Judgment:
1. The appeal has been directed by the assessee against the order of the CIT(A), Agra, dt. 21st Dec., 1990, pertaining to asst. yr. 1988-89.
2. Grounds of appeal Nos. 1 to 5 relate to the additions of the loans from the following three parties :(1) Rs. 50,000 from Shri Sushil Kumar Bansal 22-5-1987 by cheque(2) Rs. 25,000 Shri Ashok Kumar Agarwal 25-6-1987 by cheque(3) Rs. 25,000 Smt. Rajani Bansal 25-6-1987 by cheque 2.1. Briefly stated the facts of the case are that the assessee is a silversmith. There was search and seizure operation at the premises of the assessee on 21st April, 1987. Soon after the search and seizure operation the assessee filed the petition before the Settlement Commission. Certain issues raised in the petition have already been settled by the Settlement Commission. This involved the period upto the date of search.
2.2. During the course of assessment proceedings, when the AO examined the cash credits mentioned above, the assessee filed confirmation from the creditors confirming the loans. The assessee also requested the AO to issue summons under Section 131 to these creditors. The AO also issued summons to these creditors. Sushil Kumar and Shri Ashok Kumar Agarwal also appeared. In their statement, they also confirmed having advanced the bans to the assessee. Shri Sushil Kumar in his statement confirmed that his source of income wherefrom he advanced the loans, was from writing the books of accounts and money-lending business. He confirmed that the loan, of Rs. 50,000 given to the assessee by cheque was met out of the income of Rs. 10,000 derived from writing books of accounts, Rs. 15,000 by selling furniture of the shop, Rs. 24,500 by taking loan from others. When he was questioned as to whether there was any evidence for sale of furniture and the income from writing the books of accounts, he confessed that he did not have any evidence for the same. The AO further examined the copy of bank a/c furnished by Shri Sushil Bansal. He observed that Shri Bansal issued the cheques of Rs. 50,000 on 22nd May, 1987. But on that date, Shri Bansal did not have much amount in his bank a/c. On 27th May, 1987, Shri Bansal deposited sums aggregating Rs. 50,000 in his bank a/c and the cheque of Rs. 50,000 issued earlier was encashed on 28th May, 1987. The AO observed that this clearly indicated that the cheque was issued earlier when the creditor did not have any amount in his bank a/c. This was done to defraud the Revenue.
2.3. Regarding deposit of Rs. 25,000 in the name of Shri Ashok Kumar Agarwal, the AO issued summons to Shri Agarwal, who also appeared. His statement was also recorded. He confirmed having business of supply of cattle feed. He also furnished a copy of his bank a/c. When the AO examined the copy of the bank statement, he noted that a day before the loan was advanced to the assessee, there was a deposit of Rs. 25,000 by draft. When the creditor was questioned about the sources of such deposit by draft, it was stated that the creditor received back the various sums from his debtors, which was deposited in his bank a/c in the shape of the draft. However, when the AO questioned him regarding the names of those debtors from whom the amounts have been received back, Shri Ashok Kumar Agarwal could not tell the names of the debtors.
2.4. There was another deposit of Rs. 25,000 in the name of Smt. Rajani Bansal. Though, she did not appear before the AO in response to summons under Section 131 she happens to be wife of one of the creditors. The AO, therefore, obtained a copy of her bank a/c from the bank directly, After the perusal of such bank a/c, the AO observed that there was cash deposit of Rs. 20,000 in May, but there was no withdrawal on the date of the loan or on nearabout dates and, therefore, it could not be said that the loan amount has gone out of her bank a/c. The AO also observed that Smt. Bansal is housewife and had no sources of income. Thus, there was serious doubts about the genuineness of the loan transaction. A copy of documents furnished by the creditors as well as copy of their statements was forwarded to the assessee for comments. As no comments were offered by the assessee, relying on the decision in Nanakchand Laxman Das v. CIT (1983) 140 ITR 151 (All), the AO held the loans from the above three parties as non-genuine. He accordingly added the same to the income of the assessee under Section 68 of the Act.
