. Therefore, the addition as confirmed by the ld. CIT(A) should be sustained.
9. We heard the rival submissions and perused the material on record. The issue in the present appeal of the assessee relates to the addition of sundry creditors loans received from 16 parties. Under the provisions of section 68, if the Assessing Officer found that any sum is credited in the name of third party in the books of account maintained by an assessee during the previous year relevant to the assessment year under consideration, such sum may be charged to the income-tax as income of the assessee for that relevant previous year; if the assessee has no explanation about the nature and source of such sum and the explanation offered or explained by an assessee is in the opinion of the Assessing Officer not satisfactorily. Thus, the burden is placed on assessee to prove the credit appearing in the books of accounts maintained by the assessee. This burden has to be discharged with cogent evidence establishing the identity, creditworthiness and genuineness of the transactions. Once the assessee discharged this onus, the burden shifts to the Department to prove that the entries are not genuine and the credits represent the income of the assessee. In the light of this legal position, we need to examine the facts of the present case. In the present case, in respect of 16 creditors, admittedly, as evident from para 5 of the assessment order, the appellant had filed information such as name, address of the said parties, copies of the returns of income, copies of the ledger extract, copies of the bank statements, copies of the confirmation letters etc. Thus, the appellant had discharged the onus as required under the provisions of section 68 of the Act. Then the Assessing Officer had proceeded to verify the information filed by issuing notices u/s 133(6) which were returned un-served and then issued a commission u/s 133(1)(d) to the Jurisdictional Assessing Officer in respect of 16 parties to verify the transactions and who, in turn, had issued summons u/s 131 but returned un-served. Then the Jurisdictional Assessing Officer had submitted detailed report to the Assessing Officer stating that the summons were returned un-served. Even the Inspector of the Department deputed to locate these persons at the given address, they were not traced. Based on this conclusion, the Assessing Officer drew adverse inference that these sundry creditors are fictitious and bogus or credits represent the income of the assessee. Even the ld. CIT(A) confirmed the action of the Assessing Officer. In the light of these facts, the issue that requires to be considered by us is whether these sundry creditors can said to be genuine or not?. Indisputably, the assessee had discharged the onus lying upon him by filing all the necessary details and particulars such as PAN Numbers, copies of returns of income, bank statements etc. The mere fact that the sundry creditors had failed to respond to the notices issued u/s 131 could not justify any adverse inference being drawn against the assessee in the light of the judgement of the Hon’ble Supreme Court in the case of CIT vs. Orissa Corpn, (P.) Ltd., 159 ITR 78 wherein the Hon’ble Supreme Court held as under :-
“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 the income-tax assessees. Their index number was in the file of the revenue. The revenue, apart from issuing notices under section 131 at the instance of the assessee, 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 credit-worthy 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 further. In the premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such could arise.”
10. Reiterating the above position, the Hon’ble Apex Court in the case of Sumati Dayal vs. CIT 214 ITR 801 (SC) held as under :-
“In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if the receipt is in the nature of income, the burden of proving that it is not taxable because it falls within the exemption provided by the Act lies upon the assessee.” This decision is adequate authority for the proposition that by virtue of section 68 of the Income-tax Act the assessee is obliged to establish that amounts credited in the accounts do not represent its income; in that case the assessee’s version that she had won them through betting on horse racing in two consecutive years did not attract credibility. The Apex Court had followed its earlier decision, namely, Orissa Corpn. (P.) Ltd.’s case (supra) wherein it had held that since the assessee had given the names and addresses of the creditors, all of whom were income-tax assessees, the failure of the creditors to respond to the Department’s notices would not justify an adverse inference being drawn against the assessees. The Court also kept in perspective the fact that the documentation had also been produced by the assessee. It is obvious that the Supreme Court considered that in these circumstances the onus of proof had been discharged by the assessee. It is also palpable that the Supreme Court was of the further opinion that the Department had not discharged the burden of proof that had shifted to it, since it did nothing more than issue notices under section 131 of the Income-tax Act. Therefore, the Department ought to have made efforts to pursue these notices/creditors to determine their creditworthiness. These observations sound the death-knell for the contentions raised on behalf of the Department in the present batch of appeals.”
