Kalpesh Classes

Unexplained cash credit-process check​​ 

In CIT v. Goverdhan India (P.) Ltd. [2009]​​ 177 Taxman 29​​ (Delhi), the Assessing Officer issued summons to a debtor and it found certain mismatch in the balances shown in assessee’s books and that of the debtors. He, thus, made addition for the difference as unexplained credit. The assessee on the other hand requested the Assessing Officer in writing that if the debtor did not certify its account as per the assessee’s books then he should be​​ called to visit the Assessing Officer’s office for the purpose of cross examination by the assessee.

As there was no material on record to suggest any defect found by the Assessing Officer in the purchases made by the assessee which had been sold during the relevant year and further since the Tribunal returned a finding that copies of sale bills were produced by the assessee before the Assessing Officer and those bills had been counter-signed by the debtor and especially for the reason that the assessee had​​ requested for cross examination of the third party and such request had not been allowed by the Assessing Officer the Delhi High Court deleted the addition. Further the following observation needs careful reading:

“The Assessing Officer ought not to have​​ relied upon the copy of the accounts submitted by Ambrose International Corporation, when the same were disputed by the assessee as not reflecting the true and correct position and particularly when the assessee’s request for cross examining the representative of Ambrose International Corporation was not allowed.”

The revenue perhaps did not take a separate plea/ground before the Tribunal on the discrepancy and, therefore, the High Court declined to go into the merits in this regard. This is clear reminder​​ that merits of the case should not be discounted whereas legal issues can be raised at any stage.

Banking channel transaction​​ 

In CIT v. Micro Melt Pvt. Ltd. [2009] 177 Taxman 35, the Gujarat High Court deleted the addition after it found that the subject​​ transactions were made through banking channel.

Trade creditors​​ 

In Uplaksh Metal Industries v. CIT [2009]​​ 177 Taxman 298​​ (Punj. & Har.) the assessee had neither been able to disclose the complete addresses of the trade creditors nor was able to give the complete addresses of the consignors nor the name had been mentioned on the challan forms, and, thus, the verification of the same by the Assessing Officer became totally impracticable on account of lack of this complete information supplied by the assessee .​​ The assessee contended that it was unable to provide the information as the trade creditors were large in number. The P&H High Court held that the assessee failed in establishing the genuineness of the so called trade creditors appearing in its books of account.

Loans from relative​​ 

In Sanil KMP v. CIT [2009]​​ 177 Taxman 481​​ (Ker.) the loan creditors shown in the accounts were close relatives of the assessee. In this case, the Kerala High Court held that close relatives are prone to help the assessee in the income-tax proceedings and​​ unless they prove their source, credits claimed by them cannot be accepted and unless source is proved,​​ the loan creditors cannot be said to have discharged the duty of proving that the loans shown in the accounts were genuinely advanced by them to the assessee.

Onus - receipt of share capital contributions

The Delhi High Court in CIT v. Tulip Finance Ltd. [2009] 178 Taxman 182 held that the assessee has discharged the onus which laid upon it, of establishing identity of shareholders as well as genuineness​​ of transactions in the following fact situation :

• The assessee furnished permanent account numbers of shareholders;

• places of their assessment;

• confirmations from them;

• amounts received from those shareholders were through cheques which had been duly credited in bank account of assessee;​​ 

• those shareholders were also income-tax assessees; and

• they had also received dividends in respect of said shares.

Also in regard to the alleged unexplained security deposit sums, the High Court found that such security deposits were either eventually refunded or adjusted against sale of the assets to the customers upon termination of the lease and, thus, addition under section 68 did not lie either.​​ 

Share capital contribution from a listed entity

In CIT v. Gangour Investment Ltd. [2009] 179 Taxman 1 the Delhi High Court dispelled the Assessing Officer’s action in treating share capital contribution from a listed entity as the assessee’s undisclosed income. In this case the assessee-company produced the following evidence​​ which was found sufficient by the Court :

• Copy of subscription form giving identity of the subscribers, including information with respect to their addresses as well as their PAN;

• Copy of the statements of the bank accounts of the shareholder.

Interestingly the High Court found that the share capital of the investor company far exceeded its investment in the assessee-company and furthermore, it was found to be a member of the NSE being involved in sale and purchase of shares.

In fact, the Delhi High Court in Bhav Shakti Steel Mines (P.) Ltd. v. CIT [2009] 179 Taxman 25 reversed the order of the ITAT after it found that the Commissioner of Income-tax (Appeals) had verified such credit on scrutiny of the following documents :

 (a) PAN details;

 (b) Audited balance sheet of the shareholder.

