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Chander Mohan Mehta v. Assistant Commissioner of Income-tax
Structured Summary of the Tribunal Opinion (Per K.C. Singhal, Judicial Member)
Factual and Procedural Background
This appeal challenges a block assessment order dated 26 February 1997 passed by the ACIT (Inv.), Panaji, Goa, covering the block period assessment years 1986-87 to 1996-97.
The assessee is an individual engaged in trading batteries and is the proprietor of M/s. Solar Batteries at Vasco-da-Gama. His business premises were searched under section 132 of the Income-tax Act, 1961 on 10 February 1996 and the search concluded on 28 February 1996. In response to notice under section 158BC the assessee filed a return for the block period declaring undisclosed income of Rs. 2,10,000.
During post-search enquiries (a survey of the business premises after the search), loose papers were discovered which purportedly recorded money-lending transactions. The assessee's statement under section 131 was recorded on 22 November 1996, in which he admitted having carried on a money-lending business for 3–4 years. A revised return was filed on 9 January 1997 disclosing additional undisclosed income of Rs. 10,00,000 for assessment years 1993-94 to 1996-97.
The loose papers listed names of persons and amounts: aggregate borrowings of Rs. 79,00,000 and lendings of Rs. 89,00,000 — a difference of Rs. 10,00,000 which the AO treated as income from money lending and assessed. The AO required confirmations from the alleged creditors; the assessee produced confirmations. The AO summoned nine persons under section 131 whose sworn statements confirmed lending at 24% interest. Nevertheless, the AO rejected the confirmations as stereotype and bogus, treated the borrowings totaling Rs. 79,00,000 as fabricated, and added that amount back to the assessee's income. The assessee appealed against this part of the assessment order.
Legal Issues Presented
- Whether the Assessing Officer was justified in treating the borrowings of Rs. 79,00,000 shown in loose papers as bogus and making an addition of that amount to the assessee's income.
- Whether a statement recorded under section 131 (the assessee's own statement admitting money-lending activity and explaining loose papers) must be accepted in its entirety or may be accepted in part and rejected in part.
- Whether the loose papers found during the survey (post-search) are "dump papers" without evidentiary value when standing alone, or acquire evidentiary value when read together with the assessee's section 131 statement.
- Whether the assessee discharged the initial onus to prove genuineness of borrowings (identity and creditworthiness of creditors and genuineness of transactions), thereby shifting the burden to the Revenue to prove that the confirmations/statements were false.
- Whether alternative additions (a negative balance of Rs. 18,20,000 or unexplained investments under section 69) could be sustained on the material on record.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The assessee's statement recorded under section 131 was spontaneous (recorded on the date of the survey) and should be accepted in toto; if his admission of lending is accepted, the corresponding borrowings recorded in the loose papers must also be accepted.
- The loose papers discovered during survey are not books of account maintained for tax purposes and therefore their contents should be accepted unless the department brings material to disprove them (relying on Tribunal decision in Kantilal & Bros).
- The charging provisions relevant to undisclosed income lie in Chapter XIV-B; section 158BA is the charging section and the Revenue must prove undisclosed income using material found upon search — it is Revenue's burden to bring positive evidence that borrowings were undisclosed income.
- The assessee furnished creditor confirmations within the time given; nine creditors were summoned and confirmed lending at 24% interest; the assessee discharged the initial onus and the AO failed to rebut by producing any adverse material.
- Procedural fairness: the AO had not proposed an addition in draft and the assessee was not given opportunity to rebut any draft criticisms; also there was very short time granted initially to file confirmations.
- Relied on several precedents (including Mahendra Manilal Nanavati and multiple Tribunal decisions) to support the proposition that admissions/loose papers/confirmations should be accepted unless effectively disproved by the Revenue.
Respondent's (Revenue's) Arguments
- The AO was entitled to disbelieve the assessee's statements in part; statements under section 131 are not the same as admissions in pleadings and can be rejected in part (relying on para 213 of Mahendra Nanavati, as read by the Senior D.R.).
- Although the AO did not invoke section 68 specifically, general principles applicable to unexplained borrowings apply: the burden lies on the assessee to prove identity, creditworthiness and genuineness of the creditors and transactions.
- The confirmations and statements exhibited numerous weaknesses: they were stereotyped in form, the creditors' occupations/businesses were not specified, many creditors claimed having advanced money only to this assessee, several confirmations displayed identical total incomes for prior years, odd-value loans were recorded, Income-tax Form No. 4A were filed after the search (reducing evidentiary weight), and cash receipts were shown despite banking facilities being available.