11. The same ratio was followed by the Hon’ble Delhi High Court in the case of CIT vs. Divine Leasing & Finance Ltd., 299 ITR 268 (Delhi). In the present case, though the Department is in possession all full particulars of loan creditors, such as bank passbook, etc, nothing more than mere issue notice u/s 131 of the Act was done by the Assessing Officer. There was no effort made to pursue the creditors. Even the Assessing Officer granted unreasonably short time to produce the sundry creditors before the Assessing Officer. Considering these circumstances, we are of the considered opinion that the Assessing Officer had not discharged the onus of burden of proving that had shifted to it that the sundry creditors are bogus and credits represent the income of the assessee. Therefore, the Assessing Officer as well as the ld. CIT(A) had failed to appreciate the facts and law in proper perspective. Accordingly, we set aside the orders of the lower authorities and direct the Assessing Officer to delete the addition of Rs.3,52,00,150/-.
12. In the result, the appeal filed by the assessee in ITA No.1954/PUN/2017 stands allowed.
ITA No.1893/PUN/2017 – By Revenue :
13. The Revenue is in cross appeal challenging the decision of the CIT(A) deleting the addition u/s 68 of Rs.9,73,75,375/- in respect of 41 creditors. The factual background relating to the above addition of sundry creditors was narrated by us in the foregoing paragraphs. From the observation made by the Assessing Officer vide para 5 of the assessment order, it would reveal that the assessee had filed details such as name, address, PAN Numbers, income-tax assessment particulars, copy of the IT returns and confirmation letters from these 41 parties. Even those parties have responded to the notices issued u/s 133(6) either through personal attendance or by filing the information sought etc and copy of the IT returns were also filed. However, the Assessing Officer drew adverse inference on the ground that the creditworthiness and capacity of these lenders to lend the money to the assessee was not proved. On appeal before the ld. CIT(A), the ld. CIT(A) considering the evidence filed before the Assessing Officer had come to the conclusion that the assessee had discharged initial onus lying upon him by proving the identity, creditworthiness and genuineness of the transactions and, accordingly, deleted the addition made u/s 68 in respect of 41 parties.
14. Being aggrieved, the Revenue is in cross appeal before us in the present appeal.
15. The ld. CIT-DR submitted that the creditworthiness and genuineness of the transactions of these parties were not proved by the assessee and, therefore, the ld. CIT(A) ought not to have deleted the addition. He further submitted that mere fact that the loans were received and repaid through banking channel is not sacrosanct and the Assessing Officer can always verify the genuineness of transactions. Thus, he pleaded that the finding given by the ld. CIT(A) should be reversed.
16. We heard the rival submissions and perused the material on record. The ground of appeal no.1 and 2 challenges the finding of the ld. CIT(A) deleting the addition made u/s 68 to the extent of Rs.9,73,75,375/-. Admittedly, in the present case, the assessee had discharged the initial onus lying upon him in terms of provisions of section 68 by filing the necessary evidence establishing the identity, creditworthiness and genuineness of the transactions. All these 41 parties had responded to the notices issued by the Jurisdictional Assessing Officer u/s 133(6) either by personal appearance or by filing the reply to the notices issued u/s 133(6) of the Act. Based on the information filed by the these sundry creditors and on the analysis of statement of the bank accounts of the respective sundry creditors, the Jurisdictional Assessing Officer had come to the conclusion that these sundry creditors have no capacity to lend the money to the assessee. The Assessing Officer had doubted the source of the credits finding place in the bank accounts of the respective creditors and, accordingly, concluded that the assessee had failed to prove the identity of the sundry creditors and creditworthiness and genuineness of the transactions and made addition u/s 68 of the Act. However, the ld. CIT(A) was of the opinion that no addition in respect of 41 sundry creditors can be made as it is found that the creditors were existing in the stated address, had confirmed the transactions, the assessee made with sundry creditors and the bank statements, IT returns of the all the sundry creditors were filed by the assessee and no adverse inference can be drawn. This very finding is under challenge before us in the present appeal of the Revenue.