2.5. On appeal, the CIT(A) confirmed the addition by observing that onus was on the assessee to prove the identity and creditworthiness of the creditors as well as genuineness of the transaction. The assessee has failed to prove the credit-worthiness of the creditors as well as genuineness of the transaction. He also observed that Smt. Rajani Bansal did not appear, so the loan could not be corroborated. He also observed that certain-loans exceeding Rs. 10,000 in cash are claimed to have been obtained, by the assessee, but the same was in violation of the provisions of Section 269SS of the Act. The assessee is in appeal before us against the findings of the CIT(A).
2.6. It is argued by the learned counsel that onus was on the assessee to prove the identity and creditworthiness of the creditor as well as the genuineness of the transaction. The assessee has satisfied all the three conditions which lay on it. In this connection, the learned counsel stated that confirmation from all the creditors was furnished before the AO. The addresses of the creditors was also furnished along with the return of income. Two of the creditors namely, Shri Sushil Bansal and Shri Ashok Kumar Agarwal appeared before the AO and their statements were recorded. Though Smt. Rajani Bansal did not appear before the AO, he obtained her bank a/c directly from the bank. Thus, the identity of all the three creditors is established beyond doubt.
2.7. It was also stated that all the three creditors are being assessed to tax. Their permanent number/GIR No. has been given on their confirmations. All the loans have been advanced by cheque. A copy of bank a/c of all the creditors was available with the AO. It was stated that as all the creditors were assessed to tax, it proved their creditworthiness. As the transaction of loan was ' through cheque, it also proved the genuineness of the transaction. Thus, the assessee has proved the identity and creditworthiness of the creditors as well as genuineness of the transaction. For this purpose, the learned counsel relied on the decisions in CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC), Jalan Timbers v. CIT (1997) 223 ITR 11 (Gau), Sarogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat), CIT v. Baishnab Charan Mohanty (1995) 212 ITR 199 (On), Ram Niwas and Sons v. Asstt.
CJT (1993) 46 TTJ (Del) 661 : (1993) 44 ITD 394 (Del) and the decision of Agra Bench of the Tribunal in the case of Smt. Dropadi Devi bearing ITA No. 320 & 321/Del/92.
2.8. It was further argued that it appears that the AO has not accepted the loan transaction as genuine because there were certain deposits in the bank a/c of the creditors immediately before the loans were given by the creditors. It was stated that in the bank a/c of Shri Sushil Kumar Bansal, there are deposits aggregating Rs. 50,000 on 27th May, 1987, a day before the cheque issued by the creditor was encashed by the assessee. It was stated that when Shri Sushil Bansal, appeared before the AO in person, he was questioned about the sources of these deposits. He had also explained the sources of such deposits. If the creditor was not able to explain the sources of deposit in his bank a/c, the assessee could not be penalised for it. The Department should have examined this issue in the case of the creditor as he was also income-tax assessee. Asking the assessee to explain the sources of deposits in the bank a/c of the creditor is asking the source of source, which is not permissible under the law.
2.9. Regarding loan from. Shri Ashok Agarwal, the AO did not accept the loan to be genuine because there was a deposit of Rs. 25,000 in his bank a/c, a day before he gave the loan to the assessee. It was argued that when Shri Ashok Agarwal was questioned about the sources of deposit in the bank a/c, he has stated that the deposits in his bank a/c represented the refund of amount from various debtors to whom the advances were made in the earlier years. The AO had observed that Shri Ashok Kumar Agarwal failed to give the names of these debtors from whom the amount was received back. The learned counsel stated that such observation made by the AO was far from truth. He stated that in his statement recorded before the AO. Shri Ashok Agarwal has stated that he can tell the names of these debtors after seeing the bill book. From such statement made, how the AO presumed that the creditor was not disclosing the names of its debtors was not understandable. It was stated that by filing confirmation where the creditor was being assessed to tax and the transaction was by cheque, the creditor also confirmed the loan by his presence before the AO. The onus of the assessee has been discharged, which was cast on it under Section 68 of the Act. It was stated that once the assessee had discharged its onus, it has shifted on the Revenue to prove that it was assessee's own money which has been introduced in the garb of loan. For this purpose, the learned counsel has relied on the decision in CIT v. Daya Chand Jain Vaidya (1975) 98 ITR 280 (All). He stated that as the Revenue has failed to prove that it was assessee's own money which is introduced in the garb of loan, the addition sustained by the CIT(A) is against the provisions of law.
