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Advocates
  • Mr. U. Bhuyan, for the respondent
  • Dr. A.K Saraf, Mr. K.K Gupta and Mr. R.K Agarwal for the assessee.
Judges
  • D.N Baruah
  • S.B Roy, JJ.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Mr. U. Bhuyan, for the respondent
  • Dr. A.K Saraf, Mr. K.K Gupta and Mr. R.K Agarwal for the assessee.
Judges
  • D.N Baruah
  • S.B Roy, JJ.
Acts
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The assessee carried on a timber business. The dispute relates to assessment year 1981–82 (accounting year 1980–81), in which the assessee showed receipt of three cash credits: Rs. 1,50,000 from M/s Hans Kumar Jain (a partnership firm), Rs. 35,000 from Malchand Killa and Rs. 30,000 from Malchand Radheshyam. The Assessing Officer (ITO) disbelieved these cash credits and required the assessee to produce evidence. The assessee produced confirmatory letters and the creditors appeared before the ITO to confirm the transactions. The ITO issued notices under section 131 for production of books of account; the books were not produced. The ITO examined the income-tax files of the creditors and concluded the genuineness of the transactions was doubtful and disbelieved the cash credits.

The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who held that the assessee had discharged its onus. Revenue appealed to the Income-tax Appellate Tribunal (Tribunal), which set aside the CIT(A) order and restored the ITO's additions, holding that while identity of the creditors was not in doubt, their capacity to advance the loans was doubtful. The assessee sought a reference under section 256(2) of the Income-tax Act, 1961; after earlier proceedings (Civil Rule No. 5(M)/91), this Court directed the Tribunal to refer three stated questions to this Court by judgment dated 6.3.1991. The Court heard counsel for the parties and produced this opinion.

Legal Issues Presented

  1. Whether the Tribunal had any material to justify its finding and conclusion that the assessee had failed to discharge the onus to prove the genuineness of the three cash creditors amounting in all to Rs. 2,15,000/-?
  2. Whether the Tribunal was justified in law in upholding the addition of the three cash credits amounting in all to Rs. 2,15,000/- as income of the assessee?
  3. Whether the Tribunal was justified in upholding the disallowance of interest on the cash credit treated as income of the assessee?

Arguments of the Parties

Appellant's (Assessee's) Arguments — Dr. A.K. Saraf

  • The assessee had shown the receipts in its income-tax return; the creditors had shown the respective amounts in their returns and statements of accounts filed with their returns.
  • In the case of M/s Hans Kumar Jain, Rs. 1,50,000 was shown as credit and Rs. 9,375 as interest received from the assessee; similar entries existed for the other two creditors; the creditors' returns were accepted by the ITO and not challenged further.
  • The returns filed by the creditors and accepted by the ITO should be accepted as final and afford prima facie proof of the entries; accordingly, the assessee had discharged its onus under section 68.
  • The Tribunal erred in focusing only on identity and insisting separately on proof of the creditors' capacity without giving cogent reasons to displace the accepted returns.
  • Reliance was placed on several authorities (Tolaram Daga v. CTT; CIT (Central) Calcutta v. Daulat Ram Rowatmull; CIT, West Bengal v. S.C. Ghosal; Sona Electric Co. v. CIT) to support the submission that accepted accounts/returns afford prima facie proof and that rejection must be on cogent grounds supported by evidence.

