Vildirect: IncomeTax-caselaws-1994-VIL-72-ITAT-

1994-VIL-72-ITAT-

Equivalent Citation: ITD 052, 073,

Income Tax Appellate Tribunal CALCUTTA

Date: 30.09.1994

DEPUTY COMMISSIONER OF INCOME-TAX.

ANAND PRAKASH GOENKA.

BENCH

Member(s) : S. L. BANERJEE., R. ACHARYA.

JUDGMENT

Per Sri R. Acharya, AM--This appeal is instituted by the revenue against the order of the CIT (Appeals) for the assessment year 1979-80 on the following grounds :

(1) That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in deleting the addition of Rs. 2,20,000 made as income from undisclosed sources under section 69 of the Income-tax Act, 1961.

(2) That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in holding that loans should be treated as genuine since the assessee has filed loan confirmation certificates showing names and Income-tax file nos. of the loan creditors and in that view in directing the Assessing Officer to allow interest paid Rs. 20,703.

2. Briefly stated, the facts of this case are that the original assessment in this case for the assessment year 1979-80 was completed under section 143(3) on 16-3-1982 and the total income was determined at Rs. 802 against the loss of Rs. 1780 declared by the assessee in the return filed on 3-12-1979. Subsequently the assessment was reopened by issue of notice under section 148 dated 10-3-1986 and in response to that notice the assessee filed a return on 25-4-1986 declaring total income of Rs. 4,670. The reassessment was completed on 26-3-1990 under section 143(3)/147 determining the total income at Rs. 2,52,261 including income of Rs. 2,20,000 from undisclosed sources. This re-assessment is under appeal.

3. The addition of Rs. 2,20,000 as income from undisclosed sources was made on account of unexplained loans obtained from the following parties :

(i) Sri Prabhu Dayal Agarwala Rs. 1,20,000

(ii) M/s. Dibang Valley Timber Trade (P.) Ltd. Rs. 1,00,000

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Rs. 2,20,000

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The Assessing Officer (in short 'AO') found that the assessee has received a loan of Rs. 1,20,000 from Sri P. D. Agarwal of Tinsukia, Assam on an interest rate of 12% and has deposited the same in the firm M/s. Sudershan Plywood Industries. The opening balance of outstanding loan due to the creditor Sri P. D. Agarwal brought forward to this year was shown at Rs. 85,324 and the balance together with the current year's loan stood at Rs. 2,05,325. On this loan interest amounting to Rs. 20,703 (@ 15% P.A. up to 31-3-1978 and @ 12% P.A. thereafter) was credited to the account of the loan creditor and the assessee has claimed the same as deduction from the total income.

4. As regards the loan of Rs. 1,00,000 from M/s. Dibang Valley Timber Trade (P.) Ltd., Tinsukia, Assam, the assessee claimed to have invested this loan in making fixed deposit of Rs. 1,00,000 with Indian Bank, Tinsukia on which interest of Rs. 2,250 was received. In order to verify the loans, the AO issued summonses under section 131 of the Act dated 14-3-1990 to both the creditors for appearing before him on 23-3-1990 with relevant books of account and other documents. He also requested the assessee vide his letter dated 14-3-1990 to produce the loan creditors. The assessee filed a letter dated 23-3-1990 asking for time which was refused by the AO as according to him this is a time-barring case. Since neither the creditors appeared nor the assessee could produce them before the AO, the AO came to the conclusion that the loans remained unverifiable. Accordingly he added Rs. 2,20,000 to the total income of the Assessee as income from undisclosed sources. He also disallowed interest payable to Sri P. D. Agarwal.

5. Being aggrieved by this order the assessee came up in appeal before the CIT(A) and submitted particulars and documents to prove the genuineness of the loan, by producing (a) names and addresses of the creditors ; (b) loan confirmation from the creditors ; (c) Income-tax file numbers of both the creditors ; (d) copy of capital account with M/s. Sudershan Plywood Industries ; and (e) certificate from Indian Bank for amount deposited in fixed deposit. In, view of this the assessee contended that since all the particulars regarding the loan transactions are furnished and produced, the AO should have accepted the loan as genuine. It was further contended before the CIT(A) that the AO has not given proper opportunity and reasonable time to the creditors who are stationed at Tinsukia, Assam.