- Discrepancies in totals: the AO found total borrowings of Rs. 65,60,000 in some documents but confirmations showed Rs. 78,00,000, suggesting some confirmations were bogus.
- The Revenue sought at least part-sustenance of additions — e.g., Rs. 18,20,000 on account of a negative balance shown on 18 September 1996 — and alternatively that unexplained investments could be assessed under section 69.
- Relied on various case authorities and Tribunal decisions to support the proposition that additions can be sustained where the assessee fails to prove source or genuineness.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (as stated in the opinion) |
|---|---|---|
| Mahendra Manilal Nanavati v. Sushila Mahendra Nanavati, AIR 1965 SC 364 | Admissions (statements) should be considered in their entirety; relied upon to argue that a statement should be accepted as a whole. | The court applied the majority principle of this Supreme Court decision to hold that the assessee's section 131 statement must be considered and accepted as a whole; the court rejected reliance on para 213 because that paragraph is part of the dissenting judgment. |
| ITO v. Ghanshyambhai R. Thakkar [1996] 56 TTJ (Ahd.) 460 | Tribunal view that a statement should be considered and accepted as a whole when used in evidence. | The court noted that this Tribunal decision supports the view that the entire statement must be accepted and treated it as consonant with the court's conclusion that the statement could not be partly used and partly rejected. |
| Ashwani Kumar v. ITO [1991] 39 ITD 183 | Authority for the proposition that loose "dump papers" found during survey/search, standing alone, have no evidentiary value. | The court relied on this decision to hold that the loose papers by themselves amounted to dump papers with no evidentiary value, but noted that when read together with the section 131 statement they could acquire evidentiary significance. |
| Kishanchand Sobhrajmal v. Asstt. CIT [1992] 41 ITD 97 | Cited by the assessee among Tribunal decisions supporting acceptance of loose papers/statements. | Listed among authorities relied on by the assessee; the opinion records the reliance but does not state that the court rested its decision solely upon this precedent. |
| Devilal Gherilal Shah v. Dy. CIT [1995] 127 CTR (Trib.) (Ahd.) 135 | Cited by the assessee as supporting Tribunal decisions regarding evidentiary treatment of documents/statements. | Referred to as one of the Tribunal decisions relied on by the assessee; the court did not indicate exclusive reliance on it. |
| Kantilal & Bros. v. Asstt. CIT [1995] 52 ITD 412 | Proposition: loose papers found in the course of survey are not books of account; relied upon by appellant to argue section 68 inapplicable and to claim acceptance of loose paper contents. | Noted as relied upon by the assessee in submissions. The court considered the overall combination of loose papers with the section 131 statement rather than base its decision solely on this authority. |
| Smt. Narinder Bedi v. ITO [1996] 59 ITD 417 (Chd.) | Cited by the assessee in support of the submission that no addition can be made once primary burden is discharged. | Recorded as one of the authorities relied on by the assessee; the court noted the submission that primary burden had been discharged and proceeded to examine the evidentiary record. |
| Commissioner Of Income-Tax v. Sahibganj Electric Cables Pvt. Ltd. [1978] 115 ITR 408 (Cal.) | Cited by the assessee in support of the contention regarding burden and evidentiary requirements. | Listed among authorities relied on by the assessee; the court did not expressly base its decision solely on this authority in the reasoning reproduced in the opinion. |
| CIT v. Shyam Sunder & Co. [1990] 181 ITR 187 | Cited by the assessee regarding burden and proof. | Recorded as cited by the assessee; the court assessed on facts whether the onus had been discharged in this case. |
| Pragati Construction Co. v. ITO [1997] 60 ITD 201 (Delhi) | Cited by the assessee for propositions relating to burden of proof and additions. | Included in the list of authorities relied on by the assessee; the court considered the evidentiary record independently. |
| Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723 | Cited by the Revenue to support submissions on onus and proof regarding borrowings. | Recorded as relied upon by the Revenue; the court examined whether the assessee had discharged the initial burden on the facts and found it had. |
| Asstt. CIT v. Dhanalaxmi Steel Re-rolling Mills [1996] 55 TTJ (Hyd.) 679 | Cited by the Revenue regarding burden and evidentiary matters. | Cited by the Revenue; the court addressed the facts and evidence in this case rather than resting on this authority alone. |
