Income-tax Reference No. 327 of 1971

Decided on November 26, 1981

The Judgment of the Court was delivered by

R.N Pyne, J.:— In this reference under s. 256(2) of the I.T Act, 1961, we are concerned with the assessment year 1963-64, the corresponding account period being the year ended March 31, 1963. The assessee carried on business of manufacturing strand wire, barbed wire, staple hooks and wire nails. In the course of the assessment of the assessee for the said assessment year on a scrutiny of the books of the assessee-company, the ITO found, in the books of account, credits amounting to Rs. 2 lakhs in the name of one M/s. Surajmull Ganeshram on different dates. Thereafter, summons under s. 131 of the I.T Act was issued to M/s. Surajmull Ganeshram (hereinafter referred to as “the creditor firm” and in response thereto one Bhudharmal Khaitan, a partner of the creditor-firm, appeared on September 6, 1966, and produced the cash book and ledger of the firm. The concerned ITO examined these books and took necessary extracts from the cash book. It was found by the ITO from these extracts that the creditor-firm credited in their cash book in the names of parties who had already admitted that loans appearing in their respective books of accounts in the name of the creditor-firm were their own funds. The ITO also found some discrepancy with regard to the date of one of the credit entries. In the above circumstances, the ITO again issued a summons under s. 131 on May 19, 1967, to the creditor-firm requesting it to produce its books of account and ledger and the bank statement for the period from April 1, 1962, to March 31, 1965. The said documents were, however, not produced by the creditor-firm. The ITO, by his letter dated February 28, 1968, requested the assessee to produce the creditor with its books of account of March 5, 1968. In reply to the said letter, the assessee sent a letter dated March 5, 1968, stating that it had already filed a copy of the accounts of the lending firm as also a certificate from it and that one of the partners of the creditor-firm appeared before the ITO with the books of accounts. The assessee also filed an affidavit of Shri Bhudharmal Khaitan, a partner of the creditor-firm, wherein it was admitted that the loans made to the assessee-company from year to year were out of cash balance held by the firm. As the assessee failed to produce the creditor with its books of account for verification, the ITO declined to accept the aforesaid affidavit. It appears that the ITO relied on certain enquiries made by him which revealed that the creditor firm was doing the business of name lending only and some of the parties who had received similar loans from the creditor-firm admitted that the loans were not genuine and the credits represented their own money-. The ITO was of the view that unless there was positive evidence to show that the creditor was in a position to advance funds, the statements that the money belonged to them could not be accepted. The ITO held that the loans were not proved to be genuine and, therefore, he treated the sum of Rs. 2 lakhs as the assessee's suppressed income from undisclosed sources and made an addition of Rs. 2 lakhs. He also disallowed the interest of Rs. 1,649 in respect of the above loan.

