The Judgment of the Court was delivered by

Banerji, J.:— This reference under s. 256(2) of the I.T Act, 1961, arises out of income-tax assessment of Messrs. Prakash Textile Agency, the assessee, a registered firm, for the assessment year 1965–66, the relevant accounting year being-Samvat year 2020–2021 Dewali.

2. The facts found and or admitted are shortly as under:

In the assessment for the said assessment year the ITO issued a summons under s. 131 of the Act on one Sureka Jute Co., from whom a loan of Rs. 1,00,000 was shown by the assessee. By a letter dated the 26th March, 1970, Sureka Jute Co. expressed its inability to produce the relevant books of account. The ITO, therefore, added the said sum as income of the assessee from undisclosed sources.

3. On appeal from the assessment, the assessee contended before the AAC that as a letter confirming the said loan had been filed and as the creditor had responded to the summons under s. 131 of the Act, the ITO was wrong in treating the said sum as income of the assessee. The AAC rejected such contention and confirmed the assessment. The assessee preferred a further appeal to the Income-tax Appellate Tribunal and contended that it had discharged its onus of proving the genuineness of the said loan as also the existence of the creditor. A confirmatory letter from the creditor had been filed before the ITO, the creditor was an income-tax assessee and had responded to the summons under s. 131 of the Act. The loan received on the 16th September, 1964, had been repaid in two instalments of Rs. 50,000 each on the 15th April and the 30th April, 1965, respectively, in cash and Rs. 5,412.50 being interest thereon had been paid by an account payee cheque on the 25th May, 1965. The creditor could not produce its books of account as they were seized by the I.T department.

4. At the instance of the assessee, the Tribunal caused the books of account of the creditor in the custody of the I.T department to be produced before it and examined Vidyanand Sureka, the proprietor of Sureka Jute Co., the creditor.

5. Vidyanand Sureka stated before the Tribunal that he was a partner of Daluram Gaganmal and the proprietor of Sureka Jute Co. He was assessed to income-tax in Special Circle IV. He had khata pata loan transactions with the assessee in 1964 based on receipts which were not recorded in his books. He had no other books except those produced before the Tribunal. He had confirmed the said loan on the basis of receipts therefor which were no longer in his possession. On the 16th September, 1964, he had given Rs. 1,00,000 to the assessee. He had withdrawn from his bank Rs. 50,000 on the 24th July and Rs. 15,000 on the 25th July, 1964, and had deposited Rs. 22,000 in bank and Rs. 12,500 with two other persons.

6. He had received back from the assessee the amount but part of the amount paid to the assessee might have come from Daluram Gaganmal till the death of his father on 22nd or 23rd June, 1964. He had entered into fictitious transactions but thereafter all transactions carried on by him including that with the assessee were genuine.

7. The Tribunal disbelieved the evidence of Vidyanand Sureka and held that only the payment of interest by cheque was recorded in the books of the creditor to give a colour of genuineness to the transactions although neither the loan nor the repayment were recorded and the creditor was not in a position to advance the loan on the 16th September, 1964. The Tribunal held that the assessee had not proved the source of the said sum of Rs. 1 lakh credited in the books of account. The appeal of the assessee was accordingly dismissed.

8. On the application of the assessee, this court directed the Tribunal to draw up a statement of case and to send up the following question of law for the opinion of this court:

“1. Whether there was any material and/or evidence to support the inference and conclusions of the Tribunal that the sum o£ Rs. 1 lakh in question represented the assessee's income from undisclosed sources?

2. Whether the conclusion arrived at by the Tribunal that the loans in question represented the assessee's income from undisclosed sources was perverse in the sense that no reasonable man could come to the above conclusion?”.

9. Dr. Debi Pal, learned counsel for the assessee, contended at the hearing that the credit entry in dispute entered in the books of the assessee as having been advanced by a third party, the only burden on the assessee was to establish (1) identity of the creditor and (2) the genuineness of the transaction represented by the entry. The assessee was not required to establish the source or the sources, that is, the source where from the loan was advanced by the creditor. Even if the explanation of the creditor as to his source was not accepted, the same could not be held to be the income of the assessee as there was no direct nexus between the two.

