Umesh Krishnani vs Income Tax Officer

Sonia Gokani, J.—The facts in a capsulized form are necessary to be reproduced for comprehending the controversy in question in this Tax Appeal preferred by the assessee u/s 260A of the income tax Act, 1961 ["Act" for short], being aggrieved by the order of the Income Tax Appellate Tribunal, Ahmedabad ["Tribunal" for short] dated 20th April 2012. The assessee is an authorized dealer of M/s. Reliance Industries Limited for sale of POY and filament yarn. He is also authorized dealer of M/s. Silvasa Industries Private Limited for texturized yarn. For the Assessment Year 2003-04, assessee filed his return of income declaring his total income at Rs. 3,75,861/=.

1.1 It was noticed by the Assessing Officer, during the course of assessment, that the assessee had shown receipt of unsecured loans from various persons-the total amount of such deposit came to be Rs. 7,25,000/=. When called upon to furnish necessary evidence, he furnished confirmation of accounts and produced some of these depositors for personal examination. Assessing Officer, on noting that the substantial amount of cash was deposited in the bank account of these persons just prior to issuance of the cheques in favour of the assessee as an advance, the genuineness of such unsecured loan was questioned.

1.2 It is to be noted that the Assessing Officer on receiving the letters of confirmation from these parties chose to summon them and examine them on oath. Some of them did remain present and on the basis of their oral versions, he was convinced that they did not have sufficient resources so as to advance loan of substantial amount ranging from Rs. 50,000/- to Rs. 2,75,000/-. After seeking assessee''s explanation by a show cause notice, the Assessing Officer held this to be accommodation entries and further held that these amounts reflected assessee''s own unaccounted funds which were circulated along with interest @ 24% per annum.

1.3 Giving thus an elaborate finding, the Assessing Officer concluded that the said amount of Rs. 7,25,000/- in fact belonged to the assessee and was therefore, needed to be added to the income of the assessee u/s. 68 of the Act and he also disallowed a sum of Rs. 1,32,543/- being the interest paid/payable on such cash credits.

Aggrieved by such addition the assessee-respondent challenged the same before CIT[A]. It was argued reverently before the CIT[A] that the major portion of loans was received from tax payers who also had submitted their proof of income to the tax authorities and the onus of proving identity of the depositors, genuineness of the transactions and the creditworthiness of the depositors had been duly discharged by the assessee-respondent, and therefore, the order of the Assessing Officer required interference.

CIT [A] after extensive hearing and detailed findings, concluded in favour of the Revenue and against the assessee.

2.1 What weighed with the CIT[A] was the fact that out of the six creditors, the loan taken from Smt. Sunita A. Krishnani was not found to be genuine in the earlier year. She also did not appear before the Assessing Officer. It was also noted that as far as she was concerned, the cash was deposited in her bank immediately before a cheque for Rs. 75,000/- was issued in favour of the assessee-respondent. Out of other five creditors, Smt. Nirmal B. Kansal was found to be earning Rs. 1,45,370/- and one Shri Bishnu Kumar Kansal was earning Rs. 1,27,400/- and remaining three persons'' earning ranges between Rs. 50,000/- to Rs. 75,000/- per year. In their cases also, cash amount had been deposited in their respective accounts soon before the cheques were issued and therefore, it was concluded by the CIT[A] that only to give authenticity and genuineness, these transactions were structured though there was no sufficiency of fund with the creditors. From the totality of the facts and circumstances, it concluded the case of the assessee that the creditors who were having very small means allegedly gave loans of huge sum which did not seem to be an act of prudence and in consonance with the normal human behaviour. It further held that the confirmation letters and evidence of transactions were produced. From the totality of circumstances, the Assessing Officer was held right to conclude that the loans claimed by the assessee were not genuine.

Assessee, aggrieved by such decision of the CIT [A], in yet another appeal, challenged the same before the Tribunal.