| Govindram M. Oberoi v. ITO [1997] 57 TTJ (Pune) (TM) 1 | Cited by the Revenue to show potential weaknesses in confirmations and their evidentiary value. | Noted as cited by the Revenue; the court examined the actual confirmations and summoned witnesses' statements on record and found no adverse material to disprove them. |
| Dhaneshkumar B. Shah v. Asstt. CIT [1995] 52 TTJ (Ahd.) 185 | Cited by Revenue as supportive authority regarding treatment of confirmations/loans. | Listed among authorities relied on by the Revenue; the court nonetheless concluded on the available record that the assessee had discharged initial onus. |
| Marolia & Sons v. CIT [1981] 129 ITR 475 (All.) | Cited by the Revenue to support alternative grounds for sustaining additions. | Included in the Revenue's list of authorities for sustaining additions on alternate grounds; the court found no material on record to sustain the alternate additions. |
| P. Ibrahim Haji v. CWT [1998] 98 Taxman 249 (Ker.) | Cited by the Revenue for propositions on unexplained investments/additions. | Recorded among the Revenue's citations; the court found the specific alternate grounds unsubstantiated on the facts. |
| Steel Containers Ltd. v. Commissioner Of Income-Tax, West Bengal-II [1978] 112 ITR 995 (Cal.) | Cited by the Revenue for sustaining additions on alternative legal grounds. | Noted as cited by the Revenue; the court did not sustain the alternate additions on the facts before it. |
| Bishamber Nath Ram Sarup v. CIT [1987] 163 ITR 87 | Cited by the Revenue in support of alternative grounds for additions. | Recorded among authorities relied on by the Revenue; the court found no factual basis to apply those authorities to sustain additions here. |
| D.M. Neterwalla v. Commissioner Of Income-Tax, Bombay City-I [1980] 122 ITR 880 (Bom.) | Cited by the Revenue to support submissions relating to evidentiary standards and burden. | Cited by the Revenue; the tribunal evaluated the facts and concluded the assessee had discharged the initial burden on the available record. |
Court's Reasoning and Analysis
The court's analysis proceeded in a step-by-step manner grounded in the special charging provisions of Chapter XIV-B of the Income-tax Act:
- Statutory framework: The court recalled that section 158BA is the charging section for assessing undisclosed income under Chapter XIV-B, section 158B defines undisclosed income and section 158BB instructs that undisclosed income shall be computed on the basis of evidence found as a result of search and such other material available with the AO. From this combined reading, the court emphasized that the AO must prove, from search-material or other material available, that the assessee had undisclosed income chargeable under section 158BA.
- Identification and evaluation of material on record: The court examined what material the AO had — essentially the loose papers found during the post-search survey (which did not bear the assessee's name and recorded small amounts, aggregating to under Rs. 20,000 on the face of the loose sheets) and the assessee's statement under section 131 taken on the date of the survey.
- Characterization of loose papers: The court held that the loose papers considered alone were "dump papers" with no evidentiary worth and could not support any addition (citing Ashwani Kumar). The loose papers by themselves would lead to no conclusion.
- Effect of the section 131 statement: The court then considered the section 131 statement recorded on the survey date, in which the assessee explained that the loose papers were lists of persons to whom monies had been lent (at 36% p.a.) and from whom monies had been borrowed (at 24% p.a.), and that recorded amounts omitted trailing zeros (e.g., "50" meant Rs. 50,000). The court held that these explanations gave evidentiary significance to the loose papers.
- Principle on admissions/statements: The tribunal applied the legal principle that an admission or statement must be considered in its entirety (relying on the majority view in Mahendra Manilal Nanavati and consistent Tribunal authority in Ghanshyambhai R. Thakkar). The court rejected reliance on para 213 of Nanavati as it forms part of a dissenting judgment. It held that the AO could not "blow hot and cold" — i.e., use that portion of the statement favorable to Revenue while rejecting the portion unfavorable to Revenue.
- Conclusion on evidentiary weight: On that basis the court concluded that if the AO wished to rely on the section 131 statement to give evidentiary value to the loose papers, the AO had to accept the statement as a whole. Accepting the statement as a whole established the existence of both lendings and borrowings as stated by the assessee, thereby negating the AO's reasoning for treating borrowings as wholly bogus.
