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Commissioner Of Income-Tax v. Precision Finance Pvt. Ltd.

Calcutta High Court

Jun 14, 1993

Judgment

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Structured Summary of the Court's Opinion

Factual and Procedural Background

This is a reference under section 256(2) of the Income-tax Act, 1961, concerning the assessment years 1978–79 and 1979–80 for the assessee Messrs. Precision Finance Pvt. Ltd., whose accounting years ended on June 30, 1977 and June 30, 1978 respectively. The company's business is loan financing. For the year 1978–79 there were two ex parte assessments under section 144 which were subsequently reopened; the present assessment was under section 143(3)/146 dated March 11, 1986.

The Assessing Officer (AO) found several cash credits in the assessee's books, totalling Rs. 5,45,000 for 1978–79 (detailed list of ten creditors and amounts appears in the record) and made additions after investigation because many creditors could not be traced, corresponding income-tax file numbers or confirmations were not verifiable, or the alleged loans did not appear in the creditors' balance-sheets or departmental records. For 1978–79 the AO added Rs. 4,45,000 as cash credits and disallowed related interest of Rs. 19,631. For 1979–80 the AO added Rs. 4,50,000 as income from other sources plus interest of Rs. 37,512 for similar reasons.

The assessee appealed to the Commissioner of Income-tax (Appeals) (CIT(A)), who confirmed the additions. The assessee then appealed to the Tribunal, which set aside the AO's additions and deleted the additions for both years, holding that the assessee had proved identity and creditworthiness and that the AO should have verified bank accounts of the creditors since transactions were by account payee cheques. The question referred to this Court was whether the Tribunal was justified in law in deleting the additions of Rs. 5,64,631 and Rs. 4,84,205 (these totals include interest) as unexplained credits and interest for the two assessment years respectively.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the additions of Rs. 5,64,631 and Rs. 4,84,205 as unexplained credits and interest thereon for the assessment years 1978–79 and 1979–80, respectively?

Arguments of the Parties

Appellant (Assessee) — Summarised Arguments

The assessee contended that it had proved the identity of the creditors and the creditworthiness of the parties and the genuineness of the transactions.
The assessee relied on the fact that the transactions were effected by account payee cheques and other related evidence, and urged that the Assessing Officer should verify the bank accounts of the creditors to establish the genuineness of transactions.

Revenue / Assessing Officer — Summarised Position

The Assessing Officer deputed inspectors to investigate and found that, in many instances, the income-tax file numbers furnished by the assessee did not exist, the creditors were not traceable at the addresses given, or the alleged loans were not reflected in the creditors' balance-sheets or departmental records. Examples include Mohanlal Golcha, Associated Syndicate Co., Sun Enterprises, Rajasthan Jute Supply Co., Probhat Trading Co., Mahalakshmi Bastralaya, Sohanlal Suresh Kumar and others.
On these factual findings, the AO added Rs. 4,45,000 (1978–79) and Rs. 4,50,000 (1979–80) as unexplained credits / income, and disallowed interest amounts (Rs. 19,631 for 1978–79 and Rs. 37,512 for 1979–80).
The Commissioner of Income-tax (Appeals) confirmed these additions after noting that the assessee had many opportunities (over about 7½ years) to produce relevant documents or explanations and failed to do so; enquiries and letters revealed that files did not exist or records did not tally, and creditors were often not found at given addresses.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court reviewed the Tribunal's order and the factual findings made by the Assessing Officer and the Commissioner of Income-tax (Appeals). The Court's analysis proceeded in the following steps, based strictly on the material in the record:

