Blessing Construction vs Income Tax Officer

Akil Kureshi, J.—Assessee is in appeal against the judgment of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 29.12.2011 raising following questions for our consideration: (1) Whether on the facts and circumstances of the case, the Tribunal has erred in law in confirming the additions of unsecured loans as unexplained cash credit u/s 68 of the income tax Act, 1961 on the ground that assessee has failed to discharge the onus of proving the source of source or origin of the cash credits?

(2) Whether, on the facts and circumstances of the case, the Tribunal is justified in law in applying against the assessee the fact of not satisfying the authorities as to the source from which the depositors derived the money while confirming the addition as unexplained cash credit u/s 68 of the income tax Act, 1961?

The issue pertains to a sum of Rs. 13 lakhs treated as cash credit u/s 68 of the income tax Act, 1961 by the Assessing Officer. Such assessment was confirmed by the CIT(Appeals) as well as by the Tribunal. 2. During the course of assessment, it was noticed that the assessee had received unsecured loans from 8 different individuals totalling to Rs. 13 lakhs. The Assessing Officer questioned the assessee with respect to such amounts received during the year relevant to the assessment year 2005-2006. It was pointed out that such loans were received through individuals from Account Payee cheque. Their details were also supplied. Some of them also presented themselves before the Assessing Officer upon inquiry. The Assessing Officer however, held that the capacity and creditworthiness of the depositors was not proved. It was observed that there is no such type of cash deposits before or after the cash transactions in case of such depositors other than loan amounts, as appeared in their account. He concluded that the assessee did not prove the genuineness of the transaction as also the capacity and creditworthiness of the creditors.

The assessee carried the issue in appeal. The Commissioner (Appeals) reexamined the entire issue at length. He observed as under:

I have carefully considered both the positions. I have also examined the relevant documentary evidences furnished by the AR including account confirmations, copies of income tax returns of the depositors, their balance-sheets, P & L accounts, and capital accounts as also their bank statements. The first depositor was Shri Hasmukh R. Mehta, against whom the loan of Rs. 3 lakhs was shown. His bank statement with HDFC Bank shows, amongst other transactions, a deposit of Rs. 3 lakhs on 29.6.2006 by cheque. The loan was given to the Assessee by cheque on 4.7.2006. It cannot therefore be said that unexplained cash was deposited in the account of Shri Hasmukh R. Mehta before giving the said loan to the Assessee. The next depositor was Shri Jimit M. Mehta, his bank account showed a deposit of Rs. 1,50,000/- in cash on 24.3.2005. On the very next day, he issued a cheque of Rs. 1,50,000/- to the assessee. Prior to the said deposit, his balance was only Rs. 2,056.20 with no major credits. The extract of his cash book shows no cash balance prior to depositing such cash into his bank account. Next was Smt. Kokilaben M. Mehta; a loan of Rs. 1,50,000/- was showed in her name. On 6.11.2004 the said sum was deposited in cash in her bank account with Bank of Baroda. On 8.11.2004 the cheque was issued to the assessee. The balance in her account prior to this transaction was only Rs. 1,444.95. Her cash book shows capital buildup from stitching and embroidery income every month. The return of the income filed by her for the A.Y. 2005-06 declared an income of only Rs. 51,904/-. It is a clear case of accommodation entry being provided to the assessee. She simply did not have the requisite creditworthiness to give the loan.

Coming to M/s. Nirav Gems, who claimed to have given a loan of Rs. 1,50,000/- the situation was exactly the same. Cash of Rs. 1,50,000/- was deposited on 8.11.2004 and the loan was given on the very next day. Before the deposit, the balance in its account with Dena Bank, Rampura Branch was only Rs. 4,008.87. He also build up his capital by showing diamond brokerage income of approximately Rs. 3,000 per month. Once again, this is another case of accommodation entry being provided to the assessee. Shri Nirav M. Mehta who claimed to have given a loan of Rs. 1 lakh to the assessee, cash was deposited on 6.11.2004 in his bank account with Dena Bank and the loan was given to the assessee on 9.11.2004. His account shows similar transactions of rotating money at regular intervals. The average balance prior to the said deposit was approximately Rs. 2,000-Rs. 3000. Shri Sevantilal A. Mehta had a balance of Rs. 5557 before depositing cash of Rs 1 lakh on 15.1.2005 and giving the said sum as a loan to the assessee on 18.1.2005. Smt. Sushilaben R. Sanghvi had a balance of Rs. 550.05 before cash of Rs. 1,50,000 was deposited in her account and a cheque of the said sum issued to the assessee on 18.1.2005. Smt. Taraben A. Mehta had a balance of Rs. 2,557.35 as on 9.11.2004. On 24.1.2005, i.e. more than two months later, with no transaction in between, sums of Rs. 3000 and four installments of Rs. 49,000 each were deposited in cash in her bank account on 24.1.2005 creating the necessary fund for giving the loan of Rs. 2 lakhs the very next day i.e. 25.1.2005.

