Pr CIT vs. Bikram Singh (Delhi High Court)

DATE: August 25, 2017 (Date of pronouncement)
DATE: September 1, 2017 (Date of publication)
AY: 2011-12
FILE: Click here to download the file in pdf format
S. 68: The use of deceptive loan entries to bring unaccounted money into banking channels plagues the legitimate economy of our country. The mere fact that the identity of the lenders is established & payments are made by cheques does not mean they are genuine. If the lenders do not have the financial strength to lend such huge sums and if there is no explanation as to their relationship with the assessee, no collateral security and no agreement, the transactions have to be treated as bogus unexplained credits

(i) The law applicable to transactions of this nature is well settled by this Court in Divine Leasing (supra). Both parties have referred to and relied upon this judgement. This Court, after analyzing the entire law on the subject in the context of Section 68 of the Act, held as under:

…16. In this analysis, a distillation of the precedents yields the following propositions of law in the context of Section 68 of the IT Act. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber. (4) If relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Shared Application Forms, Share Transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the AO take such repudiation at face value and construe it, without more, against the assesee. (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation….

(ii) In Divine Leasing (supra), on the question of burden of proof, the Court relied upon CIT v. Musaddilal Ram Bharose, (1987) 165 ITR 14, to hold that the initial burden is upon the Assessee to show the absence of fraud and this is not discharged by the Assessee tendering an incredible and fantastic explanation. The Court also held that every explanation given by the Assessee need not be accepted.

(iii) In Kamdhenu (supra), this Court categorically held that the initial burden lies on the Assessee to establish the identity of the shareholders, the genuineness of the transaction and the creditworthiness of the shareholders. It is only after the initial burden is discharged that the onus shifts to the Revenue. This Court in Kamdhenu (supra) referred to CIT v. Sophia Finance, 205 ITR 98 which had held to the same effect. The Divine leasing (supra) and Sophia Finance (supra) judgments were reiterated by this Court in Dwarkadhish (supra). Thus, the law in relation to Section 68 is well settled.

(iv) Applying the settled law to the present case, the facts narrated above reveal that the Assessee was unable to discharge the initial onus cast upon him. A review of the documents filed on record, as also findings of the CIT(A) and the AO, reveal that the genuineness of the transactions and the creditworthiness of the creditors is seriously in issue and the findings of the ITAT are contrary to the settled law.

(v) The AO and the CIT (A) rightly concluded that in respect of all the transactions, the identity, creditworthiness and genuineness are in doubt.

(vi) In fact, the Assessee was unable to discharge the onus cast on him in respect of any of the four creditors and the transactions thereof and hence the onus did not shift to the Revenue, as held in Divine Leasing (supra).

(vii) The Assessee relied upon Lalchand Bhagat Ambica Ram v. CIT, Bihar and Orrisa 37 ITR 288 (hereafter ‘Lalchand Bhagat’) to contend that a mere suspicion, conjecture or surmise is not sufficient to deem a transaction as not being genuine. The analysis of the AO and the CIT (A) as also the documents produced in fact point to the fact that the transactions are not genuine. The statements of the creditors and the documents produced do not leave anything to suspicion but point to the certainty of the transactions being not genuine. Each of the creditors did not have the financial strength to part with such huge sums of money and the transactions, as revealed from chronology of opening of bank accounts, deposits of cash and then the loan transaction, establish lack of genuinity.

(viii) The Assessee also relied upon Sona Electric Co. v. CIT 152 ITR 507 (hereafter ‘Sona Electric’) to argue that mere suspicion is not enough. However, in this case the Court appears to have been persuaded to hold in favour of the Assessee as the Assessee was not allowed to cross-examine the witness, whose statement was recorded and that there was an admitted supply of goods against which the payment was made. Thus, the facts are clearly distinguishable.

(ix) The Assessee further relied upon Mukundray Shah (supra) to argue that there can be no interference when the Tribunal has given findings of fact. However, the Supreme Court in the said case held that the finding of the Tribunal was not perverse, as the concept of giving deemed dividend, under consideration in the said case, was rightly considered by the Tribunal, which ought not to be disturbed. The said judgment deals with deemed dividend under Section 2(22) (e) of the Act and since the two companies had merged, the accumulated profits of one would be taken into the merged account. The facts of the said case have no correlation, whatsoever, with the present case.

(x) The judgement in Daulat Ram (supra) relied upon by Mr. Agarwal, was concerned with a case where the Department could not establish either the source or the recipient of the fixed deposit of Rs.5,00,000/-. In those circumstances, the Supreme Court held that “the onus to prove that the apparent is not the real is on the party as who claims it to be so.” This case has no application in the facts of the present case, as here the Assessee has failed to discharge the initial burden upon him after producing the creditors and documents in support of its case. The source of the funds and the recipient is known in the present case.