Examination of the Tribunal's approach: The Court observed that the Tribunal did not apply its mind to the specific facts and circumstances of this case. The Tribunal had reversed the AO's findings essentially because transactions were by account payee cheques and because the AO had not checked bank accounts of the creditors.
Review of the AO's factual findings: The AO's inspectors made inquiries in departmental records and at addresses supplied by the assessee. For a number of creditors the AO found that the income-tax file numbers as given did not exist in the locations indicated, the creditors could not be located at the addresses given, or the creditors' balance-sheets and departmental records did not reflect the alleged loans. In two instances (Moolchand Chhabra and Somani Supply Syndicate Company) records were available, but in other cases, files or corroboration were absent.
Opportunity afforded to the assessee: The Court noted that the assessee was given repeated opportunities across roughly 7½ years (from September 16 to February 24, 1986) to produce documents to substantiate the genuineness of the loans, but the assessee's representatives did not respond adequately and produced nothing before the CIT(A). Several letters had been issued by the department during this period indicating that loans could not be verified and requesting adequate proof.
Legal burden and proper sequence of investigation: The Court emphasised that it is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. The Court held that the Tribunal erred in effectively shifting to the AO a duty to verify bank accounts (i.e., to make bank verifications) without accepting that the assessee had first established the identity and creditworthiness of the creditors. Mere production of particulars or mere payment by account payee cheque was not enough to discharge the assessee's burden.
Conclusion from the facts: Because the AO's enquiries revealed non‑existence of files, inability to trace creditors at given addresses, or inconsistency with creditors' own balance-sheets in several instances, the Court found that the primary ingredient — the identity of the creditors — was not established. If identity is not established, the Court reasoned, questions of genuineness of transactions and creditworthiness cannot arise in favour of the assessee.
Result of analysis: The Tribunal's deletion of the additions was therefore unsustainable because it failed to apply these factual-legal standards and improperly relied on the existence of account payee cheques and on an expectation that the AO should have made bank enquiries without the assessee first establishing identity and creditworthiness.

Holding and Implications

Holding: The Court answered the referred question in the negative and ruled in favour of the Revenue. In other words, the Tribunal was not justified in law in deleting the additions, and the Tribunal's order was set aside. The Court observed that mere payment by account payee cheque does not by itself establish genuineness and that the assessee bears the burden of proving identity, creditworthiness and genuineness of alleged loans. The Court expressly stated: "The question before us is answered in the negative and in favour of the Revenue."

Direct implications for the parties:

The deletions made by the Tribunal are disapproved; the additions made by the Assessing Officer (as confirmed by the CIT(A)) stand subject to the usual consequences of the reference procedure.
The Court ordered that there will be no order as to costs.

Broader implications: The opinion focuses on the proper allocation of the evidential burden in tax assessments — specifically that an assessee must establish identity and creditworthiness of creditors and genuineness of transactions before an AO is required to undertake bank-account verification. The opinion does not articulate or purport to establish any broader new legal principle beyond applying these standards to the facts of this case.

Show all summary ...

Ajit K. Sengupta, J.:— In this reference under section 256(2) of the Income-tax Act, 1961, for the assessment years 1978–79 and 1979–80, the following question has been referred to this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 5,64,631 and Rs. 4,84,205 as unexplained credits and interest thereon for the assessment years 1978–79/1979–80, respectively?”

2. Shortly stated the facts leading to this reference are that the assessee is Messrs. Precision Finance Pvt. Ltd. and the assessment years involved are 1978–79 and 1979–80 for which the accounting periods ended on June 30, 1977, and June 30, 1978, respectively. The business of the assessee-company is loan financing. In the assessment for the assessment year 1978–79, there were two assessments under section 144 due to non-compliance by the assessee but both the ex parte assessments were reopened under section 146 of the Income-tax Act, 1961. The present assessment was a third assessment made under section 143(3)/146 on March 11, 1986. In the course of assessment proceedings for the year 1978–79, the Assessing Officer found that the following cash credits appeared in the books of account of the assessee for which the income-tax file numbers of the creditors as furnished by the assessee were as under:

Sl. No. Name of the creditors Cash credit I.T file Nos. Rs. 1. Mohanlal Golcha 80,000 11-018-FX-5414 Cal/IV()/H 2. Assam Jute Supply Company 10,000 Not furnished 3. Associated Syndicate Company 50,000 11-082-FD-4270 Cal/I(1)/G 4. Sun Enterprises 75,000 11-014-PX-2155 Cal/V(2)/F 5. Rajasthan Jute Supply Company 50,000 11-013-PN-4659 Cal/VI/M 6. Probhat Trading Company 80,000 11-043-PX-2648 Cal/II(2)/L 7. Mahalakshmi Bastralaya 50,000 11-051-PY-7837 Cal/VI/C 8. Sohanlal Suresh Kumar 25,000 V(1)/734-S/G 9. Mulchand Chabra 25,000 11-011-9410 Cal/IV(2)/M 10. Somani Supply Syndicate Company 1,00,000 11-054-FQ-0953 Total 5,45,000

