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TMI Blog2001 (11) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... e above cash credits. The Assessing Officer asked the assessee to explain the genuineness of the cash credits in response to which the assessee has submitted as under: (1) The amounts have been received from the creditors who are identifiable. (2) The transactions are through banks and are genuine. (3) The source of amount is gift received by the creditors from persons identifiable. (4) The donors have disclosed these gifts to Income-tax Department and have paid Gift-tax as per law. (5) Gift-tax returns of these donors have been accepted by the Department. (6) The donors have furnished Affidavit confirming the gifts made by them. 2.1 Thereafter, the Assessing Officer asked the assessee to produce the creditors. The guardians of the creditors attended before the Assessing Officer and their statements under section 131 were recorded. It was stated by them that the amounts were received by gifts from agriculturists of Gujarat through drafts and these gifts were accepted by them on behalf of their minor children and the same were given as loans to the assessee-firm. It was also stated that these gifts were given out of love and affection and the donors were friends of the donees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey were not assessed to Income-tax being farmers. The gifts were sent by demand drafts either from Bank of Baroda, Bhadran or State Bank of India, Siswa Branch, Gujarat. They had filed gift tax returns at the advise of Shri Narendrabhai Patel. The D.D. had been purchased simultaneously. These donors had not given any such gifts to their own children or any grand children except two donors, Shri Dayabhai Patel and Shri Madanbhai Patel. Members of the Sable family of Pune had not given any gifts to their children. 2.4 The assessee was also requested to produce the donors for cross examination in his office. Though sufficient opportunity was allowed the donors were not produced by the assessee. However, at the instance of assessee, the camp was held by the Assessing Officer in the Income-tax Office at Anand (Gujarat) between 18 July to 20 July, 1989. Notices of summons were issued to all these donors requesting them to attend the Income-tax Office at Anand during that period. During the period of the said camp, the statements of ten persons were recorded under section 131 of the Income-tax Act. Certain similarities were noticed by the Assessing Officer. All the persons were farmers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had submitted that no addition could be made since the confirmative letters had been filed by the creditors. The gifts were admitted by the donors and the same had been disclosed in the return under the Gift-tax Act. The assessee also relied on the various case law reported as Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723 (Bom.), CIT v. Daulatram Rawatmull [1973] 87 ITR 349 (SC), S. Hastimal v. CIT [1963] 49 ITR 273 (Mad.). However, the Assessing Officer was not satisfied with the explanation of the assessee and finally it was concluded by the Assessing Officer that all the gifts were not genuine and the same were arranged through Shri Narendrabhai Patel, accountant of M/s. Fulabhai Govindbhai a Commission Agent of assessee for purchase of Tobacco. There was a systematic tax planning and evidences had been created to give colour of the genuineness of the transactions. He was also of the view that the possibility of the amount paid as purchase price coming up to the assessee in the form of gifts, could not be ruled out. Accordingly, the addition of Rs. 6 lacs was made under section 68. Consequently, he also disallowed the interest of Rs. 49,241 on these cash credits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of ITO v. Dr. Jagdish Kansagara [1998] 66 ITD 381 wherein on similar facts, the Tribunal had rejected the genuineness of the gifts after applying test of human probabilities and the decision of Supreme Court in the case of Sumati Dayal and the decision of Punjab & Haryana High Court in the case of Lall Chand Kalra v. CIT [1981] 22 CTR (Punj. & Har.) 135 and the decision of Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465. 5. On the other hand, the learned counsel for the assessee has strongly supported the order of the CIT (Appeals) by raising various submissions. Firstly, it has been submitted by him that all the tests laid down by the Courts have been satisfied. There is no dispute about the identity of the donors. The capacity of the donors cannot be doubted on the basis of material on the record. He has filed the copies of the bank accounts to prove that amounts were withdrawn from their own account and the DDs were purchased. It was also submitted by him that the donor's bank had no facility for issuing the DD for Pune and, therefore, the DDs had to be purchased through another bank. Accordingly, the Assessing Officer was not j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cash credits in the hands of firm would amount to taxing the family of Shri Govind Sable without any reason. As far as firm is concerned, the onus has been fully discharged by proving the identity, creditworthiness of the creditor and genuineness of the transactions. The decision of Ahmedabad Bench of Tribunal reported as Dr. Jagdish Kansagara's case is distinguishable on facts since in that case the Tribunal was concerned with the case of donee himself while in the present case the assessee-firm and donees are totally different. 