6. The CIT(A) scrutinised and perused all the material and evidence and came to the conclusion that identity, creditworthiness as well as genuineness of the loan transaction are well established. Before coming to the conclusion he verified the confirmation certificates, relevant cash book, bank certificate, capital accounts and other documentary evidence. He also agreed with the contention of the assessee that the assessee had fully discharged its onus of proving the genuineness of the loan. According to the CIT(A) merely because the creditors who are stationed at a distant place could not appear before the AO at Calcutta is no reason to consider the loan as not genuine. According to the CIT(A) enough documentary evidence and material have been produced and furnished by the assessee to establish the identity, creditworthiness and genuineness of the loan transactions and there was no reason for disallowing the same. Accordingly he deleted the addition of Rs. 2,20,000 and directed the AO to allow deduction of interest payable at Rs. 20,703.

7. Being aggrieved by the order of the CIT(A) the revenue has preferred this appeal to the Tribunal. The learned departmental representative (in short 'DR') strongly relied on the order of the AO and vehemently supported the stand taken by him. He opposed the action of the CIT(A) and contended that the CIT(A) was not justified as according to him, creditworthiness of the creditors is not proved beyond doubt. He invited our attention to pages 6 & 28 of the paper book filed by the learned counsel for the assessee and submitted that as it is evident from the balance sheet of Sri P. D. Agarwal placed at page 6 of the paper book that he himself is a debtor to more than 20 persons, he could not have advanced such a loan to the assessee. He further argued on the basis of the profit & loss account of M/s. Dibang Valley Timber Trade (P.) Ltd. placed at page 28 of the paper book that the creditor itself had suffered huge losses and, therefore, was not in a position to advance the loan to the assessee.

8. The learned counsel for the assessee filed a paper book and placed reliance on the order of the CIT(A). He submitted that the assessee has discharged his onus by furnishing sufficient proof and documentary evidence like confirmatory letters, balance sheet, copies of accounts, extract from cash book, certificate from the bank, etc., and has proved the genuineness of the loans beyond doubt. It is further submitted that the CIT(A) has examined all the evidence and has come to the conclusion that the identity of the creditors, creditworthiness of the creditors and the genuineness of the transactions have been proved beyond doubt. In order to meet the contention of the DR about the creditworthiness, he invited our attention to page 27 of the paper book which is the balance-sheet of M/s. Dibang Valley Timber Trade (P.) Ltd. and pointed out that as the creditor is having fixed deposit of Rs. 10,80,549 his creditworthiness cannot be doubted. Similarly, the learned counsel relied on the balance sheet of Sri P. D. Agarwal placed at page 6 of the paper book and pleaded that Sri Agarwal was also having sufficient capital and cash balance to advance the loan to the assessee and like this loan he has given loans of Rs. 3,56,017 to Nandlal & Co. and of Rs. 2,18,166 to Sudershan Timber Trading Co. The learned counsel for the assessee then argued that although the primary facts regarding these loans were already disclosed and the loan confirmations filed were accepted by the department in the original assessment as it is evident from the original assessment order placed at page 45 of the paper book, the reopening of assessments under section 147 is absolutely wrong. To support his argument and contention, he placed reliance on the following decisions :

(i) Panchanan Hati v. CIT [1978] 115 ITR 336 (Cal.) ;

(ii) ITO v. A. R. (P.) Ltd. [1980] 125 ITR 177 (Cal.) ;

(iii) Rungta Sons (P.) Ltd. v. ITO [1980] 125 ITR 708 (Cal.) ; &

(iv) S. P. Agarwalla v. ITO [1983] 140 ITR 1010 (Cal.).

