2000 (9) TMI 204 - AT - Income Tax

Unexplained cash credits - discrepancies in the explanations provided by the creditors regarding the sources of their deposits - HELD 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 AO under s. 131 by the alleged creditors will not be sufficient to draw an adverse inference against the assessee. In the case of six creditors who appeared before the AO and whose statements were recorded by the AO they have admitted having advanced loans to the assessee by account payee cheques and in case the AO 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 u/s 69. See ORISSA CORPORATION PVT. LIMITED 1986 (3) TMI 3 - SUPREME COURT The phraseology of s. 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 Hon ble Supreme Court while interpreting similar phraseology used in s. 69 has held that in creating legal fiction the phraseology employs the word may and not shall . Thus 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 in the case of CIT vs. Smt. P.K. Noorjehan 1997 (1) TMI 6 - SUPREME COURT AO has not disallowed the interest claimed/paid in relation to these credits in the assessment year under consideration or even in the subsequent years and TDS has been deducted out of the interest paid/credited to the creditors we are of the opinion that the Departmental authorities were not justified in making the addition of which is directed to be deleted. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the addition of Rs. 12,85,000 to the assessee's income on account of unexplained cash credits under section 68 of the Income Tax Act was justified;

(b) Whether the assessee discharged the onus of proving the identity, capacity, and genuineness of the creditors and the loan transactions;

(c) Whether the failure of some creditors to appear before the Assessing Officer (AO) or respond to summons under section 131 could lead to adverse inference against the assessee;

(d) Whether the Department was justified in treating the loans as bogus and the amounts as undisclosed income of the assessee;

(e) The scope and interpretation of section 68 regarding unexplained cash credits and the extent of the assessee's burden to explain the source of such credits;

(f) The applicability of relevant judicial precedents on the burden of proof and treatment of unexplained credits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Justification of addition under section 68 and discharge of onus by the assessee

The legal framework under section 68 mandates that when any sum is credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, the AO may treat that sum as the assessee's income. The burden initially lies on the assessee to prove the identity of the creditor, the capacity of the creditor to advance the amount, and the genuineness of the transaction.

The AO had made the addition of Rs. 12,85,000 on the ground that the loans were unexplained cash credits. The AO's reasoning was based on inquiries and examination of creditors, where in many cases the creditors either failed to appear or their explanations regarding the source of cash deposits in their bank accounts were found unsatisfactory. The AO also noted that some creditors had bank accounts but had deposited large sums in cash shortly before issuing cheques to the assessee, indicating possible accommodation entries. The CIT(A) upheld the AO's action, emphasizing the assessee's failure to prove the creditors' capacity and genuineness of the loans.

The assessee contended that all loans were received by account payee cheques from the creditors' bank accounts, and interest payments and repayments were also made by account payee cheques. The assessee furnished confirmations of loans along with complete addresses, GIR/PAN numbers, and copies of assessment orders or returns of the creditors. It was argued that the assessee is only required to prove the source of the credits in its books, not the source of the creditors' funds. The assessee also highlighted that the AO did not disallow the interest claimed on these loans, which was paid and allowed as business expenditure, and TDS was deducted on interest payments in some cases.

The Tribunal examined the evidence and found that the assessee had indeed furnished complete details of the creditors, including their identity and capacity, through confirmations, PAN/GIR numbers, and assessment orders or returns. The receipt and repayment of loans, as well as payment of interest, were made by account payee cheques, reflecting genuine banking transactions. The Tribunal held that the assessee had discharged the initial onus under section 68.

Regarding the genuineness of the cash deposits in the creditors' bank accounts, the Tribunal reiterated the principle established by the Bombay High Court in Orient Trading Co. vs. CIT that the assessee cannot be compelled to explain the "source of the source." The genuineness of the credits in the assessee's books was established by the banking transactions and confirmations.