Respondent's (Revenue's) Arguments — Mr. U. Bhuyan

  • The Tribunal was justified in holding that merely proving the identity of the creditors is not sufficient under section 68; the assessee must additionally prove the genuineness of the transaction and the creditors' capacity to advance the loans.
  • The assessee failed to prove the creditors' capacity; therefore the Tribunal rightly restored the ITO's view that the cash credits could be treated as income.
  • Reliance was placed on decisions of the Calcutta High Court (Prakash Textile Agency v. CIT; CIT v. United Commercial and Industrial Co. (P) Ltd.; CIT v. Precision Finance (P) Ltd.) and the Apex Court (Sreelekha Banerjee v. CIT) to support the principle that identity, genuineness and capacity are required, and if the assessee fails to prove by convincing evidence the ITO may reject the claim.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Tolaram Daga v. CTT, 59 ITR 632 The accounts of a firm accepted and acted upon by the department afford prima facie proof of entries under section 34 of the Evidence Act; such entries are prima facie proof of deposits made in the name shown in the accounts. The Court considered this authority to support the assessee's submission that accepted returns/accounts of the creditors afford prima facie proof of the transactions and should not be lightly ignored.
CIT (Central) Calcutta v. Daulat Ram Rowatmull, 87 ITR 349 A false explanation by A about the source of money in A's deposit does not, by itself, justify the far-fetched conclusion that the money belongs to B; there must be a direct nexus between facts found and the conclusion. The Court relied on this observation to caution against drawing remote inferences and to support the view that rejection must rest on a proper evidentiary nexus rather than speculation.
CIT, West Bengal v. S.C. Ghosal, 196 ITR 980 Tribunal may accept positive evidence adduced by the assessee — examples include existence of creditors, assessment file numbers, confirmation letters, and books of account in support of claim. The Court referenced this decision to illustrate the types of positive evidence which, when accepted, can sustain the assessee's burden under section 68.
Sona Electric Co. v. Commissioner Of Income-Tax, 152 ITR 507 (Delhi High Court) Section 68 allows the ITO to reject the assessee's explanation on cogent grounds; but if such grounds are based on no evidence, presumption against the assessee does not arise. The Court relied on this authority to emphasise that rejection must be founded on cogent evidence; absent evidential basis, rejection is not permissible.
Prakash Textile Agency v. CIT, 121 ITR 890 (Cal) Calcutta High Court's articulation (one of a series) that to establish receipt under section 68 the assessee must prove identity, genuineness of transaction and capability of the person giving the credit. The Court acknowledged this as part of the established tripartite test (identity, genuineness, capacity) cited by the revenue but evaluated whether those tests were met on the facts.
CIT v. United Commercial and Industrial Co. (P) Ltd., 187 ITR 596 (Cal) Part of the Calcutta High Court line holding that identity, genuineness and capability must be shown to satisfy section 68. Used by the Court as placed before it by the revenue to state the legal tests, while the Court assessed whether the Tribunal had adequate material to apply them against the assessee.
CIT v. Precision Finance (P) Ltd., 208 ITR 465 (Cal) Another Calcutta High Court decision reiterating the need to prove identity, genuineness and capability for cash credits under section 68. The Court considered this decision as part of the revenue's support for the requirement of capacity proof, but concluded that on the facts the Tribunal had not cogently explained why accepted returns of the creditors should be disregarded.
Sreelekha Banerjee v. CIT, 49 HR 112 (as cited) If the assessee fails to show that a receipt is not income, the ITO may hold it to be income from disclosed or undisclosed sources. The Court noted this principle as supporting the revenue's position that failure to prove can justify treating the receipt as income, but applied it in context and found the assessee had made sufficient proof here.

Court's Reasoning and Analysis

The Court began by identifying the governing statutory provision, quoting section 68 of the Income-tax Act, 1961, which places on the assessee the duty to explain sums found credited in its books and to satisfy the Assessing Officer as to the nature and source of such sums.

The Court analysed the factual record: the assessee and the creditors had shown the amounts in their respective returns; the creditors' returns were accepted by the ITO in their own assessments; confirmation letters and the appearance of creditors before the ITO were on record; interest receipts were reflected in the creditors' returns in at least one instance (Hans Kumar Jain). The Tribunal had accepted identity of the creditors but concluded that capacity to advance the loans and genuineness required further proof and that such proof was lacking.

The Court considered the parties' authorities. It recognised the established triad — identity of the person, genuineness of the transaction and capability of the creditor — as enunciated by the Calcutta High Court decisions relied upon by the revenue. The Court also considered authorities cited by the assessee which supported the proposition that accounts and returns accepted by the department afford prima facie proof and that an assessing authority must give cogent reasons supported by evidence for rejecting such proof.

