2008 (1) TMI 442 - AT - Income Tax

Addition made u/s 68 - taken loans from nine relative persons - failed to establish the creditworthiness of the creditors and the genuineness of the transactions - required to paid Interest on loan taken from relative? - HELD THAT - The compensation stated to have been received by Hari Chand for land acquisition did not constitute the source for the loans allegedly given to the assessee. The other submission of the ld representative of the assessee that the loans were all repaid in August, 2004 does not advance the assessee's case. The repayment of the loans is an independent transaction and it does not affect in any way the question whether the original receipts of the monies were genuine or not. In CIT vs. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT , the Supreme Court observed that the Tribunal would be justified in disbelieving a story which is prima facie fantastic and does not accord with human probabilities and that the Courts and Tribunals have to Judge the evidence before them by applying the test of human probabilities. In Sumati Dayal vs. CIT 1995 (3) TMI 3 - SUPREME COURT held that in such cases, a superficial approach to the problem should be eschewed and the matter has to be considered in the light of human probabilities and further that any transaction about which direct evidence is rarely available should be inferred on the basis of the circumstances available on the record. In that case, the majority opinion of the settlement Commission was approved as it was taken after considering the surrounding circumstances and applying the test of human probabilities. These principles apply to the present case where the documentary evidence prima facie supports the assessee's case but a closer look at the same in the light of the surrounding circumstances and applying the test of human probabilities reveal that the documentary evidence cannot be accepted. The learned CIT(A), with respect, did not approach the case from this angle and seems to have been guided merely by the documentary evidence. In this, he fell into an error. He ought to have given a wholesome treatment to the case taking into account the principles laid down by the Supreme Court in the judgments cited above. We are unable to agree with him that the AO was wrong in adding the loans aggregating to Rs. 10 lacs as the assessee's income. Hence, it is not possible to accept the submission of the learned representative of the assessee that s. 68 has no application to the case. Even without reference to the section, the amount can be added if the explanation of the assessee with regard to the nature and source of the receipt is not satisfactory. We, therefore, uphold the addition. The order of the CIT(A) is reversed and the addition is restored. The appeal of the Department is allowed with no order as to costs.

Summary

Issues Involved
1. Deletion of addition under Section 68 of the IT Act, 1961.
2. Creditworthiness of the creditors.
3. Genuineness of the transactions.
4. Application of Section 68 in the absence of books of account.

Detailed Analysis

1. Deletion of Addition under Section 68 of the IT Act, 1961

The main issue in this appeal is whether the CIT(A) erred in deleting the addition of Rs. 10 lakhs made under Section 68 of the IT Act, 1961. The AO had added the amount as unexplained cash credit, citing the assessee's failure to establish the creditworthiness of the creditors and the genuineness of the transactions.

2. Creditworthiness of the Creditors

The AO examined loans from seven persons, aggregating Rs. 10 lakhs, and found several common features: all creditors were relatives, loans were taken simultaneously, no interest was paid, and there were cash deposits in the creditors' bank accounts just before issuing demand drafts to the assessee. The AO doubted the capacity of the creditors to advance such amounts, considering their status as agriculturists.

The CIT(A) disagreed, noting that:
- All loans were confirmed by affidavits.
- Evidence of agricultural land holdings was provided.
- Loans were given through bank drafts.
- Summons were issued, and creditors or their representatives appeared.
- Agriculturists do not regularly use bank accounts, which should not be held against them.
- Bills and revenue records supported the creditors' capacity to give loans.

3. Genuineness of the Transactions

The AO's skepticism stemmed from the timing of cash deposits and the issuance of drafts. He argued that the creditors' bank accounts showed minimal activity, suggesting the loans were not genuine. The CIT(A) found the transactions genuine based on affidavits, landholding evidence, and the fact that the loans were repaid.

The Tribunal, however, found the AO's concerns valid. It noted:
- The improbability of interest-free loans from agriculturists for over three years.
- The suspicious timing of cash deposits and draft issuance.
- The inclusion of draft commission in cash deposits.
- The lack of regular banking habits among creditors.

The Tribunal concluded that these factors, combined with the improbability of the creditors holding large sums of cash for extended periods, undermined the genuineness of the transactions.

4. Application of Section 68 in the Absence of Books of Account

The assessee argued that Section 68 could not apply as she did not maintain books of account, citing the Bombay High Court's judgment in CIT vs. Bhaichand Gandhi. The Tribunal rejected this argument, stating that the AO could add unexplained receipts as income regardless of whether they were recorded in books of account. The Tribunal referenced the Supreme Court's rulings in A. Govindarajulu Mudaliar vs. CIT and Parimisetti Seetharamamma vs. CIT, which support the AO's authority to assess unexplained receipts as income based on the facts and circumstances.

Conclusion

The Tribunal found that the CIT(A) erred in deleting the addition of Rs. 10 lakhs. It held that despite the documentation, the surrounding circumstances and human probabilities indicated that the loans were not genuine. The Tribunal upheld the AO's addition under Section 68, reversing the CIT(A)'s order and allowing the Department's appeal.