6. Rival submissions of the parties have been considered carefully in the light of case law referred to and the materials placed before us. In order to appreciate the controversy before us, it would be useful to refer to certain settled legal positions. Firstly, in the case of cash credits in the books of assessee, the initial burden is on the assessee to prove the identity and creditworthiness of creditor as well as genuineness of the transactions. If the creditor appears before the Assessing Officer and proves that money was paid from his books of account, then it can be said that creditworthiness of cash credit is proved and no addition can be made e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made to the strangers out of social obligations on certain occasions such as birth day, wedding ceremonies and other social functions. The quantum of such gifts would depend upon the social relations and the practice prevalent in the society. Sometimes the money is also parted with for charitable purposes. In all the cases there is some bond between the donor and donee either by way of personal love and affection or social obligation or on account of compassionate ground. Therefore, in the absence of such bond, in our opinion, it would be difficult to accept the genuineness of so called gifts in view of the test of human probabilities as approved by the Supreme Court in the case of Sumati Dayal. 7. Before applying the above test to the present case, it would be useful to refer to the undisputed facts which are set out as under: (1) All the donees are the children of partners belonging to Shri Shankar Sable family in Pune while all the donors are farmers of a distant village Siswa, Tal Borsad, Dist. Kaira, Gujarat. (2) There is no relation between donors and donees. Both belong to a different communities. There is also no friendship between them. The assessee has failed to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he family of a very high status. All the action of the donors and donees, in our opinion, are contrary to the human behaviour. The only inference that can be drawn from the facts and surrounding circumstances of the case is that the entire affair was an arranged one through the help of Shri Narendrabhai Patel. Therefore, we are of the view that evidences for making such gifts were created to make believe the existence of the genuineness of the gifts. Our conclusion is also fortified by the decision of the Ahmedabad Bench of the Tribunal in the case of Dr. Jagdish Kansagara wherein it has been held on similar facts that such gifts were not genuine and it has been further held that amounts of gifts could be treated as income of the donees. Similarly, Punjab & Haryana High Court in the case of Lall Chand Kalra had held that valid gift could not be made to the strangers unless there was an occasion to make such gifts. Therefore, following the above decisions and applying the test of human probabilities, it is held that the gifts in the present case were not genuine. 9. Having given the above finding, the next question arises whether the addition can be justified under section 68. As a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, in our opinion, all the conditions are satisfied by the assessee. There is no dispute about the identity. The Assessing Officer had doubted the capacity of the donors. The assessee is not bound to prove the source of the source. However it has been established by producing the pass-book of the donors that transactions of gift were effected after withdrawing the amounts from their own accounts and the money in their accounts was deposited by cheques which represented the sale proceeds of their agricultural Produce. Since all the transactions are through bank, the genuineness of the transactions between the assessee and the minors cannot be doubted particularly when no inference can be drawn that money of firm was utilised for money laundering. At this stage, it would be useful to refer to the decision of Hon'ble Supreme Court in the case of Smt. P.K. Noorjahan wherein the Court has clearly held that addition under section 69 is not automatic because of the language employed. The discretion is with Assessing Officer which should be exercised judicially. This principle can be applied to section 68 also because the Legislature has used the word 'may' both in sections 68 & 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of my learned brother, I proceed to write a dissenting order. 2. The facts of the case have been elaborately given by my learned brother in his order and I need not repeat the same. After discussing the facts in detail and the arguments of both the parties, my learned brother arrived at a judicially correct conclusion in para 8 of his order that, "Therefore, following the above decisions and applying the test of human probabilities, it is held that the gifts in the present case were not genuine." So far so good and I have no dispute to this extent. But having held that the gifts were not genuine, I do not agree with him that the addition of Rs. 6,00,000 is not justified under section 68 of the Act. For this proposition, my learned brother has relied upon the decision of this Bench in the case of Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. where this Bench has followed the judgment of the Hon'ble Supreme Court in the case of Smt. P.K. Noorjahan. 2.1 Section 68 of the Act reads as under: "68. Cash credits.--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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuine. In fact, the giving of gifts by the said agriculturists was a stage-managed show, because no person would normally part with his hard-earned money by was of gift, unless there is a personal bond of love and affection between the donor and the donee. In the present case it is an admitted fact that the donors had no relation with the donees; even they had not seen the donees, but strangely enough they made the gifts of huge amounts. Thus, the two tests which prove a cash credit as genuine and hence acceptable fail in the case of the assessee-firm. 3. The facts in the case of Mahavir Nagari Sahakari Pat Sanstha Ltd. are distinguishable from the facts of the assessee-firm before us. In the case of Mahavir Nagari Sahakari Pat Samstha Ltd. this Bench was dealing with a banking company and there also this Bench held that provisions of section 68 are applicable even to a banking company (para 27 of the order). Thereafter in para 29, this Bench has observed as under: "Having held that provisions of section 68 are applicable to banking concerns, the next question would be whether the initial onus has been discharged by the assessee. At this stage, it would be useful to mention that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71] 82 ITR 540 (SC). In