Procedure by a written show-cause notice to prove the nature and source of the cash credits. - Income Tax - 218/CBDT

INSTRUCTION NO. 218/CBDT Dated: September 18, 1970 Section(s) Referred: 69D Statute: Income - Tax Act, 1961 A perusal of a number of orders of various benches of the ITAT discloses that while some benches have upheld the action of the ITO in adding loans as income other benches have taken a contrary view. The department has failed because of the faulty procedure followed in dealing with the evidence. The fault lies in admitting uncorroborated Hundis Khokas affidavits and confirmatory letters as evidence and in the ITO taking upon himself the onus proving the case credits as income by summoning the alleged lenders. 2. The onus of proving the loans or credits appearing in his books is on the assessee. The proper procedure therefore is to require the assessee by a written show-cause notice to prove the nature and source of the cash credits. If the assessee produces the discharged hundi khokhas in support of his explanation that cash credits represent genuine hundi loans, the ITO should call upon the assessee in writing to prove the genuineness of the documents. A document can be proved by producing the persons who has signed it. This can ordinarily be done by producing the alleged lender and proving his signature on the hundi khokas. 3. If the assessee files an affidavit of or a confirmatory letter of the alleged lender the ITO can insist upon the production of the alleged lender. The ITO need not and should not summon the alleged lender on his own initiative but after in writing to summon him and should do so if the assessee makes a request to that effect. The assessees failure to produce or to apply for summmoning the alleged lender will be valid ground for the ITO to reject the hundis khokas the affidavit or the confirmatory letter as inadmissible evidence after recording the fact on the document in the order sheet and in the assessment order. If the assessee applies for summoning the alleged lender and the summons is issued but not served as he is untransferable the amount can be brought to tax on the ground that the assessee alleged lender or the deponent is produced or appears in response to a summons he should be carefully examined to find out the truth and ascertain the creditability of his statement. 4. Where it is found necessary to make a reference to the confessional statement it must be made clear in the assessment order that hundi loans are being added as income because of the failure of the assessee to prove nature and source of the cash credits and corroborate the findings arrived at independently of the confessional statement. If it is intended to prosecute the assessee and if the ITO is confident of contacting the lenders who have made confessional statements it may be desirable to summon them and offer them for cross-examination to the assessee. 5. What is true of Hundi loans is equally true of other loans, credits and even purchases. But the procedure of throwing the onus on the assessee should not be followed indiscriminately in respect of every entry. It should be resorted to in cases where there is a prime facie belief that the entry or the transaction is not genuine and the amount involved is substantial vis-a-vis the income returned. 6. These instruction may be brought to the notice of all officers in your charge.