2005 (9) TMI 233 - AT - Income Tax

Unaccounted investment u/s 69 - Income From Other Sources - cash loans - Search and seizure operation - found cash and Jewellery - Discharge of onus - finance broker and arranges finance for borrowers - three assessment years is based on two diaries A-3 and A-5 found during the course of search - HELD THAT - The present four diaries, in the shape they are maintained are neither the cash book nor journal nor a ledger. It is a sort of a memorandum in the form of a ledger where record of a borrower has been maintained so as to remember that from whom he has borrowed the funds and at what rate of interest and for what period, or whether there has been an extension of borrowing period. Thus A-2, A-3, A-4 and A-5 are not the ledger in strict sense. For invoking s. 69, the Revenue has to establish that investment belonged to the assessee. In the present case, we find that onus cast on the Revenue to establish that outgoings belonged to the assessee has not been discharged. Therefore, in our view, the deeming provisions of s. 69 cannot be invoked in this case. For making addition u/s 69, there ought to be some material to prove that outgoings taken by the borrowers belonged to the assessee. The AO did not point out any cogent reason as to why the onus (that) lay on the assessee by virtue of presumption under s. 132(4A) is not discharged. In our view, the onus lying on the assessee regarding explaining the investments in outgoing or about the ownership of the investment is discharged the moment the AO accepted that the outgoings recorded in similarly placed document A-2 and A-4 belonged to the third parties. After this the burden again shifts to the Revenue to prove, with some additional material that even though outgoings recorded in A-2 and A-4 belonged to third parties but outgoings recorded in A-3 and A-5 belonged to the assessee. No such material has been brought on record or no cogent reasons have been advanced. There cannot be two standards of presumption, one for set A-2 and A-4 and other for A-3 and A-5. We have already discussed the nature of diaries A-3, A-5 and A-2/A-4. There are memorandum of transaction between lenders and borrowers arranged by the assessee on which the assessee is entitled for brokerage/commission. These diaries are neither cash book nor ledgers. They strictly do not fall in the definition of the book for the purposes of cash credit. Even presuming that they are the books of the assessee, then really speaking there is no credit coming in these books so as to fall in the concept of cash credit, which could be deemed as income of the assessee in absence of a satisfactory explanation. Where cash transaction takes place outside the kitty of the assessee or outside the books of the assessee, like in the present case, the case cannot be considered u/s. 68 also. In any case, we feel that the AO seems to be satisfied that there was no case u/s 68, that is why he invoked only s. 69. There is no allegation or facts shown by the Department that alleged cash given to the borrowers has passed through the books of the assessee. In fact they are not reflected in the balance sheet, not even in the case of A-2 and A-4, whose transactions have been accepted as correct and recorded in regular books of account. Therefore, basic premises for invoking s. 68 is not built-up. It is clear that the assessee is admitting the ownership of money advanced to the business by him is only Rs. 40 lakhs. This may be a case where there may not be a name of the lender. In any case, this statement was retracted subsequently. Notwithstanding such retraction, the statement given u/s 132(4) has to be read as a whole and the liability of the assessee is to be restricted to what he has owned u/s 132(4). Since there is a retraction the onus lie on the Department to find out as to how much money so advanced belonged to the assessee. There is a categorical assertion by the learned counsel of the assessee that all the entries in A-3/A-5 contain the names of the lenders. We have also test checked. Since all the entries in A-3/A-5 contain the names of the lenders, therefore, what the assessee means in the statement is that money was advanced through him and it does not, therefore, lead to the inference that money so advanced belonged to the assessee. Thus, not much weight can be given to the question and answers recorded on 3rd Jan., 1995 particularly when legal implication of the words used in the statement are not clear to the deponent and when he is under lot of stress due to search operation and-fear of life due to disclosure of the names of the lenders. Further, the statement cannot be read in isolation of seized documents, which reflect that borrowings by borrowers belonged to the lenders. This is particularly important when Department did not pursue further on the summons issued by it to the common lenders/borrowers in two sets. Thus, merely on the basis of part of the statement in question No.5 on 3rd Jan., 1995, it cannot be inferred that entire lending reflected in A-3/A-5 belonged to the assessee. This plea of the Revenue is not accepted. The next issue arises is that assessee has failed to provide the names and addresses of the borrowers recorded in the diary A-3/A-5. It is an admitted position that entries in A-2 and A-4 are recorded in regular books and are through banking channels. It is also an admitted position that there are common names of lenders and borrowers in A-2/A-4 and A-3/A-5. Nothing stopped the Department from pursing these common entries by calling the details from the bank, from the regular books, summon the parties and record the statements about transactions so recorded in A-3/A-5. The Department chose not to pursue the matter further in respect of some summons issued by the AO. If the Department accepts that entries common in two sets as listed in para 12 of this order are genuine, then it should accept that all the entries in A-3/A-5 are genuine and true. If after carrying out enquiries/investigation in respect of these common entries, the AO comes to the conclusion that cash advanced to the borrowers as named against these lenders belonged to the assessee, then onus would have shifted to the assessee. But, not, before. Hence, nothing much can be derived from not providing names/addresses of all the lenders/borrowers particularly when what was available in common list was accepted as true. Hence, this plea of the Revenue is also rejected. Thus, we hold that there is no case for making addition in the case of the assessee u/s 69 and even u/s 68 of the Act, in respect of the borrowings in the case of the finance broker. He can at best be assessed only on the finance brokerage. The additions so sustained by CIT(A) u/s 69 are hereby deleted. These grounds of the assessee in all the three years are allowed. Regarding one ground for a sum of Rs. 25,000 taken in asst. yr. 1994-95, the learned counsel for the assessee did not press for the same. It is treated as rejected. In view of this, the appeal of the assessee in asst. yrs. 1993-94, 1995-96 are fully allowed, while in the asst. yr. 1994-95 is partly allowed.

