1997 (2) TMI 176 - AT - Income Tax

Summary

Issues Involved:
1. Examination of creditworthiness of creditors under the Amnesty Scheme.
2. Establishment of creditworthiness of minor creditors.
3. Determination of the amount to be added to the income of the assessee firm.

Issue-wise Detailed Analysis:

1. Examination of Creditworthiness of Creditors under the Amnesty Scheme:
The primary issue was whether the Assessing Officer (AO) could examine the creditworthiness of creditors who disclosed income under the Amnesty Scheme while completing the assessment of the borrower. The assessee argued that such an examination would frustrate the purpose of the Amnesty Scheme, which aimed to unearth black money by providing certain immunities, including not investigating the source of declared income. The Tribunal, however, referred to various circulars issued by the CBDT, which clarified that while immunity was provided against roving inquiries in the declarant's assessment, no such assurance was given for inquiries in the case where the money was deposited. The Tribunal also cited the Hon'ble Supreme Court's decision in Jamnaprasad Kanhaiyalal, which allowed the AO to investigate the true nature and source of credits, even if they were declared under the Amnesty Scheme. Consequently, the Tribunal held that the AO had the power to examine the creditworthiness of creditors under the Amnesty Scheme.

2. Establishment of Creditworthiness of Minor Creditors:
The Tribunal examined whether the assessee had established the creditworthiness of the minor creditors. The minors had no independent source of income and claimed to have received gifts, which were accumulated and declared under the Amnesty Scheme. The Tribunal noted several inconsistencies:
- The minors declared substantial amounts (Rs. 80,000 to Rs. 90,000 each) as income, which was unusual for gifts.
- No evidence was provided to support the receipt of gifts, including details of donors or amounts received over time.
- The minors' guardians, who were aware of tax laws, still declared gifts as income, suggesting a motive to create evidence of funds.
- The meager household withdrawals of the guardians contradicted the claim of substantial gift accumulation.
- The improbability of minors keeping large sums of cash at home.
Based on these factors, the Tribunal concluded that the creditworthiness of the minor creditors was not established.

3. Determination of the Amount to be Added to the Income of the Assessee Firm:
The final issue was whether the addition should be for the total amount disclosed by the minors under the Amnesty Scheme or only for the amount credited in the firm's books. The AO had added the entire disclosed amount (Rs. 5,16,000), considering it as the firm's secret profit. However, the Tribunal found no evidence to support this claim. Instead, it focused on the sum actually credited in the firm's books (Rs. 3,61,246). As the assessee failed to prove the creditworthiness of the creditors, the Tribunal upheld the addition of Rs. 3,61,246 to the firm's income. Additionally, the disallowance of interest paid on this credit amounting to Rs. 11,849 was also confirmed.

Conclusion:
The Tribunal partly allowed the Revenue's appeal by confirming the addition of Rs. 3,61,246 and the disallowance of interest amounting to Rs. 11,849. The decision emphasized the necessity of proving the creditworthiness of creditors, even under the Amnesty Scheme, and the importance of substantial evidence to support claims of income and gifts.