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Commissioner Of Income Tax v. Ranchhod Jivabhai Nakhava
Factual and Procedural Background
This Appeal arises under Section 260A of the Income Tax Act, 1961, filed by the Revenue against the order dated 25th August 2010 of the Income Tax Appellate Tribunal, Rajkot Bench, in I.T.A.No.710/RJT/2010 for the Assessment Year 2006-07. The Tribunal dismissed the Revenue's appeal and affirmed the order of the Commissioner of Income Tax (Appeals), who had deleted an addition of Rs. 15 lac made by the Assessing Officer under Section 68 of the Income Tax Act on account of alleged unexplained income.
The assessee, an individual engaged in trading iron scrap, claimed loans totaling Rs. 15 lac from three persons. The assessee produced confirmation letters, PAN card photocopies of the lenders, and showed that the loans were received by account payee cheques. The Assessing Officer examined the lenders under Section 131, who gave inconsistent statements regarding the source of the money, leading the Assessing Officer to add Rs. 15 lac as unexplained income.
The assessee appealed to the Commissioner of Income Tax (Appeals), who deleted the addition after observing inconsistencies in the lenders’ statements and noting that the Assessing Officer had not verified the books of the entity M/s. Vaibhav Enterprises, from whose account the cheques were issued. The Tribunal affirmed the appellate order. The Revenue is aggrieved by this decision and filed the present appeal.
Legal Issues Presented
- Whether the Tribunal committed a substantial error of law in confirming the deletion of the addition of Rs. 15 lac made under Section 68 of the Income Tax Act by the Assessing Officer?
Arguments of the Parties
Appellant's Arguments (Revenue)
- The Revenue contended that it had discharged its onus and that the burden was on the assessee to prove the genuineness and creditworthiness of the creditors.
Respondent's Arguments (Assessee)
- The assessee established that loans were taken by account payee cheques from income tax assessees whose PAN details were disclosed.
- Produced confirmation letters from the lenders.
- Asserted that since the lenders and the entity M/s. Vaibhav Enterprises are assessed to income tax, the Assessing Officer should have verified their income tax returns before doubting the genuineness of the loans.
- Argued that the Assessing Officer wrongly shifted the burden to the assessee without verifying the lenders’ tax returns, contrary to the principles under Section 68.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court analyzed the application of Section 68 of the Income Tax Act, which places an initial burden on the assessee to explain the nature and source of loans or credits when unexplained. The Court observed that the assessee discharged this initial burden by producing confirmation letters, PAN details, and bank cheques evidencing the loans from income tax assessees.
The Court held that the Assessing Officer erred by examining the lenders under Section 131 without first verifying from the respective Assessing Officers whether these lenders had disclosed the loans in their income tax returns. The Court emphasized that such verification is a necessary procedural step before demanding further proof from the assessee about the genuineness or creditworthiness of the creditors.
Since the lenders’ statements were inconsistent and the Assessing Officer had not checked the books of M/s. Vaibhav Enterprises, the Court found the Assessing Officer’s approach flawed. The Court also noted that the Assessing Officer cannot disbelieve the correctness of the creditors’ assessments if the co-ordinate Assessing Officers have accepted their returns reflecting these transactions.
Accordingly, the Tribunal and the Commissioner of Income Tax (Appeals) were correct in deleting the addition and dismissing the Revenue’s appeal.
Holding and Implications
The Appeal is dismissed.
The Court’s decision directly affirms the deletion of the addition of Rs. 15 lac under Section 68, confirming that the Assessing Officer must verify the income tax returns of creditors before disbelieving transactions evidenced by account payee cheques and confirmation letters. No new legal precedent was established; the ruling clarifies procedural adherence under Section 68 and the limits of the Assessing Officer’s powers in such circumstances.
ORDER
Bhaskar Bhattacharya, ACTG. C.J.
1. This Appeal under Section 260A of the Income Tax Act, 1961 is at the instance of the Revenue and is directed against the order dated 25th August 2010 passed by the Income Tax Appellate Tribunal, Rajkot Bench, Rajkot in I.T.A.No.710/RJT/2010 for the Assessment Year 2006-07, by which the Tribunal has dismissed the appeal preferred by the Revenue and has affirmed the order passed by the Commissioner of Income Tax (Appeals). Being dissatisfied, the Revenue has come up with the present Appeal.
2. The only question that arise for determination in this Appeal is, whether the Tribunal below committed substantial error of law in confirming the decision of the Commissioner of Income Tax (Appeals), by which the said appellate authority deleted addition of Rs. 15 lac made on account of alleged unexplained income under Section 68 of the Income Tax Act by the Assessing Officer.
3. The following facts are not in dispute :
The assessee is an individual and is engaged in the business of trading of iron scrap. In the Accounting Year in question, the assessee claimed to have taken the following loans:
(1) Smt. Manjula J. Shah Rs. 4 lac
(2) Shri. Mital J. Shah Rs. 3 lac
(3) Shri. Vaibhav J. Shah Rs. 8 lac
4. During the course of proceeding, the assessee had produced confirmation letters from these depositors and the photocopy of their PAN card. It further appears that the assessee had received loans by Accounts Payee Cheque from these three persons.