3.1 The Tribunal concurred with both the authorities by holding thus -

... It is to be seen that in the case of Mrs. Sunit Krishnani also all these details were available with the Tribunal for the assessment year 2001-02. But inspite of that the Tribunal has held that the credit worthiness of Mrs. Sunita Krishnani was not satisfactorily explained and accordingly upheld the addition. Therefore, the point emerges out of the situation is that it is not sufficient to satisfy the technical requirements of explaining case credits, such as, identity of person, mode of transaction, PAN, statement of accounts, etc. The crucial question to be considered is whether the creditor is in a position to raise that much fund necessary for advancing to the assessee. The soul and substance of the issue is whether the creditor has resourcefulness to make advance of certain amounts to the assessee. While explaining the sources available in the hands, these creditors usually explain that they received amount from vocations like tuition, gardening, tailoring and so many such fancy items. It is true that a housewife may be earning income out of tuition. It may be true that a housewife may be earning income by designing or gardening, etc. All these possibilities have to be examined in the light of the facts and circumstances of the case surrounding each and every individual case. In the present case also, the creditors have explained the nature of activities carried on by them to generate income. But, we are of the view that all these activities explained by the creditors are fanciful explanations just to help out the assessee. When we examined the surrounding circumstances of the creditors, mainly relatives of the assessee, who are coming from business families, it is to be seen that the explanation regarding the activities furnished by the creditors are not convincing.... On an overall view of the situation and in the light of the decision of the Tribunal for the earlier assessment years in the case of Mrs. Sunita Krishnani, we find that the assessee has failed to convince the lower authorities regarding the resourcefulness available in the hands of the creditors. Therefore, we find that the lower authorities are justified in adding the credits as unexplained u/s 68 of the Income Tax Act. Accordingly, we confirm the addition of Rs. 7,25,000/=.

3.2 Respondent also preferred Misc. Application for rectification u/s 154 of the Act being Misc. Application No. 38/Ahd/10 and vide order dated 20th April 2012, the Tribunal dismissed such application by following order:-

We have heard the rival submission and carefully perused the materials on record. We have also gone through the order of the Tribunal dated 16-12-2009 supra in the case of the assessee for AY 2003-04 and we find that the Tribunal while deciding the issue for the year under consideration considered the view taken by the Tribunal in the case of the assessee for the AY 2001-02, and also from the materials produced for the relevant assessment year has given a specific convincing that whatever documents filed by the assessee was resourcefulness available with the creditors to advance any funds to the assessee. Para five of the order of the Tribunal contains a detailed discussion on the issue. Hence, there is no mistake apparent on record in the order of the Tribunal as argued by the learned AR. We find no merit in the Misc. Application of the assessee resulting in mere waste of time and resources. Accordingly, we dismiss the same restraining ourselves from ordering cost.

3.3 The tribunal decided entire issue classifying the same into three aspects viz., (i) establishment of identity of the creditors or donors; (ii) genuineness of the transactions and (iii) capacity of the donor/creditor to make gift or deposit. The Tribunal held that the main source of income of the assessee is the receipt of agency commission and during the year under question, he received a total sum of Rs. 40,32,867/- and there does not appear to be any apparent need for receiving more funds as what all he needed to do was to run the agency and the initial stage of obtaining the agency where fund requirement would be much more was long over. It was also noted by the CIT[A] that the documents adduced reflected his capabilities to pay to his brokers and no liquidity crunch emerged from the record so as to obtain loan to ratify the contention of obtaining the loan at the rate as high as twenty four per cent. This was held in these circumstances as nothing but an attempt to reduce the instance of tax by increasing the interest liability by using his own funds through these creditors. In essence thus, the Tribunal''s ultimate conclusion was that such funds were those of the assessee himself.

Challenging this order of the Tribunal assessee has approached this Court, proposing the following substantial questions of law for our consideration:-

{A} Whether in the facts and circumstances of the case the income tax Appellate Tribunal was right in law in confirming the order of CIT(A) and holding that the credits of amount of Rs. 7,25,000/- as unexplained u/s 68 of the income tax Act, when the appellant has furnished creditor''s confirmations, PAN, computation of income and acknowledgments, etc.?

{B} Whether in the facts and circumstances of the case the income tax Appellate Tribunal was right in law in confirming the order of CIT(A) when the identity of creditors, genuineness of the transactions, and credit worthiness of the creditors are proved ?