10. Dr. Pal also contended that the assessee had established the identity of the creditor, who was an income-tax assessee, who admitted the transaction and it was established from his evidence that he had capacity to advance the loan on the 16th September, 1964. The creditor also explained why the payment of interest was entered in the accounts and the loan was not so entered. Dr. Pal submitted that the assessee discharged its onus of proving the genuineness of the loan.

11. In support of his contentions Dr. Pal cited the following decisions:

Cit (Central), Calcutta v. Daulat Ram Rawatmull., [1973] 87 ITR 349 (SC). In this case, the question before the Supreme Court was whether the amount of a fixed deposit receipt in a bank in the name of one Biswanath, a son of a partner of the assessee, on the security whereof the assessee obtained overdraft, could be treated as the concealed income of the assessee. The Supreme Court observed as follows (page 359):

“The fact that Biswanath has not been able to give a satisfactory explanation regarding the source of Rs. 5,00,000 would not be decisive even of the matter as to whether Biswanath was or was not the owner of that amount. A person can still be held to be the owner of a sum of money even though the explanation furnished by him regarding the source of that money is found to be not correct. 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.”

12. CIT v. Mahalakshmi Textiles Mills Ltd., [1975] 100 ITR 360 (Mad). The controversy here was whether a sum of Rs. 3,00,000 shown as cash credit in the accounts of the assessee in the name of Thannappa Chettiar could be treated as income of the assessee from undisclosed sources as the creditor was found to be a man of no means.

13. The Madras High Court Observed that the decision of the Supreme Court in Cit (Central), Calcutta v. Daulat Ram Rawatmull., [1973] 87 ITR 349 squarely applied to the facts of the case before it and observed (See 100 ITR at p. 369):

“…the revenue has established only that Thenappa Chettiar was not in a position to explain the source for the monies deposited in his name in the assessee's account. From that fact alone the conclusion cannot be arrived at that the money belonged to the assessee.”

14. Sarogi Credit Corporation v. Commissioner Of Income-Tax, Bihar., [1976] 103 ITR 344 (Pat). Here, the controversy was whether the assessee had discharged its onus in respect of cash credits entered in its books of account within the meaning of s. 68 of the I.T Act, 1961. The Patna High Court, after considering several decisions of other High Courts, observed as follows (page 349):

“If the credit entry stands in the names of the assessee's wife and children, on in the name of any other, near relation, or an employee of the assessee, the burden lies on the assessee, though the entry is not in his own name, to explain satisfactorily the nature and source of that entry. But, if the entry stands not in the name of any such person having a close relation or connection with the assessee, but in the name of an independent party, the burden will still lie upon him to establish the identity of that party and to statisfy the Income-tax Officer that the entry is real and not fictitious. Once the identity of the third party is established before the Income-tax Officer and other such evidence are prima facie placed before him pointing to the fact that the entry is not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the third party obtained the money and how or why he came to make an advance of the money as a loan to the assessee. Once such identity is established and the creditors, as in the instant case, have pledged their oath that they have advanced the amounts in question to the assessee, the burden immediately shifts on to the department to show as to why the assessee's case could not be accepted and; as to why it must be held that the entry, though purporting to be in the name of a third party, still represented the income of the assessee from a suppressed source. And, in order to arrive at such a conclusion, even the department has to be in possession of sufficient and adequate materials. As I have already indicated above, the Income-tax Officer's rejection not of the explanation of the assessee, but of the explanation regarding the source of income of the depositors, cannot by itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee's books of account.”

15. S. Hastimal v. Commissioner Of Income-Tax, Madras., [1963] 49 ITR 273 (Mad). Here a sum of Rs. 15,000 was found credited in the name of the assessee in a firm where he was a partner. The assessee explained his source of this amount by showing that he had borrowed Rs. 63,000 from Bikaner, received the same by a bank draft and kept a part of the money in his bank. On the security of the said amount the assessee obtained a loan from the bank of Rs. 15,000 which was credited in his name in the firm. On these facts the Madras High Court held that the assessee had produced indisputable documentary evidence to show that the said Rs. 15,000 had come out of his borrowing and pointed out a source which could not be refuted by the revenue. After a lapse of ten years the assessee should not be placed upon the rack and called upon-to explain not merely the origin and source of his capital contribution but the origin of origin and the source of source as well. It was held that there was no material to hold that the amount credited to the capital account of the assessee in the firm represented his income from undisclosed sources.

