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Income Tax Appellate Tribunal (ITAT) Delhi in a recent judgment deleted the additions made as unexplained cash credits u/s 68 of the Income Tax Act, 1961 stating that appellant was not obliged to prove source of source of the credits.

Case Law Details:
ITA No.1542/Del./2012 Assessment Year:2008-09
Banwari Lal (Appellant) vs ITO (Respondent)
Date of Order: 15-01-2016

Question before ITAT:
Whether the authorities justified in sustaining the addition under section 68 of the Act on the ground of inability of the creditors to explain the source of source.

Brief facts of the Case:
The assessee was a part time accountant and maintain books of account and also dealing in the business of trading of shares. For the relevant assessment year he filed return of income at a loss of Rs.1,20,122/- and the same was processed on 29.03.2010. Subsequently, the case was selected for scrutiny. The assessee had shown unsecured loans of Rs.21,55,000/- out of which Rs.12.50 lakhs were in respect of three unsecured creditors. The transactions were made by account payee cheques, assessee produced all three creditors before the AO and all of them accepted to have advance money to the assessee. However, the AO observed that for the three creditors on the dates of issuing cheques to the assessee, an identical amount was deposited in cash in their bank accounts.

Accordingly AO added Rs. 12.50 lakhs u/s 68 on the ground that the creditworthiness and genuineness of the loan transactions and source of the source had not been proved.

Contentions of the assessee:
The assessee contended that authorities had accepted that the identity of the creditors is that established that have held that creditworthiness and genuineness of the creditors was not proved on the ground that there was inconsistency or contradiction in the statement of the creditors. It was submitted that such inconsistency and contradiction is vis-à-vis the sources of the creditors and therefore, it was submitted that mere fact that the source of source of the creditors was not explained could be a ground to bring to tax sum received as loan by the appellant.

Contentions of the Revenue:
The Revenue contended that the assessee had failed to discharge the onus cast on him of proving the genuineness and creditworthiness of the creditors.

Important Excerpt from ITAT Judgment:

The Hon’ble Gauhati High Court in the case of Nemi Chand Kothari vs. CIT (supra) has held as under:-

“The Revenue/Assessing Officer, however, remains free to show that the amount, which has come to the hands of the assessee by way of loan from the creditor actually belonged to the assessee, but this conclusion cannot be reached by mere failure on the part of the sub-creditor to show his creditworthiness and/or the genuineness of the transaction between the creditor and sub-creditor, for, the creditor may receive any amount from sources known to the creditor only and if he fails to show how he has received the amount, in question, or if he fails to show the creditworthiness of his sub-creditor, such an amount may be treated as the income from undisclosed source of the creditor or of the sub-creditor, as the case may be, but such failure, on the part of the creditor cannot, in the absence of any clinching evidence, be treated as the income of the assessee derived from undisclosed source.

17. Since it is not the business of the assessee to find out the source(s) from where the creditor has accumulated the amount, which he has advanced, in form of the loan, to the assessee, section 68 cannot be read to show that in the case of failure of the sub-creditors to prove their creditworthiness, the amount advanced as loan to the assessee by the creditor shall have to be read, as a corollary, as the income from undisclosed source of the assessee himself.