2.10. Regarding loan of Rs. 25,000 from Smt. Rajani Bansal, the learned counsel reiterated the same arguments. He further stated that the AO has made certain wrong observations after perusing her bank a/c, which was obtained by him directly from the bank. The AO had observed that there are no debits in the bank a/c of Smt. Rajani Bansal when the loan was advanced to the assessee. It was stated that the bank a/c, which was obtained by the AO directly, was for the year 1989 and not for the year 1987, which was the relevant period. Naturally, there will be no entry in the bank a/c of Smt. Bansal representing advance of loan to the assessee in that statement.
2.11. The learned counsel also stated that it was a settled law that while examining the genuineness of the loan transaction, the Department cannot question the source of source. Reliance was placed on the decisions in (1976) 103 ITR 344 (Pat) (supra), Tolaram Daga v. CIT (1966) 59 ITR 832 (Assam), CIT v. Daulatram Rawatmull (1972) 87 ITR 349 (SC) and Rohini Builders v. Dy. CIT (2001) 117 Taxman (Magazine) 25 (Ahd). The learned counsel stated that asking the creditor as to from where they have received the money, was inquiring the source of source and the CIT(A) has, therefore, erred in confirming the addition on this ground. Regarding non-appearance of Smt. Rajani Bensal before the AO, the learned counsel while relying on the decision of Tribunal Delhi Bench in the case of Raj Vikas Quarries v. Asstt. CJT (1991) 42 TTJ (Del) 262 argued that it was not expected of a debtor to prove the creditworthiness of the creditor beyond all reasonable doubts. If, it can be proved from other sources, it was sufficient enough to discharge the onus of the assessee. The learned counsel, therefore, pleaded that the cash credit sustained by the CIT(A) was not justified and deserves to be deleted. On the other hand, the learned Departmental Representative stated that the onus was on the assessee to prove the identity and creditworthiness of the creditors as well as the genuineness of the transaction. In case, merely a confirmation is filed, it was not sufficient to discharge the burden cast on the assessee. Reliance was placed on the decision reported in (1983) 140 ITR 151 (All) (supra). He argued that onus was on the assessee to prove creditworthiness of the creditors. In all the cases, there have been deposits in the respective bank a/cs of the creditors just a day or two before advancing loan to the assessee. This amply proves that the creditors were not financially sound to advance the loan to the assessee. So, the creditworthiness of the creditors remained to be proved. It was further argued that even if all the three creditors were being assessed to the income-tax, the income declared by them proves that hardly they can save money out of which the advances can be made to the assessee.
He, therefore, pleaded that addition sustained by the CIT(A) deserves to be upheld.2.12. We have considered the rival submissions. Admittedly the onus is on the assessee to prove the identity and creditworthiness of the creditors as well as genuineness of the transactions. The assessee has filed confirmations from all the creditors confirming the loan transaction. All the three creditors are being assessed to tax. The entire loans have been obtained by the assessee by cheque. Out of the three creditors, the two creditors have appeared in person before the AO whose statements were also recorded. In their statements, they not only confirmed having advanced the loan to the assessee but also explained the sources from where they had advanced the loan to the assessee. One, who did not appear before the AO was the wife of other creditor. By filing these evidences, the assessee had discharged its initial burden and the onus shifted on the Department to show as to why the assessee's case could not be accepted and as to why it must be held that the entries though purporting to be in the names of the three creditors still represented the income of the assessee from a suppressed sources. The Hon'ble Patna High Court in the case of Sarogi Credit Corporation (supra) had observed as under : "Once the identity of the third party is established before the ITO and other such evidence are prima facie placed before him pointing to the fact that the entry is not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the third party obtained the money or how or why he came to make an advance of the money as a loan to the assessee. Once such identity is established and the creditors, as in the present case, have pledged their oath that they have advanced the amounts in question to the assessee, the burden immediately shifts on to the Department to show as to why the assessee's case could not be accepted and as to why it must be held that the entry, though purporting to be in the name of a third party, still represented the income of the assessee from a suppressed source. And, in order to arrive at such a conclusion, even the Department has to be in possession of sufficient and adequate materials." 