2007 (1) TMI 567 - HC - Income Tax

Cash deposits from identified depositors admitting payments u/s68: no 'source of source' proof; additions deleted, appeal allowed.

Whether cash credits could be added under s.68 where the assessee proved the existence of the depositors and they admitted the deposits. The HC held that ... Additions u/s 68 - Cash credits found in the books of the account - Identity of the creditors - failed to discharge onus - HELD THAT:- The fact that the explanation furnished by the aforementioned four creditors about the sources wherefrom they acquired the money was not acceptable by the revenue could not provide necessary nexus for drawing inference that the amount admitted to be deposited by these four persons belonged to the assessee. The assessee having discharged his burden by proving the existence of the depositors and the depositors owing their deposits, he was not further required to prove source of source. Accordingly the Tribunal, and the Assessing Officer had seriously erred and misdirected themselves in law by not correctly appreciating the legal principle about necessity of establishing such nexus once the assessee has discharged his onus by proving the existence of the depositors and the depositors having accepted their deposits with the assessee. Once this onus is discharged the presumption raised u/s 68 stands rebutted and it becomes burden of revenue to prove that source of such deposits is traceable to assessee before the same can be treated as undisclosed income of the assessee concerned. Accordingly, the appeal is allowed. The orders passed by the Tribunal, the CIT(A) and the Assessing Officer are set aside to the extent of additions in respect of the cash credits found in the books of the account of assessee were added in the income of the assessee. The additions made in the income of the assessee's account are directed to be deleted and demand notice to be accordingly modified. In favour of assessee Issues Involved:1. Whether the Tribunal was justified in holding that the assessee failed to discharge his onus under section 68 of the Income-tax Act, 1961.2. Whether the rejection of the explanation furnished by the appellant regarding the cash credits was perverse by ignoring the objective material available to the assessee.3. Whether the additions made by the Assessing Officer, based on statements of persons examined at the back of the appellant without giving him an opportunity to cross-examine them, were justified in law.Issue-wise Detailed Analysis:1. Onus under Section 68 of the Income-tax Act, 1961:The court examined whether the assessee had discharged his burden under section 68 by proving the identity of the creditors and their ownership of the deposits. The assessee provided affidavits from the creditors, who admitted to having advanced the sums in question. The creditors were also assessed to income tax, confirming their existence as real persons. The court held that once the assessee proves the existence of the creditors and their ownership of the deposits, the onus shifts to the revenue to prove that the deposits are actually the assessee's income. The court concluded that the Tribunal erred in holding that the assessee failed to discharge his onus under section 68.2. Rejection of Explanation as Perverse:The court found that the Assessing Officer and the Tribunal ignored significant parts of the statements made by the creditors, focusing only on portions where the creditors pleaded ignorance about details. For instance, Smt. Ramkanwari Devi and Smt. Santosh Sharma provided explanations about their sources of income, which were not fully considered by the Assessing Officer. The court noted that the creditors' inability to explain the sources of their deposits does not automatically mean the deposits belong to the assessee. Therefore, the rejection of the assessee's explanation was deemed perverse.3. Additions Based on Statements Without Cross-Examination:The court addressed the issue of whether the Assessing Officer was justified in making additions based on statements of persons examined at the back of the appellant without giving him an opportunity to cross-examine them. The court emphasized that the assessee must be given a fair opportunity to cross-examine the witnesses whose statements are being used against him. The failure to provide such an opportunity violates the principles of natural justice. Consequently, the additions made by the Assessing Officer were not justified in law.Conclusion:The court held that the Tribunal and the Assessing Officer misdirected themselves in law by not appreciating the legal principle that once the assessee has discharged his onus by proving the existence of the depositors and their ownership of the deposits, the burden shifts to the revenue to prove that the deposits are the assessee's income. The appeal was allowed, and the orders of the Tribunal, CIT(A), and the Assessing Officer were set aside to the extent of the additions of Rs. 3,15,000. The additions were directed to be deleted, and the demand notice was to be modified accordingly. There was no order as to costs. The judgment was in favor of the assessee.