Issue (c): Effect of creditors' failure to appear before the AO or respond to summons

The AO issued summons under section 131 to some creditors, but several did not appear or the summons were returned unserved. The AO and CIT(A) treated this as a basis to disbelieve the genuineness of the loans. The assessee argued that mere non-compliance with summons by creditors cannot be a ground to treat the credits as bogus.

The Tribunal relied on the Supreme Court decision in CIT vs. Orissa Corporation, which held that when the assessee furnishes complete details of creditors, the burden shifts to the Department to establish the lack of creditworthiness. Non-compliance of summons by creditors alone is insufficient to draw adverse inference against the assessee. The Tribunal observed that the AO did not establish lack of creditworthiness or capacity of the creditors beyond the non-appearance and unsatisfactory explanations regarding cash deposits. Therefore, the addition could not be sustained on this ground.

Issue (d): Whether the loans could be treated as bogus and amounts as undisclosed income

The Department contended that the cash deposits in creditors' accounts shortly before issuance of cheques to the assessee indicated accommodation entries and that some creditors filed returns under amnesty schemes to create false evidence of income-tax compliance. The Department relied on precedents supporting addition of unexplained credits where the assessee fails to prove genuineness.

The Tribunal, however, found that the AO did not make any addition on account of interest payments, which were allowed as business expenditure, and TDS was deducted on interest in some cases. This indicated recognition of the genuineness of the transactions. The Tribunal held that the circumstantial evidence of cash deposits in creditors' accounts was insufficient to treat the loans as bogus without further independent proof. The proper course, if the Department doubted the creditors' source of funds, was to assess the creditors for unexplained investments under section 69, not to add the amounts as income of the assessee.

Issue (e): Interpretation of section 68 and the extent of the assessee's burden

The Tribunal referred to the wording of section 68, which uses the term "may" charge the unexplained credit as income, not "shall," indicating discretion. The Supreme Court in CIT vs. Smt. P.K. Noorjehan interpreted similar language in section 69 to mean that unsatisfactory explanation does not automatically result in addition. The Tribunal emphasized that the addition under section 68 is discretionary and requires the AO's satisfaction after considering all facts.

Given the evidence of identity, capacity, genuineness of transactions, and the absence of any addition on interest, the Tribunal found that the AO and CIT(A) erred in making the addition.

Issue (f): Applicability of precedents on burden of proof and unexplained credits

The Tribunal considered various judicial precedents relied upon by both parties, including CIT vs. Orissa Corporation, CIT vs. Daulat Ram Rawatmal, Sarogi Credit Corpn. vs. CIT, and others. The principles established were that the assessee must prove identity and capacity of creditors and genuineness of transactions, but is not required to prove the source of the creditors' funds beyond reasonable satisfaction. Non-appearance of creditors or unsatisfactory explanations by them do not ipso facto justify addition against the assessee if the assessee has otherwise discharged its burden.

The Tribunal applied these principles to the facts and found in favor of the assessee.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The assessee has discharged the initial onus which lay on it in terms of s. 68 by proving the identity of the creditors by giving their complete addresses, GIR Numbers/Permanent Account Numbers and the copies of assessment orders wherever readily available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank account of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Hon'ble Bombay High Court in the case of Orient Trading Co. vs. CIT."

"Merely because summons issued to some of the creditors could not be served or they failed to attend before the AO, 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 Hon'ble Supreme Court in the case of Orissa Corporation."

"The phraseology of s. 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 Hon'ble Supreme Court while interpreting similar phraseology used in s. 69 has held that in creating legal fiction the phraseology employs the word 'may' and not 'shall'. Thus, 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."

"Taking into consideration the totality of the facts and circumstances of the case, and in particular the fact that the AO has not disallowed the interest claimed/paid in relation to these credits in the assessment year under consideration or even in the subsequent years, and TDS has been deducted out of the interest paid/credited to the creditors, we are of the opinion that the Departmental authorities were not justified in making the addition of Rs. 12,85,000 which is directed to be deleted."

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