We have carefully gone through the orders of the lower authorities and the evidence forming part of the record. It is not the case of the Department that the assessee had failed to discharge the onus lying upon him in terms of the provisions of section 68 of the Act. In fact, in respect of all the sundry creditors, the Assessing Officer had either received the reply in response to notice u/s 133(6) or appeared in person in response to the summons u/s 131 and confirmed the transactions. The case of the Assessing Officer was clearly narrated vide para 5 of the assessment order. On careful perusal of this case made out by the Assessing Officer it would appear that the Assessing Officer had drew a conclusion that the sundry creditors had no capacity to lend the money to the assessee based on the findings given by the Jurisdictional Assessing Officer of the sundry creditors in pursuant to the commission issued u/s 131(1)(d) of the Act. The Assessing Officer had not given any independent finding as to the creditworthiness of the sundry creditors. Even from the finding given by the Jurisdictional Assessing Officer of the sundry creditors, it is clear that the creditworthiness of such creditors were doubted merely because the balances remaining in the bank accounts after the transaction is very minimal and income shown in the return of income is very low. It is not case of the Jurisdictional Assessing Officer that they did not exist, no credit balance was available at the time of granting of loan to the assessee. Nor was it case of the Jurisdictional Assessing Officer that the cash was deposited in the respective accounts of the sundry creditors just before issuing cheque to the assessee. No adverse findings were given by the Assessing Officer as to the submissions of the assessee that the loans were repaid through banking channel with interest after deducting tax at source. What the Assessing Officer held was that the source of the source was suspected in view of the low income returned by the respective sundry creditors and the low cash balance in their respective bank accounts. Thus, there is no dispute about the identity of the sundry creditors and the genuineness and creditworthiness of the transactions. The assessee also explained as to how the loans were given to the assessee by all these creditors. The Assessing Officer only suspected the source of the source. The Hon’ble Bombay High Court in the case of Pr. CIT v. Veedhata Towers (P.) Ltd., 403 ITR 415 (Bom.), held that an assessee is required to explain only source of credit, there is no requirement under law to explain the source of source. This reasoning was reiterated by subsequently Jurisdictional High Court in the case of Gaurav Triyugi Singh vs. ITO, 423 ITR 531 (Bom.) wherein following its earlier decision in the case of Veedhata Towers (P.) Ltd. (supra) held that in view of the discharge of burden lying upon the assessee, the burden shifted to the Department and the Department could not prove or bring any material to show that the evidence filed was false and the assessee was not required to explain the source of source i.e. to explain the source of money provided by the creditors.
17. In the light of the judgement of the Hon’ble Supreme Court in the case of CIT vs. Daulat Ram Rawatmull, 87 ITR 349 (SC) and the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Agarpara Co. Ltd., 158 ITR 78 (Cal.) and also in the light of our foregoing detailed discussions on this issue, we do not find any reasoning to interfere with the order of the ld. CIT(A) though the order of the ld. CIT(A) is cryptic. Thus, the ground of appeal no.1 and 2 filed by the Revenue stands dismissed.
18. Ground of appeal no.3 challenges the finding of the ld. CIT(A) deleting the addition made u/s 41(1) of the Act. The Assessing Officer made addition of Rs.16,14,500/- (M/s Arpit Enterprises) and Rs.12,35,500/- (M/s. V.S.N. Trading Co.) disbelieving the genuineness of the credit and brought the tax u/s 41(1) of the Act. During the course of appellate proceedings before the ld. CIT(A) as well as proceedings before us, the assessee had filed credit notes establishing as to how the credit in the name of said two parties came to be made in the books of account of the assessee. The ld. CIT(A) considering the fact that the sundry creditors are not written off in the books of accounts held that the question of invoking provisions of section 41(1) does not arise. It is settled position of law that merely because the credit was outstanding for long time does not lead to conclusion that the sundry creditors are not payable. We find from the material on record that there is a material on record in the form of credit notes issued by the appellant as to how the amount became payable to these parties. This evidence was not reverted by the Department. The submission made by the assessee that these amounts were paid in the subsequent year through banking channel remained uncontroverted. The burden lies upon the Department to establish the cessation of liability before invoking the provisions of section 41(1) of the Act. Apparently, this burden was not discharged by the Revenue, inasmuch as, the amounts of sundry creditors were paid in the subsequent year then there is no scope to invoke the provisions of section 41(1) by the Assessing Officer. Thus, we do not find any illegality and perversity in the order of the ld. CIT(A) to delete the addition made u/s 41(1) of the Act. Thus, we do not find any merits in the ground of appeal no.3 filed by the Revenue, hence, the ground of appeal no.3 stands dismissed.
19. In the result, the cross appeal of the Revenue in ITA No.1893/PUN/2017 stands dismissed.
20. To sum up, the appeal of the assessee stands allowed and the cross appeal of the Revenue stands dismissed, as indicated above. Order pronounced on this 16th day of June, 2022.
