1984 (4) TMI 119 - AT - Income Tax

Appeal allowed as section 69D not applicable due to absence of hundies. Importance of assessee's explanations under section 68 highlighted.

The appeal was allowed in the case challenging the addition of income under section 69D of the Income Tax Act for loans without hundies executed. The ... Borrowing on a hundi - deemed income under section 69D - cash credits and explanation under section 68Borrowing on a hundi - deemed income under section 69D - Whether the amounts shown as loans in the assessee's books were taxable under the deeming provision of section 69D. - HELD THAT: - The Tribunal found that section 69D operates only where an amount is borrowed on a hundi and that, on the facts, no hundies were executed. Although the transactions were in cash and no banking channel was used, the statutory requirement of borrowing on a hundi was not satisfied. The ITO and the AAC therefore applied section 69D incorrectly. The ITO himself, by an order under section 154, had conceded that section 69D did not apply to the case and had accepted two of the loans while treating one as not proved; that concession underscores that section 69D was inapposite to the facts. [Paras 3]Section 69D did not apply as no hundi was executed; the finding and tax under section 69D cannot be sustained.Cash credits and explanation under section 68 - Whether the alleged loans should be reconsidered as cash credits under section 68 and, if so, whether the assessee's explanations are satisfactory. - HELD THAT: - The Tribunal directed that the ITO should examine the three entries as cash credits under section 68, which requires that where the assessee offers an explanation about the nature and source of a cash credit, the explanation must be accepted if satisfactory; only an unsatisfactory explanation permits charging the amount to income. The ITO and the AAC did not proceed under section 68 nor did they properly consider the explanations offered by the assessee; in fact, the ITO's earlier section 154 order had accepted two loans. For these reasons the assessment and the order under appeal are set aside insofar as they relate to the alleged borrowings and the matter is remitted to the ITO for fresh decision in accordance with law. [Paras 4]Matter remanded to the ITO to reconsider the three loan entries under section 68 and pass fresh orders after considering the assessee's explanations.Final Conclusion: The appeal is allowed: section 69D was wrongly applied because no hundi was executed; the assessments/orders are set aside insofar as they relate to the alleged borrowings and the ITO is directed to reconsider them under section 68 and pass appropriate orders. Issues: Appeal against addition of income under s. 69D of the IT Act for loans without hundies executed, application of s. 69D, treatment of cash credits under s. 68 of the IT Act, failure to consider explanations by the assessee, remand for reconsideration under s. 68.Analysis:The judgment involves an appeal against the addition of Rs. 45,208 in the assessee's income under s. 69D of the IT Act for loans without hundies executed. The Income Tax Officer (ITO) treated the loans as borrowed on a hundi and taxed them under s. 69D. The Appellate Assistant Commissioner (AAC) dismissed the appeal. The Tribunal noted that s. 69D applies when an amount is borrowed on a hundi without an account payee cheque drawn on a bank. Since no hundies were executed in this case, s. 69D was deemed inapplicable, despite attempts by the ITO and AAC to justify its application based on the absence of banking channels. The Tribunal highlighted that the ITO rectified the mistake by conceding that s. 69D did not apply to the case, accepting two loans but treating one as income due to lack of proof of source.The judgment further delves into the treatment of cash credits under s. 68 of the IT Act. Under s. 68, if the assessee fails to explain the nature and source of a cash credit satisfactorily, it may be charged to income tax. The Tribunal emphasized that while s. 69D focuses on hundi transactions, s. 68 requires the ITO to consider the explanation provided by the assessee. In this case, the ITO and AAC did not properly evaluate the explanations offered by the assessee regarding the loans. Consequently, the Tribunal set aside the assessment order and the AAC's decision related to the alleged borrowings, directing the ITO to reconsider the matter under the provisions of s. 68 of the IT Act and make a suitable order.In conclusion, the appeal was allowed, highlighting the need for a reassessment of the loans in accordance with the provisions of s. 68. The judgment underscores the importance of considering explanations provided by the assessee in cases of cash credits and the distinction between the applicability of s. 69D and s. 68 in determining tax liability for borrowed amounts.