1989 (3) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the provisional acceptance of cash credits by the Income Tax Officer (ITO).
2. Application of Section 68 of the Income Tax Act, 1961.
3. Authority of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of the Provisional Acceptance of Cash Credits by the ITO
The CIT set aside the regular assessments made by the ITO for the assessment years 1982-83 and 1983-84, noting that Rs. 1,00,000 was introduced by the assessee in each year. The ITO had provisionally accepted the assessee's explanation that these amounts were loans from his father, Shri Chandulal Sethi, derived from the sale proceeds of house property at Meerut and land at New Delhi. The CIT concluded that the provisional acceptance of the explanation suggested that the ITO was not satisfied with the evidence and, per Section 68 of the IT Act, 1961, the amounts should have been assessed as income. The CIT directed de novo assessments after thorough inquiries into the genuineness of the sources of cash introduced.

2. Application of Section 68 of the Income Tax Act, 1961
The CIT argued that the provisions of Section 68, which mandates that unexplained cash credits should be taxed as income, were not followed. The ITO's provisional acceptance lacked legal sanctity, as explanations must be accepted or rejected outright. The CIT issued a show cause notice stating the ITO's action was erroneous and prejudicial to the interest of Revenue. However, the Tribunal noted that the ITO had made efforts to verify the transactions and had accepted the explanation after considering the evidence, including affidavits and confirmation letters from the assessee and his father.

3. Authority of the CIT under Section 263 of the Income Tax Act, 1961
The CIT's revisional authority under Section 263 was invoked on the grounds that the ITO's assessments were erroneous and prejudicial to the interest of Revenue. The Tribunal, however, found that the ITO had conducted sufficient inquiries and was satisfied with the explanation provided by the assessee. The Tribunal emphasized that Section 68 uses the word "may" rather than "shall," indicating discretion in treating unexplained cash credits as income. The Tribunal concluded that the CIT's interpretation of Section 68 as mandatory was incorrect and that the ITO's assessments were neither erroneous nor prejudicial to the interest of Revenue. The Tribunal set aside the CIT's revisional orders and restored the ITO's assessments.

Conclusion:
The Tribunal allowed the appeals, holding that the CIT had not demonstrated that the ITO's assessments were prejudicial to the interest of Revenue. The Tribunal restored the ITO's original assessments, emphasizing the discretionary nature of Section 68 and the sufficiency of the ITO's inquiries into the genuineness of the cash credits.