Lack of effort from AO to verify creditors is not the part of fault of Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH `H’ NEW DELHI

BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

AND

SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER

I.T.A.No.723/Del/2012

Assessment Year: 2005-06

The Gurukul Trust

C/o Sh. Anup Sharma, Advocate,

108, Lawyer’s Chamber,

Delhi High Court,

New Delhi-110003

(PAN: AAATT3993R)

Vs.

ADIT (E),

Trust Circle-IV,

New Delhi.

Appellant by: Shri Anoop Sharma, M. Giri

Respondent by: Mrs. Shumana Sen, Sr. DR

O R D E R

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

This appeal has been preferred by the assessee against the order dated 13.12.2011 of the CIT(A)-XXI, New Delhi for AY 2005-06, passed u/s 143(3) of the Income Tax Act (hereinafter referred to as the Act).

2. The grounds of appeal read as under:-

“1. The ld. CIT(A) has erred in disallowing the expenditure of Rs.1,70,000/-.

2. The CIT(A) has failed to appreciate the facts in the case and submissions of the assessee and thus the order is contrary to the facts of the case.

3. The disallowance of the expense is bad in law and the order deserves to be corrected.

4. The assessment order as well as the order of the CIT(A) has been passed in contravention to the principle of natural justice. The same is liable to be set aside and the case deserves to be decided on the basis of facts.”

3. Briefly stated, the facts of the case giving rise to this appeal are that the assessee filed a return showing income as Nil and his case was selected for scrutiny assessment and a notice u/s 143(2) of the Act was served on the assessee. The assessee trust was registered u/s 12A of the Act w.e.f.

12.05.2010. The AO allowed the benefit of Section 11 and 12 of the Act to the assessee with a noting that he has not found any violation of Section 13 of the Act. Further, on examination of balance sheet of the assessee trust, the AO noted that the following loan creditors of the assessee trust were not assessed to income tax:

4. The AO called the assessee to explain why the above claim of unsecured loan from the above three persons shall be treated as unexplained cash credit u/s 68 of the Act. In response to show cause notice, the assessee submitted details of cheque nos. by which credits were received and also the details of cheque nos. by which the assessee trust made the repayment to the creditor. The assessee also submitted confirmation from Ms Rakhee Agarwal and Ms Charu Jain but it could not submit confirmation from Ms Rajrani Kainth as she was no more at the time of assessment. The AO held that the explanation advanced by the assessee was found to be not satisfactory and the claim of unsecured loan of Rs.5,70,000 was treated as unexplained cash credit u/s 68 of the Act and the same was added to the total income of the assessee.

5. The aggrieved assessee filed an appeal before the CIT(A) which was allowed in regard to cash credit from Ms Rajrani Kainth but partly disallowed with regard to cash credit provider Ms Rakhee Agarwal and Charu Jain total amounting to Rs.1,70,000.

6. The operative part of the impugned order is being reproduced below:-

“3.2 I have gone through the finding of the AO in the assessment order and written submission of the ld. AR. In this regard AO has observed that all the three persons who have given the loan are not assessed to tax. So, he has held that provisions of section 68 are attracted and he has relied on various case laws in this regard. During the course of appellate proceedings it was submitted by the ld. AR that out of three creditors Ms Charu Jain and Ms Rakhee Agarwal are not assessed to tax but Rajrani Kainth who has given loan of Rs. 4 lakh is assessed to tax and he has also filed copy of income tax return for AY 2005-06. On further examination he has also explained vide letter dated 18.11.2010 that Ms Rajrani Kainth has since been deceased, so, her confirmation could not be submitted. In this regard I have perused the detail filed from time to time and it is that with regard to Ms Rajrani Kainth ld. AR of the appellant has filed copy of the IT return, details of cheque numbers, ledger account. The only paper which could not be filed is the confirmation because Ms Rajrani Kainth is no more. So, in my considered opinion, identity and capacity of the creditor has been established as far as Ms Rajrani Kainth is concerned but similar case is not with Ms Rakhee Agarwal for loan amounting to Rs.50,000/- and Ms Charu Jain for loan amounting to Rs.1,20,000/-. Their creditworthiness has not been established either before the AO or during the appellate proceedings because they have been found to be not assessed to income tax. How a person can give a loan amounting to Rs.50,000 and amounting to Rs.1,20,000 when his/her income is not to the taxable limit. In view of the above discussion, I am of the considered opinion that out of addition of Rs.5,70,000, an addition of Rs.4,00,000/- pertaining to Ms Rajrani Kainth has been found to be properly explained, but, remaining addition of Rs.1,70,000/- has not been explained properly. So, an addition of Rs.1,70,000/- is sustained. Assessee gets relief of Rs.4,00,000/-. In view of the above discussion grounds No. 1 to 4 are partly allowed.”

Now, aggrieved the assessee is before this Tribunal with this second appeal.

7. We have heard rival arguments of both the parties in the light of material and documents on record before us. The assessee’s representative submitted that the cash credit from Ms Rajrani Kainth was confirmed with a finding that the assessee could not submit her confirmation regarding the cash credit because at the time of assessment she had expired. The CIT(A) also noted that Ms Rajrani Kainth was an income tax assessee. Therefore, her identity, creditworthiness and genuineness of the transaction was accepted and the order of the AO in this regard was set aside deleting the addition of Rs.4 lakh.

