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2015 (12) TMI 1291 - DELHI HIGH COURT

2015 (12) TMI 1291 - DELHI HIGH COURT - TMI - Addition u/s 68 - Held that:- As far as the present case is concerned, the Assessee has indeed discharged its onus of proving the creditworthiness and genuineness of the lender (TIL). There was no requirement in law for the Assessee to prove the genuineness and credit worthiness of the sub-creditor, which is in this case was TCL. - Decided in favour of the Assessee - ITA 429/2003 - Dated:- 21-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appe .....

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med the following questions of law for consideration: 1. Whether the ITAT has correctly interpreted and applied Section 68 of the Income Tax, 1961 while upholding deletion of ₹ 38 lakhs and ₹ 1,01,007 made by the Assessing Officer by applying the said section? 2. Whether the ITAT has erred in deleting addition of ₹ 38 lakhs and ₹ 1,01,007 without going into and examining the credit worthiness of M/s. Tuq Credits Ltd. and genuineness of the transaction with reference to av .....

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Pearls & Investment Limited, filed its annual return of income on 29th November 1994 for the AY in question declaring ₹ 13,68,440. The return was accompanied by the tax audit report under Section 44AB of the Act and the audited final accounts. The return was picked up for scrutiny and notices were issued under Section 143 (2) of the Act on 22nd August 1995. 4. In the assessment order dated 28th February 1997 the Assessing Officer ( AO ) noted that the Assessee continued to derive its b .....

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om Tom Investment Limited ( TIL ), 9, Ezra Street, Calcutta. The acknowledgement of the return filed by TIL showed that it had returned an income of ₹ 2,904 in the AY in question and a loss of ₹ 18,677 in the AY 1996-97 which created doubts about TIL's the creditworthiness. Accordingly, TIL was asked to furnish the source of its lending. 6. The Authorised Representative ( AR ) of TIL attended the proceedings and intimated that the amount lent to the Assessee had in turn been borr .....

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loss account and auditor s report for the period ending 31st March 1994, 31st March 1995 and 31st March 1996, bank statement showing the lending of money to TIL, confirmation of the parties and their complete addresses, if any, from whom further loans have been obtained. 7. The letter containing the summons sent by registered post (speed post) to TCL was received back unserved with the remarks not available. The AO then concluded that TCL was not a genuine party which could have lent the money t .....

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38 lakhs as unsecured loan was treated as unexplained income of the Assessee under Section 68 of the Act. A sum of ₹ 1,01,007 shown as interest payable on the said loan was also disallowed as an expenditure. The income of the Assessee was computed as ₹ 52,84,439. 8. An appeal was filed by the Assessee before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. By an order dated 24th October 1997 the CIT (A) allowed the Assessee s appeal and held that as long as TIL had confirmed the .....

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The CIT (A) found that the following documents were also placed before the AO: (a) confirmation of account of the Assessee in the books of TIL; (b) copy of the bank statement of the Assessee with Central Bank of India showing the receipt of loans raised from TIL; (c) copy of the bank statement of TIL showing both the receipt of monies and the encashment of cheques issued by it to the Assessee; (d) audited balance sheets of TIL as on 31st March 1994, 31st March 1995 and 31st March 1996; (e) certi .....

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y the AO. 10. The Revenue then appealed to the ITAT. By the impugned order dated 30th April 2003 the ITAT dismissed the appeal. In addition to the factors already noticed by the CIT (A), the ITAT examined the details furnished by the Department Representative ( DR ) on 11th February 2003 with regard to the return filed by the TIL (lender) for AYs 1997-98 and 1998-99. For AY 1997-98, a refund of ₹ 2,98,408 was obtained and the refund was issued to TIL which was on account of tax deducted at .....

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paid, then the refund was issued to TIL. Apart from showing that the Department had accepted the genuineness of the AO of the Assessee who was regularly assessed to income tax, the Department has also accepted the return filed by TIL. It was therefore, held that all the three ingredients for proving the identity, genuineness and creditworthiness of the creditor were present in the case. 11. Mr. Raghvendra Singh, learned standing counsel for the Revenue, relied on the decision of the Gauhati High .....

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n the Gauhati High Court referred to Section 68 of the Act and observed that the onus of the Assessee to the extent of his proving the source whom which he has received the cash credit. The High Court held that the AO had ample freedom 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 .....

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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/sources from where the creditor has received the money, Section 106 makes the Assessee liable to disclose only the s .....

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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 .....

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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. (emphasis supplied) 13. The above observations, far from supporting the case of the Revenue, does the opposite. In the subsequent decision of this Court in Mod. Creations Pvt. Ltd. v. Income Tax Officer .....

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es the authenticity of transactions as executed between the Assessee and its creditors. It is no part of the Assessee's burden to prove either the genuineness of the transactions executed between the creditors and the sub-creditors nor is it the burden of the Assessee to prove the credit worthiness of the sub-creditors. 14. In Mod. Creations Pvt. Ltd. (supra) this Court negatived the case of the Revenue that the onus was on the Assessee to prove the source of the sub-creditor. It was observe .....

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into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The ITAT, in our view, without adverting to the aforementioned principle laid stress on the fact that despite opportunities, the Assessee and/or the creditors had not proved the genuineness of the transactio .....

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