Summary

Issues involved:
1. Addition of undisclosed income under Section 69 of the IT Act for the assessment years 1993-94, 1994-95, and 1995-96.
2. Addition of Rs. 25,000 on account of cash loans for the assessment year 1994-95.
3. Legitimacy of the retraction of the statement made under Section 132(4).
4. Verification of the identity of lenders and borrowers recorded in the seized diaries A-3 and A-5.
5. Applicability of Section 68 for unexplained credits.

Issue-wise detailed analysis:

1. Addition of undisclosed income under Section 69 of the IT Act:
The assessee, a finance broker, was subjected to a search and seizure operation under Section 132, resulting in the discovery of cash, jewellery, and incriminating documents (A-1 to A-5). Diaries A-2 and A-4, which recorded cheque transactions, were accepted by the AO and CIT(A) as reflecting genuine financial transactions recorded in the assessee's regular books of account. However, diaries A-3 and A-5, which recorded cash transactions, were not reflected in the regular books and were treated as unaccounted income by the AO. The AO calculated the peak amounts for the financial years 1992-93, 1993-94, and 1994-95 and added these amounts to the assessee's total income under Section 69. The CIT(A) confirmed these additions, citing the lack of documentary evidence provided by the assessee to prove that the unaccounted income pertained to others.

2. Addition of Rs. 25,000 on account of cash loans for the assessment year 1994-95:
The AO made an additional sum of Rs. 25,000 based on a Hundi not verifiable with seized diaries A-3 and A-5. The CIT(A) upheld this addition.

3. Legitimacy of the retraction of the statement made under Section 132(4):
During the search, the assessee initially disclosed Rs. 40 lakhs as unaccounted income, which was later retracted. The CIT(A) held that the retraction was not justified as incriminating documents were found, and the statement under Section 132(4) was considered significant evidence. The Tribunal, however, noted that the statement should be read as a whole, and the retraction was made due to alleged pressure and threats during the search.

4. Verification of the identity of lenders and borrowers recorded in the seized diaries A-3 and A-5:
The assessee argued that the cash transactions recorded in A-3 and A-5 were similar to those in A-2 and A-4, which were accepted as genuine. The assessee maintained that the funds belonged to lenders, and he earned brokerage for arranging finance. The AO and CIT(A) rejected this explanation due to the lack of names and addresses of the lenders and borrowers. The Tribunal found that the Department did not pursue further verification of common entries in A-2/A-4 and A-3/A-5, which could have corroborated the assessee's claim.

5. Applicability of Section 68 for unexplained credits:
The Department argued that the amounts recorded in A-3 and A-5 could be taxed under Section 68 as unexplained credits. The Tribunal held that Section 68 could not be invoked as the transactions did not pass through the assessee's books, and the diaries were not ledgers or cash books. The Tribunal emphasized that the onus to prove the ownership of the investments lay on the Department, which was not discharged.

Conclusion:
The Tribunal concluded that the additions under Section 69 were not justified as the Department failed to prove that the cash transactions recorded in A-3 and A-5 belonged to the assessee. The presumption under Section 132(4A) was rebuttable, and the assessee successfully discharged the onus by explaining that the funds belonged to lenders. The Tribunal deleted the additions under Section 69 for all three assessment years and rejected the alternative ground under Section 68. The addition of Rs. 25,000 for the assessment year 1994-95 was not pressed by the assessee and was treated as rejected. The appeals for the assessment years 1993-94 and 1995-96 were fully allowed, and the appeal for the assessment year 1994-95 was partly allowed.