2. Being aggrieved by the aforesaid assessment order, the assessee preferred a first appeal to the AAC. It was urged before the AAG that the creditor was a third party, one of its partners appeared before the ITO and produced the books of account and the creditor was assessed to income-tax on substantially high income. The assessment orders of the creditor-firm for the assessment years 1960-61 to 1963-64 were filed before the AAC. It was observed by the AAC that the assessment order, for the year 1963-64 on the creditor-firm, revealed that the loans advanced as per the books exceeded Rs. 185 lakhs whereas the creditor in that year had no such capacity to lend and some of the parties, figuring as debtors, have admitted that the loans shown were their suppressed income. The AAC declined to place any reliance on the said affidavit of the partner of the creditor-firm, Shri Bhudharmal Khaitan. It was held by the AAC that the loans were not proved to be genuine and, therefore, he upheld the addition. Against the said order of the AAC, the assessee preferred a second appeal to the Tribunal. After hearing the rival contentions of the parties, the Tribunal was of the view that the loans were genuine. It was found by the Tribunal that the assessee-company maintained accounts in the regular course of business and got receipts showing the repayment of the money. The cash book and ledger of the creditor-firm were produced by one of its partners before the ITO on September 6, 1966, who examined the books and took extracts from them. According to the Tribunal, the assessee-company could be required to prove the source of the loan but not the source of that source. The Tribunal also accepted the affidavit of Shri Bhudharmal Khaitan who had also appeared before the ITO with the books of account of the lending firm on an earlier occasion. The Tribunal perused the assessment orders on the creditor-firm for the assessment years from 1960-61 to 1963-64. From those assessment orders, certain conclusions were drawn by the Tribunal, viz., (i) that the lending-firm had been doing business in jute and money-lending for a long number of years on substantial scale; (ii) it had been assessed on sufficiently large amounts; (iii) that each partner of that firm had a large carry forward capital. On a consideration of the entire evidence, the Tribunal was of the view that the creditor was a genuine party and the entries were also genuine. Regarding the enquiries made by the ITO, it was observed by the Tribunal that the ITO could get an enquiry made through an Inspector and rely on the result of such an enquiry, but before doing so he should communicate the substance of the result of the enquiries to the assessee. According to the Tribunal, in the instant case, that was not done. With regard to the onus of proof, the Tribunal observed that the assessee should prove that the person from whom he claims to have received the money is a genuine and not fictitious person and, further, that the entry is also genuine. Thus, the initial burden is on the assessee to explain the receipt of cash and to prove the genuineness of the transaction. The Tribunal applied the ratio laid down by the Bombay High Court in the case of Orient Trading Co. Ltd. v. Commissioner Of Income-Tax (Central), Calcutta., [1963] 49 ITR 723. It was held by the Tribunal that the assessee had discharged the initial burden. It was observed that the Department did not challenge the genuineness of the creditor. According to the Tribunal, the assessee had succeeded in proving that the creditor had the capacity to advance the loan and the entry was genuine. It further observed that the assessee could not be called upon to prove as to how and wherefrom the creditor obtained this money, and why, it advanced the loan to the assessee. It was, therefore, held by the Tribunal that the sum of Rs. 2 lakhs could not have been treated as assessee's income from undisclosed sources and it deleted the addition of Rs. 2 lakhs and also allowed the interest of Rs. 1,649.

3. On the above facts, the following questions of law have been referred to the court under s. 256(2) of the I.T Act, 1961:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law or acted without evidence in arriving at the finding that the sum of Rs. 2 lakhs in the name of Surajmull Ganeshram and interest of Rs. 1,649 paid thereon are genuine and do not represent the assessee's income assessable for the assessment year 1963-64?

2. Whether the Tribunal misdirected itself in law in completely ignoring or overlooking the material evidence on record and whether its decision is thereby vitiated?”

4. The scope of enquiry in the instant reference is limited. The identity of the creditor is not in dispute. Only, the dispute relates to the creditworthiness of the creditor and/or the genuineness of the loan transaction.

5. For the consideration of the above points, the relevant principles derived from decided cases appear to be that when the assessee claimed that he had borrowed money from a third party, the initial onus lies on the assessee to establish : (a) the existence of the 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 authorities' duty is to examine all materials carefully and objectively. But, if it is found that the authority concerned, after a careful consideration of all materials, has come to the conclusion that the assessee's case of loans from a third party cannot be accepted, it is not open to this court to disturb the findings in a reference under s. 66 of the Indian I.T Act, 1922 or under s. 256 of the I.T Act, 1961.

6. As stated, hereinbefore, the identity of the creditor is not in dispute in the instant reference. But the controversy is with regard to the ability of the creditor to advance money and/or the genuineness of the loan transactions.

7. Department's contention is, that the Tribunal has overlooked and/or ignored some material facts found by the authorities below, i.e, the ITO and the AAC. Further, the Tribunal has not considered all the materials on the record of this case. The decision of the Tribunal is based on surmise and conjecture.

8. The assessee, on the other hand, disputes the Department's contention. According to the assessee, after considering and evaluating all material facts and evidence of the case, the Tribunal has come to the conclusion that the creditor has the capacity to give the loan and that the impugned transaction is genuine. It has been further submitted that various points have been taken before the Tribunal and, further, in a reference, it is not open to the court to reappreciate the facts, materials and evidence found by the authorities below, and come to a different conclusion.

9. We have considered the materials on record as also the orders of the ITO, the AAC and the Tribunal. It appears to us, that the Tribunal has failed to consider and/or has ignored some relevant facts and/or materials on record of this case.