(xi) In Parimisetti (supra), it was held that every receipt cannot be taxed as an income and the burden lies upon the department to show that the receipt is within the taxing provision. When an exemption is claimed, the onus to prove that income is exempted, lies on the Assessee.

(xii) Insofar as this Court is concerned, Divine Leasing (supra), Dwarkadhish (supra) and Kamdhenu (supra) settles the law under Section 68 of the Act beyond any pale of doubt. The question of law has to be determined on the basis of the ratio laid down in Divine Leasing (supra) and thereafter in Dwarkadhish (supra) and Kamdhenu (supra). Going by the factors laid down in Divine Leasing (supra), this Court holds that the identity of the four creditors namely Shri Amar Singh, Shri Chandan Singh, Shri Ram Chander and Smt. Sunita has been established. However, the genuineness of the transactions, though through the banking channels, has not been established. The creditworthiness of these creditors and their financial strength has also not been established.

(xiii) An analysis of the above facts shows that none of these four individuals have the financial strength to lend such huge sums of money to the Assessee, that too without any collateral security, without interest and without a loan agreement. The mere establishing of their identity and the fact that the amounts have been transferred through cheque payments, does not by itself mean that the transactions are genuine. The AO and the CIT (A) have rightly held that the identity, creditworthiness and the genuineness are all in doubt. Moreover, the Court notes that that these amounts have been advanced to the Assessee without any explanation as to their relationship with the Assessee, the reason for the payment of such huge amounts, as also whether any repayments have, in fact, been made. There are contradictions in the explanation given by the Assessee and the statements recorded by these four individuals, which are irreconcilable. For example, in the case of Shri Ram Chander/Ram Charan, he had initially stated that he had given Rs.10,00,000/- out of the proceeds of sale of the land but thereafter it was claimed by him that the money had come from her sister Vidya. Such contradictions clearly render all these transactions dubious. The ITAT could not have, merely because the payments were through cheques, held that the transactions were genuine. The ITAT erred in simply accepting the explanation of the Assessee qua the four transactions. The ITAT, clearly, did not follow the binding precedent in Divine Leasing (supra), which in no uncertain terms requires that the authorities are duty bound to investigate the creditworthiness of the creditors, subscribers and the genuineness of the transactions. Thus the ITAT did not merely give findings of fact but misapplied the law. Hence the authorities CIT Madras vs. S. Nelliappan (1967) 66 ITR 722 (SC), CIT Orissa vs. Orissa Corporation Pvt. Ltd. 159 ITR 78 (SC), CIT Vs. Gun Nidhi Dalmia (1987) 168 ITR 282 (Del) do not support the Assessee’s case. The Assessee has failed to discharge his initial burden as the explanation given by the Assessee and the four individuals does not appear to be credible.

(xiv) There is no dispute to the proposition that the source of the source need not be seen as held in Shiv Dhooti (supra) and the other cases relied upon by the Assessee. The ITAT has erred in its approach towards dealing with the transactions and has incorrectly held that the Assessee has discharged his onus merely because the money was advanced through the banking channels. The ITAT has ignored all the contradictions and has ignored glaring circumstances such as Shri Amar Singh, not even being an Income-tax Assessee, in holding that the transactions are genuine and creditworthiness is established. The explanation for advancing the loans is clearly contradictory in respect of two of the creditors. To accept such explanations would in effect result in turning a blind eye as has been done by the ITAT, to transactions which clearly lacked bona fides. Thus, the ITAT’s order is erroneous and contrary to law and is accordingly, set aside.

(xv) The transactions in the present appeal are yet another example of the constant use of the deception of loan entries to bring unaccounted money into banking channels. This device of loan entries continues to plague the legitimate economy of our country. As seen from the facts narrated above, the transactions herein clearly do not inspire confidence as being genuine and are shrouded in mystery, as to why the so-called creditors would lend such huge unsecured, interest free loans – that too without any agreement. In the absence of the same, the creditors fail the test of creditworthiness and the transactions fail the test of genuineness. The findings of the CIT (A) are upheld and the order of the ITAT dated 19th July, 2016 is set aside to the extent of the deletion of four entries. The deletions made in respect of the transactions of the Assessee with Shri Amar Singh, Shri Chandan Singh, Shri Ram Charan/Ram Chander and Smt. Sunita to the tune of Rs.50,00,000/-, Rs.1,10,00,000/-, Rs.10,00,000/- and Rs.98,00,000/-, respectively, are liable to be added back to the returned income of the Assessee for the relevant AY, under Section 68 of the Act.

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