2013 (1) TMI 140 - HC - Income Tax

Modus operandi for tax evasion - Sham transactions - Identities of the creditors Genuineness & creditworthiness of the loan creditors Assessee in a 3 days time contact 148 persons and took loan in cash - too in small amount of less than Rs.20,000/- and collected Rs. 25.97 lakhs in no time - that too, as interest-free loan and further to give it to a Company as interest free loan - Assessee was asked to file the details of the names and addresses of the persons from whom he had taken loan - A.O. demanded further proof from the assessee, who in turn, submitted the loan confirmation from creditors - A.O. issued summons u/s 131 to 26 person - Issued enquiry letters u/s 133(6) in 30 cases - Out of 26 cases, where summons under Section 131 were issued, two summons returned unserved and in 15 cases, no reply to the summons was received Whether in the taxation matter, there can be a test check method for finding out the genuineness of the transaction as alleged by the assessee which can be examined independent to even creditworthiness of the creditors Held that - If the A.O. would have proceeded further to enquire about the creditworthiness of those 148 persons, he may have found that all persons had capacity to advance a loan of Rs.20,000 in cash. In such fact situation, it is heavy duty of the A.O. and other authorities to find out all truth from the evidence which includes acceptance or rejection of evidence of independent or interested witnesses. In three days, the assessee himself, who was having no worth, alleged that he borrowed Rs.25.97 lakhs from 148 persons as if every person was waiting for this person to come and demand the money and every person was ready to give him money. This type of modus-operandi can be adopted by many persons. The test check method for the purpose of finding out the creditworthiness of individual creditor may not be a valid mode of proceeding in the other tax matter. But so far as to find out whether the transaction as a whole is absolutely unbelievable which may not be believed by a prudent man of slightest common sense, then in that situation, in addition to other facts and circumstances, test check can be the right mode so as to meet with the clever mode of avoiding the tax Every officer, who is required to assess the evidence of any witness/deponent, is required to evaluate the evidentiary value of the evidence. In favour of revenue Interest u/s 234A and 234B Whether interest can be levied over the assessed income or it can be levied only on the income declared in the return - Held that - Following the decision in case of Smt. Tej Kumari (2000 (9) TMI 52 - PATNA HIGH COURT) that the revenue can levy the interest only on the total income declared in the returns and not on the income assessed and determined by the A.O. to that extent. In favour of assessee

Summary

Issues Involved:
1. Legitimacy of the loans taken by the assessee.
2. Genuineness of the transaction and creditworthiness of the loan creditors.
3. Assessment of evidence by the Assessing Officer (A.O.).
4. Levy of interest under Sections 234 A and 234 B of the Income Tax Act, 1961.

Detailed Analysis:

1. Legitimacy of the Loans Taken by the Assessee:
The assessee filed original returns on 22.04.2004, showing a total income of Rs.84,200/-. The A.O. issued a notice under Section 147 on 23.11.2005 for the assessment year 2003-04, suspecting that the assessee had taken loans from 148 different persons amounting to Rs.25.97 lakhs in cash, all below Rs.20,000/-. The A.O. believed that the assessee had escaped assessment of income for the assessment year 2003-04 due to this clandestine deal.

2. Genuineness of the Transaction and Creditworthiness of the Loan Creditors:
The assessee provided a list of 148 persons from whom he claimed to have taken loans. The A.O. demanded further proof, and the assessee submitted loan confirmation forms signed by the creditors. The A.O. issued summons under Section 131 to 26 persons and enquiry letters under Section 133(6) to 30 cases. The A.O. found inconsistencies, such as some creditors being salaried persons, farmers, or small shopkeepers with no concrete proof of their sources of income. The A.O. concluded that the transaction was bogus, adding Rs.2,88,000/- as taxable income and initiating penalty proceedings under Section 271(1)(c).

3. Assessment of Evidence by the A.O.:
The A.O. considered the genuineness of the loan creditors, the genuineness of the transaction, and the creditworthiness of the loan creditors. The A.O. found the transaction suspicious due to the large number of creditors, the short period in which the loans were collected, and the identical wording of the confirmation letters. The A.O. also noted that the original agreement with Ajay Kumar was not produced, and the transaction was deemed a sham. The appellate authorities upheld the A.O.'s findings, emphasizing the improbability of the transaction and the lack of credible evidence.

4. Levy of Interest under Sections 234 A and 234 B:
The A.O. ordered interest to be charged as per rule. The appellant argued that interest could only be levied on the income declared in the return, not on the assessed income, citing the Full Bench judgment of Ranchi Bench of Patna High Court in Smt. Tej Kumari Vrs. Commissioner of Income-tax. The court agreed, modifying the orders to levy interest only on the income declared in the returns.

Conclusion:
The court upheld the A.O.'s findings regarding the bogus nature of the transactions, the lack of credibility of the loan creditors, and the improbability of the entire scheme. The court emphasized the need for a prudent assessment of evidence and the validity of test checks in exceptional cases. However, the court modified the orders concerning the levy of interest, aligning with the Full Bench judgment that interest should be levied only on the income declared in the returns. The appeal was partly allowed on this ground.