9. We have heard the parties at length and have carefully considered the rival contentions, relevant facts and material placed on the record. We have also gone through the High Court's decisions on which reliance has been placed by the learned counsel for the assessee. We find that the assessee has filed confirmatory letters from both the creditors, copies of balance-sheets of both the creditors, copy of extracts from the cash book of M/s. Dibang Valley Timber Trade Pvt. Ltd., copy of certificate from Indian Bank regarding investment of Rs. 1,00,000 in fixed deposit, copy of account of M/s. Sudershan Plywood Ind. for repayment of loans of M/s. Dibang Valley Timber Trade P. Ltd. etc. to prove the identity and creditworthiness of the creditors and genuineness of the loan transactions. The CIT(A) has verified the contention of the assessee on the basis and with reference to the relevant material and evidence and has come to the conclusion that since the assessee has produced the name and address of the creditors, loan confirmation certificate, Income-tax file Nos. of both the creditors, copy of capital accountwith M/s. Sudershan Plywood Ind. in the case of Sri P. D. Agarwal and the certificate from Indian Bank in the case of M/s. Dibang Valley Timber Trade (P.) Ltd., he has fully discharged his onus of proving the genuineness of the loans. He also accepted the plea of the assessee in respect of summonses under section 131 and concluded that there is no reason to consider the loan as not genuine merely because the creditors who are stationed at a distant place like Tinsukia, could not appear before the AO. Accordingly, he accepted the identity of the creditors, creditworthiness of the creditors and genuineness of the transactions and deleted the additions being satisfied with the explanations of the assessee. In our opinion, the CIT(A) has reached the correct conclusion as the assessee has discharged his primary onus to prove the genuineness of the loans by furnishing sufficient and positive material and cogent evidence and the department has failed to prove and declare them to be bogus or sham. Therefore, nothing more survived for the assessee to prove as no material and evidence produced by the assessee is negatived and controverted by the AO.

10. It is seen that the AO made these additions simply because according to him, the loans remained unverifiable as both the creditors who were summoned under section 131 of the Act dated 14-3-1990 to appear before him on 23-3-1990 failed to appear and the assessee was requested vide AO's letter dated 14-3-1990 to produce them but the assessee could not do so. In response to letter dated 14-3-1990 the assessee filed a letter dated 23-3-1990 asking for time which was refused by the AO on the ground that this is a time-barring case. We notice that summonses have been issued by the AO at the fag end of the year in which limitation for assessment expires and only seven days time which is too short looking to the distance of more than 1500 Km. is given to the creditors and the assessee. We agree with the contention of the assessee that no reasonable time and proper opportunity was given to the creditors. In our opinion, the AO has not exercised his powers under section 131 properly and legally in summoning the creditors who were stationed at a far-flung place of hilly area situated beyond more than 500 Km. It was only to observe the formality that the summonses were issued and the request of the assessee for time was refused. This is against the principles of natural justice.

11. In order to bring important facts to close focus it is pertinent to know that in the original assessment order passed under section 143(3) on 16-3-1983 confirmatory letters filed by the assessee were accepted subject to verification by the AO, as it is evident from the assessment order dated 16-3-1982, which is a part of record. It is also noticed that subsequently assessment was reopened under section 147 on 10-3-1986 by issue of notice under section 48 and the return was filed on 25-4-1986 and reassessment was completed on 26-3-1990. Thus, we find that more than eight years have elapsed and the AO could not complete the verification of loans by conducting necessary enquiry and investigation, for the reasons best known to him. On the other hand, he has chosen to complete the job at the fag end of the year and that too by refusing the time to the assessee and to the creditors. In this way we find that the AO has not collected any evidence to support the additions. Therefore, the additions made merely on the ground that loans remained unverifiable cannot be sustained in the eyes of law.

12. Our view gets support from the decision of the Tribunal, Allahabad Benches in the case of Raj Kumar Jain v. Asstt. CIT [1994] 208 ITR 22 wherein it was held that where evidence and materials are not sufficient to support the addition to income, the Tribunal cannot order further investigation to cover up the inefficiency of the department and, therefore, the Tribunal has to delete the addition as it is only a matter of appreciation of evidence and materials on record. It may be mentioned here that in that case also the assessee in spite of summon under section 131 given to him did not attend the office. In this view of the matter as well as for the reasons discussed above we hold that the CIT (A) was justifted in deleting the addition on merit.