16. Orient Trading Co. Ltd. v. Commissioner Of Income-Tax (Central), Calcutta., [1963] 49 ITR 723 (Bom). The question here was whether Rs. 2,50,000 standing in the books of the assessee to the credit of one Rampratap Agarwal belonged to the assessee and was includible in its assessment. The Bombay High Court observed as follows (page 735):

“It seems to us that where the entry stands in the name of the asses-see's wife or childern, or in the name of any other near relation or an employee of the assessee, the burden will lie on the assessee, though the entry is not in his own name, to explain satisfactorily the nature and source of that entry. Where the entry stands not in the name of any such person having a close relation or connection with the assessee, but in the name of an independent party, the burden will still lie upon him to establish the identity of the said party, and to satisfy the Income-tax Officer that the entry is real and not fictitious. When, however, in a case where the entry stands in the name of the third party, the assessee satisfies the Income-tax Officer as to the identity of the third party and also supplies such other evidence which will show, prima facie, that the entry is not fictitious, the initial burden which lies on him can be said to have been discharged by him. It will not, thereafter, be for the assessee to explain further how or in what circumstances the third party obtained money and how or why he came to make a deposit of the same with the assessee. The burden will then shift on to the department to show why the assessee's case cannot be accepted and why it must be held that the entry, though purporting to be in the name of a third party, still represents the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the department has to be in possession of sufficient and adequate material.”

17. Tolaram Daga v. CIT, [1966] 59 ITR 632 (Assam). In this case a sum of Rs. 10,000 and Rs. 719 as interest thereon was shown as credited in the name of the wife of the assessee in the books of account of the firm of M/s. Motilal Inderchand in which the assessee was a partner. The assessee being unable to explain the source of the said deposit, the ITO treated the amount as income of the assessee from undisclosed sources. On appeal, the AAC did not accept the declaration by the wife of the assessee that the said amount had been deposited by her out of her savings from earlier years and confirmed the order of the ITO. In a future appeal, the Tribunal found that there was no evidence that the wife received Rs. 9,000 at the time of her marriage 13 years before the deposit as alleged by the assessee and the alleged investment thereof prior to the deposit. The individual assessment of the wife on the basis of her voluntary return without production of any books of account and her declaration were not accepted by the Tribunal and the appeal was dismissed.

18. In the reference at the instance of the assessee, the Assam High Court observed as follows (p. 636):

“In the instant case, we have not only the accounts of the firm showing that the deposit stood in the name of Smt. Munni Devi Daga, but we have also, in addition, the declaration made by her that the money belonged to her and the deposit was made by her. It is also significant that this lady is also assessed to income-tax on the basis of a return made by her. The enquiry as to the source from which this amount was acquired or obtained by Smt. Munni Devi Daga, may, perhaps, be relevant in an investigation into the assessment to be made regarding her income and when determining the correctness of the return submitted by her. But the mere fact that the petitioner was unable to satisfy the authorities as to the source from which Smt. Munni Devi Daga derived the monies which she deposited with the firm cannot, in our opinion, be used against the petitioner. The Tribunal, therefore, was not justified in either demanding this proof or in drawing an adverse inference against the assessee on his failure to produce the same.

Mr. Ajit Sengupta, learned counsel for the revenue, contended on the other hand that on the questions as framed the contentions of Dr. Pal could not be gone into. The questions to be decided were, firstly, whether there was any material or evidence to support the inference or conclusion of the Tribunal and, secondly, if the conclusion of the Tribunal that the loan represented the assessee's income from undisclosed sources, was perverse, on the sole ground that no reasonable man could come to such conclusion.”