18. If sections 106 and 68 have to survive together, the logical interpretation will be that while the assessee has to prove only his special knowledge, i.e., the source from where he has received the credit and once he discloses the source from which he has received the money, he must also establish that so far as his transaction with his creditor is concerned, the same is genuine and his creditor had the creditworthiness to advance the loan, which the assessee had received. When the assessee discharges the burden so placed on him, the onus, then, shifts to the Assessing Officer if the Assessing Officer wishes to assess the said loan as the income of the assessee from undisclosed source, to prove either by direct evidence or indirect/ circumstantial evidence that the money, which the assessee received from the creditor actually belonged to, and was owned by, the assessee himself. If there is direct evidence to show that the loan received by the assessee actually belonged to the assessee, there will be no difficulty in assessing such amount as the income of the assessee from undisclosed source ; but if there is no direct evidence in this regard, then, the indirect or circumstantial evidence has to be conclusive in nature and must in such circumstances, unerringly point to the assessee as the person from whom the money had actually flown to the hands of the sub-creditor and, then, routed through the hands of the subcreditor to the hands of the creditor. For this purpose, the circumstantial evidence has to be not only consistent with the hypothesis that the money belonged to the assessee, but that this hypothesis must also be inconsistent with the hypothesis that none other than the assessee owned the said money. If the conclusion be that the money received, as loan, by the assessee may or may not belong to him or if the possibility exists that the money received, as loan, by the assessee may not belong to him, then, in none of such two cases, the loan amount can be conclusively treated as income from undisclosed source of the assessee inasmuch as for assessing the money as income of the assessee from undisclosed source, there must be clinching evidence to show that the money actually belonged to none but the assessee himself. If no such clinching evidence is available, the money may be treated as the income from disclosed source of the creditor or of the sub-creditor, as the case may be. If the inquiry under section 68 reveals that though the creditor had the creditworthiness, on the day on which he had advanced the loan to the assessee, yet the source of the creditor is not genuine, that is to say, though the transaction between the assessee and the creditor is genuine, the transaction between the creditor and the sub-creditor is not genuine, then, in such a situation, it cannot be read as a corollary nor can it lead to the lone and only conclusion, in the absence of any other material, that the money that has changed hands from the sub-creditor to the creditor was received by the subcreditor from none other than the assessee himself.”

Also Hon’ble Gujarat High Court in the case of DCIT vs. Rohini Builders (supra) has held as under:-

“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 accounts of the creditors and the assessee is not expected to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co. Ltd. vs. CIT [1963] 49 ITR 723. The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assesse to the depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques.

The Hon’ble Madhya Pradesh High Court in the case of CIT vs Metachem Industries (supra) has held as under:

“Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee is over . Whether that person is an income-tax payer or not and where he had brought this money from, is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax.”

Further, the Hon’be Rajasthan High Court in the case of CIT vs. Jai Kumar Bakliwal (supra) has held as under :-

“9. If there is direct evidence to show that the loan received by the assessee actually belong to the assessee, there will be no difficulty in assessing such amount as the income of the assessee from undisclosed source but if there is no direct evidence in this regard, then the indirect or circumstantial evidence has to be conclusive in nature and should point to the assessee as the person from whom the money has actually flown to the hands of the creditor and then from the hands of the creditor to the hands of the creditor.

20. When we peruse the facts herein above, it is an admitted position that all the cash creditors have affirmed in their examination that they had advanced money to the assessee from their own respective bank accounts. Therefore, when there is categorical finding even by the AO that the money came from the respective bank accounts of the creditors, which did not flow in the shape of the money, then, in our view, such an addition cannot be sustained and has been rightly deleted by both the two appellate authorities. There is no clinching evidence in the present case nor the AO has been able to prove that the money actually belonged to none but the assessee himself. The action of the AO appears to be based on mere suspicion.

21. Accordingly, in our view, the ITAT, after appreciation of evidence has rightly come to the aforesaid conclusion and when there is appreciation of evidence, then it is purely a finding of fact and no question much less substantial question of law can be said to emerge out of the said order of the Tribunal and we do not find any infirmity or perversity in the order of the ITAT so as to call for any interference of this Court. In our view, no substantial question of law arises out of the order passed by the ITAT.”

We find that there is no doubt about the identity of all these three creditors. The only dispute before the authorities below is that these creditors are not creditworthy and the transaction in question is not genuine and source of source is not proved. It is well settled position of law and as stated above that appellant is not obliged to prove source of source of the credits. The burden of the assessee is to restrict himself to prove and explain the source of the credit; and once creditor has appeared and accepted that he has provided loan and, there is nothing to prove that money received by the appellant is his own money.

Download Full Judgment Click Here >>

Assessee not obliged to prove source of source of the unsecured loan creditor. The burden is to prove source of the credit only-ITAT | 19-01-2016 |

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