5. The Assessing Officer, without verifying whether those three creditors in their respective income tax return had shown those transactions, decided to examine those three persons under Section 131 of the Income Tax Act. Those persons stated that before receiving the cheques, the assessee had given cash to them which was deposited in the account of M/s. Vaibhav Enterprises on different dates, and against that, they had received cheque and out of that balance they had deposited the money with the assessee.
6. The assessee was given opportunity to cross-examine two of the lenders. In the cross-examination, both the lenders had confirmed giving loan to the assessee, and in response to the question of the assessee about the source of the money, it was stated that they had received cash from the assessee which they had deposited in M/s. Vaibhav. Enterprises and from that account cheques were issued in favour of the lenders, and in turn, the lenders issued cheques and deposited with the assessee. They, however, confirmed that signature and address on the confirmation letters were theirs. They further stated that they did not know the assessee but the father of Mital J. Shah & Vaibhav J. Shah and the husband of Manjula Shah knows the assessee.
7. The Assessing Officer issued a show-cause notice, which was replied by the assessee stating that the assessee had produced confirmation letters of the lenders who are assessed to tax and had given their passbooks and it was also stated that they had received loan from M/s. Vaibhav Enterprises and the source of money deposited by them is a loan from M/s. Vaibhav Enterprises. He further stated that as all those persons, the lenders as well as the persons who had deposited the money in his bank account and issued cheques in favour of the assessee are all assessed to income tax, therefore, the assessee cannot be asked to prove the source of money.
8. The Assessing Officer, however, on consideration of the above facts, added Rs. 15 lac in the hand of the assessee under Section 68 of the Act.
9. Being dissatisfied, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) and the said appellate authority, on consideration of the above materials, came to the conclusion that all the three lenders and other entity, namely, M/s. Vaibhav Enterprises, of which Jayendra Kanji Shah was the proprietor, are assessed to income tax regularly and the Assessing Officer did not examine the books of account of M/s. Vaibhav Enterprises. The appellate authority further came to the conclusion that suddenly the lenders made confessional statement to the Assessing Officer that the appellant had given them money and the same were deposited in the bank account; however, later on, they had stated that the money was given by some other person whom they did not know. According to the Commissioner of Income Tax (Appeals), the statement of the lenders were full of inconsistency and incongruity and thus it was not a fit case of believing those persons.
10. The Commissioner of Income Tax (Appeals), thus, deleted the said amount.
11. Being dissatisfied, the Revenue preferred appeal before the Commissioner of Income Tax (Appeals) and by the order impugned, the Tribunal has affirmed the order passed by the Commissioner of Income Tax (Appeals).
12. Being dissatisfied, the Revenue has come up before us.
13. After hearing Mrs. Bhatt, the learned advocate appearing on behalf of the appellant and after going through the materials on record, we are unable to accept her contention that in this case the Revenue has discharged its onus and it was for the assessee to further prove the genuineness and creditworthiness of the creditors.
14. In our view, once the assessee has established that he has taken money by way of account payee cheques from the lenders who are all income tax assessees whose PAN have been disclosed, the initial burden under Section 68 of the Act was discharged. It further appears that the assessee had also produced confirmation letters given by those lenders.
15. Once the Assessing Officer gets hold of the PAN of the lenders, it was his duty to ascertain from the Assessing Officer of those lenders, whether in their respective return they had shown existence of such amount of money and had further shown that those amount of money had been lent to the assessee. If before verifying of such fact from the Assessing Officer of the lenders of the assessee, the Assessing Officer decides to examine the lenders and asks the assessee to further prove the genuineness and creditworthiness of the transaction, in our opinion, the Assessing Officer did not follow the principle laid down under Section 68 of the Income Tax Act.
16. If on verification, it was found that those lenders did not disclose in their income tax return the transaction or that they had not disclosed the aforesaid amount, the Assessing Officer could call for further explanation from the assessee to prove the genuineness of the transaction or creditworthiness of the same. However, without verifying such fact from the income tax return of the creditors, the action taken by the Assessing Officer in examining the lenders of the assessee was a wrong approach. Moreover, we find that those lenders have made inconsistent statement as pointed out by the Commissioner of Income Tax (Appeals) and in such circumstances, we find that both the Commissioner of Income Tax (Appeals) and the Tribunal were justified in setting aside the deletion as the Assessing Officer, without taking step for verification of the Income Tax Return of the creditors, took unnecessary step of further examining those creditors. If the Assessing Officers of those creditors are satisfied with the explanation given by the creditors as regards those transactions, the Assessing Officer in question has no justification to disbelieve the transactions reflected in the account of the creditors. In other words, the Assessing Officer had no authority to dispute the correctness of assessments of the creditors of the assessee when a co-ordinate Assessing Officer is satisfied with the transaction.
17. We, thus, find that in the case before us the Tribunal below rightly set-aside the deletion made by the Assessing Officer, based on erroneous approach by wrongly shifting the burden again upon the assessee without verifying the Income Tax return of the creditors. The position, however, would have been different if those creditors were not income tax assessees or if they had not disclosed those transactions in their income tax returns or if such returns were not accepted by their Assessing Officers. No substantial question of law is, thus, involved. We find no merit in this Appeal and the same is dismissed.
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