Sumati Dayal's case, the Apex Court has held that surrounding circumstances and applying the test of human probabilities is a must. In Lal Chand Kalra's case, before the Hon'ble Punjab & Haryana High Court, the donor was a stranger to the assessee and the Hon'ble High Court held that there was no reason why he should make a gift of Rs. 10,000 to the assessee. It was further held in that case that gift from a relative who had other more important liability like marrying four sisters of his own would not be a genuine gift and especially when there was no occasion for such a gift. 4. In Smt P.K. Noorjahan's case, the assessee before the Hon'ble Supreme Court was a Muslim lady who was aged about 20 years during the previous year relevant to the assessment year 1968-69. On November 15, 1967, she had purchased 16 cents of land in Ernakulam and the amount spent by her, inclusive of stamp and registration charges for this purchase was Rs. 34,628. On November 27, 1968, she purchased another 12 cents of land at Ernakulam and the total investment for this purchase was Rs. 25,902. The explanation of the assessee regarding the source of the purchase money for these inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as regular. The grounds of such exercise must, therefore, appear from the order of the reasoning of the authority." In the case before us, the Assessing Officer has rightly not exercised his discretion, because here is an assessee-firm constituted of rich partners--all coming from higher strata society--who took undue advantage by inducing semi-literate agriculturists who used to sell to the firm their agricultural produce, i.e., tobacco leaves; obviously coming from lower strata of society to make gifts of huge amounts and then guided them in filing Gift-tax returns to give legal tenor to the bogus gifts to the advantage of the assessee-firm (in whose books gifts appeared as credits); its partners and their wards. Such an unethical and dubious practice has to be frowned upon. In essence, the assessee-firm which is a compendium of its partners has committed a social crime. In such case, in my considered opinion, a discretion in favour of the assessee will be gross mis-carriage of justice. 5. In the light of above discussion, I hold that the credits aggregating to Rs. 6,00,000 have rightly been added by the Assessing Officer under section 68 of the Act. Accordingly, I reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shankar Sable. For the sake of brevity the Assessing Officer's reasons are not reproduced here. Suffice to state that he held that the gift theory was opposed to human probabilities despite the agriculturists having filed gift-tax returns and paid the tax thereon. He therefore disbelieved the genuineness of the credits and added the same to the income of the assessee-firm. 3. On appeal the CIT (Appeals) accepted the assessee's explanation and deleted the credits from the assessment. The Revenue preferred an appeal to the Tribunal. After discussing the mater elaborately, the learned Judicial Member (JM), who wrote the leading order, for reasons elaborately given therein and relying on the judgment of the Supreme Court in the case of Sumati Dayal, agreed with the Assessing Officer that the gifts were not genuine. He however accepted the alternative contention put forth by the assessee that even if the gifts are not genuine, the credits cannot be added as the firm's (assessee) income and the person in whose hands they could be added was Shankar Sable since the credits were all found in the accounts of the minors who belonged to Shankar Sable's family. In his view, taxing the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter, he held, differing from the learned, JM that the credits were rightly assessed in the assessee-firm's hands. 5. It is in the above circumstances that the question extracted above has been referred to me for decision. I have heard the rival contentions. Mr. K. Srinivasan, the learned DR, in an able argument before me contended that the learned JM had gone wrong in exercising the discretion vested under section 68 in favour of the assessee after having held that the gift-theory was untrue. He submitted that the explanation given by the assessee-firm cannot be compartmentalised or dissected into genuine and non-genuine parts and that once the gifts have been found to be non-genuine it must follow that the credits are not genuine and that they must be assessed in the hands of the firm. He was at pains to point out that the "genuineness of the gifts cannot be delinked from the chain of events". He further submitted that if the credits appear in the names of the minors belonging to the partner's family the principle that the assessee need not prove the source of the source would plot apply in all its rigour. In his submission, the principle laid down in Smt. P.K. Noorjahan's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the section, was to enquire into the explanation of the assessee-firm regarding the nature and source of the credits and if the same is found to be not genuine or unsatisfactory the only option was to add the credits as income. To elaborate if the credits appears in the books of the assessee and if the explanation is not genuine or satisfactory, section 68 leaves no choice in the matter as to who is to be assessed. The section, according to Mr. Srinivasan, clearly says that the credit is to be assessed in the hands of the person in whole accounts it appears. The rationale behind this, according to him, is that such person is the beneficiary of the funds and is therefore liable to be assessed. An enquiry as to who is the real owner of the funds is beyond the scope of enquiry contemplated by the section. He therefore contended that the order of the learned A.M. should be preferred because it is based on a correct understanding of the judgment of the Supreme Court in Smt. P.K. Noorjahan's case. 8. Mr. Srinivasan wound up his arguments by referring to the following decisions: 1. Rosham Di Hatti v. CIT [1977] 107 ITR 938 (SC) 2. Lata Mangeshkar v. CIT [1973] 88 ITR 336 (Bom.) 