{C} Whether in the facts and circumstances of the case the income tax Appellate Tribunal was illegal, perverse, contrary to evidence on record and wholly unsustainable?

Before us, learned senior counsel Shri Saurabh Soparkar fervently argued challenging all the three orders. He contended that when the assessee respondent had already duly discharged his burden of proving identity of the creditors and all necessary documents were already produced before these authorities, no further aspect was needed to be proved at his end. All the persons were assessed to tax and four, out of six creditors, had appeared before the Assessing Officer. Therefore, there was no justification in treating such loans as "unexplained cash credit". He also further urged that it is a well-established principle that the source of the source need not be proved by the assessee. The revenue could tax those creditors; if they are found liable, however, in the assessee''s hands, these loans could not be held to be bogus and therefore, this Court need to intervene. He has produced the paper-book to indicate that the statements were recorded of the four of the creditors by the Assessing Officer, which according to the learned counsel, clearly indicate how the transactions are genuine. Moreover, when payments are made by way of account payee cheques deposited in the bank account of the assessee, genuineness of transaction is duly established as well.

5.1 Following are the authorities sought to be relied upon by the learned counsel for the purpose of challenging the order impugned. These are:-

[a] Commissioner of Income Tax, Orissa Vs. Orissa Corporation (P) Ltd., ;

[b] The Commissioner of Income Tax Vs. Pragati Co. Op. Bank Ltd., ;

[c] Murlidhar Lahorimal Vs. Commissioner of Income Tax, ;

[d] Commissioner of Income Tax Vs. Ranchhod Jivabhai Nakhava, .

In the case of CIT v. Orissa Corporation (P) Limited [Supra] before the Apex Court, the assessee was a private limited company which was maintaining the accounts according to the calender year. The credit entries in the books of account of the assessee stood in the name of third party and the explanation was that the amount represented loans to the assessee from the concerned persons. The assessee had produced discharged Hundis and confirmation letters from the alleged lenders. Before the Supreme Court, the inconsistency in the confirmation letters were pointed out. It was also pointed out that the assessee had not discharged the burden. The Apex Court, after discussing various case-laws, noted that the assessee had given names and addresses of the creditors and except for issuing notices u/s 131 of the Act, the revenue did not pursue the matter further, it did not examine the source of income of the said creditors to find out their credit worthiness. In absence of any efforts on the part of the Revenue to pursue such creditors, the Court held that the assessee could not have done anything further and when the Tribunal had held the discharge of burden on the part of the assessee, the Court found such conclusion on the basis of evidence available with the Tribunal and it did not entertain the Appeal by holding that no question of law had arisen. 7.1 Thus, the creditworthiness of the creditor could not be examined for want of requisite endeavour on the part of the Revenue and hence, the Court held that that was in the hands of the assessee. It must be noted here that the creditworthiness of the creditors is one of the vital considerations as can be culled out from the discussion above and that vital stage was missed by the Revenue and therefore its say was held unsustainable.

In case of CIT v. Pragati Cooperative Bank Limited [Supra], the assessee was a Cooperative Society engaged in the business of banking. During the search proceedings u/s 132 of the Act at the premises of the Bank, various discrepancies came to the fore. Certain additions were made by the Assessing Officer holding such income from "undisclosed sources". ITAT deleted such findings. This Court held that the assessee had furnished details discharging the onus that the deposits were made of the third party i.e., the customers of the Bank and it was since not the case of anybody that these deposits were the Directors of the assessee Bank or any other relatives of the Directors and when the activities of Bank were regulated by the provisions of the Banking Regulations Act, 1949 as well as by the guidelines of the Reserve Bank of India; coupled with the fact that the entire income from the banking activities were exempt in the hands of the assessee, which is a cooperative Bank, the Court confirmed the findings of the Tribunal of deleting the entire amount added by the Assessing Officer as "undisclosed income" in respect of the fixed deposits.

