Section 68 addition by treating creditors as not genuine- Draft Submission

Addition u/s 68 of the Act by the Ld Assessing officer; deleted by the Ld. CIT (A), on seen that the assessee has full filled the requirement as per section 68 of the Act  regarding cash credits Credits.

• The AO made addition to the income of the assessee of the cash credits of Rs. 74000.00 treating the creditors as not genuine .bogus, not existing and treated the cash credits as income of the assessee.
• The reason which the AO has given is that the assessee could not produce these cash creditors in spite of various opportunities afforded to the assessee failed to produce the cash creditors but furnished reply alongwith affidavit.
• No enquiry has been made by the Assessing officer. For invocation of section 68, proper inquiry is needed. Section 68 empowers the Assessing Officer to make enquiry specifically to be satisfied regarding the cash credit. If he is satisfied that these enquiries are not genuine he has every right to add these amounts as income from other sources. The satisfaction of the Assessing Officer is the basis of invocation of the powers under section 68 and the satisfaction must be derived from relevant factors on the basis of proper enquiry. No reasonable and just enquiry has been made. Khandelwal Constructions Vs. CIT, (1997) 227 ITR 900 ,904 (Gauh.) . Cash credits could not be included in the total income of the assessee because the enquiry was not properly made. No summons was issued to the creditors as the full address and sufficient material was with the AO at the time of framing assessment. . Even correct mind authentic entries in the books of account can not without independent evidence of their trustworthiness, fix a liability upon a person.  Where the genuineness and regularity of the accounts have not been challenged, the accounts are relevant prima facie proof of the entries and the correctness thereof.
• Where, however the identity of the third party and his capability is established, the initial burden which lies upon the assessee can be said to have been discharged by the assessee. . It will not, thereafter, be for the assessee to explain further how or in what circumstances the third party obtained the money and how or why he came to make a deposit of the same with the assessee. The burden will shift on to the department to show why the assessee case can not be accepted and why it must be held that the entry ,though purporting to be in the nature of a third party still represent the income of the assessee from a suppressed source . In order to arrive at such a conclusion, however the department has to be in the possession of sufficient and adequate material. The revenue had failed to bring on record any material to prove that the deposits in the name of the credits are bogus . There can not be one general or universal proposition of law which could be the guiding yardstick in the matter, Each case has got to be decided on the facts and circumstances of that case. The surroundings circumstances to be considered must however be objective facts. , evidence adduced before the taxing authorities. , presumption of facts based on common human experience in life and reasonable conclusions. In holding a particular receipt as income from undisclosed source, the fate of the assessee can not be decided by the revenue on the basis of surmises, suspicions or probabilities .Every loan granted or taken by the assessee in regard to which person was not produced can not automatically be termed as income of the assessee. Without tangible material to suspect that the receipt was by way of income and without recording such a finding the conclusion that the cash credits was assessable as income was wholly untenable not definite . But he made addition half heartedly so that it may be income of the assessee or may not be. No definite finding has been made in the order. Order is not speaking on that front.
• Where an assessee furnishes reasonable explanation, there is no justification for accepting his explanation in part and discarding it in relation to the rest. As held in Mehta Parikh & Co. Vs. CIT ,(1956)30ITR 181 (SC)
• When an assessee comes forward with an explanation that the suppressed income as found by the AO ,is introduced in the account books as cash credits ,it should be taken as a reasonable explanation unless that explanation is shown to be false by cross examination by the AO ,
• Where the assessee explanation is rejected without making proper enquiry, the addition can not be sustained. In such a case the proper course is to remand the case for proper enquiry .As held in Devamani Atha Vs. CIT ,(1978)112 ITR 837 (Orisa) .
• How the AO has held that the entries in the books of the assessee were false. It is only presumption of the AO. No evidence is there with the AO. No explanation has been taken into account. Even not acknowledged by the AO and he framed his mind to ignore the explanation. No reasonable enquiries were made. .
• Confirmatory letter from creditors, giving their income tax file numbers, full addresses were given and the AO did not summon any of the creditors for examination. No addition can be made as held in CIT Vs. Shyam Sunder & Co. (1990) 181 ITR 187

The AO has written that after going to reply it can not be opined that the creditors are genuine creditors. Who are these persons? The full capability of the creditors has been established. It is only the presumption of the AO that he introduced cash whenever he needed it . . . The contention of the AO can not be accepted since the initial onus of establishing the identity, creditworthiness and genuineness of the transaction had been discharged by the appellant and further enquiries should have been made by the AO before arriving at a conclusion to make the addition u/s 68 of the Income Tax Act,1961 . The appellant has clearly discharged the onus of establishing the identity, genuineness and creditworthiness of the transaction. No summons were issued by the AO to the creditors and no enquiries were made by the AO  invoking the provision of section 133 (6) of the income tax Act ,1961.

The assessee was asked to produce the persons who have rendered cash credits to the assessee. The assessee could not produce these persons before the AO circumstantially as he was hesitant to disturb the persons/relatives to come to the Income tax Department for explaining source of loans etc etc. But assessee was never unable to produce theses persons. These persons are genuine, identified, close to the assessee. Initial onus was discharges by the assessee by submitting copy of confirmation of the loan duly signed, copy of income tax returns of those persons, copy of TDS certificates, copy of PAN, copy of Bank Statement etc,etc. Whatever the material could be produced by the assessee before the AO in order to discharge the burden to prove identity of the creditor, capacity/creditworthiness to advance the money and genuineness of the transaction. Now it was open to the income tax officer to issue summons u/s 131(1) of the Income Tax Act, 1961 or issue notice u/s 133(6) of the same act which was not done by the AO before making the addition u/s 68 of the Income Tax Act, 1961 which is contrary to the principle of natural justice and law. Affidavits from the creditors were also furnished by the assessee before the AO which has not been considered by the AO. The Hon’ble Court is prayed to give one more chance to produce the creditors in order to meet with the sufficiency to prove the genuineness of the creditors. Thus no addition can be made merely on the basis of rough jottings or scribblings unless these are supported with some cogent evidences that the assessee introduced cash in his books of accounts and no other creditors.