- Burden and rebuttal: Even assuming the initial burden lay on the assessee to prove genuineness of the borrowings, the court found that the assessee had discharged this initial burden: (a) a letter from the CIT dated 31 January 1997 indicated that AO had proposed no addition (suggesting initial satisfaction with genuineness); (b) confirmations were filed as directed; (c) nine creditors were summoned by the AO and their sworn statements confirmed the loans; (d) no material was produced by the Revenue to show confirmations or witness statements were false. The court held that the AO, if dissatisfied, should have required further evidence or produced material to rebut the confirmations; failure to do so meant the onus effectively shifted to the Revenue and the Revenue did not discharge that burden.
- Alternative contentions (negative balance / section 69): The court rejected the Revenue's contention that a negative balance of Rs. 18,20,000 could sustain an addition because there was no material on record to demonstrate any cash flow. The court noted that the assessee had an admitted income of Rs. 10,00,000 from money lending for four years which could explain investments, and repayments from borrowers could be re-invested. Consequently, the court found no basis to sustain additions under section 69.
Holding and Implications
Holding:
The impugned addition of Rs. 79,00,000 is deleted; the Assessing Officer's order on this issue is set aside and the assessee's appeal is allowed.
Implications (direct effect):
- The Tribunal concluded that no addition could be sustained on the basis of the loose papers and the section 131 statement as available on the record, and therefore deleted the Rs. 79,00,000 addition made by the AO.
- Alternative grounds urged by the Revenue (addition on account of a negative balance of Rs. 18,20,000 or unexplained investment under section 69) were not accepted because there was no material to support those contentions.
- The direct consequence for the parties is that the assessee succeeds on this issue and the assessment order is modified accordingly.
Broader implications:
The opinion emphasizes the following procedural/legal propositions (as applied on the facts): (a) materials found on search must be evaluated in accordance with the statutory scheme in Chapter XIV-B; (b) loose papers found in survey may be "dump papers" if unconnected to explanatory admissions, but where an explanatory statement under section 131 exists, the statement must be accepted in entirety if the Revenue seeks to rely on it; and (c) once the assessee discharges the initial onus regarding genuineness of borrowings, the burden shifts to the Revenue to bring material to disprove confirmations or statements. The court resolved the dispute on the facts before it and did not state that it was laying down any new legal principle beyond its application of existing authorities.
End of summary. (Reference: Tribunal opinion per K.C. Singhal, Judicial Member; appeal allowed.)
Per K.C. Singhal, Judicial Member - This appeal is against Block assessment order passed by Sri S.M. Keshkamat, ACIT (Inv.), Panaji, Goa dated 26th February, 97. The block period consists of assessment years 1986-87 to 1996-97.
2. The assessee is an individual dealing in batteries. The premises of the assessee was searched u/s 132 of the Income-tax Act, 1961 on 10th February, 1996. The search completed on 28th February, 1996. In response to notice u/s 158BC the assessee filed his return for the aforesaid block period declaring undisclosed income at Rs. 2,10,000. According to the AO, the post search enquiries revealed that assessee was engaged in money lending business from the premises of his proprietary concern M/s. Solar Batteries at Vasco-da-Gama and the assessee was not disclosing any income from this source. Hence, survey was conducted at the aforesaid premises of the assessee in the course of which some loose papers were found containing the money lending activities of the assessee.
Thereafter, the assessee was summoned u/s 131 and his statement was recorded on 22nd November, 1996. In this statement, it was confirmed by the assessee that money lending activities were being carried on by him for the last 3 to 4 years. Accordingly, the assessee filed the revised return on 9th January 1997 disclosing additional undisclosed income of Rs. 10,00,000 pertaining to A.Ys. 1993-94 to 1996-97. The loose papers found from the premises of the assessee contained the names of the persons from whom the assessee had borrowed money as well as the names of the persons to whom the money was lent. The borrowings amounted to Rs. 79,00,000 while the lending amounted to Rs. 89,00,000. This difference of Rs. 10,00,000 was considered and assessed as income from money lending business. The assessee was asked to furnish confirmations from all the persons from whom the assessee claimed to have borrowed funds for his money lending business. The confirmations were filed by the assessee. To test check the genuineness of the loans, 9 persons were issued notices u/s 131. These persons appeared before the AO. Their statements were recorded on oath wherein all of them confirmed that they had lent the money to the assessee at the rate of 24% interest. However, the AO rejected all the confirmations by observing as under :—
"On verification of confirmation letters produced by the assessee it was found that the assessee has merely got stereotype letters signed by some people. All of them claimed to have advanced money only to this assessee but nobody admitted to have any taxable income. All of them are supposed to be dealing in commodities which are not specified and the loan is attributed to saving from such business. Even those who have appeared before the undersigned in response to the notice under section 131 have given stereotype answers stating the source to be savings from manual labour, house hold savings, savings from salary etc. Even the confirmations which contain the total incomes for the last 3 years of a particular person were also found to be same in many cases. Further, it was claimed in the confirmation letters that the people have given loan only to this assessee and not any other else. All things considered the stereotype confirmation letters filed by the assessee are found to be not from genuine persons who had genuinely advanced money to this assessee. Thus, the entire loans of Rs. 79 lakhs borrowed by the assessee are considered bogus and added back to the total income of the assessee."