10. It was submitted, on behalf of the Department, that the Tribunal overlooked and/or ignored the fact that the creditor was doing name-lending business at a fantastic scale as found by the AAC. The Tribunal also did not consider and/or has ignored the finding of the ITO as also of the AAC, regarding the fact that the creditor at the relevant time was doing mainly name-lending business. It was further submitted that the Tribunal misdirected itself in holding that the creditor did substantial business and was assessed at substantial amount as stated in the assessment order for the year 1963-64, and for the earlier years. But, the finding against the creditor was not considered. It was, further submitted that if the cash book up to August 3, 1962, was fictitious and the creditor had no fund, as held by the ITO, then how could the creditor, advance the loan in subsequent years?

11. On behalf of the assessee, it was submitted that the Tribunal duly considered the assessment orders of the creditor for 1960-61 to 1963-64, and upon a consideration of the same and other materials before it was of the view that creditors' capacity to lend money and the genuineness of the transaction were proved.

12. The assessee's representative furnished copies of the assessment orders of the creditors for the years 1960-61 to 1963-64 to the AAC, and they were also before the Tribunal. The assessment order for 1963-64, would show that the creditor was mainly doing name-lending business at the relevant period. It appears that, while drawing various conclusions from the said assessment orders, the Tribunal overlooked and/or failed to consider the aspect of name-lending as will appear from p. 42 of the paper book. The Tribunal also overlooked the fact, that the creditor was mainly carrying on business of name-lending at the relevant time and that the name-lending and money-lending businesses are mutually exclusive. As the Tribunal overlooked and/or ignored the aspect of the business of name-lending of the creditor it misdirected itself in holding that the credit-worthiness of the creditor was proved.

13. It was argued on behalf of the Department that the Tribunal ignored the fact that various parties in whose favour loans were shown in the creditor's books of account admitted that those moneys were their own moneys and not advanced by the creditor. On behalf of the assessee, it was submitted that the Tribunal duly considered the above finding. It appears that the above admissions were not duly considered by the Tribunal. It also did not consider the discrepancy in the date regarding advance made to the assessee in the creditor's books of account as found by the ITO.

14. Discrepancy about the date as to when the advance was made to the assessee, was found by the ITO and, thereafter, for further enquiry a summons was served on the creditor on May 19, 1966, to produce its account books, ledger and bank statement for the period between April 1, 1962, to March 31, 1965, but in spite of repeated opportunities being given the account books were not produced. The admissions made by several parties as stated above were also not considered by the Tribunal.

15. It should also be noted that inasmuch as further clarification on the question of the capacity of the creditor became necessary in view of the information gathered by the ITO as also in view of the discrepancy in the date, the assessee was asked to produce the creditor with his books of account. In this connection, the letters dated February 28, 1968 and March 5, 1968, should be noted. In the said letter dated February 28, 1968, it was stated why further inspection became necessary. The definite charge against the creditor was that it mainly acted as a name-lender. The Tribunal overlooked and/or ignored this aspect of the case.

16. Regarding the assessment order of the creditor for the assessment year 1963-64, it would appear that the specific finding was that the main income of the creditor was by means of name-lending and the income from business was very small. The Tribunal ignored the finding of the ITO that the creditor had no resources to advance the loan and it acted as a mere name-lender. Further, the partners' carry forward capital was not material for the purpose of loan. The assessee's case was that the money was advanced out of the cash book, and not out of the income of the creditor, which the assessee failed to prove. The assessee also relied upon the creditor's books of account in support of its contention, but in spite of repeated reminders such books of account were not produced.

17. It further appears that AAC in his order observed (at page 32 of the Paper Book) that although the partner of the creditor-firm at one stage appeared before the ITO, and could only show that the name of the assessee appeared as creditor in the books of account of the creditor-firm, yet it failed to give details as to how cash came from which the amount was advanced. The Tribunal failed to consider and/or has ignored the above finding of the AAC. It, therefore, appears that the Tribunal ignored and/or overlooked the relevant materials on record as also the relevant findings of the ITO and the AAC. Further, the Tribunal erred and/or was misdirected, in law, in arriving at the conclusions that the genuineness of the loan transaction was proved.

18. In the aforesaid view of the matter, we answer both the questions in the affirmative and in favour of the Revenue. There will, however, be no order as to costs.