8. He further submitted that the assessee submitted details of cheques pertaining to all three creditors by which the assessee Trust received the loan and made repayment to the creditors and confirmation from Ms Rakhee Agarwal and Ms Charu Jain were also submitted but the CIT(A) sustained the addition in regard to these creditors with the only finding that they have been found to be not assessed to income tax and how a person can give a loan of Rs.50,000 and Rs.1,20,000 when her income is not to the taxable limit. The AR concluded his argument with the submission that the treatment which was given to the cash credit to Ms Rajrani Kainth was to be given to the other creditors i.e. Ms Rakhee Agarwal and Ms Charu Jain. But the ld. CIT(A) took a baseless stand for sustaining addition made by the AO in this regard.

9. The DR submitted that the action of the AO as well as findings of the CIT(A) in the impugned order in regard to addition of Rs.1,70,000 are based on the facts and circumstances of the case which needs no interference. The DR also submitted that the onus was on the assessee trust to establish identity, creditworthiness and capability of the creditors with genuineness of the transaction pertaining to the cash credits shown by it in the balance sheet submitted before the AO but the assessee trust miserably failed to do so. Therefore, addition made by the AO and partly confirmed by the CIT(A) deserves to be confirmed.

10. On careful consideration of the submissions, relevant citations and material on record before us, we observe that it is not in dispute that all three cash credits were received through account payee cheques from the creditors and repayment was also made through account payee cheques to the creditors by the assessee trust. It is also not in dispute that the assessee trust filed confirmations, identity and all relevant documents showing that the loan advanced to the assessee trust and its repayment by the assessee trust was routed through account payee cheques and the relevant written confirmations containing full address of the creditors and their bank pass

books and bank statement of the assessee trust were also submitted before the authorities below by the assessee trust. The assessee appellant has also furnished a paper book before us with a certification that documents shown at Sl.No. 1 to 6 i.e. confirmation from Ms Rakhee Agarwal, her ledger account with the assessee, her bank pass book showing payment and receipt of Rs.50,000 and also confirmation from Ms Charu Jain, her ledger account with the assessee trust with bank statement of the assessee trust showing the receipt and repayment of the cash credits of Rs.1,70,000 were submitted before the AO and the CIT(A).

11. At this juncture, it is necessary and appropriate to rely on the judgment of Hon’ble Guwahati High Court in the case of Nemi Chand Kothari v.Commissioner of Income-tax [2003] 264 ITR 254 (GAU.) wherein their lordships held that it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors, the genuineness of the transaction which he had with his creditors and the creditworthiness of the creditors visà- vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue to show that though covered by cheques, the amounts in question actually belonged to, or was owned by the assessee himself. In the present case, since the assessee has shown that the transaction was made through cheques and he also submitted the confirmation with detailed address of the creditors, then the burden shifts to the revenue to establish that the amount in question actually belonged to or was owned by the assessee trust but neither the AO nor the CIT(A) has brought any incriminating material or evidence against the assessee trust to establish that the cash credits shown in the balance sheet actually belonged to or owned by the assessee himself. We also observe that the AO and the CIT(A) never went a step ahead to verify the identity and creditworthiness of the creditors and the genuineness of the transaction which the assessee Trust had with his creditors.

12. The Hon’ble High Court of Madhya Pradesh in the case of CIT vs Metachem Industries (2008) 245 ITR 160 (MP) held that:-

“Assessee cannot be asked to explain whether credit has suffered tax – Where the assessee firm had satisfactorily explained the creditors standing in the name of its partners, the responsibility of the assessee stands discharged. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. If that person owns the entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited the amount – CIT vs Metachem Industries (2000) 245 ITR 160 (MP).”

13. In the present case, we are inclined to observe that the ld. CIT(A) simply confirmed the addition of Rs.1,70,000 with a finding that the creditors Ms Rakhee Agarwal and Ms Charu Jain have been found to be not assessed to income tax. Therefore, their capability to advance loan is doubtful and their income was not to the taxable limit. We are unable to uphold this finding because this is not a test parameter for evaluating the capability of a person for advancing loan that whether his income is assessed to income tax or not. If this test standard is approved, then the creditworthiness of all the persons out of the ambit of income tax assessment would be doubtful.

14. In view of above, following the judgment of Hon’ble Guwahati High Court in the case of Nemi Chand Kothari (supra) and the judgment of Madhya Pradesh high Court in the case of Metachem Industries (supra), we hold that the AO and the CIT(A) did not make any effort to verify the confirmations, identity and creditworthiness of the creditors in question and they also ignored the fact that the transaction of cash credits received and its repayment were made through bank and we also hold that the authorities below did not bring any incriminating material or evidence against the assessee trust to establish that the amount shown in the balance sheet as cash credits amounting to Rs.1,70,000 actually belonged or was owned by the assessee trust itself.

15. Accordingly, we arrive to a conclusion that the addition of Rs.1,70,000 u/s 68 of the Act confirmed by the CIT(A) is not sustainable in the facts and circumstances of the case. We, therefore, allow the appeal of the assessee trust, setting aside the orders of the authorities below in this regard.

16. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 19.9.2012.

                                                      Sd/-                               Sd/-

                                    (SHAMIM YAHYA) (CHANDRA MOHAN GARG)

                                  ACCOUNTANT MEMBER JUDICIAL MEMBER

DT. 19th SEPTEMBER 2012

‘GS’

Copy forwarded to:-

1. Appellant

2. Respondent

3. CIT (A)

4. CIT

5. DR

By order

Asstt. Registrar