Aggrieved by this part of the order, the present appeal has been preferred by the assessee.
3. The learned counsel for the assessee Mr. Pathak has seriously assailed the order of the AO by raising various contentions. Firstly, it was contended by him that statement of the assessee recorded u/s 131 should be either accepted or rejected in toto unless there is material on the record to prove the contrary. According to him, if the statement of the assessee to the effect that he was carrying on money lending business and certain amounts were advanced by way of loan aggregating Rs. 89,00,000 as mentioned in the loose paper is accepted, then as a corollary, the other part of statements to the effect that he had borrowed the amounts from different persons as mentioned in the loose paper should also be accepted. In support of this contention, he relied on the decision of the Supreme Court in the case of Mahendra Manilal Nanavati v. . Sushila Mahendra Nanavati AIR 1965 SC 364 and various other Tribunal decisions mentioned below :
1. Tribunal Ahmedabad Bench Decision in the case of ITO v. Ghanshyambhai R. Thakkar [1996] 56 TTJ (Ahd.) 460.
2. Tribunal Delhi Bench decision in the case of Ashwani Kumar v. ITO [1991] 39 ITD 183.
3. Tribunal Jaipur Bench Decision in the case of Kishanchand Sobhrajmal v. Asstt. CIT [1992] 41 ITD 97.
4. Tribunal Ahmedabad Bench Decision in the case of Devilal Gherilal Shah v. Dy. CIT [1995] 127 CTR (Trib.) (Ahd.) 135.
In view of the aforesaid decisions, it was submitted by him that the contents of loose paper found in the course of survey should be accepted in toto and the fact that the assessee has borrowed money from the persons as mentioned in the loose paper should be accepted. Secondly - it was contended that the provisions of section 68 cannot be applied to the facts of the present case since the loose papers found in the course of survey cannot be considered as books of account maintained by the assessee in view of the decision of Tribunal Pune Bench in the case of Kantilal & Bros. v. Asstt. CIT [1995] 52 ITD 412 . According to him, the loose paper was never meant for disclosing to the income-tax authorities and therefore, the contents of the loose paper are to be accepted in toto unless the department brings in material on the record to disprove the case of the assessee. Thirdly - it was his contention that the provisions of Chapter XIV-B provide for assessment of undisclosed income. Section 158BA being charging section to assess the undisclosed income, the burden is on the Revenue to prove the undisclosed income of the assessee by bringing positive material on the record. According to him, not even a single material has been brought on record to prove that borrowings mentioned in the loose paper amounted to undisclosed income of the assessee. The assessment is purely on the basis of surmises and conjectures. Fourthly— his submission was that if the statement of the assessee is rejected in toto, then the loose paper found from the premises of the assessee would be a dump paper and no inference can be drawn on the basis of such paper, because even the name of the assessee is not written on the loose paper. It is not clear from the loose paper whether it pertains to money lending business. The amounts shown against the names of persons are very small amounts which may not even exceed Rs. 20,000 in aggregate. Fifthly - even assuming that onus was on the assessee to prove the genuineness of the borrowings, no fault can be found with the assessee. It was only in the beginning of February, 1997 that assessee was asked to file the confirma- tion from the creditors and a very short time of 8 days was given to file the confirmation. The assessee furnished all the confirmations before the AO and thereafter nothing was asked from the assessee. To test check the genuineness of the confirmations, the AO of his own issued summons to 9 persons who appeared before him and their statements were recorded u/s 131. These 9 persons confirmed before the AO that they had lent the money to the assessee on interest at the rate of 24% per annum. Since nothing further was asked from the assessee, he was under the bona fide impression that the confirmations filed by him were accepted by the AO. But, to his surprise, he received the assessment order wherein the entire borrowings had been rejected on flimsy grounds. According to Mr. Pathak, the onus which lies on the assessee has been duly discharged and the same were shifted to the AO for disproving the stand of the assessee. According to him, not even a single material has been brought on record to suggest that confirmations filed by the assessee were false or bogus. In support of his contention that no addition can be made if primary burden is discharged, the reliance was placed by him on the following decisions:
1. Smt. Narinder Bedi v. ITO [1996] 59 ITD 417 (Chd.)
2. Commissioner Of Income-Tax v. Sahibganj Electric Cables Pvt. Ltd. [1978] 115 ITR 408 (Cal.)
3. CIT v. Shyam Sunder & Co. [1990] 181 ITR 187/[1989] 45 Taxman 248 (Cal.)
4. Pragati Construction Co. v. ITO [1997] 60 ITD 201 (Delhi).
Lastly, it was submitted by him that even the draft order proposed by the AO was not disclosed to the assessee and therefore, the question of rebuttal did not arise.
4. The learned senior D.R. has supported the order of the AO by reiterating the reasonings by the AO which need not be repeated since the same have been reproduced by us in earlier paras. Regarding the first legal contention of Mr. Pathak, it was submitted by him that statement of the assessee can be disbelieved in part. He also relied on the same decision of the Supreme Court which was relied upon by Mr. Pathak. In support of his submission, he relied upon the observations of the Hon’ble Supreme Court in para 213 of the order appearing at page 404 of the report. Particular reliance was placed on the observations "no doubt what applies to an admission in the pleading would not apply to statements made by witness in evidence." According to him, the statement of the assessee u/s 131 cannot be considered as an admission in order to accept it fully. Further stated that defence which is false can be rejected.
Regarding the second contention of Mr. Pathak, it was submitted by him that AO has not invoked the provisions of section 68 and therefore, the same has to be ignored. According to him, the general principles applicable to the borrowings would apply and the burden is on the assessee to prove the identity, the creditworthiness of the creditors and genuineness of the transactions.
Regarding the onus, it was submitted by him that the same has not been discharged by the assessee. Onus is shifted to the Revenue only where the initial burden which lies on the assessee is discharged. In support of his submission, he relied on the decision of the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723 and the decision of the Tribunal Hyderabad Bench in the case of Asstt. CIT v. Dhanalaxmi Steel Re-rolling Mills [1996] 55 TTJ (Hyd.) 679. He then drew our attention to the confirmations filed by the assessee to point out the inherent weakness in such confirmations. In this regard, he repeated the reasonings given by the AO namely — (1) that confirmations were in the stereotype form (2) the nature of business carried on by the creditors not specified (3) all of them claimed to have advanced money only to the assessee. It was further stated by him that most of the creditors had shown similar income. Loans were received in odd figures which is not a probability. Income-tax Form No. 4A were filed after the search and therefore, have no evidentiary value. Reliance was placed on the decision of the Tribunal in the case of Govindram M. Oberoi v. ITO [1997] 57 TTJ (Pune) (TM) 1. He also referred to the decision of Ahmedabad Bench in the case of Dhaneshkumar B. Shah v. Asstt. CIT [1995] 52 TTJ (Ahd.) 185, in support of his submission. It was further submitted that all the loans were received in cash, though banking facilities were available. He also referred to a pronote appearing on the last page of the paper book to show that assessee was in the habit of borrowing money on the basis of pronotes and therefore, cash transactions could not be believed. It was also pointed out by him that in fact the total borrowings were to the extent of Rs. 65,60,000 while the confirmations were given for Rs. 78,00,000 which shows that the confirmations filed by the assessee were bogus. A query was raised from the Bench as to why all the persons from whom money was borrowed by the assessee were not examined. It was stated by him that assessee had requested in a statement not to make investigations as his business would be ruined. It is because of this reason that all the persons were not examined.
The learned D.R. also invited our attention to the notes on confirmations appearing at pages 1 to 4 of the paper book filed by him to show the weaknesses in the statement of the persons who appeared before the AO.