19. Mr. Sengupta contended that none of the primary facts found by the Tribunal has been challenged but only the ultimate conclusion was challenged. Mr. Sengupta urged that the Tribunal had found the following facts, viz., (i) interest had been shown to be paid by cheque to give a colour of genuineness to the transaction, (ii) assertion by Vidyanand Sureka that he had lent Rs. 1,00,000 to the assessee was not corroborated by the entries in his books and the reasons given for not recording the same were not accepted; (iii) the maximum capital (taking the higher of the figures mentioned) available to Sureka could only be about Rs. 1.5 lakhs and it did not follow that the entire capital was available for making the advance to the assessee; and that creditworthiness of the creditor had not been established; (iv) nor had the assessee proved the source of the credit.

20. Mr. Sengupta submitted that in the books of Vidyanand Sureka produced before the Tribunal neither the payment of Rs. 1 lakh nor its repayment were recorded but significantly the interest allegedly paid by an account payee cheque was recorded. Admittedly, Sureka had no other books. He is alleged to have withdrawn from his bank in April, 1964, an amount of Rs; 1,15,000 of which an admitted balance of Rs. 80,500 remained in his hands. He had been carrying on business of money-lending and in jute and such balance could not have been lying idle till the 16th September, 1964, at the time of the alleged advance to the assessee. Sureka is further alleged to have discontinued his namelending business by June, 1964, after the death of his father. On such facts the conclusion which followed was that the alleged loan was not genuine and the source of the alleged loan was therefore not proved.

21. Mr. Sengupta contended that the assessee had to establish:

(i) Identity of the creditor,

(ii) Creditworthiness of the creditor and his capacity to advance the loan, and

(iii) Genuineness of the transaction.

22. The Tribunal after considering all facts, circumstances and evidence has come, to the conclusion that neither the capacity of Vidyanand Sureka to advance the loan nor his creditworthiness was established by the assessee and thus the source and genuineness of the cash credit remained unproved.

23. Mr. Sengupta contended that neither the decision of the Supreme Court in Cit (Central), Calcutta v. Daulat Ram Rawatmull., [1973] 87 ITR 349 nor observations of the Patna High Court in Sarogi Credit Corporation v. Commissioner Of Income-Tax, Bihar., [1976] 103 ITR 344, nor the decisions in Tolaram Daga v. CIT, [1966] 59 ITR 632 (Assam) and CIT v. Mahalakshmi Textiles Mills Ltd., [1975] 100 ITR 360 (Mad), applied in the facts and circumstances of the instant case.

24. In support of his contentions Mr. Sengupta cited the following decisions:

(a) An unreported decision of this court in Income-tax Reference No. 20 of 1967—6-9-1972 intituled Knitting. Machineries Syndicate (India) Private Ltd. v. CIT, where this court made the following observations:

“We find that by a series of decisions of different High Courts as well as of the Supreme Court, it has been consistently laid down that when an assessee claims that he has borrowed money from a third party the initial onus lies on the assessee to establish (a) the existence of the third party.; (b) the ability of the third party to advance moneys and (c) that prima facie the loan is a genuine one. The assessee by proving these facts discharges the onus upon him. But that does not prevent the authority concerned to probe further into the matter and investigate the case on materials available to the authority to come to an independent and unbiased finding as to the genuineness of the transaction. It is true that the tax authority is not entitled to reject the assessee's case summarily or arbitrarily or without sufficient reason. It is true that the authority's, duty is to examine all the materials carefully and objectively. But if it is found that the authority concerned after careful consideration of all relevant materials has come to the conclusion that the assessee's case of a loan from a third party cannot be accepted, it is not open to this court to disturb the finding in a-reference under sec. 66(1).

(b) Another unreported decision of this court in Income-tax Reference No. 238 of 1970 intituled Basdeo Agarwalla v. Commissioner Of Income-Tax West Bengal Iii., [1980] 121 ITR 901 (infra), where also this court laid down a similar principle.

(c) Sriram Jhabarmull (Kalimpong) Ltd. v. Commissioner Of Income-Tax, [1967] 64 ITR 314 (Cal). The following observations were made by this court (at p. 316):

“It is not correct to say that as soon as the initial burden of proof on the part of the assessee is discharged, the Income-tax Officer is not entitled to reject the assessee's explanation without some other positive evidence falsifying the assessee's case. It cannot be true that any possible explanation which an assessee puts forth for clarifying the source and nature of a cash receipt must have to be accepted by the income-tax department nor can it be lawfully urged that the Income-tax Officer can arbitrarily reject the assessee's explanation. A dogmatic assertion on the part of either the assessee or the revenue authorities cannot determine the issue. Objectively it must be found out that the assessee's explanation suffers from inherent infirmity or is inconsistent with more reliable evidence adduced by the department, before the assessee's explanation is rejected.”

