Whether when assessee fails to produce PAN numbers of parties and also pays no interest on huge loans taken from them, it goes to establish that loan transactions were not genuine - YES: HC

THE issue before the Bench is - Whether when assessee fails to produce PAN numbers of parties and also pays no interest on huge loans taken from them, it goes to establish that the loan transactions were not genuine. And the verdict favours the Revenue.

Facts of the case

The assessee filed its return of income declaring loss. The return was processed under Section 143(1) of the Act and thereafter, a notice was issued under Section 143(2) of the Act, initiating scrutiny assessment proceedings. The Assessment officer assessed the loss at a lesser amount than the one returned by the assessee. Assessing Officer made additions of unsecured loans credited in the books of account of the assessee being income from undisclosed sources under

Section 68 of the Act on the ground that the assessee failed to discharge the onus cast upon it to identify the persons and prove their creditworthiness of having advanced the loan to the assessee.

On appeal, CIT(A) allowed the appeal, holding that the identity of parties and creditworthiness and genuineness of the transaction was proved, hence addition under Section 68 was not justified. Tribunal also upheld the order of the CIT(A).

On appeal before the High Court, the Revenue submitted that the assessee failed to discharge the onus in proving the identity, genuineness of the transactions and creditworthiness of the parties. It was submitted that Assessing Officer had rightly treated the income from other sources and made an addition. It was submitted that the finding of the CIT(A) and the Tribunal that the assessee had repaid the loan in subsequent year was without ascertaining whether interest was paid by the assessee for the loans.

Assessee submitted that it was able to prove the identity and genuineness of the transactions through the account details of the parties from where the loan was advanced. It was submitted that the genuineness of the loan was accepted by the Assessing Officer and there was no reason for the Assessing Officer to reject loans.

Having heard the parties, the Court held that,

++ Section 68 of the Income Tax Act, 1961 (‘Act’ in short), empowers the Assessing Officer to treat the income credited in the books of accounts of the assessee for any previous year if there is no plausible explanation by the assessee about the nature and source of such income or if the explanation given is not satisfactory. Once it is explained, it is for the Assessing Officer to consider the same and form an opinion about the genuineness of the whole transactions. Such an opinion must be based on cogent evidence i.e. material produced by the assessee. In A.Govinda Rajulu Mudaliar Vs. CIT, [1958] 34 ITR 807 (SC), it was held that it is not necessary for the department to adduce evidence to show from which sources the income was derived and as to why it should be treated as undisclosed income. If the assessee fails to prove satisfactory the source and nature of certain amount of cash received through the accounting year, the ITO is entitled to draw an inference that the receipts are of an assessable nature. Therefore, the burden of proving the source of such income is on the assessee;

++ in CIT Vs. Durga Prasad More,2002-TIOL-877-SC-IT, it was held that the discharge of onus is dependent on the facts and circumstances of each case. Whether the initial onus is discharged or not that has to be ascertained from the materials on record. Once the initial onus is discharged, the onus shifts on the Revenue. Then, it is for the Revenue to act on it and until it comes to a finding that the explanation is insufficient and unsatisfactory, it could either ask for further explanation or could come to a decision on the basis of such material, but it is also a necessity or incumbent on the taxing authority to discharge their duty before fastening liability on the assessee. Therefore, when the materials are placed before it, the Revenue is duty bound to look into the same;

++ the assessee could not produce the PAN Number of both the parties. The Assessing Officer, using his power under Section 131 of the Act, had called upon the bankers of the parties to produce the necessary particulars. The banks could only produce the account opening forms and bank statements of the parties. We do not think that the efforts made by the Assessing Officer and the fact that he was able to procure the bank statement would justify the finding and conclusion that identity, creditworthiness and genuineness of the transactions stands established. The findings recorded by the Assessing Officer and which remained unnoticed are telling and unequivocal. Attempts made by the Assessing Officer to serve the parties at 17/4, Mathura Road, New Delhi proved futile. This position is admitted and it is accepted by the counsel for the respondent that the address mentioned was correct. Mr. Bharat Kaushik, who acted as an introducer while opening the accounts and who is said to be the son of an old friend and was instrumental for arranging funds, was not produced on the pretext that the assessee was not in best relations with him. This appears to be a ploy for not producing him. His presence definitely would have thrown light on the identity of the parties. We also note, at the same time, the Assessing Officer should have invoked Section 131 of the Act to ensure his presence. The parties who had given loans of Rs.28 lacs namely Sheela Textile and Rajesh Upadhyaya & Co. were not produced. That apart, we note the Account Numbers being 51706, 51921 are in close proximity and have been opened around the same time. It is surprising that the bank had not even cared to seek the complete details of the parties at the time of the opening of the account like their PAN Number. It is also not disputed by the counsel for the assessee that the assessee had not paid any interest to the parties for advancing such huge loans. It has also come on record that the parties were not known to the assessee so as to oblige the assessee by advancing interest free loan of substantial amounts. The purpose for which the loans were taken, have not been spelt out by the assessee in his affidavit or otherwise. The Paying back of the so called loans by way of an Account payee cheque is not conclusive, moreso, if the aspects narrated above, are considered cumulatively. The facts have to be seen in the context of Section 68 of the Act. Suffice to state, the identity of the parties have not been proved, their creditworthiness not established and genuineness of transactions not demonstrated. In this context the respondent assessee was unable to file/give PAN number, details of income tax returns etc;

++ CIT(A) and the Tribunal, in our view, have committed an error in not properly approaching the issue which fell for their consideration out of the findings rendered by the Assessing Officer. In such a situation, it has to be held that they have committed substantial error of law in interfering with the order of the Assessing Authority without any proper basis;

++ we accordingly set aside the order of the Tribunal and restore the order of the Assessing Officer. The question of law is accordingly decided in favour of the appellant-Revenue and against the respondent-assessee