Delhi High Court

Mod Creations Pvt Ltd. vs Income Tax Officer on 29 August, 2011

Author: Rajiv Shakdher

*                    THE HIGH COURT OF DELHI AT NEW DELHI

%                                Judgment delivered on: 29.08.2011

+                         ITA No. 1158/2007

MOD CREATIONS PVT. LTD.                        ...... APPELLANT

                Vs

INCOME TAX OFFICER                            ..... RESPONDENT

Advocates who appeared in this case:

For the Appellant: Mr. S. Krishnan, Advocate For the Respondent: Mr. Sanjeev Sabharwal, Advocate

CORAM :-

HON‟BLE MR JUSTICE SANJAY KISHAN KAUL HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether the Reporters of local papers may be allowed to see the judgment ?

2. To be referred to Reporters or not ?

3. Whether the judgment should be reported in the Digest ?

RAJIV SHAKDHER , J (ORAL)

1. The learned counsels for both parties agree that the appeal can

be admitted and heard on the basis of the pleadings and material on

record.

2. Admit.

2.1. The only question of law which arises for our adjudication is as

follows:

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal (for short „ITAT‟) was justified in sustaining `8,24,000.00 on account of unexplained cash credit under the provisions of Section 68

of the Income Tax Act, 1961 (hereinafter referred to as the „IT Act‟)?"

3. In the captioned appeal, we are concerned with the Assessment

Year 2002-2003. The assessee has filed this appeal as it is aggrieved

by the judgment dated 27.4.2007 passed by the ITAT. As indicated

hereinabove the only issue which arises for our consideration is as to

whether the ITAT erred, in the given facts & circumstances of the case

in sustaining the addition of sum of `8,24,000.00 in the income of the

assessee.

4. In order to decide the aforementioned issue the following facts

are required to be noticed.

4.1 The assessee is engaged in the business of trading in imported

tailoring accessories like buttons etc. During the relevant assessment

year, the assessee had raised unsecured loans from its Directors and

shareholders. The total amount of loan raised was, in fact, added to its

income, i.e. `8,24,000.00. The persons, who had lent money to the

assessee company were five (5) in number. Out of the five (5)

persons, two (2) persons were at the relevant time the Directors of the

assessee, while the other three (3) persons were, its shareholders.

4.2 The Assessing Officer (for short „AO‟) while carrying out the

assessment sought information from the assessee vide notice dated

10.10.2003 qua the credits found in its books of accounts, vis-a-vis the

loans extended by the five (5) persons, who were its Directors and

shareholders. In response to the notice issued by the AO, a reply

dated 14.12.2004 was submitted by the assessee, setting out the

following details:

        Name           Amounts recd. &                   Source
                      advanced to „a‟ co.
1. Shri Krishan Lal 19.5.01   `35,000/-         Opening Balance
Johar
                    22.6.01   `77,000/-         Commission      received
                                                from Alfa TV Studio (P)
                                                Ltd. on 19.6.01 at
                                                `77,800/-
                        8.1.02    `1,00,000/-   Gift received on 4.1.02

                                                Commission       received
                        23.3.02   `50,000/-     from     creative    Edge
                                                Mens Wear at `89,590/-
2. Shri Anil Kumar 9.1.02         `1,00,000/-   Gift received of `One
Malik                                           Lac on 5.1.02
                   12.1.02        `70,000/-     Commission             of
                                                `69,389/- received from
                                                Goyal Offset Printers on
                                                10.1.02
                        15.1.02   `40,000/-     Commission       received
                                                from Earth Leasing &
                                                Finance (P) Ltd. at
                                                `40,450/- on 12.1.02
3.   Smt.        Meenu 25.6.01    `52,000/-     Commission       received
Malik                                           from Shally Summon
                                                Productions at `52,500/-
                                                on 23.6.01.
                        6.6.02    `76,000/-     Commission             of
                                                `77,818/- received from
                                                Designers Point (I) Pvt.
                                                Ltd. 28.1.02.
4.   Smt.        Shashi 22.6.01   `55,000/-     Commission             of
Malik                                           `55,400/- received from
                                                Shally           Summon
                                                Productions on 22.6.01.
                        16.2.02   `74,000/-     Commission             of
                                                `74,680/- received from
                                                Designer‟s Point India
                                                (P) Ltd. on 28.1.02.
5. Smt.         Ranjana 28.3.02   `1,30,000/-   Commission of `1 lac
Kumari                                          received     in    March,
                                                2002.




 4.2    On receiving the reply, the AO followed it up with a notice under

Section 131 of the IT Act. The said notice under Section 131 of the IT

Act was issued to, one such Director of the assessee, i.e., Mr. Krishan

Lal Johar.

