2003 (9) TMI 62 - HC - Income Tax

Assessee proved creditor identity, genuineness and cheque receipts under s.106 Evidence Act; burden shifted to Revenue to prove ownership

Nemi Chand Kothari Versus Commissioner of Income-Tax And Another.

GAUHATI HC held that the assessee had proved identity of creditors, genuineness of loans and receipt by cheque, thereby discharging his burden under s.106 ... Addition of income from undisclosed sources u/s 68 - genuineness of the loans - creditworthiness of the sub-creditor - burden of proof - Section 106 of the Evidence Act - onus of the assessee to the extent of his proving the source - Whether, the learned Tribunal was justified in demanding the proof regarding the creditworthiness of the sub-creditor and in drawing an adverse inference against the appellant on his alleged failure to satisfy the respondents regarding the creditworthiness of the sub-creditors? - HELD THAT:- We find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact, the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure, as a corollary, could not have been and ought not to have been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub-creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from undisclosed sources merely on the failure of the sub-creditors to prove their creditworthiness. It is, no doubt, true that in the present case, the findings arrived at by the Assessing Officer as well as the learned Tribunal are findings of fact, but since these findings are based on an wholly erroneous view of law, such findings cannot be said to be mere findings of facts. It is trite that no assessment can be made contrary to the provisions of law. The present assessee-appellant is concerned, his burden stood discharged, when he had proved the identity of his creditors, the genuineness of the transactions, which he had with his creditors, and the creditworthiness of his creditors vis-a-vis the transactions, which he had with the creditors. The burden had, then, shifted to the Revenue to show that though covered by cheques, the amounts, in question, actually belonged to, or were owned by, the assessee himself, but no material, direct or indirect, exists on record to come to such a conclusion confidently and boldly. appeal succeeds and the impugned orders are set aside and quashed. Issues Involved:1. Justification of the Tribunal in demanding proof regarding the creditworthiness of the sub-creditor.2. Adverse inference against the appellant for failure to satisfy the respondents regarding the creditworthiness of the sub-creditors.3. The burden of proof under Section 68 of the Income-tax Act, 1961.4. Interpretation and scope of Section 68 of the Income-tax Act in conjunction with Section 106 of the Evidence Act.5. The role of the Assessing Officer in determining the genuineness of transactions and the creditworthiness of creditors and sub-creditors.Issue-wise Detailed Analysis:1. Justification of the Tribunal in Demanding Proof Regarding the Creditworthiness of the Sub-Creditor:The Tribunal demanded proof of the sub-creditors' creditworthiness, which was contested by the appellant. The appellant argued that once the identity of the creditors and the genuineness of the transactions were established, the burden of proving the creditworthiness of the sub-creditors should not fall on the assessee. The court held that the Assessing Officer's inquiry under Section 68 should not be confined to transactions between the assessee and the creditor but could extend to the source(s) of the creditor and sub-creditor. However, the burden on the assessee under Section 106 of the Evidence Act is limited to disclosing the source from which he received the loan.2. Adverse Inference Against the Appellant for Failure to Satisfy the Respondents Regarding the Creditworthiness of the Sub-Creditors:The Tribunal's adverse inference against the appellant for failing to prove the sub-creditors' creditworthiness was deemed incorrect by the court. The court emphasized that the assessee's burden is to prove the identity of the creditor, the genuineness of the transaction, and the creditor's creditworthiness concerning the transactions with the assessee. It is not the assessee's responsibility to prove the sub-creditors' creditworthiness or the genuineness of transactions between the creditor and sub-creditors.3. The Burden of Proof Under Section 68 of the Income-tax Act, 1961:The court clarified that the assessee must satisfy three conditions under Section 68: (i) identity of the creditor, (ii) genuineness of the transaction, and (iii) creditworthiness of the creditor. Once the assessee discharges this burden, the onus shifts to the Assessing Officer to show that the transactions are not genuine or that the creditor lacks creditworthiness.4. Interpretation and Scope of Section 68 of the Income-tax Act in Conjunction with Section 106 of the Evidence Act:The court interpreted Section 68 in conjunction with Section 106 of the Evidence Act, stating that while the Assessing Officer can inquire into the sources of the creditor and sub-creditor, the assessee's burden is limited to proving the source of the loan he received. The harmonious construction of these sections implies that the assessee does not need to prove the sub-creditors' creditworthiness or the genuineness of transactions between the creditor and sub-creditors.5. The Role of the Assessing Officer in Determining the Genuineness of Transactions and the Creditworthiness of Creditors and Sub-Creditors:The court held that the Assessing Officer could inquire into the sources of the creditor and sub-creditor but must provide evidence that the loan amounts actually belonged to the assessee. The failure of sub-creditors to prove their creditworthiness cannot automatically lead to the conclusion that the loan amounts are the assessee's income from undisclosed sources. The Assessing Officer must provide direct or circumstantial evidence to prove that the money belonged to the assessee.Conclusion:The court concluded that the Assessing Officer and the Tribunal erred in treating the loan amounts as the assessee's income from undisclosed sources based on the sub-creditors' failure to prove their creditworthiness. The appeal was allowed, and the impugned orders were set aside. The court emphasized that the assessee's burden is limited to proving the identity of the creditor, the genuineness of the transaction, and the creditor's creditworthiness concerning the transactions with the assessee. The onus then shifts to the Assessing Officer to prove otherwise.