3. The Assessing Officer deputed his inspector to make investigation about the above loan creditors. On enquiry, it was found that the income-tax file numbers given in respect of Mohanlal Golcha (Sl. No. 1) was not available and the said party was not also available at the given address at 161/1, M.G Road, Calcutta. In respect of Assam Jute Supply Company (Sl. No. 2), the assessee neither filed the confirmatory letter nor the address was fully given which could be verified by the inspector. In respect of Associated Syndicate Co. (Sl. No. 3), the inspector could not find the file in District (1), C-Ward, Calcutta. Moreover, the creditor, Messrs. Associated Syndicate Company, was not traceable at the given address at 2, Nawab Badruddin Street, Calcutta. In respect of Sun Enterprises (Sl. No. 4), on enquiry the file could not be found in District V(2), F-Ward. The said party was also not traceable at the given address at 4, Wood Street, Calcutta. In respect of Rajasthan Jute Supply Company (Sl. No. 5), the file could not be found in District VI also. The party was not traceable at the given address at 11, Pollock Street, Calcutta. Subsequently, the assessee in respect of this party had furnished a file number of District 7(1) but the file also could not be found out. In respect of Probhat Trading Company (Sl. No. 6), the file could not be found out in District 11(2), B-Ward. In respect of Mahalakshmi Bastralaya (Sl. No. 7), the file number given by the assessee could not be found out in C-Ward, District VI. In respect of Sohanlal Suresh Kumar (Sl. No. 8), the file number given could not be found out in District V(1), Calcutta. Moreover, the party was not traceable at the given address. In respect of Mulchand Chabra it was found on examination of the income-tax assessment records that the party had income from commission and interest. His balance-sheet for the relevant year did not reflect the alleged loan given to the assessee-company. In respect of Somani Supply Syndicate Company (Sl. No. 10), it was found on enquiry that the loan given to the assessee-company was not reflected in the balance-sheet. For the aforesaid reasons, the Assessing Officer made an addition of Rs. 4,45,000 as cash credits and also disallowed interest relatable to those loans amounting to Rs. 19,631 for the assessment year 1978–79. Similarly, for the assessment year 1979–80, the Assessing Officer made an addition of Rs. 4,50,000 as income from other sources as he found similar defects in respect of cash credits from the following parties:

1. Mohanlal Chola.

2. Rajasthan Jute Supply Company.

3. Assam Jute Supply Company.

4. Rajendra Kumar Gupta.

5. Hemraj Sagarmal.

6. Lakshmi Narayan Botanlal.

7. Sitaram Khaitan.

8. Kedarnath Ramratan.

4. The Assessing Officer also added interest relatable to the fictitious loans amounting to Rs. 37,512 for the assessment year 1979–80. Aggrieved by the orders of the Assessing Officer, the assessee filed appeals before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), considering the facts and circumstances of the case, confirmed the additions.

5. Being aggrieved, the assessee came up in appeal before the Tribunal. The Tribunal found that all the parties were old parties. It also found that the Assessing Officer made enquiries in the old districts of the Department but did not try his hand in the survey circles of the Department to find out the creditors. Therefore, the Tribunal held that it could not be said that efforts were made by the Assessing Officer to trace the income-tax files of the cash creditors. The Tribunal also held that the Assessing Officer was expected to find out the truth from all districts. In this case all the transactions were made by account payee cheques. The assessee urged the Assessing Officer to verify the bank accounts of the parties to find out the truth of the transactions which he did not do. The Tribunal further found that since the Assessing Officer did not verify the bank accounts of the creditors, it should be held that the creditworthiness and genuineness of the transactions have been established. By so holding the Tribunal deleted the additions made by the Assessing Officer for the two years under reference.

6. On going through the order of the Tribunal, it appears to us that the Tribunal did not apply its mind to the facts and circumstances of this case. The Tribunal disposed of the appeal in the following terms:

“We have examined the assessment order as well as the order of the Commissioner of Income-tax (Appeals). We have taken into consideration the arguments advanced by learned counsel for the assessee and the learned departmental representative, Sri K.L Bhowmick. We do find substance in the assessee-company's appeals to allow relief. The assessee-company has proved the identity of the creditors and their creditworthiness and the genuineness of the transactions should have been found out by the Income-tax Officer by making investigation from their bank accounts because of the account payee cheques being issued and other related evidence. The additions on account of these credits cannot stand. Therefore, we are unable to confirm the order of the Commissioner of Income-tax (Appeals).”