4.3 Mr. Krishan Lal Johar attended the proceedings before the AO. In

the course of proceedings certain questions were put to Mr. Krishan Lal

Johar. It is not disputed that the other four (4) creditors, that is, one

(1) Director, Mr. Anil Kumar Malik; and three (3) shareholders Mrs.

Meenu Malik, Mrs. Shashi Malik and Mrs. Ranjana Kumari, did not

personally appear before the AO. It is also not in dispute that the

assessee company was also issued a notice under Section 142(1) of

the IT Act, on 12.1.2005. Pursuant to this notice, the assessee filed a

reply on 24.1.2005.

4.4 It is also not in dispute that in so far as the other creditors were

concerned they filed their affidavits stating therein the source of funds,

which were used in lending the amounts to the assessee company.

The AO also records in the assessment order that the said creditors

filed with him their income tax returns as well as their bank

statements.

4.5 It may be noted at this stage that the AO after perusing the reply

of the creditors as well as that of the assessee issued summons under

Section 131 of the IT Act, on 24.2.2005, even to the entities which

evidently had paid commission and given gifts to the five (5) creditors

(hereinafter referred to as sub creditors) which formed the source of

funds available with the said creditors. The notices under Section 131

of the IT Act were issued to the following entities/persons:

   i)       M/s. Vasu Apparels (P) Ltd.

   ii)      Mr. Ramesh Kumar Goel.

   iii)     Mr. Deepak Gupta.

4.6       It is important to note that even though these notices had been

sent to the aforementioned entities/persons only on 24.2.2005, the AO

proceeded to pass the assessment order within four (4) days of the

issuance of notice, that is, on 28.2.2005.

4.7 Suffice it to say at this stage that, the AO after perusing the

material placed before him and explanation given by the assessee

came to the conclusion that both the genuineness of the transactions

as also the creditworthiness of the creditors remained unexplained.

Consequently, the AO directed that the unexplained credit in the books

of accounts of the assessee to the extent of `8,24,000.00 be added to

its income.

4.8 The assessee being aggrieved by the order of the AO preferred

an appeal before the Commissioner of Income Tax (Appeals) {for short

„CIT(A)}. The CIT(A), after a detailed examination of the material

placed on record as well as pleas of the assessee and the revenue

reversed the view taken by the AO.

4.9 The Revenue being aggrieved by the order of the CIT(A)

preferred an appeal to the ITAT. The ITAT in turn reversed the view

taken by the CIT(A). The necessary consequences of which was the

AO‟s order was sustained.

5. In support of the appeal, we have heard both, Mr. Krishnan,

learned counsel for the appellant/assessee and Mr. Sabharwal, learned

counsel for the respondent/revenue.

6. Mr Krishnan largely relied upon the order of the CIT(A). It was

the submission of Mr Krishnan that the three tests which are ordinarily

applied to an assessee to explain credits found in his books of accounts

are as follows:

(i) Identity of the creditors;(ii) The credit worthiness of the

creditors; and (iii) the genuineness of the creditors.

6.1 Mr Krishnan elaborated the aforementioned submission by

submitting before us that in so far as the identity of the creditors was

concerned, there was a concurrent finding of fact, which is not in

dispute. The finding records that creditors in this case are directors

and shareholders of the assessee.

6.2 In so far as the creditworthiness of the said creditors is

concerned, Mr. Krishnan submits that the bank statements as well as

the income tax returns of the said creditors had been filed with the AO.

The said creditors, as has been found by the authorities below, were

assessable to tax. It is his submission that even though the assessee

was not required to give explanation vis-à-vis the sub-creditors; the

identity as well as addresses of the sub creditors were available on

record.

6.3 As regards the genuineness of the transaction, Mr. Krishnan

submits that all transactions had been routed through banks, and

necessary material has been placed before the authorities below.

6.4 Mr. Krishnan submits that once the assessee had done the

needful, the onus shifted on to the revenue, and if the revenue

contended that the monies which the sub-creditors gave to the

creditors was that of the assessee then, the revenue would have to

prove the same by placing on record the necessary material and

cogent evidence in that regard. In this case, Mr. Krishnan submits, no

such material has been placed on record nor is there any finding to

that effect.

6.5 In support of the aforesaid submissions Mr Krishnan relied upon

the following judgments. CIT vs Value Capital Services P. Ltd. (2008)

307 ITR 334 (Del) and Nemi Chand Kothari vs CIT & Anr. (2003) 264 ITR

254.