The Court's pivotal analytical observation was that the ITO had accepted the returns of the three creditors in their own assessments; this acceptance, the Court held, furnished prima facie evidence of the transactions. The Tribunal, while asserting that identity alone was insufficient, did not make any endeavour to give cogent reasons why the creditors' accepted income-tax returns should be ignored. The Court found no adequate explanation in the Tribunal's reasoning to displace the prima facie validity arising from the accepted returns. On this basis the Court concluded that the assessee had at least proved its case sufficiently to discharge the onus under section 68.

Holding and Implications

Holding: The Court answered all three referred questions in the negative — that is, against the revenue and in favour of the assessee.

Implications:

  • Direct effect on the parties: The Court's negative answers mean that, on the material before it, the Tribunal did not have adequate grounds to hold that the assessee had failed to discharge its onus under section 68. The Court therefore ruled in favour of the assessee on the three questions referred.
  • Broader implications: The opinion does not purport to lay down a novel legal principle beyond applying settled authorities (the tripartite test and the principle that accepted returns/accounts afford prima facie proof); the Court emphasised that rejection of such evidence requires cogent reasons supported by evidence. The opinion does not state that it creates a new precedent beyond its application to the facts before the Court.

Disposition

The three questions referred under section 256(2) were answered in the negative, i.e., against the revenue and in favour of the assessee.

Show full summary ...

    Jalan Timbers v. Commissioner Of Income Tax N.E. Region

    1. As directed by this Court vide judgment dated 6.3.91 in Civil Rule No. 5(M) of 1991, the Tribunal has referred the following questions u/s. 256(2) of the Income-tax Act, 1961 (for short ‘the Act’) for opinion of this Court:

    “1. Whether the Tribunal has any material to justify its finding and conclusion that the assesses has failed to discharge onus to prove the genuineness of the three cash creditors in all amounting to Rs. 2,15,000/-?

    2. Whether the Tribunal was justified in law in upholding the addition of three cash creditors in all amounting to Rs. 2,15,000/- as income of the assessee?

    3. Whether the Tribunal was justified in upholding the disallowance of interest on the cash credit treated as income of the assessee.”

    2. The facts for the purpose of answering the questions may be narrated as follows:

    The assessee carries on timber business and the matter relates to the assessment year 1981-82. In the accounting year 1980–81 the assessee received loan of Rs. 1,50,000/- from M/S Hans Kumar Jain, a partnership firm, Rs. 35,000/- from Malchand Killa and Rs. 30,000/- from Malchand Radheshyam. While making the assessment for the said period the ITO disbelieved the cash credit received and directed the assessee to produce evidence to prove the genuineness of the transaction. Pursuant to that the assessee produced confirmatory letters from the cash creditors. Inspite of that the assessing officer was not inclined to accept the cash credits as genuine. Therefore, the assessing officer called all the three creditors for further verification. Manager of M/S Hans Kumar Jain appeared and confirmed the letters and also gave evidence. The other two creditors also appeared before the assessing officer and confirmed the transaction. The assessing officer did not believe the transaction and issued notice u/s. 131 of the Act for production of the books of account and inspite of the notice the books of account were not produced. The assessing officer therefore, called for the income tax files for the relevant year of the three creditors. After examination of the income-tax files of the aforesaid creditors, the assessing officer disbelieved the some holding the genuineness of the transaction was doubtful.

    3. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), for short ‘the CIT (Appeals)’ and the CIT (Appeals) after hearing the appeal disposed of the same holding that the assessee discharged their onus regarding receipt of the cash credit. The revenue being dissatisfied with the appellate order passed by the CIT (Appeals) preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal disposed of the appeal holding that although the identity of the person was not doubtful but the capacity to advance the loan was doubtful and therefore set aside the appellate order passed by the CIT (Appeals) and restored the order passed by the assessing officer. The assessee requested the Tribunal to refer the aforesaid question to this Court, which, however, the Tribunal refused. Situated thus, the assessee filed application u/s. 256(2) of the Act which was numbered as Civil Rule No. 5(M)/91 and this Court by judgment dated 6.3.91 directed the Tribunal to refer the aforesaid questions to this Court. Hence this reference. We have heard Dr. A.K Saraf, learned counsel appearing on behalf of the assessee and Mr. U. Bhuyan, learned counsel appearing for the revenue.