2.13. The Hon'ble Supreme Court in the case of Orissa Corporation (supra) has also considered similar issue wherein it was held that if the assessee has given names and addresses of the creditors and it was in the knowledge of the Revenue that the said creditors were being assessed to tax, the onus is on the Revenue to pursue the matter with the creditors. Hon'ble Orissa High Court in the case of Baishnab Charan Mohanty (supra) had observed as under : "When a question arises as to whether a cash credit appearing in the books of account of an assessee has to be accepted or to be rejected and addition to be made in accordance with Section 68 of the IT Act, 1961, the assessee is required to establish the identity of his creditors, the capacity of the creditor to advance the money and the genuineness of the transaction. If the assessee establishes the aforesaid three preconditions, then it would be for the Department to disprove the same." 2.14. In view of the ratio laid down in the cases reported/mentioned above, we hold that the assessee had discharged its initial burden of proving the identity and creditworthiness of the creditor as well as genuineness of the transaction. Now, the burden shifts on the Revenue to disprove the contentions of the creditors. For disapproving it, sufficient and adequate material has to be brought in by the AO. This observation was made by Hon'ble Patna High Court in the case of Saroagi Credit Corporation (supra).
2.15. The only apparent reason for rejecting the case of the assessee regarding the genuineness of the loan transaction appears to be certain deposits in the bank a/c of the creditors. Whether certain deposits in the bank a/c of the creditors will make the loan obtained by the assessee as non-genuine was considered by the Hon'ble Patna High Court in the case of Saroagi Credit Corporation (supra). After considering the whole facts, the Hon'ble Court observed as under: "The ITO's rejection, not of the explanation of the assessee, but of the explanation regarding the source of income of the depositors, could not by itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee's books of account." 2.16. The Hon'ble Assam High Court in the case of Tolaram Daga v. CIT (supra) has held, as under : "In the account of the firm deposit made by the party the genuineness and regularity of the account has not been challenged, the accounts are relevant any prima facie proof of entry and correctness thereof under Section 34 of the Evidence Act to require the firm to adduce the source of depositors from where the deposit was made could not require under the law." 2.17. The Hon'ble Supreme Court in the case of Daulat Ram Rawatmull (supra) has considered similar issue. The Hon'ble Supreme Court held that in case a partner of the firm was not able to explain certain deposits in his name introduced in the firm, it cannot lead to a conclusion that the income belongs to the firm. The ratio of Hon'ble Supreme Court squarely applies to the assessee's case. This issue was also considered by Ahmedabad Bench of the Tribunal in the case of Rohini Builders v. Dy CIT (supra). The Bench while deciding the issue observed as under : "In case of six creditors who appeared before the AO and whose statements were recorded by the AO, they had admitted having advanced loans to the assessee by a/c payee cheques and in case the AO was not satisfied with the cash amount deposited by those creditors in their bank a/cs, the proper course would have been to make assessments in the cases of those creditors by treating cash deposits in their bank a/cs as unexplained investments of those creditors under Section 69." 2.18. On the basis of above judicial pronouncements, we hold that as the source of the source cannot be inquired by the Department, the loan transactions having been confirmed by the creditors not only by their confirmations but by their personal presence, the creditors have been assessed to tax, the transactions taking place through cheques, there was no occasion to treat the loans from the above three creditors as non-genuine. We therefore, delete the addition under Section 68 of the Act made/sustained by AO/CIT(A).
3. Ground No. 6 raised by the assessee relates to the confirmation of the addition representing interest on the above loans. As we have already held the loans to be genuine, we direct the AO to allow the deduction of interest on such loans. This ground of appeal is, therefore, allowed.
4. Ground Nos. 7 to 10 relate to the addition on account of difference in the value of machinery found during the course of search as well as addition on account of low withdrawal for household expenses. All these issues were involved in the petition filed by the assessee before the Settlement Commission. We, therefore, direct the AO to consider the findings of the Settlement Commission in its order dt. 28th Feb., 1997, and examine the additions made by him accordingly. These grounds of appeal are decided with above directions.
5. In the result, the appeal directed by the assessee is partly allowed.