7. As against this, Mr. Sabharwal before us submits that the details

supplied by the assessee would show that the source of funds of the

creditors was by way of commissions and gifts. Mr. Sabharwal further

submits that in this case the assessee impeded the inquiry of the AO

inasmuch as the assessee neither produced the creditors for

examination before the AO (except Mr. Krishan Lal Johar) nor did the

sub-creditors appear before the AO, despite notice having been issued

under Section 131 of the IT Act.

7.1 It was, therefore, Mr Sabharwal‟s submission that the A.O. had

correctly made the addition to the income of the assessee. Mr

Sabharwal in support of his pleas relied upon that portion of the A.O.‟s

order wherein the questions put to Sh. K.L. JOhar are set out. Relying

upon the answers to the questions put by the A.O. Mr Sabharwal

submitted that it could easily be gathered that the transactions in issue

involved circulation of funds from the assessee to the creditors through

the aegis of the sub-creditors. In other words the credits were nothing

but a device adopted by the assessee to introduce its own unexplained

money through the aforementioned creditors and sub-creditors. Mr

Sabharwal thus contended that the onus to prove the genuineness of

the transaction was on the assessee and merely because the

impugned transactions had been routed through the banking channels,

would not discharge the assessee of the onus cast on it. In support of

his submissions the learned counsel relied upon the judgment of the

Supreme Court in the case of CIT vs P. Mohanakala (2007) 291 ITR 278

(SC).

8. We have heard the learned counsel for the parties. It is clear

that the addition was made by the A.O. broadly for the following

reasons:

(i) At the point in time when loans were advanced to the assessee,

the aforesaid creditors did not have sufficient balance to their credit in

their respective bank accounts.

(ii) Cheques were issued from the creditors‟ bank accounts in favour

of the assessee in close proximity to the date when monies were

received by the creditors in the form of commission/ gifts. De hors

these receipts, the creditors would not have had sufficient money to

advance to the assessee in the form of loan.

(iii) The statement made by Sh. K.L. Johar, director of the assessee

under Section 131 of the I.t. Act, showed that he was unaware of some

of the aspects related to his earnings and receipt of gifts etc.

Therefore, the entries in the books of accounts of the assessee were in

the nature of accommodation entries.

(iv) Out of five (5) creditors, four (4) creditors did not personally

appear before him in response to the summons issued to them.

(v) The said creditors had paid small amounts as tax qua their

individual returns and that tax had not been deducted at source in

respect of commission received by them.

9. We may note at this stage that in the order of the CIT(A) there is

a discussion with respect to the response received from the assessee

on these aspects. Broadly, the CIT(A) recorded the fact that in so far

as the credit worthiness of the aforementioned creditors was

concerned they had in support of their submission disclosed that their

source of funds were largely commissions (except two instances where

gifts were received), in support of which certificates have been

submitted from parties who had paid the commission. It is also

observed in the CIT(A)‟s order that parties which paid the commission,

as also donors of gifts, were assessed to tax and confirmations in

respect of commission as well as gift deeds were also alluded to.

9.1 As regards the creditors which included the four creditors who

had not appeared before the A.O., following documents were filed:

(i) Acknowledgements of returns filed for assessment year 2002-03;

(ii) Computation of income for assessment years 2002-03;

(iii) Statement of bank accounts; and

(iv) Affidavits stating that monies have been advanced to the

assessee.

9.2 Apart from the above in the order of CIT(A) there is a reference

to a letter dated 28.02.2005 issued on behalf of four creditors who did

not appear before the A.O. wherein they alluded to the fact that they

had placed relevant material before the A.O. and thus did not feel the

need to appear in person unless the queries remained unanswered. In

any event they offered to supply further information if a specific query

in that regard were to be raised by the A.O.

9.3. As regards the failure on the part of Mr K.L. Johar to give specific

details in respect of questions put to him by the A.O., the CIT(A)

observed in his order that it was argued before him that on account of

Mr. K.L. Johar‟s age, who at the relevant time was approximately 70

years of age, he was unable to give some details in respect of the

queries put to him, though he had supplied the complete address of

the donors from whom the gift had been received which included the

name and locality where the donors resided. The CIT(A) has made a

record of these submissions in paragraphs 3 to 5 of his order. After

recording these submissions the CIT(A) in paragraph 6 returned the

following findings of fact:

(i) The identity of the creditors could not be doubted as the

assessee was able to show the existence of five creditors.

(ii) The genuineness of the transaction was also established as all

transactions routed through bank accounts and monies were paid by

the assessee through cross-cheques. In other words payments were

made through banking channels and were thus verifiable.

