1978 (7) TMI 186 - AT - Income Tax

Summary

Issues Involved:
1. Reopening of assessment based on alleged bogus Hundi loans.
2. Burden of proof regarding the genuineness of Hundi loans.
3. Admissibility and sufficiency of evidence provided by the assessee.
4. Treatment of interest payments related to Hundi loans.
5. Division of Hundi loans into categories by the AAC.
6. Application of Section 69D of the Income Tax Act.
7. Role of the Department in summoning witnesses and providing evidence.

Issue-wise Detailed Analysis:

1. Reopening of Assessment Based on Alleged Bogus Hundi Loans:
The assessment for the year 1962-63 was originally completed on 14th August 1962. The Income Tax Officer (ITO) later reopened the assessment based on information that the assessee had taken bogus Hundi loans. The reassessment added a peak credit of Rs. 2,75,000, concluding that the assessee had introduced black money through false Hundies or pronotes from Multani bankers involved in hawala transactions.

2. Burden of Proof Regarding the Genuineness of Hundi Loans:
The ITO stated that the burden of proving the genuineness of the credits was on the assessee. Despite the assessee producing discharged Hundies, pronotes, and addresses of the bankers, the ITO concluded that the transactions were not genuine due to the inability to serve notices on the bankers and independent enquiries establishing the transactions as bogus.

3. Admissibility and Sufficiency of Evidence Provided by the Assessee:
The Appellate Assistant Commissioner (AAC) noted that the assessee produced relevant counterfoils of cheques and other evidence to prove the genuineness of the Hundi loans. However, the AAC disallowed the claim due to the assessee's failure to produce the Hundi bankers. The AAC relied on the Kerala High Court decision in CIT vs. Adam, emphasizing that the production of counterfoils and discharged Hundies did not prove the genuineness of the credits.

4. Treatment of Interest Payments Related to Hundi Loans:
For the second year under appeal, the ITO added Rs. 95,000 as income from undisclosed sources and disallowed interest payments of Rs. 40,921. For subsequent years, interest payments of Rs. 6,625, Rs. 5,750, and Rs. 310 were disallowed. The AAC, however, made adjustments based on the peak credit related to black-listed Hundi bankers and directed specific disallowances of interest.

5. Division of Hundi Loans into Categories by the AAC:
The AAC categorized the creditors into those who admitted to hawala business and those where the Department had some material evidence. The AAC concluded that only credits from black-listed Hundi bankers should be included in the total assessment as income from undisclosed sources, reducing the additions made by the ITO.

6. Application of Section 69D of the Income Tax Act:
Section 69D, introduced by the Taxation Laws (Amendment) Act, 1975, states that amounts borrowed or repaid on a Hundi, otherwise than through an account payee cheque, shall be deemed as income. The Tribunal noted that Section 69D is not retrospective and emphasized that not every Hundi loan is necessarily bogus. The Tribunal highlighted the need for direct and positive evidence to prove that the transactions were sham.

7. Role of the Department in Summoning Witnesses and Providing Evidence:
The Tribunal criticized the Department for not providing the assessee an opportunity to cross-examine the Hundi bankers who later claimed the transactions were bogus. The Tribunal emphasized the need for a live link between the material coming to the ITO's notice and the formation of his belief that the Hundi transactions were bogus, as highlighted by the Supreme Court in ITO vs. Lakhmani Mewal Das.

Conclusion:
The Tribunal concluded that the assessee had reasonably proved the genuineness of the Hundi loans through evidence such as cheques, interest payments, and initial confirmations from the bankers. The Tribunal deleted the additions made by the ITO and allowed the payment of interest by the assessee to the Hundi bankers for all years under appeal. The assessee's appeals were allowed, and the Department's appeals were dismissed.