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Issues Involved:
1. Addition of Rs. 39,000 under Section 68 of the Income Tax Act. 2. Disallowance of interest amounting to Rs. 12,545 on the cash credits. Issue-wise Detailed Analysis: 1. Addition of Rs. 39,000 under Section 68 of the Income Tax Act Assessee's Argument: The assessee contended that the loans were genuine, obtained through account payee cheques from three individuals who were income-tax assessees. The identity and creditworthiness of the lenders were established, and two of the lenders were examined on oath under Section 131 of the Act. Assessing Officer's (AO) Findings: The AO found the loans to be non-genuine, noting that the creditors could not establish the source of their creditworthiness. Specific observations included: - Gokul Prasad Sahu: Rs. 13,000 deposited in the bank a day before issuing a cheque to the assessee. - Govind Prasad Sahu: Rs. 11,000 deposited and withdrawn within a day, and a pay-in-slip found during a CBI search. - Praveen Kumar Jain: Rs. 15,000 credited, with insufficient evidence of income from salary and commission. Appellate Tribunal's (ITAT) Decision: The Judicial Member held that the addition should be deleted, citing: - Loans were given by account payee cheques, establishing the identity of the parties. - The Hon'ble Patna High Court in Adex. CIT v. Bahri Bros. (P.) Ltd held that loans by account payee cheques discharge the borrower's burden. - The AO's disbelief in the lenders' creditworthiness was not sufficient to treat the loans as income under Section 68. - The Bombay High Court in Orient Trading Co. Ltd. v. CIT and the Supreme Court in CIT v. Daulat Ram Rewatmal supported the view that mere falsity of explanation does not convert loans into income. Accountant Member's Dissent: The Accountant Member disagreed, emphasizing: - The peculiar circumstances of each loan, including close familial relationships and suspicious timing of deposits and withdrawals. - The Supreme Court's decision in Sumati Dayal v. CIT, which stressed the importance of considering human probabilities and surrounding circumstances. - The Patna High Court's decision in Saraogi Credit Corpn. v. CIT, which placed a greater burden on the assessee when the creditor is a close relative. Third Member's Decision: The Third Member agreed with the Judicial Member, highlighting: - The statements by Niranjan Prasad were recorded at the back of the creditors and not confronted to them, violating principles of natural justice. - The bulk of documentary evidence, including bank statements and balance sheets, supported the genuineness of the loans. - The burden of proof initially lies with the assessee but shifts to the department once sufficient evidence is provided. The department failed to discharge this burden. Conclusion: The addition of Rs. 39,000 under Section 68 was deleted, as the assessee successfully established the identity, creditworthiness, and genuineness of the transactions. 2. Disallowance of Interest Amounting to Rs. 12,545 on the Cash Credits Assessee's Argument: The interest on the cash credits should not be disallowed as the loans were genuine and the interest payments were legitimate. Assessing Officer's (AO) Findings: The AO disallowed the interest on the grounds that the loans themselves were non-genuine. Appellate Tribunal's (ITAT) Decision: The Judicial Member held that the interest should be allowed, as the loans were genuine. The Accountant Member, however, upheld the disallowance, reiterating the non-genuine nature of the loans. Third Member's Decision: The Third Member agreed with the Judicial Member, stating that since the loans were genuine, the interest payments should not be disallowed. Conclusion: The disallowance of interest amounting to Rs. 12,545 was deleted, as the loans were found to be genuine. Final Outcome: The appeal was allowed, and the additions under Section 68 and the disallowance of interest were both deleted.
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