Landlord not to prove capacity of tenant

The position in regard to a deposit or advance paid by a tenant in regard to a lease of premises is different from a loan from a third party. A lease or tenancy is governed by the​​ terms of the lease deed or tenancy agreement. When the premises are let out on terms mutually agreed and one such term relates to the deposit or advance which the tenant agrees to pay, it is not necessary for the landlord to ascertain the source from which​​ the tenant gets the amount to pay as a deposit/advance.​​ When persons take premises on rent invariably they will organise the funds required to pay an advance or deposit. Further, as the lessee/tenant will always be available for verification as he will be​​ in occupation of the premises, the fact whether he has paid the deposit or not can be easily verifiable.​​ Therefore, in regard to deposits from tenants, it is sufficient if the assessee proves the identity of the tenant and the genuineness of the transaction under which the deposit is made. It will not be necessary for the assessee to prove the capacity of the tenant to make the deposit/advance. Therefore, where the tenancy is established and the tenant is actually in occupation of the premises and a lease​​ deed or tenancy agreement is produced showing the amount agreed to be paid as deposit and the deposit is paid by cheque or demand draft and is duly accounted for in the books of account of the assessee as also the tenant, then the assessee has discharged his burden under section 68 of the Income-tax Act, 1961.​​ If the Assessing Officer still wants to treat such amount as unexplained income of the assessee, then the burden lies on the Revenue to establish that the deposit was not really a deposit by the tenant, but the unexplained income of the assessee channelised through the tenant.​​ However the identity of the depositor and the genuineness of the deposit has to be established by showing that the person making the deposit is in occupation of the assessee’s​​ premises as a tenant or had​​ occupied the premises for a considerable time and the deposit was paid by cheque/bank draft and borne out by books of account of both the assessee and the tenant and by the lease agreement, wherever such lease agreement exists.​​ Held accordingly, that the Tribunal was justified in holding that in respect of deposit against tenancy, the assessee was only required to prove the identity of the depositors and that the deposits were made by the tenants.​​ [2007] 290 ITR 0453- ​​​​ Commissioner of Income-tax v. Nevendram Ahuja (Madhya Pradesh High Court).​​ Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723 (Bom), Sarogi Credit Corporation v. CIT [1976] 103 ITR 344 (Patna) and Ashokpal Daga (HUF) v. CIT [1996] 220 ITR 452 (MP) followed.

The assessee had received sums of Rs. 2,95,000, Rs. 1,05,000 and Rs. ​​ 85,000 during the accounting years relevant to the assessment years 1989-90, 1990-91 and 1991-92. The Assessing Officer did not accept the creditworthiness of the depositors​​ by holding that the tenants/depositors had credited cash to their accounts either on the date of issue of cheques or only a few days earlier to the issue of the cheques to the assessee which showed that the depositors had apparently helped the assessee by​​ depositing the assessee’s funds to their account and then issuing cheques to the assessee by way of deposit for the tenancies. The Assessing Officer treated the receipts as unexplained income under section 68. The Commissioner (Appeals) granted relief only​​ to an extent of Rs. 25,000 relating to the assessment year 1989-90 and Rs. 60,000 relating to the assessment year 1991-92 and confirmed the balance of Rs. 2,70,000 for the assessment year 1989-90, Rs. 1,05,000 for the assessment year 1990-91 and Rs. 25,000 for the assessment year 1991-92. The Tribunal noted that the assessee had produced confirmation of deposits from the tenants/depositors except in one case and the bank statements confirmed the payments ; the rental agreements produced by the assessee established that the depositors were tenants running their businesses in shops in the assessee’s premises and the assessee had received rents from such tenants. The Tribunal held that the assessee had proved the identity of the tenants and the genuineness of​​ the transaction and hence these tenancy deposits could not be added to the income under section 68 and deleted the entire additions. On a reference ​​ :​​ Held, that there was nothing strange about the tenants remitting the cash to their bank accounts to meet​​ the amount of the cheques issued by them towards rental deposit. Once the identity of the tenant was established and the genuineness of the transaction was also established by producing the lease agreement and by proving that such a tenant continues in possession and by showing that the books of account of the tenant also reflected the deposit, the fact that the tenants did not have the funds earlier to meet the cheque and had remitted the amount to their accounts to meet the cheques only a few days before​​ the issue of the cheque was not relevant.​​ The Revenue had not shown that the deposits were really funds of the assessee. Even if the Assessing Officer had some doubt about the capacity of the tenant, that would be a good ground for taking action against the tenant and not against the assessee. There was no documentary evidence with regard to one tenant who had deposited Rs. 40,000. Neither the bank statements establishing the payments nor any confirmation by the tenant were furnished. The addition with regard to the transaction was justified. Thus, the Tribunal was justified in holding that the assessee had discharged the burden in respect of deposits of Rs. ​​ 2,70,000, Rs. 1,05,000 and Rs. 85,000 received from tenants during the accounting years relevant to​​ the assessment years 1989-90, 1990-91 and 1991-92.

