2003 (9) TMI 62 - HC - Income Tax

Tribunal cannot demand proof of sub-creditor's creditworthiness or draw adverse inference for non-compliance

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

The HC held that the Tribunal was not justified in demanding proof of the sub-creditor's creditworthiness nor in drawing an adverse inference against the ... 'Whether, on the facts and circumstances of the case, 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?' - This 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.