(iii) The assessee had filed copies of bank accounts of the creditors,

who showed not only the transactions related to the cheques issued to

the assessee but also those related to other entries in the said

account. Therefore, the genuineness of the transaction could not be

doubted.

(iv) As regards credit worthiness of the creditors, the reliance was

placed on the returns filed by the creditors for the relevant year and

the fact that they were assessed to tax.

(v) The fact that the creditors‟ Permanent Account Number (in short

„PAN‟) as well as the credit entries made in their bank accounts were

available with the A.O., was also noticed. It was also noticed that PAN

of other parties, who had made the payments to the creditors, were

also available. The details of the two donors, who had given gifts of ` 1

lac to the two creditors, were also available with the A.O.

10. With these materials on record, a finding was returned that

credit worthiness of the aforementioned creditors was established.

The CIT(A) thus came to the conclusion that in these circumstances

non-appearance of the remaining four creditors before the A.O. was

not material and that in the wake of the material before the A.O. the

onus had shifted on to the revenue to prove, if it disputed, as it did, the

genuineness of the loans extended to the assessee. The CIT(A) also

disagreed with the A.O.‟s observation that since the creditors had paid

small amounts as tax against their individual assessments, it would

demonstrate that the loans advanced to the assessee were not

genuine.

11. In our view, with the findings of fact recorded by the CIT(A), the

ITAT ought not to have reversed the said findings unless it come to the

conclusion that they were perverse based on tenable reasoning. On

the other hand, the ITAT has reversed the order of the CIT(A), as

observed in paragraph 18 of the impugned judgment passed by the

ITAT, solely on the ground that despite opportunities having been

granted to the assessee/ directors/ shareholders, the assessee had

done "nothing substantial" to prove the genuineness of the transaction

and the credit worthiness of the creditors/ persons, who lent the

money to the assessee. This, according to the ITAT, showed "malafide

intention" of the assessee. The Tribunal concluded by saying that in

view of these two aspects, the assessee had failed to establish that the

order of the A.O. was perverse or based on inadmissible findings and,

therefore, since there was no illegality, perversity or miscarriage of

justice in the order of the A.O., the same has to be sustained.

12. In our view, the Tribunal has adopted an erroneous approach on

the aspects of genuineness of the transaction in issue and the credit

worthiness of the persons/ creditors who lent money to assessee. As

noticed above, the first aspect, i.e., identity of the creditors was

established before any of the authorities below. It will have to be kept

in mind that Section 68 of the I.T. Act only sets up a presumption

against the assessee whenever unexplained credits are found in the

books of accounts of the assessee. It cannot but be gainsaid that the

presumption is rebuttable. In refuting the presumption raised, the

initial burden is on the assessee. This burden, which is placed on the

assessee, shifts as soon as the assessee establishes the authenticity of

transactions as executed between the assessee and its creditors. It is

no part of the assessee‟s burden to prove either the genuineness of

the transactions executed between the creditors and the sub-creditors

nor is it the burden of the assessee to prove the credit worthiness of

the sub-creditors. [See Nemi Chand Kothari (supra)].

13. In the light of the above principle, let us examine as to what the

authorities below found vis-à-vis the genuineness of the transactions

and the creditworthiness of their creditors.

(i) The fact that there was sufficient balance available with the

creditors when cheques have been issued to the assessee company

was established.

(ii) It was also established that the funds available at the relevant

point in time were not infused into the bank accounts of the creditors

by way of cash but were in fact credited to their account again by way

of cheques largely on account of commissions received by them save

and except two transactions of ` 1 lac each received by two creditors

from verifiable donors.

(iii) The bank accounts as well as returns filed by the creditors who

were assessable to tax alongwith their PANs‟ were also available with

the A.O.

(iv) The assessee in turn had received the monies by way of cheques

in respect of which credits were made in their books of accounts.

(v) The creditors had also placed on record receipts of commission

as well as the gift deeds in respect of gifts made to the donors.

(vi) The identity and addresses of sub creditors was also available.