Lastly, it was submitted by him that on the basis of the loose paper, there was negative balance on 18th September, 1996 to the extent of Rs. 18,20,000 which remains unexplained and therefore, the addition to this extent has to be sustained. He also raised an alternative ground to the effect that assessee had made investment by way of loans and the source of money has not been proved by the assessee. Therefore, the additions should be sustained u/s 69. He referred to various decisions mentioned below for the proposition that addition can be sustained even on other grounds :
1. 22 ITD 983 (sic)
2. Marolia & Sons v. CIT [1981] 129 ITR 475 (All.)
3. P. Ibrahim Haji v. CWT [1998] 98 Taxman 249 (Ker.)
4. Steel Containers Ltd. v. Commissioner Of Income-Tax, West Bengal-Ii, Calcutta [1978] 112 ITR 995 (Cal.)
5. Bishamber Nath Ram Sarup v. CIT [1987] 163 ITR 87/[1986] 25 Taxman 52 (Delhi)
6. D.M Neterwalla v. Commissioner Of Income-Tax, Bombay City-I. [1980] 122 ITR 880 (Bom.)
5. In reply to the submissions of the learned D.R., Mr. Pathak has submitted that statement of the assessee u/s 131 was recorded on the very same date of the survey and the statement was spontaneous. Therefore, such statement has to be believed and cannot be brushed aside as an after-thought. He also drew our attention to page 5 of the departmental paper book which is a letter from Commissioner of Income-tax to show that no addition was proposed by the AO and it was at the instance of the CIT that assessee was required to file the confirmations. According to him, it shows that AO was satisfied with the statement of the assessee. Confirmations were filed in response to such request, but, thereafter, neither the CIT nor the AO asked the assessee to prove further. He also drew our attention to the order of assessment to show the fact that assessee was engaged in the money lending business has been accepted by the AO in the earlier years, which shows that in the past also the assessee must have made borrowings and lendings in the earlier years, which is a continuing process. Sometimes there are renewals of the loans which may appear in the loose paper. He, again reiterated that loose-paper was not meant for the Income-tax Officers and assessee never anticipated the survey. Therefore, the correctness of the loose paper cannot be disputed.
6. The rival contentions of the parties and the material placed before us have been considered carefully. At the outset, it would be useful to refer the well-settled legal position, that burden lies on the Revenue to prove that case of assessee falls within the four corners charging provisions of the fiscal statute. Special provisions have been enacted by the legislature in Chapter XIVB for assessing the undisclosed income. Section 158BA is the charging section which authorises the AO to assess the undisclosed income in accordance with the provisions of Chapter XIVB. What is undisclosed income is defined in section 158B. Section 158BB provides that undisclosed income shall be computed on the basis of evidence found as a result of search and such other materials as are available with the AO. The combined reading of these provisions reveals that AO has to prove, on the basis of the evidence or material found as a result of search or as available with the AO, that assessee had the undisclosed income chargeable to tax under section 158BA.
7. Now the question is whether there is any material or evidence on the record which was available to the Assessing Officer to prove the undisclosed income of the assessee. The perusal of the record shows that only materials found in the course of survey of the business premises of the assessee, though after the search, are certain loose papers containing the list of certain persons against whom some small amounts varying between Rs. 5 to Rs. 150 are mentioned and the statement of assessee recorded under section 131 on the date of survey itself. These loose papers, even do not indicate the name of the assessee. From the list of persons, it cannot be inferred that either any loan or any advance was given to these persons or received from these persons. The total amount on these loose papers would not exceed even Rs. 20,000. Therefore, if we consider these loose papers as the only material, then in our opinion, it would lead to no conclusion whatsoever and these loose papers will have to be considered as dump papers having no evidentiary value. In such situation, no addition can be sustained on the basis of such dump papers in view of the Tribunal decision in the case of Ashwani Kumar ( supra).
8. However, if we consider above loose papers alongwith the statement recorded under section 131, then certainly these loose papers can be considered as relevant material having evidentiary value. Therefore it is necessary to examine this statement. The statement explains the nature of the transactions. It has been explained in the statement that particular list contained the names of the persons to whom the assessee had advanced monies as loan on interest at the rate of 36% p.a. It is further explained that the other list in the loose papers contains the names of the persons from whom the assessee had borrowed the money on interest at the rate 24%. It has also been explained that in such lists, the last three zeros have been deleted while recording the amount against the name of a person. For example, the sum of Rs. 50 would mean Rs. 50,000, Rs. 30 would mean Rs. 30,000 and so on. It is on the basis of this statement that AO inferred that assessee was engaged in money lending activity. Therefore, the evidentiary value attached to the loose papers is only because of this statement. In these circumstances, we are of the considered view that this statement has to be considered and accepted as a whole if the AO wants to use it in evidence. The AO cannot be allowed to blow hot and cold simultaneously. Revenue cannot be permitted to use that part of the statement which is beneficial to it and reject the other part of the statement which is detrimental to it. This view has also been taken by the Tribunal, Ahmedabad Bench in the case of Ghanshyambhai R. Thakkar (supra). The decision of the Supreme Court in the case of Mahendra Manilal Nanavati ( supra), also says that admission has to be considered in its entirety. However, the Senior D.R. has also relied on para 213 of the aforesaid decision of the Supreme Court for the proposition that even the part statement can be rejected. We find that para 213 is part of the dissenting judgment. According to the majority judgment, the entire admission was to be acted upon. We therefore reject this submission of the learned senior D.R.
