2011 (11) TMI 654 - HC - Income Tax

Revenue's Burden of Proof on Creditors' Creditworthiness; Assessing Officers' Responsibility to Verify Sources

The Commissioner of Income Tax-II, Ludhiana Versus M/s Amar Chand and sons

The High Court dismissed the revenue's appeal, emphasizing that the burden of proving the credit worthiness of creditors does not lie on the assessee. The ... Unexplained under Section 68 - Held that:- We feel that the submission is absolutely untenable as the assessee cannot be asked to show credit worthiness of his creditors and the Assessing Officer of that creditor can add the said amount to the income of that creditor if he is not satisfied by the explanation given and it is not possible for the assessee to prove the sources of the creditors. It has also been recorded as a matter of fact that the amounts have been received by way of banking channel and, therefore, it was for the Assessing Officers of the said creditors to question the said creditors, who were income tax assesses and in the absence of any evidence, the Assessing Officer could not have treated the said amount as belonging to the assessee from his undisclosed sources. No question of law Issues involved:1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in dismissing the appeal of the department regarding the genuineness of transactions and credit worthiness of creditors.2. Whether the ITAT was correct in upholding the deletion of addition by the Commissioner of Income Tax (Appeals) in the case of unsecured loans taken by a partnership firm.Analysis:1. The appeal was filed by the revenue under Section 260A of the Income Tax Act against the ITAT order for the assessment year 2007-08. The revenue contended that the ITAT erred in dismissing the appeal by holding that the assessee proved the genuineness of transactions and credit worthiness of creditors, even though the commodity profits introduced were found to be bogus. The department argued that the assessee failed to explain the source of credits satisfactorily. However, the court held that the assessee cannot be expected to prove the credit worthiness of creditors. The court emphasized that the Assessing Officer of the creditor can scrutinize and add amounts to the creditor's income if unsatisfied, and the burden does not fall on the assessee to prove the sources of the creditors' funds.2. The department challenged the deletion of addition of Rs. 33,11,510 by the Commissioner of Income Tax (Appeals) and upheld by the ITAT. The case involved a partnership firm engaged in trading and manufacturing cycle parts, which had taken unsecured loans from 18 persons. The Assessing Officer questioned the credit worthiness and genuineness of transactions of 15 creditors, leading to the addition. However, it was revealed that the creditors were existing income tax payees with accepted tax affairs. The court noted that the creditors had filed returns showing the mode of advance and sources, accepted by their Assessing Officers. The court dismissed the appeal, stating that no question of law arose as the amounts were received through banking channels, and the Assessing Officers of the creditors had the authority to investigate them further.In conclusion, the High Court dismissed the appeal filed by the revenue, emphasizing that the burden of proving the credit worthiness of creditors does not lie on the assessee. The court highlighted that the Assessing Officers of the creditors have the responsibility to question and investigate the sources of funds, and in the absence of evidence, the amounts cannot be treated as belonging to the assessee from undisclosed sources.