2012 (10) TMI 601 - HC - Income Tax

Addition on account of Unexplained cash credit Unsecured loan from trust - Assessee receive unsecured loan from eight different trusts Managing Director of company & trustee of all eight trusts are same person The dates of donations to the trusts and advance of loans by the trusts to the assessee are the same - Held that - We have no doubt that Managing Director has created these trusts and was depositing the amount in cash to be given to the company as loans. He did not produce the trust deeds, the author of the trusts or beneficiaries of the trusts. The method and manner, in which he was depositing the amount in the accounts of the trusts, and was transferring the same on the same day by way of cheques to the company, of which he was majority shareholdings along with his associates, clearly establishes that he was playing a fraud with the revenue, and thus the AO and CIT(A) fully justified in finding that the burden of proof did not shift on the revenue and in adding to the amount to the income of the assessee. Where the source is the assessee himself, he is required to prove the source of the source to verify the transactions. It will be open to the Income Tax department to proceed against the trusts in accordance with the law. The questions of law are decided in favour of revenue and against the assessee. In favour of revenue

Issues Involved:
1. Justification of ITAT in deleting the addition by considering the identity of creditors.
2. Justification of ITAT in holding the creditworthiness of the trusts.
3. Justification of ITAT in holding the genuineness of the transactions.

Detailed Analysis:

Issue 1: Justification of ITAT in Deleting the Addition by Considering the Identity of Creditors
The High Court examined whether the ITAT was correct in deleting the entire addition of Rs. 17,83,571/- by accepting the identity of the creditors. The AO found that the loans were taken from eight different trusts managed by the same trustee, who was also the director of the assessee company. The AO observed that the trusts had no independent identity and acted as a tool for the assessee company. The CIT(A) upheld the AO's findings, noting that the trusts did not produce books of accounts or evidence of petty donations received, and the funds were not utilized for the trusts' objectives. The ITAT, however, found that the assessee had proved the identity of the creditors by filing balance sheets, income & expenditure accounts, and PAN details, and that the loans were advanced through banking channels.

Issue 2: Justification of ITAT in Holding the Creditworthiness of the Trusts
The High Court scrutinized whether the ITAT was justified in holding that the creditworthiness of the eight trusts was established. The AO and CIT(A) found that the trusts received cash deposits, which were immediately transferred to the assessee company, raising doubts about the creditworthiness. The ITAT, however, concluded that the trusts had sufficient opening balances from preceding years, which were enough to advance the loans. The ITAT emphasized that the trusts were assessed by the same AO who assessed the assessee company, and their returns were accepted under Section 143(1)(a) of the Act.

Issue 3: Justification of ITAT in Holding the Genuineness of the Transactions
The High Court evaluated whether the ITAT was correct in holding that the genuineness of the transactions was established. The AO and CIT(A) found that the transactions were a colorable device to hoodwink the revenue, as the sole trustee of the trusts was also managing the assessee company, and the funds were transferred on the same day the cash was deposited. The ITAT, however, held that the assessee had discharged the initial onus under Section 68 of the Act by proving the identity, creditworthiness, and genuineness of the transactions. The ITAT noted that the loans were advanced through cheques and were reflected in the balance sheets of the trusts.

Conclusion:
The High Court concluded that the ITAT grossly erred in law by allowing the appeal and reversing the judgment of CIT(A) and AO. The High Court found that the assessee could not prove the genuineness of the transactions, as the trusts were managed by the same person who managed the assessee company, and the funds were transferred on the same day the cash was deposited. The High Court held that the burden of proof did not shift to the revenue under Section 68 of the Act, as the assessee could not establish the independent existence of the trusts. The questions of law were decided in favor of the revenue, and the department was directed to compute the tax accordingly. The High Court also allowed the Income Tax department to proceed against the trusts in accordance with the law.

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