6.1 The aforesaid facts clearly show that the availability of funds in the hands of the depositors were manipulated by depositing cash in their bank accounts except for Shri Hasmukh R. Mehta. Even though four of the depositors may have appeared before the Assessing Officer and confirmed the loans, even then the loans did not stand satisfactory explained, especially in relation to the creditworthiness of the alleged depositors. The identities of four depositors were established only by their personal appearance. However, the returns of income cannot be treated as a conclusive evidence of genuine identity or even the bank accounts, especially when it is considered that a large number of bogus returns and bank accounts are opened for providing such entries, the practice of which in Surat is almost an industry, apart from the textile and diamond industries. On the face of it the transactions were made look absolutely genuine as the loans were taken by account-payee cheques, the depositors had filed their returns of income, had prepared their accounts, had their own bank accounts and four of them had even appeared before the Assessing Officer. Unfortunately, a deep scrutiny into the pile of documents furnished by the AR and the assessee, both in asst. proceedings and in appellate proceedings clearly reveal that the manipulations, the manner in which cash was deposited in the bank accounts of seven of the alleged depositors immediately prior to issuing the cheques to the assessee. It may be alright to contend by relying on Court decisions that the Assessing Officer was not competent to enquire into the source of source of the loans yet, the Courts have also held that the creditworthiness of the depositors/lenders have to be necessarily established. Though this is clearly a contradictory and dichotomous situation yet, the necessity of enquiries regarding the creditworthiness of the alleged depositors cannot simply be wished away. In the case of the assessee, such enquiries have clearly revealed that, apart from Shri Hasmukh R, Mehta, the remaining seven alleged depositors simply did not have the funds available to give the loans to the assessee. The funds were available by surreptitious means which was not explainable. Given such facts and circumstances of the case, I hold that of the unexplained loans of Rs. 13 lakhs, only the loans of Rs. 3 lakhs in the name of Shri Hasmukh R. Mehta, stood satisfactorily explained. The remaining loans of Rs. 10 lacs represented absolutely bogus accommodation entries. The addition to the extent of Rs. 10 lakhs under the provisions of sec. 68 of the IT Act is sustained.

Not satisfied with such conclusions, assessee approached the Tribunal. The Tribunal concurred with the view of the Revenue authorities and dismissed the assessee''s appeal. It was noticed that cash was deposited in the accounts of such depositors shortly prior to giving such loans. There were no other transactions between the said two parties either before or after giving of such loans. It was noticed that after giving the loan, very small amounts remained in the account of depositors. Depositors had not maintained any books of account. Though all creditors were maintaining their book accounts, nothing has come on record why the transactions were conducted in cash. Tribunal therefore, held that the evidence produced by the assessee should not be accepted in view of surrounding circumstances and natural probabilities. The Tribunal therefore, came to the conclusion that assessee could not establish the creditworthiness of the depositors and genuineness of the transactions.

Learned counsel for the appellant vehemently contended that the Revenue authorities as well Tribunal committed serious error in inquiring with the assessee the source of the income of the creditors. He contended that while examining the question of addition u/s 68 of the Act, assessee cannot be expected to establish source of the source. In this context, he placed heavy reliance on the following decisions:

(1) Commissioner of Income Tax Vs. Jay Dee Securities and Finance Ltd.,

(2) Nemi Chand Kothari Vs. Commissioner of Income Tax and Another, .

(3) S. Hastimal Vs. Commissioner of Income Tax, Madras,

5.1 Counsel further submitted that assessee had not only established the identity of the depositors, had received the amount through cheque. Genuineness of the transaction therefore, could not have been doubted. The creditworthiness of the depositors also was sufficiently established. Assessee thereafter, could not have been asked to establish the source of the income of such creditors.

With respect to the legal contention that the Revenue cannot insist on assessee supplying the source of source is impeccable. However, the facts of the present case are vastly different. It is of course true that some of the observations made by the Tribunal may suggest that the Tribunal did concern itself with the source of the source. However, such observations cannot be picked in isolation as to treat that as the conclusion of the Tribunal. When one reads the order of the Assessing Officer, that of the Commissioner (Appeals) and also of the Tribunal, inescapable conclusion one arrives at is that the Revenue authorities as well as the Tribunal found the entire transaction not genuine. There was sufficient evidence on record to suggest that in case of all the depositors, their bank accounts contained meagre balance shortly before sizable amount of Rs. 1 lakh and upward were given to the assessee through such account. In such bank accounts, cash amounts were credited and immediately entire amounts were withdrawn through issuance of such cheques in favour of the assessee. It was noticed that such creditors did not maintain any books of account. Nowhere their capacity to raise such amount for drawing cheque of sizable amounts was established. In short therefore, the very genuineness of the transaction was not established. This therefore, is not a case where the Revenue makes addition on the assessee failing to establish source of the source. All issues are essentially based on facts and appreciation of evidence on record. No question of law arises. Tax Appeal is dismissed.