Assessee’s explanation is required with regard to the following points

Nature and its source

Law explained through judicial developments.

Identity,

Creditworthiness and

Genuineness

Identity: Best evidence is Copy of PAN Card/letter of the creditor. Other useful evidences can be voters I-card, Ration Card, Driving license, Copy of acknowledgement of Return, certificates from sarpanch of village panchayats and so on.

Credit worthiness: Copy of ITR, Balance Sheet and Profit and Loss Account, Bank Statement, evidences of holding of land and agricultural income, other evidences of availability of funds with creditor e.g. sale deed of properties etc.

Genuineness: The objective is to ensure that the transaction is not camouflaged. Once identity and creditworthiness of the creditor are established, the burden would normally be upon the A.O. to prove that the transaction is not genuine.

There is one thing more, which may be required for the satisfaction of the A.O. i.e. confirmation of the transaction by the creditor. Primarily it is duty of the assessee to arrange for confirmation of the transaction which can be filed in one or more of the following ways:

1. Duly signed confirmation by the creditor containing at least following information:

• Date of signing of confirmation.
• Confirmation of fact of transaction of giving the amount by the creditor to the assessee.
• Mode of payment i.e. through cheque/DD/Cash.
• Date of cheque/ DD its number and drawee bank, its account no. and name and address of drawee bank’s branch.
• In case of cash transaction date of transaction.
• Ostensible source of amount given.
• Nature of loan/advance/share application.
• If interest Bearing: state this vital fact.
• PAN and Place of assessment of the creditor.

2. Duly sworn and notarized affidavit from the creditor deposing on oath all these facts as stated in the confirmation.

Mehta Parekh 30 ITR 181 (SC): The contents of the affidavit can not be disbelieved without rejecting the same.

Law in this regard was laid down by a celebrated judgment of the Supreme Court in the case of CIT vs. Orissa Corporation (P) Ltd. 159 ITR 78. Under these circumstances it is not the responsibility of the assessee to enforce the attendance of these persons. Non appearance of the creditors in response to summons of the A.O. issued u/s 131 which were duly served or inaction on the part of the A.O. to issue the summons would not lead to the inference that assessee had failed to discharge the onus on his part as held in the following cases:-

• GG films vs. ITO 45 TTJ 644.
• Anil Kumar Midha vs. ITO 100 TTJ 644

Tolaram Daga V/s Commissioner of Income Tax 59 ITR 632 (Assam)

“But the position is different in regard to a sum which is shown in the assessee’s books in the name of a third party. In such a case, the onus of proof is not upon the assessee to show the source or nature of amount of the cash credit; on the other hand, the onus shifts to the department to show by some material that the amount standing in the name of the third party does not belong to that third party but belongs to the assessee. That is the principle laid down by the division Bench of this court in S. N. Ganguly’s case. There is a decision to a similar effect in an earlier case, Ramkinkar Banerji vs Commissioner of Income Tax.

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 in such a case to establish that the entry was not real but was pseudonymous.”

CIT vs Shri Ram Narain Goel 224 ITR 180 (Pun. & Har.)

“The finding of fact given by the Tribunal is based on the material on record. 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.”

Jalan Timbers vs CIT 223 ITR 11 (Gauhati)

In order to establish the fact of receipt of a cash credit as required u/s 68 of the Income Tax Act, 1961 the assessee must prove three important conditions, namely, (1) the identity of the person, (2) the genuineness of the transaction, and (3) the capability of the person giving the cash credit.

Section 68 of the Act makes it clear that in respect of a cash credit entry the explanation offered by the assessee can be rejected by the Income Tax Officer on cogent grounds. When such grounds themselves are based on no evidence, the question of presumption against the assessee does not arise.

Sona Electric Co. vs CIT 152 ITR 507(Delhi)

Section 68 of the Income Tax Act, 1961 makes it abundantly clear that a cash credit entry in the assessee’s books of accounts can be rejected by the Income Tax Officer on cogent grounds. When such grounds are themselves based on no evidence, the question of raising a presumption against the assessee does not arise.

M/s Essan Remedies Ltd. vs DCIT ITA No. 256/Del/04

In this case, all the creditors and the share contributors were assessed to income tax and their PAN numbers were also filed in their confirmations. They had also filed their statement of affairs or Balance Sheet and evidence for having filed the return of income. Moreover, there is no suggestion in the impugned order that the assets and income position exhibited in the records of the creditors / share contributors is false. Merely because they did not appear before the assessing officer in response to the summons, it cannot be concluded that the amount have to be added as the assessee’s income. The assessee had no power to enforce their attendance.

Hence the Hon’ble court is prayed to delete the entire addition of Rs.74000.00 on account of cash credit in the books of the assessee.

The observations made by the Ld. CIT (A) , Faridabad were as under

During the course of appellate proceedings, the appellant not only provided evidence in support of the identity of the creditors but more importantly submitted documents to substantiate the creditworthiness of all the 4 creditors by way of copy of PAN and income tax return. By submitting these evidences, the appellant has been able to discharge his onus regarding the creditworthiness of these 4 lenders. Thus the addition made by the AO on this issue is deleted and hence this ground of appeal is allowed.

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