    4. Dr. Saraf submitis that in respect of the three cash credits, the assessee showed the receipt of the amount in the income tax return. Similarly the creditors also entered the respective amounts in the statement of accounts which were filed alongwith the return: In respect of M/S Hans Kumar Jain an amount of Rs. 1,50,000/- was show tb have been given on credit to the assessee. Not only that an amount of Rs. 9375/- was shown as interest received from the assessee. The amount has also been reflected in the return filed for the assessment year 1981–82 which will appear from page 15 of the paper book. Similarly in the case of Malchand Killa an amount of Rs. 35,000/- was shown by the assessee that it had received as a cash credit and the creditor also had shown the amount in their return. In respect of Malchand Radheshyam an amount Of Rs. 30,000/- had been shown in the return of the assessee as a loan received from the creditor and the creditor entered the amount in the statement of accounts and the returns filed by the creditors were accepted by the ITO and there was ho further appeal/revision against the said return.

    5. Dr. Saraf submits that the return filed by the creditors should be accepted as final. That being so, when the matters were before the ITO, the onus to prove the transaction had been fully discharged. However, the Tribunal without considering that aspect of the matter brushed aside the case of the assessee holding that mere identity of the transaction was not enough, the capability also ought to have been considered. Dr. Saraf further submits that the assessment made by the ITO in respect of the creditors itself is sufficient to indicate the genuineness of the transaction and capability of giving cash credit. Mr. Bhuyan, however, opposed the submissions made by Dr. Saraf. He strenuously argued that the Tribunal was fully justified in holding that mere identity was not enough, there should be atleast some evidence to show that the creditors had the capability to advance cash credit and the transaction was genuine. As the assessee miserably failed to discharge that burden the Tribunal was justified in holding that the assessee failed to discharge its burden in proving the transaction.

    6. On the rival contentions of the parties it is to be seen whether there was any material before the Tribunal to come to a conclusion that the assessee had failed to discharge its onus. Section 68 of the Act provides as follows:

    “68. 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.”

    7. From the above it is clear that it is the duty of the assessee to fully satisfy the assessing officer as to the genuineness of the transaction and the capability of the person giving the credit.

    8. Dr. Saraf has drawn our attention to a decision of this Court reported in Tolaram Daga v. CTT, 59 ITR 632 which is quoted below:

    “It would appear that the accounts of the firm which had been produced in the case had been accepted and acted upon by the department and no serious challenge had been made to their genuineness or that they were kept regularly in the course of business. That being the case, the accounts are relevant and afford prima facie proof of the entries and the correctness thereof under section 34 of the Evidence Act, so that where a deposit is found to have been made by a third party in the accounts of the firm, that entry is prima facie proof that the amount in question was deposited by the person in whose name the deposit stands. To require the firm or the individual partners to go further and adduce proof of the sources from which the deposits in question appearing in the accounts in the name of third parties were derived by them, would be placing a burden on the firm as well as the partners, which is not required or justified by law.

    9. Dr. Saraf has also drawn our attention to a decision of the Apex Court in CIT (Central) Calcutta v. Daulat Ram Rowatmull, 87 ITR 349. In the said case the Apex Court while considering the genuineness of the entries made regarding the deposit observed thus:

    From the simple fact that the explanation regarding the source of money furnished by A, in whose name the money is lying in deposit, has been found to be false, it would be a remote and far-fetched conclusion to hold that the money belongs to B. There would be in such a case no direct nexus between the facts found and the conclusion drawn therefrom.