7. The following facts are undisputed in respect of the alleged cash credits:

Rs. (a) Mohanlal Golcha No such file was available in the above number nor the party is available at address 161/1, M.G Road, Calcutta 80,000 F. No. 11-018-FX-5414/ Cal/(IV(I)/H (b) Assam Jute Supply Co. For want of loan confirmation and the address given could not be verified 10,000 (c) Associated Syndicate Co. There is no such file in District I(I)/G-Ward, moreover the assessee is not traceable at 2, Nawab Baddruddin Street 50,000 11-082-FT-4270 Cal/I(I)/G (d) Sun Enterprises No such file in District V(2), F-Ward, moreover the assessee is not traceable at the given address at 4, Wood Street, Calcutta 75,000 11-014-PX-2155 Cal/V(2)/F (e) Rajasthan Jute Supply Co. There is no such file in District VI and moreover the assessee is not traceable at 11, Pollock Street, Calcutta. Out of abundant precaution enquiry was made at District V(I) also, but there is no such file 50,000 11-013-PN-4659 Cal/VI(M) (f) Probhat Trading Co. There was no such file in District 11(2)/L-Ward 80,000 11-043-PX-2648 Cal/2(2)/L (g) Mahalakshmi Bastralaya There is no such file in District VI/G-Ward, and moreover in District V(I)/G-Ward also 50,000 11-051-PY-7837 Cal/VI(C)/L (h) Sohanlal Suresh Kumar There is no such file in District V(I)/G-Ward, and moreover the assessee is not available at 203/1, M.G Road, Calcutta 25,000 V(I)/734/8.G (i) Moolchand Chabra He has shown commission on interest for bogus name-lending business. His balance-sheet for the relevant year does not reflect the loans given to the assessee 25,000 11-011-PX-9410 Cal/IV(2)/M

(j) Somani Supply Syndicate Co. The loans advanced to the assessee to the tune of Rs. 50,000 were not reflected in the balance-sheet of the firm as on March 31, 1977. But the party filed photostat copy of the balance-sheet where loans were reflected. The loans were not reflected in the balance-sheet filed by the party with Income-tax Officer, District V(I). Hence, the loan of Rs. 1,00,000 could not be regarded as genuine and is added back 1,00,000 1154-FQ : 0953 Cal/C/VI(C)

8. It appears from the order of the Commissioner of Income-tax (Appeals) that the Income-tax Officer allowed opportunity to the assessee for about 7 ½ years starting from September 16, and ending on February 24, 1986, to produce the relevant documents in support of the contentions that the loans were genuine. Those opportunities were not availed of Nothing was produced before the Commissioner of Income-tax (Appeals). Enquiries were conducted through the inspector on different dates and it was found that either the files do not exist as per details given by the assessee or the records do not tally with the facts mentioned by the assessee, except in two cases where the records were available in respect of Moolchand Chhabra and Somani Supply Syndicate Company and in all other cases creditors were not even found at the addresses given by the appellant. Apart from having enquiries made by the inspectors several letters were also issued to the assessee between January 16, 1982, and February 24, 1986, bringing to its notice that the loans could not be verified and adequate proof is required. At no stage have the appellant's representatives responded properly. Nowhere was the question of checking up the bank account raised.

9. It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. In our view, on the facts of this case, the Tribunal did not take into account all these ingredients which have to be satisfied by the assessee. Mere furnishing of the particulars is not enough. The enquiry of the Income-tax Officer revealed that either the assessee was not traceable or there was no such file and, accordingly, the first ingredient as to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, accordingly, it is to be presumed that the transactions were genuine. It was not for the Income-tax Officer to find out by making investigation from the bank accounts unless the assessee proves the identity of the creditors and their creditworthiness. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. In that view of the matter, the question before us is answered in the negative and in favour of the Revenue. There will be no order as to costs.

Nure Alam Chowdhury, J.:— I agree.