14. With this material on record in our view as far as the assessee

was concerned, it had discharged initial onus placed on it. In the event

the revenue still had a doubt with regard to the genuineness of the

transactions in issue, or as regards the credit worthiness of the

creditors, it would have had to discharge the onus which had shifted on

to it. A bald assertion by the A.O. that the credits were a circular route

adopted by the assessee to plough back its own undisclosed income

into its accounts, can be of no avail. The revenue was required to

prove this allegation. An allegation by itself which is based on

assumption will not pass muster in law. The revenue would be

required to bridge the gap between the suspicions and proof in order

to bring home this allegation. The ITAT, in our view, without adverting

to the aforementioned principle laid stress on the fact that despite

opportunities, the assessee and/or the creditors had not proved the

genuineness of the transaction. Based on this the ITAT construed the

intentions of the assessee as being malafide. In our view the ITAT

ought to have analyzed the material rather than be burdened by the

fact that some of the creditors had chosen not to make a personal

appearance before the A.O. If the A.O. had any doubt about the

material placed on record, which was largely bank statements of the

creditors and their income tax returns, it could gather the necessary

information from the sources to which the said information was

attributable to. No such exercise had been conducted by the A.O. In

any event what both the A.O. and the ITAT lost track of was that it was

dealing with the assessment of the company, i.e., the recipient of the

loan and not that of its directors and shareholders or that of the sub-

creditors. If it had any doubts with regard to their credit worthiness,

the revenue could always bring it to tax in the hands of the creditors

and/or sub-creditors. [See CIT Vs. Divine Leasing & Finance Ltd., (2008)

299 ITR 268 (Delhi) and CIT Vs. M/s. Lovely Exports (P) Ltd. (2008) 216

CTR 195 (SC)].

15. This also answers the observations made by the A.O. with regard

to some of the queries raised by the A.O. with Mr. K.L. Johar. Having

regard to the answers given by Mr. K.L. Johar, we are not persuaded to

hold that the answers by itself diluted the veracity of the material on

record to explain the impugned credits in the assessee‟s books of

accounts.

16. This brings us to the last aspect of the matter with regard to the

non-appearance of the sub-creditors to whom the notices have been

issued under Section 131 of the I.T. Act by the A.O. As observed

above, notices had been issued to the sub-creditors on 24.02.2005.

The A.O. without giving sufficient time for the services to be effected

on the said noticees, within a period of four days proceeded to frame

the assessment order. As a matter of fact the A.O. quite curiously, has

observed in the assessment order, that the said noticees have

preferred not to reply to the summons issued to them. There is no

observation whatsoever as to the date on which the said notices were

dispatched and thereafter served on the said noticees. It is not

uncommon that notice issued by the revenue get dispatched much

later than the date mentioned on the notice and as a matter of fact get

served on the noticee either on the date of appearance or thereafter.

The aforesaid circumstances, according to us, show that the A.O.

framed the assessment in haste. If the A.O. was genuinely interested

in establishing the allegations made in the assessment order, which is,

that the assessee had routed its own money through the device of

creditors and sub-creditors, it ought to have given sufficient time to the

said noticees to produce relevant material before him. These are

aspects which the ITAT did not examine.

17. As regards the judgment cited by Mr Sabharwal is concerned in

our view the same is distinguishable on facts. In the case of P.

Mohanakala (supra) the assessees evidently had received gifts from

two foreign agents by the name of Ariavan thotan and Suprotoman,

who were, according to the revenue, aliases of one Sampat Kumar. In

the course of scrutiny the A.O. recorded the submissions of the

assessees who were before him. The statements of the said Sampat

Kumar were also recorded. It appears that Sampat Kumar did not

reveal the details of his bank accounts in India. There was also

correspondence available which persuaded the A.O. to conclude that

Sampat Kumar had given the gifts perhaps in lieu of compensatory

payments to be made in respect of gifts made by him to the assessee.

It is in these facts that the court ruled in favour of the revenue and

against the assessees by observing that the High Court was not

justified in interfering with the concurrent findings of fact arrived at by

the authorities below including the ITAT. We may only note the

principle enunciated in the said judgment, which ultimately in the facts

of each case, would determine as to whether the explanation offered

by the assessee in respect of credit entries ought to be accepted or

not. The observations being apposite are extracted hereinbelow:-

"15. The question is what is the true nature and scope of Section 68 of the Act? When and in what circumstances Section 68 of the Act would come into play? That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessees; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessees of that previous year. The expression "the assessees offer no explanation" means where the assessees offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessees. It is true the opinion of the Assessing Officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion."

18. Before we part with the judgment we may only notice that this

court vide its order dated 23.09.2009 had directed the counsel for

parties to inform the court "as to whether the five directors who had

given loan to the company had shown cash deposited in their bank

accounts in their respective income tax return in the relevant year and

how the same was assessed". In response to the above, the learned

counsel for the assessee filed a set of documents on 11.11.2009 which

included the copies of returns, statements of income, balance sheet,

profit and loss account and bank statements of K.L. Johar. Similar

documents, except the bank statement of other four creditors, were

also filed. None of these documents were put in issue by the revenue.

19. For the aforementioned reasons, we are of the view that the