13. Then on examination of the learned counsel's contention that reopening of the assessment itself is wrong as primary facts regarding loans were disclosed, we find that the contention is correct. It is seen from the original assessment order passed on 16-3-1982 that the confirmatory letters filed by the assessee were accepted subject to verification by the AO. In spite of that assessment was re-opened by issuing notice under section 148 and re-assessment was completed including these loans of Rs. 2,20,000 as income from undisclosed sources. It is further noticed that the assessee had already filed all particulars and requisitions including loan confirmatory letters at the stage of notice under section 143 (2) and this fact is admitted by the AO in the original assessment order. Thus, in our opinion, it is proved that the assessee had furnished all particulars and had disclosed all primary facts regarding these loans to the department and the AO has not only admitted the primary facts disclosed by the assessee but has also accepted the confirmatory letters of creditors. It is also observed that the original assessment was completed under section 143(3) and even then the AO kept the verification pending. What prevented him from verification is not known. If he had any doubt while accepting the loans and not making the addition, he could have conducted necessary enquiry and investigations at that time. Since the AO failed to do so in our view he could not have taken recourse to section 147 and issued notice under section 148 of the Act. Once the AO has taken a stand and accepted the loans as genuine ones he cannot change the stand in the absence of positive material and evidence, go back and reopen the assessment.

14. All the four Calcutta High Court decisions on which the reliance is placed help the case of the assessee and support our view. In the case of S. P. Agarwalla it was held by the Calcutta High Court that in the absence of a direct nexus or live link such confessional statement would not constitute the relevant material justifying the reopening of assessment. Therefore, reassessment notice, was liable to be quashed. In this case also confirmatory letter from the lender was filed and was accepted as genuine in original assessment but subsequently on confession by the lender the assessment was re-opened although confessional statement did not refer to the name of the assessee. In that case it was further held that it was the duty of the AO to investigate the genuineness of the transaction of the loan before accepting the same. In view of these decisions as well as for the reasons mentioned above we come to the conclusion that the reassessment proceedings are not valid as they were devoid of initial jurisdiction. Our view is supported by Gujarat High Court in the case of Rajan P. Shah v. ITO [1993] 201 ITR 280, wherein it was held " that the petitioners had disclosed the primary facts that they had jointly constructed a house after withdrawing certain amounts from the firm VR. At the time of assessment under section 143, the ITO ought to have verified whether statements made in the returns as to the cost of construction of the house was an under-statement or not. If he had any doubt he could have called for a valuation report at that time. As the ITO failed to do so he could not issue a notice under section 147(a)/148 to reopen the assessment. The notice was liable to be quashed ".

15. Our view is also supported by the latest Calcutta High Court decision in the case of Ujjain General Trading Society Ltd. v. ITO [1994] 208 ITR 583 wherein it was held that " in the original assessment the AO could not but had noticed the receipt of the bonus shares as they were reflected in the balance sheet of the assessee....there was no failure prima dacie in the matter of disclosure of facts....Hence the initiation of proceedings under section 147(a) and issue of notice under section 148 were devoid of initial jurisdiction. The re-assessment proceedings are not valid ". As the re-assessment proceedings are invalid and lack initial jurisdiction, re-assessment order is also illegal and is liable to be quashed.

16. But we find that the department is in appeal and the assessee is only a respondent. The assessee-respondent can urge any ground of defence for showing and proving that there should be no increase in the assessee's income and may resist the appeal even on this ground that the assessee is not liable to be assessed at all. But if we quash the assessment order as it is not in accordance with the provisions of law, it will not be " an order on the appeal " as held by the Allahabad High Court in the case of Kanpur Industrial Works v. CIT [1966] 59 ITR 407. In this case it was held that if the Tribunal accepts the ground of defence that the assessee was not liable to be assessed at all, it can only refuse to increase the assessed income as only that will be " an order on the appeal " by the department, any other order such as annulling the assessment would be outside the scope of the appeal.

17. Thus, loaded with this legal restrain we cannot annul the re-assessment order but we have to restrict ourselves to the deletion of the additions only.

18. In view of this and considering all the facts and circumstances of the case we hold that the addition of Rs. 2,20,000 made by the AO as income from undisclosed sources is bad in law. We have already held that even on merit these additions cannot be sustained in the eye of law. Accordingly the order of the CIT(A) wherein the addition of Rs. 2,20,000 on account of loans is deleted and the interest of Rs. 20,703 is allowed, is upheld.

19. In the result, the departmental appeal is dismissed.

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