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Smt. P.K. Noorjahan's case 10. Mr. Sathe further contended on the strength of the following authorities that once the genuineness of the gifts is accepted there is an end of the matter and no further enquiry is required: 1. CWT ,CIT v. K.N. Shanmughasundarm [1998] 232 ITR 354 (SC) 2. Shanmshuddin Manzoor Haque's case It may be clarified that the above argument was put forth by Mr. Sathe on the assumption that the gifts to the minors by the agriculturists in Gujarat were genuine. When it was pointed out to him that the finding of both the learned Members is that the gifts were not genuine, he submitted that in this respect there is some factual confusion or contradiction in paragraphs 2 and 4 of the learned JM's order. He submitted that in these paragraphs the learned JM has himself made observations to the effect that the gifts are genuine, on the basis of the bank statements etc. of the Gujarat parties produced before him in the course of the hearing of the appeal and that in the light of these observations his ultimate conclusion that the gifts are not genuine cannot be sustained. It was made clear to Mr. Sathe at this juncture that my jurisdiction, as Third Member is limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r children of Shankar Sable are not genuine. The difference arises only with the regard to the consequence of this finding. The learned JM says that despite this it is still possible to hold that the assessee-firm is not assessable in respect of the credits under section 68. He says that the right person to be taxed is only Shankar Sable because the credits appear only in the accounts of his minor children and it would be unreasonable to hold the assessee-firm liable for the said and that would make Govind Sable, the other partner, assessable in respect of amounts which do not belong to his family. He has held that money-laundering (i.e., conversion of undisclosed income into disclosed income) has been done only by Shankar Sable's family and therefore he is the right person to be assessed on the same. The learned AM does not accept that this consequence must follow. In his view, once the gifts are held to be non-genuine and the device adopted by the assessee-firm is uni-ravelled, it is the assessee-firm which must be assessed in respect of the credits. 15. The first question to be answered was whether it is necessary, within the scope of enquiry envisaged by section 68, to find ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not genuine. 16. In Smt. P.K. Noorjahan's case, on which heavy reliance has been placed by both the learned JM as well as the learned counsel for the assessee, the explanation offered by the assessee was not accepted by the income-tax authorities, but the Tribunal held that though the explanation was liable to be rejected, section 69 gave a discretion to the Assessing Officer because of the use of the word "may" and despite rejection of the explanation lie can still hold that the amount of investment is not assessable in the hands of the assessee. The decision of the Tribunal was affirmed by the Kerala High Court whose judgment was affirmed by the Supreme Court. The use of the word "may" in section 68 also therefore must be held to give a discretion to the Assessing Officer but if he chooses not to exercise it in favour of the assessee in a case where the explanation has been found to be non-genuine it cannot be held that he has exercised the discretion arbitrarily, in other words, it cannot be held that despite the non-genuineness of the explanation, be should have exercised the discretion in favour of the assessee. There was no falsity or non-genuineness in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him by the section, if he thereafter holds the assessee in whose books the credits appear, liable to tax. No further duty is cast upon him under the section. He cannot thereafter be found fault with for not having exercised his discretion in favour of the assessee or with not having attempted to find the real owner of the monies. To hold otherwise does not appear to my mind to be consistent with the object, tenor and purport of section 68. In my view, it would amount to exlcuding the principle laid down in Smt. P.K. Noorjahan's case a little too far. 18. It was said on behalf of the assessee that the facts found by the Assessing Officer himself showed that there was inherent probability that the monies belonged not to the assessee-firm but to the family of Shankar Sable and it was therefore open to the Assessing Officer to exercise the discretion in favour of the assessee by holding that the credits were not assessable in the firm's assessment. I am unable to agree. As rightly pointed out by the learned AM, any discretion must be exercised judicially and must be based on reason and not humour. It should be legal and not arbitrary or fanciful. There arc inherent limitations on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other. May be the appellate authorities might have on the same material exercised the discretion the other way, but so long as the Assessing Officer's exercise of the discretion is supported by material on record and cannot be considered to be arbitrary, capricious, fanciful or perverse it should not be lightly interfered with Smt. P.K. Noorjhan's case offers guidelines in this regard but in my humble view it cannot be understood as a "carte blanche" to interfere with the Assessing Officer's powers even where the assessee's explanation has been found to be non-genuine, either in part or in full. 20. In the view I have taken, I do not consider it necessary to refer to the various authorities cited by both the sides. The question before me involves a limited enquiry as to whether on the facts found by the learned Members of the Tribunal it can be said that the discretion vested in the Assessing Officer under section 68 has not been properly exercised. The learned AM has not disagreed with the learned JM on the existence of the discretion. He has differed from him only on the question whether the Assessing Officer had properly exercised the discretion. I agree with his conclusion t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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