The High Court in CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP) had dealt with the question of the limitations on the power to issue commission for examination of witnesses. The High Court pointed out to​​ the guidelines on the subject in a decision of the Bombay High Court in Jamnadas Madhavji and Co. v. J. B. Panchal, ITO [1986] 162 ITR 331 and Rina Sen v. CIT [1999] 235 ITR 219 (Patna), where it was held that existence of pending proceeding is a condition​​ precedent for exercise of power to issue a commission following the powers of the court as laid down in the Civil Procedure Code, 1908. The fact that such power is to be exercised under section 131(1A), when there is a reason to suspect concealment, does​​ not enlarge the power, so as to justify an exercise of the power when there are no pending proceedings. Any statement recorded on the basis of such wrong use of this power would be invalid. In this case, a commission was issued to a Departmental Valuation​​ Officer to value certain premises prior to the commencement of proceedings, so that such valuation report became inadmissible as evidence.​​ 

Sundry creditors ​​ 

The Kerala High Court in CIT v. Smt. Annamkuty Jose [2008] 174 Taxman 328, held that has even​​ though there is no specific provision in the statute casting burden on the assessee to prove sundry credits, yet the principles contained in section 68 as well as in section 69(c) are squarely applicable to sundry credits in the case of a trader. The Court​​ pointed out that, in fact, credit purchases are nothing but expenditure and if sundry credits are not proved by the assessee, addition can be made by resort to section 69(c) of the Income-tax Act. In this case the​​ assessee did not furnish the names and addresses of creditors or confirmation letters from them. Since the assessee did not prove the sundry credits, the Assessing Officer made an addition.

Entries in creditors books ​​ 

The Gujarat High Court in Krishna Textiles v. CIT [2008] 174 Taxman 372 has held that addition under section 68 is possible for amount credited in the assessee’s books and not for amounts shown to the credit of the assessee’s account in creditor’s books so that in this case certain drafts shown as received in creditor’s books to the assessee’s account are not held as income of the assessee. The Court held that the burden was on the department to show that the amount of demand drafts found to be credited in the assessee’s account in the books of account of the GMDC belonged to the assessee by bringing proper evidence on record and the assessee could not be expected to explain the source of income or to call responsible officers of the GMDC or bank to discharge the burden that laid upon the department. ​​ 

Cash deposit ​​ 

In CIT v. Shailesh Rasiklal Mehta [2009]​​ 176 Taxman 270​​ (Guj.), the assessee deposited cash in bank on two different dates. The Assessing Officer alleged that​​ it had no cash balance in hand and this lead to addition of undisclosed income only for the fact that it disbelieved the opening balance as it had rejected books of account for the earlier assessment year. After taking cognizance of the Tribunal’s order in​​ preceding year, the Tribunal deleted the addition in this case. The Gujarat High Court did not disapprove such action of the ITAT.

Source of source​​ 

The Delhi High Court in CIT v. Diamond Products Ltd. [2009] 177 Taxman 331 held that the Assessing Officer​​ is not permitted to examine the source of the source, once the assessee has been able to establish that the transactions with his creditors are genuine and the creditors’ identities and creditworthiness have been established.

The creditor in this​​ case had been regularly assessed to income-tax and copies of his returns for the relevant years were also filed before the Assessing Officer by the assessee along with his confirmation. Further, he had also appeared before the Assessing Officer and had furnished all the information and details required by him. He had also produced the books of account of his proprietary concerns for verification by the Assessing Officer. A statement on oath of the creditor was also recorded by the Assessing Officer. As per​​ the said statement, he admitted having advanced a sum of Rs. 23,00,000 to the assessee. He had also filed bank statements pertaining​​ to the proprietary concerns indicating that the said sum of money had been advanced to the assessee through bank drafts. Further, he explained that the bank drafts were made out of the deposits to the extent of Rs. 23,00,000 made in the bank accounts of his proprietary concerns and were representing cash received from M/s. Punjab Tractors towards repayment of loan given earlier. In this case the attempt sought to be made by the Assessing Officer to verify the whereabouts of the M/s. Punjab Tractors was held to be nothing but an attempt to examine the source of the source which was not permissible as per the Court.

Carried forward amount of earlier years

The assessee on the first day of the previous year relevant to the assessment year 1993-94 i. e. on April 1, 1992, credited an amount of investment/cash​​ credit of Rs. 1,55,316 in his books of account. The Assessing Officer added this amount in the income of the assessee as unexplained investment in the assessment year 1993-94. The Tribunal held that this was not a case of cash credit entered in the books​​ of account of the assessee during the year but it was a case in which the assessee had invested the capital in the business and this amount was shown as a closing capital as on March 31, 1992 and on April 1, 1992, it was an opening​​ 

balance. Therefore the Tribunal held that what was already credited in the books of account ending on March 31, 1992, for financial year 1991-92 relevant to assessment year 1992-93 could not be an​​ unexplained cash credit or investment in the books of account maintained for the financial year 1992-93, the accounting period for which ended on March 31, 1993.​​ On appeal held carried forward amount of the previous year did not become an investment or cash credit generated during the relevant year 1993-94. This alone was sufficient to sustain the order of the Tribunal in deleting the amount of Rs. 1,55,316 from the assessment for the assessment year 1993-94.