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2008 (7) TMI 291 - HC - Income TaxCash credits in account of person from whom assessee made purchases even if the assessee did incur expenditure, the equivalent debit in the P/L Account would neutralize each other and no addition could be made proviso to S. 69C inserted w.e.f. 1.4.99 not applicable for A.Y. 1987-88 - therefore, amount covered by cash credits would be an allowable deduction u/s 37 and it cannot be treated as income of the assessee
Issues Involved:
1. Whether the Tribunal was right in law in holding that the drafts of Rs.1,67,261 being cash credits in the books of Gujarat Mineral Development Corporation (GMDC) in the account of the assessee was the income of the assessee when there are no corresponding entries in the books of the assessee. 2. Whether the Tribunal was right in law in not allowing the deduction of the said amount as the cost of purchase or as allowable expenditure. Issue 1: Tribunal's Holding on Cash Credits as Income The Tribunal held that the drafts totaling Rs.1,92,161, credited by GMDC in their books but not accounted for in the assessee's books, were the income of the assessee. The Tribunal emphasized that the onus was on the assessee to explain the source of the funds remitted to GMDC, which the assessee failed to do, providing only a general explanation that GMDC's accounts were unreliable. The Tribunal found this explanation insufficient, especially considering GMDC is a reputable State Government undertaking. Consequently, the Tribunal justified the addition made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals). Issue 2: Deduction of the Amount as Business Expenditure The Tribunal rejected the assessee's alternative contention that the amount should be allowed as a deduction for the cost of purchase or as allowable expenditure. The Tribunal reasoned that there was no evidence to presume that the payments were made for business purposes. Court's Analysis and Judgment: Analysis of Issue 1: The court noted that the burden of proof was on the revenue to show that the drafts credited in GMDC's books belonged to the assessee. The court referenced the Supreme Court's decision in Kishinchand Chellaram v. CIT, which held that the department must provide proper evidence to prove that the money belonged to the assessee. The court found that the Assessing Officer failed to discharge this burden, as no further inquiry was made to substantiate the claim that the drafts were the income of the assessee. The court emphasized that the department should have inquired with the bank to gather additional details. Given the age of the case (pertaining to the assessment year 1987-88), the court decided not to remit the matter for further inquiry and concluded that the revenue failed to prove that the amount in question was the income of the assessee. Analysis of Issue 2: The court found that the Tribunal cursorily dealt with the alternative contention of the assessee. The court noted that if the payments by drafts were presumed to be made by the assessee to GMDC, it should also be presumed that these payments were for business purposes, given the business relationship between the assessee and GMDC. The court observed that the Assessing Officer could have asked GMDC to clarify the purpose of the payments. The court concluded that since the assessee was engaged in the business of coal and lignite and made purchases from GMDC, any addition under Section 69C should be allowed as a deduction under Section 37(1) of the Income Tax Act, 1961. The court also noted that the proviso to Section 69C, which disallows such deductions, was not applicable to the assessment year in question (1987-88). Conclusion: The court answered both questions in the negative, ruling in favor of the assessee and against the revenue. The reference was disposed of without any order as to costs.
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