Cash-credit and fair-hearing principles in block assessment: assessee need not prove source of source absent Revenue linkage.

In a cash-credit dispute, once the assessee shows receipt of funds from identifiable corporate entities assessed to tax, it is not required to prove the source of the source unless the Revenue links the credited money to the assessee's own undisclosed income. The article also notes that adverse material used in assessment must be properly confronted to the assessee before reliance is placed on it, as a matter of fair hearing. On the unexplained expenditure issue, a search document was treated as showing that the expenditure was incurred, even though it was not allowable as business expenditure.

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Issues: (i) Whether the addition of Rs. 3 crores as unexplained cash credit in the assessee-company's block assessment was sustainable, including the objection that the material collected by the Assessing Officer had not been properly confronted to the assessee; (ii) Whether the addition of Rs. 2,50,000 as unexplained expenditure was sustainable.

Issue (i): Whether the addition of Rs. 3 crores as unexplained cash credit in the assessee-company's block assessment was sustainable, including the objection that the material collected by the Assessing Officer had not been properly confronted to the assessee.

Analysis: The funds subscribed by the four Sapphire group companies were traced by investigation to other companies and ultimately to the bank account of Khemka & Co., but no material established that the money in that account belonged to the assessee-company. The assessee had shown that it received money from identifiable corporate entities assessed to tax, and it was not required to prove the source of the source beyond that point. The Memorandum of Understanding and the surrounding circumstances did not conclusively establish that the assessee-company's own undisclosed income was introduced as share capital. Independently, the use of adverse material without proper confrontation to the assessee offended the requirement of fair hearing in assessment proceedings.

Conclusion: The addition of Rs. 3 crores was not sustainable and was deleted in favour of the assessee; the alternative natural justice objection also succeeded in principle.

Issue (ii): Whether the addition of Rs. 2,50,000 as unexplained expenditure was sustainable.

Analysis: A document found during search indicated that the assessee had incurred the expenditure, and the denial that no payment was made was not accepted on the facts. The amount was treated as expenditure actually incurred, though its purpose did not make it allowable as business expenditure.

Conclusion: The addition of Rs. 2,50,000 was upheld against the assessee.

Final Conclusion: The assessee succeeded on the major block-assessment addition relating to share capital, but failed on the separate addition for unexplained expenditure, resulting in partial relief only.

Ratio Decidendi: In a cash-credit matter, once the assessee establishes receipt from identifiable corporate entities, it is not required to prove the source of the source unless the Revenue links the credited funds to the assessee; adverse material used in assessment must also be confronted to the assessee before reliance is placed upon it.

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