(d) Northern Bengal Jute Trading Co. Ltd. v. Commissioner Of Income-Tax., [1968] 70 ITR 407 (Cal).

(e) Todar Mal v. Commissioner Of Income-Tax, Patiala., [1977] 106 ITR. 619 (Punj).

(f) Dulichand Omprakash v. CIT, [1978] 113 ITR 476 (Cal).

In the aforesaid cases the assessees were held unable to establish the genuineness of cash credits in their respective accounts.

(g) An unreported judgment of this Bench in Income-tax Reference No. 507 of 1975 intituled Shankar Industries v. Commissioner Of Income-Tax, Central, Calcutta (since reported in [1978] 114 ITR 689 (Cal)). This case involved cash credits in the name of Sureka Jute Co., a concern belonging to Vidyanand Sureka, the creditor in the instant case.

It was ascertained from records that Vidyanand Sureka had made a confession on the 9th September, 1966, that his transactions were not genuine and he was acting only as a name-lender. None of the other creditors appeared. The Tribunal confirmed the addition made by the ITO. On the above facts this Bench, in a reference by the assessee, observed as under (at-p. 695):

“We would like to observe that the law on this point is now well settled. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor, the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. These things must be proved prima facie by the assessee and only after the assessee has adduced evidence to establish, prima facie, the aforesaid the onus shifts on to the department. In the instant case, it seems that the assessee established only the identity of the creditor and nothing more.”

(h) CIT v. Durgaprasad More, [1971] 82 ITR 540 (SC). Reliance was placed on the following observations of the Supreme Court in this case (page 546):

“Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to the reliability of a piece of evidence. But in that sphere the decision of the final fact-finding authority is made conclusive by law.”

25. We are of the opinion that the question in the present reference is wide enough so as to enable us to go into the question as to whether the assessee had established all the ingredients necessary to prove or substantiate the genuineness of the loan and whether the finding of the Tribunal was perverse.

26. We agree with Mr. Sengupta that the decision in Cit (Central), Calcutta v. Daulat Ram Rawatmull., [1973] 87 ITR 349 (SC) has no application to the facts and circumstances of this case.

27. So far as this court is concerned the law on cash credits is now well settled by several decisions of this court in Knitting Machineries Syndicate (India) Pvt. Ltd. (ITR No. 20 of 1967 dated 6-9-1972), Basdeo Agarwalla, [1980] 121 ITR 901 (infra), Sriram Jhabarmull, [1967] 64 ITR 314, Northern Bengal Jute Trading Co. Ltd., [1968] 70 ITR 407, Dulichand Omprakash, [1978] 113 ITR 476 and Shankar Industries, [1978] 114 ITR 689.

28. In the instant case, the Tribunal has found that although several cash transactions were recorded in the books of Vidyanand Sureka yet neither the loan to the assessee nor its repayment by the assessee were recorded in such books. The Tribunal disbelieved the evidence of Vidyanand Sureka and held that the payment of interest on the said loan was made by cheque and was recorded in the said books with a view to give a colour of genuineness to the said transaction. On a consideration of all facts and materials before it the Tribunal came to the conclusion that from the resources available to him on the 16th September, 1964, Vidyanand Sureka was not in a position to advance Rs. 1 lakh to the assessee and his creditworthiness was not established and thus the assessee had not proved the source of the said credit of Rs. 1 lakh.

29. The assessee has no doubt established the existence and identity of the creditor but has failed to establish the ability of the creditor to advance the said loan or the genuineness of the transaction. For the above reasons, in our opinion, it cannot be said that there was no material or evidence to support the inference or conclusions of the Tribunal that the said sum of Rs. 1 lakh represented the assessee's income from undisclosed sources nor the same can be said to be perverse.

D.K Sen, J.:— I agree.