    10. Another decision of the Calcutta High Court in CIT, West Bengal v. S.C Ghosal, reported in 196 ITR 980 has also been placed before us by Dr. Saraf. In the said decision it has been held that the Tribunal had not decided the matter only on the basis of onus but had accepted the positive evidence which had been adduced by the assessee. The positive evidence was: (1) the existence of the creditors, (2) the assessment file numbers of the creditors, (3) the confirmation letters of the creditors in support of the assessee's claim and (4) books of account atleast in the case of one creditor. Besides this, Dr. Saraf also submits before us that even if after production of all the evidence the assessing officer or for that matter the Tribunal rejects the contention, the authority must give cogent reason. In this connection our attention has been drawn by Dr. Saraf to a decision in Sona Electric Co. v. Commissioner Of Income-Tax., reported in 152 ITR 507 wherein the Delhi High Court held that Section 68 of the Income-tax Act makes it clear that in respect of a cash credit entry the explanation offered by the assessee can be rejected by the ITO on cogent grounds. When such grounds themselves are based on no evidence, the question of presumption against the assessee does not arise. To counter the submissions of Dr. Saraf, Mr. U. Bhuyan strenuously argued that the Tribunal has come to a clear finding that the assessee could discharge a portion of the burden namely, the identity and not other matters. Learned counsel has pointed out that the Tribunal has specifically stated that the identity itself was not sufficient to come to a conclusion regarding the genuineness and the capability of the creditors is also required to be looked into. Mr. Bhuyan submits that, as the assessee miserably failed to discharge that part of the onus, the finding of the Tribunal was just and proper. In this connection Mr. Bhuyan has placed the following three decisions of the Calcutta High Court:

    1. Prakash Textile Agency v. CIT, 121 ITR 890 (Cal)

    2. CIT v. United Commercial and Industrial Co. (P) Ltd., 187 ITR 596.

    3. CIT v. Precision Finance (P) Ltd., 208 ITR 465 (Cal).

    11. In all these three decisions, the Calcutta High Court observed that in order to establish the fact of receipt of the cash credit as required u/s. 68 of the Act, the assessee must prove three important conditions, namely, (1) identity of the person, (2) the genuineness of the transaction and (3) the capability of the person giving the cash credit.

    12. Relying on the decisions of the Calcutta High Court Mr. Bhuyan has submitted that except the identity nothing could be proved. Mr. Bhuyan has also placed a decision of the Apex Court in Sreelekha Banerjee v. CIT, 49 HR 112. Relying on the said decision Mr. Bhuyan has submitted that if the assessee failed to prove by convincing evidence then the assessing officer will be fully justified in rejecting the claim of receipt of the cash credit. In the said decision the Apex Court observed thus:

    “From the last two cases, it is plain that if there is receipt of an amount in the accounting year, it is incumbent in the first instance upon the assessee to show that it does not bear the character of income. If he fails to do this, the Income-tax officer may hold that it represents income of the assessee either from the sources he has disclosed or from some undisclosed source.”

    13. On the basis of the cases cited above, it is to be seen whether in the present case the assessee could discharge the onus regarding the receipt of the cash credit. The Tribunal in its judgment indicated that the identity of the creditor was not enough. It is true that by proving the identity the assessee cannot be said to have discharged its onus. In the instant case, the amounts were shown in the income-tax return of the assessee. Besides, the creditors had also shown in the returns about giving of the loan to the assessee. Strangely, the Income-tax officer while making the assessment in respect of the three creditors abovenamed accepted the returns. This itself will go to show that the amount received by the assessee was atleast prima facie genuine. As the ITO had accepted the returns of the three creditors it should go to mean that the amounts given by those creditors were also genuine. On going through the Tribunal's judgment we find that the Tribunal observed thus:

    “Of course, confirmation letter was filed but in the instant case, the ITO went further and verified the assessment records of that creditor from which he found various facts as mentioned in the assessment order and as discussed by us above. Thus, in our opinion, identity of the creditor alone is not sufficient. It has also to be shown that the creditor had the capacity to advance the loan and that the loan itself was genuine.”

    14. The Tribunal, however, did not make any endeavour to give any cogent reason why the income-tax returns filed by the creditors and accepted by the ITO should be ignored. In our view the assessee had atleast proved its case.

    15. Accordingly, we answer the three questions in the negative i.e against the revenue and in favour of the assessee.

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    Comments

    Jalan Timbers v. Commissioner Of Income Tax N.E. Region
    (Aug 7, 1996)