In case of Murlidhar Lahorimal [Supra], the assessee, an individual was also a partner in a firm, who filed his return of income alongwith a copy of the capital account of the partnership firm. A credit entry reflected gift of Rs. 50,000/= to such assessee. A notice was issued as such gift was not found genuine and was held to be assessable u/s 68 of the Act. The Tribunal, found that the donor was genuine and the gift was by way of bank draft, he also produced evidence in support of the source from which the funds for making the gift were available with him. Even though motivation for making the gift was not established, the Court held that the addition of Rs. 50,000/= was not found justifiable. The Court further held therein that the revenue if was not satisfied with the source of the funds in the hands of the donor, it was up to the Revenue to take appropriate action and the motivation of making the gift was not a relevant consideration.

This Court, in case of CIT vs. Ranchhod Jivabhai Nakhava [Supra], was dealing with an assessee who had received advance by way of an account payee cheques from the lenders who were all income tax assessees and whose PAN also had been disclosed. The Court held that the burden u/s 68 of the Act was duly discharged by him. The Court in terms held that the assessee could not be asked to prove the source of money as the persons who had deposited money in his bank account issued the cheques and they were assessed to income tax.

9.1 The lenders did not disclose in their income tax returns the transactions in questions. It was held that if on verification it was found that the lenders had not disclosed the disputed amount, the Assessing Officer could call for further explanation to prove genuineness of the transaction or the creditworthiness of the same from the assessee. However, without verifying such facts from the income tax return of the creditors, the action taken by the Assessing Officer was held to be a wrong approach. The Court held that verification of the I.T. returns of the creditors was essential before further examining those creditors. The coordinate Assessing Officer was found to be satisfied with the transaction, the Court found that the Assessing Officer who assessed such income in the hands of the assessee was not held justified to dispute the correctness of the assessment of the creditors of the assessee.

In light of the discussion above, it can be stated that there could be no dispute to the well laid down principle that the assessee, when once discharges initial burden of proving the source, he is not required to prove the source of the source.

10.1 It would be relevant to produce, at this stage, Section 68 of the Act, which read, thus:-

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 the explanation offered by him is not, in the opinion of the Assessing Officer satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

10.2 It is also required to be noted that Section 68 requires that the credit in the books of account maintained by the assessee of the sum will need to be of the previous year and if the source of such credit; if is not explained by the assessee, or that the explanation offered by him is not, in the opinion of the Assessing Officer, is satisfactory, then the sum so credited can be charged to tax as the income of the assessee of the previous year and the primary duty of the assessee to offer explanation as and when the nature and source of such credit. Assessee can be asked to prove the source of credit in his books of account, however, he cannot be asked to prove the source of source.

Before adverting to the case of the appellant herein, it would be profitable to reproduce at this stage, some of the decisions on the subject.

[a] Commissioner of Income Tax Vs. United Commercial and Industrial Co. (P.) Ltd., ;

[b] Commissioner of Income Tax Vs. Precision Finance Pvt. Ltd., .

[c] Commissioner of Income Tax Vs. P. Mohanakala, .

The Calcutta High Court in case of CIT v. United Commercial & Industrial Co. (P) Limited [Supra] was considering the case of an assessee who was asked by the income tax Officer to prove genuineness of the said loans. The assessee had produced confirmatory letters and discharged hundis. He also filed copies of accounts to show that the receipts and repayments were made by cheques. When asked to produce parties, he did not. Notices came unserved. In such circumstances, ITO added entire income to the returned income of the assessee as "income from undisclosed sources" and also disallowed interest thereon. It was held and observed as under:-

The primary onus lies on the assessee to prove the nature and source of credits in its accounts. It is necessary for the assessee to prove prima face the identity of his creditors, the capacity of such creditors to advance the money and lastly the genuineness of the transactions. Only when these are proved by the assessee prima facie and only after the assessee has adduced evidence to establish the aforesaid facts does the onus shift on to the Department. It is not enough to establish the identity of the creditors. Mere production of the confirmation letters before the income tax Officer would not by itself prove that the loans have been obtained from those loan creditors or that they have credit-worthiness.