9. In view of the above, it is held that the entire statement of the assessee has to be accepted. If that is so, no addition can be sustained on the basis of the materials mentioned above. The loose papers were maintained and kept by the assessee for his private knowledge and information and not meant for disclosing to the Department. If the statement of the assessee is to be rejected in toto, then no addition can be made on the basis of loose papers since those would be dump papers as discussed in the earlier part of our order. If the statement of the assessee is accepted in toto, then contents of the statement are to be accepted and the borrowings mentioned in these loose papers have to be accepted as genuine. In either case, no addition is called for. No doubt, the presumption to the correctness of the documents can be rebutted by the Department, but the Revenue has not been able to bring any material on the record for rebuttal. Therefore, we are of considered view that no addition can be sustained on the basis of these materials.
10. Even assuming, for the sake of arguments, that burden lies on the assessee to prove the genuineness of the borrowings mentioned in the loose papers, we are of the view that the initial burden which lies on the assessee has been discharged. From the letter of the CIT dt. 31st January, 1997, it appears that no addition was proposed by the AO that implies that AO was satisfied with the genuineness of the borrowing made by the assessee. It was only at the direction of the CIT that assessee was asked to file the confirmations which were in fact filed by the assessee within the time allowed by the AO. Thereafter, nothing was asked by the AO from the assessee. On the other hand, he issued summons to 9 persons u/s 131 who appeared before the AO and their statements were recorded at the back of the assessee. All these 9 persons confirmed that they had advanced loans to the assessee on interest at the rate of 24% p.a. Despite this, the AO rejected all the confirmations filed by the assessee and made additions on the flimsy grounds which have been reproduced by us in the earlier part of our order. If the AO was not satisfied with the creditworthiness of the creditors and the genuineness of the transactions, he should have asked the assessee to produce all the creditors and the relevant evidence. The assessee cannot be burdened with the liability of the tax on account of failure of the AO in discharging his duties. No material has been brought on the record to prove that these confirmations were false. Further, there is nothing on the record to suggest that statements of the persons recorded by the AO were false. Therefore, the question of rejection of the confirmations does not arise. In our considered opinion, we are of the view that initial burden which lies on the assessee has been discharged and the onus shifted to the Revenue to prove that evidences produced by way of confirmations were false. In the absence of any adverse material on the record, the addition cannot be sustained on mere surmises and conjectures. We need not repeat the reasons given by the AO which have been reproduced by us while stating the facts of the case. Therefore, even on this alternative ground, the assessee must succeed.
11. Now we deal with the contention of the learned Senior D.R. to the effect that at least addition of Rs. 18,20,000 should be sustained on account of negative balance on 18th September, 1996. In our opinion, there is no force in such contention of the learned D.R. There is no material available on the record to prove any cash flow in the hands of the assessee. Admittedly, the assessee had been carrying on the business of money lending for the last 4 years i.e. assessment years 1993-94 to 1996-97 as is apparent from page 4 of the assessment order where the AO has accepted the undisclosed income of Rs. 10,00,000 on account of money lending business pertaining to the above 4 years. This amount was therefore available with the assessee for investment for which credit has to be given. Besides this, the assessee must have been receiving the money back from the borrowers which could be re-invested by the assessee. In the absence of any material on record in this regard, it cannot be said positively that there was any negative balance on the date stated by the learned D.R. Hence, this contention of the D.R. cannot be accepted.
12. Since it has been held that assessee has discharged his onus regarding his borrowings, the question of considering the contention of the learned Senior D.R. regarding unexplained investment u/s 69 does not arise.
13. In view of the above discussions, the impugned addition of Rs. 79,00,000 cannot be sustained. The order of the AO is, therefore, set aside on this issue and the impugned addition of Rs. 79,00,000 is hereby deleted.
14. In the result, appeal of the assessee is allowed.
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