Held that, in the instant case, the Tribunal misdirected itself in holding that the transactions were genuine simply because some of the transactions were made by cheques. The assessee had failed to prove the credit-worthiness of the alleged lenders. A number of other assessees had also admitted that loans obtained from these bankers against hundis were not genuine and such hundi loans really represented their own concealed income. The assessee had not discharged its burden of proving that the loans in question were genuine.

In case of Commissioner of income tax v. Precision Finance Private Limited [Supra], the Assessing Officer during the course of assessment proceedings found various cash credits in the books of the assessee. On inquiring through the Inspector, it was found that either the files did not exist as per the details furnished or the records did not tally with the facts presented by the assessee. Several letters were issued to the assessee bringing to its notice that the loans could not be verified for want of adequate proof. In such circumstances, it is held that, "it is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine.

13.1 The Apex Court in case of Commissioner of Income Tax v. Mohankala [Supra] observed that in respect of nature and source of amount credited in the books of account of assessee, explanation tendered if is not found satisfactory, that would amount to prima facie evidence against the assessee and it would be he who shall have to rebut such evidence and on such failure, receipt can be held in the nature of an income of the assessee.

This Court recently in case of Blessing Construction vs. Income Tax Officer [Tax Appeal No. 16 of 2013:: Decided on 13/03/2013], when found serious questions of credentials of the genuineness of the transactions, dismissed the appeal by confirming the order of the revenue authorities, which held such income as a part of the assessee''s income having come from the unexplained sources. It would be apt to reproduce relevant observations, which read thus-

6.1 Counsel further submitted that assessee had not only established the identity of the deposits, had received the amount through cheque. Genuineness of the transaction therefore, could not have been doubted. The creditworthiness of the deposits 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 meager 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 sizeable 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.

It would be worth recapitulating that in the case on hand during the course of assessment, Assessing Officer noted the cash credit worth Rs. 7,25,000/= in the accounts of the assessee. Six persons were found to have issued the cheques in favour of the assessee for lending such amount. Out of these six persons, case of one person i.e., Smt. Sunita Krishnani for the earlier Assessment Year also was held to be ingenuine and therefore five other lenders'' details were examined by the Assessing Officer.

16.1 It may be that identity of the lenders/creditors was duly proved. Vital defect noticed by all the three revenue authorities was the creditworthiness of these lenders. On inquiry, it was brought on record that their yearly earnings were either less or almost similar to what they gifted to the assessee. And again, assessee having his earning through agency commission had no reason to borrow such amount at a high rate of interest of 24% per annum. Cumulatively, this led these revenue authorities and the Tribunal to concurrently conclude that the transaction was nothing, but, a design to bring back in a circuitous route his own money by paying the higher rate of interest and thereby saving the tax as well. Three basic ingredients viz., [a] identity; [b] creditworthiness and [c] genuineness of the transaction, when are considered, it cannot be disputed that all the three of them require independent consideration and yet they are not mutually exclusive or can be considered in isolation. It hardly needs to be specified that the well recognized principle of not insisting upon source of the source needs no elaboration. Upon appreciation of materials on record and totality of facts and circumstances of the case, the revenue authorities and the Tribunal came to the conclusion that the entire transaction was a circuitous route to bring on books the assessee''s own accounted money. The factor that the donors did not possess independent source to make such deposits must be viewed in light of the findings that the assessee had no justification for borrowing such amounts at such high rate of interest. These aspects would have a bearing on the genuineness of the transaction and the credit worthiness of the donors and cannot be seen as an attempt to throw the burden to prove source of the source on the assessee.

As is very eloquent from the record itself, substantial amount of cash was deposited in the bank accounts of all the creditors shortly prior to issuance of cheques and insufficiency of the fund with the creditors when could be duly established from the overall facts and circumstances of the case and when it is further found as a matter of fact that the assessee had no justification for borrowing such amounts at high rate of interest, even without disturbing the well established principle of not insisting on the assessee proving source of the source, on the robust facts of the revenue authorities have rightly not concluded in favour of the assessee. All issues are essentially in the realm of appreciation of facts No error is committed by any of these authorities to term the findings as perverse leading to raise question of law.

Tax Appeal is resultantly dismissed.