Swastik Pipes LimitedCase Laws on Cash Credit

1. Addl. CIT Bihar vs Hanuman Agarwal (1985) 151 ITR 151 (Patna High Court)

The assessee having furnished the correct name and address of the creditor, having confirmatory letter from the creditor, did all that it could do and these three materials showed prima facie not only the identity of the creditor but also the genuineness of the transaction and also the capacity of the creditor and as such the assessee completely discharged its initial onus under Section 68 of the I.T. Act 1961.

2. Jalan Timber vs CIT (1997) 223 ITR 11 (Gauhati H.C.)

In the instant case, the amounts were shown in the income tax return of the assessee. Besides, the creditor had also shown in the return about giving of the loan to the assessee. Strangely, the Income Tax Officer while making the assessment in respect of the three creditors above named accepted the returns. This itself will go to show that the amount received by the assessee was at least prima facie genuine. As the Income Tax Officer had accepted the returns of the three creditors it should go to mean that the amounts given by those creditors were also genuine.

3. Neeru Devi Kothari vs ITO (2001) 116 Taxman 224 (Jodhpur)

Where the creditor was an income tax assessee and had filed confirmation letter, credit in his account could not be added to the assessee’s income on the ground that assessee has failed to prove the creditworthiness of the creditor.

4. Sarogi Credit Corporation vs CIT (1976) 103 ITR 344 (Patna HC)

Once the identity of the third party is established before the Income Tax Officer and such other 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 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

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assessee, the burden immediately shifts 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 entry, though purporting to be in the name of the 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.

The Income Tax Officer’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.

5. Cash credits – Burden to prove genuineness and credit worthiness of credit confined to transaction and not of sub-creditor – Sec. 68 r/w Sec. 106 of Indian Evidence Act

It is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor it is the burden of the assessee to prove that sub-creditor had creditworthiness to advance cash credit to creditor from whom cash credit has been eventually received by the assessee. It is not the business of the assessee to find out the sources from where the creditor has accumulated amount, which he has advanced in the form of loan to assessee. Section 68 cannot be read to show that in case of failure of sub-creditors to prove their creditworthiness, amount advanced as loan to assessee by creditor shall have to be treated as a corollary, as income from undisclosed sources of assessee himself. The burden of the assessee gets discharged as per the provisions of Section 106of the Indian Evidence Act once the assessee proves the source of the loan received and creditworthiness of the creditor.

6. Nemi Chand Kothari vs CIT [2004] 264 ITR 254(Gau)

Keeping in view the above position of law, when we turn to the factual matrix of the present case, we find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact, the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors

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aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans.

Thereafter the burden had shifted to the Assessing Officer to prove the contrary. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure, as a corollary, could not have been and ought not to have been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub-creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from undisclosed sources merely on the failure of the sub-creditors to prove their creditworthiness.

7. S. Hastimal vs CIT 49 ITR 272

An explanation prima facie reasonable cannot be rejected on arbitrary grounds or on mere suspicion or on imaginary or irrelevant grounds.

The ITO cannot merely reject a reasonably good explanation and convert good proof into no proof.

8. CIT vs K.S. Kannan Kunhi 87 ITR 3958.

Credit in the name of close relative, the assessee cannot be presumed to have knowledge of the source from which depositor has obtained money.

9. CIT vs Pithampur Conzima (P) Ltd. (2000) 244 ITR 442 (MP High Court

Where in appeal before Tribunal, the assessee showed that the credit given to the assessee company were duly declared by the creditors in their respective returns, whereupon the Tribunal concluded that the investment in the assessee firm was duly explained and no addition was called for in the hands of the assessee and deleted the addition.

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10. Tolaram Daga's case [1966] 59 ITR 632 (Assam):

At the outset, we have to point out that there is no substance in the contention that the sources from which the money was realised by the third party are within the special knowledge of the petitioner as the depositor happens to be his wife. Whether he has knowledge at all of the source of the money deposited by the third-party is a matter which has to be decided on evidence.....Under law, in the absence of specific proof of that knowledge, it cannot be assumed that the assessee has the knowledge in question within the meaning of section 106 of the Evidence Act.....To require the firm or the individual partners to go further and adduce proof of the sources from which the deposits in question appearing in the accounts in the name of third parties were derived by them, would be placing a burden on the firm as well as the partners, which is not required or justified by law. For ought we know, in most cases it may well-high be impossible for the firm or the partners to know or determine the sources from which the money deposited with them had been realised by the depositors.....The enquiry as to the source from which this amount was acquired or obtained by Smt. Munni Devi Daga may, perhaps, be relevant in an investigation into the assessment to be made regarding her income and when determining the correctness of the return submitted by her. But the mere fact that the petitioner was unable to satisfy the authorities as to the source from which Smt. Munni Devi Daga derived the monies which she deposited with the firm cannot, in our opinion, be used against the petitioner. The Tribunal, therefore, was not justified in either demanding this proof or in drawing an adverse inference against the assessee on his failure to produce the same.

11. Commissioner of Income Tax Versus Mehrotra Brothers 270 ITR 157 ( MP)

that in this case the respondent had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue apart from issuing notices under section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were credit worthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence.'

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The decisions of the Patna High Court in the case of  CIT v. Ram Prasad Ram Bhagat [1987] 163 ITR 202; 

Addl. CIT v. Bahri Brothers (P.) Ltd. [1985] 154 ITR 244, the Allahabad High Court in the case of Sundar Lal Jain v. CIT [1979] 117 ITR 316; 

Shankar Industries v. CIT [1978] 114 ITR 689 (Cal) and the Madhya Pradesh High Court in the case of 

CIT v. Shiv Shakti Timbers [1998] 229 ITR 505; 

CIT v. Shanti Swarup [2002] 255 ITR 655 (P & H); 

CIT v. Ram Narain Goel [1997] 224 ITR 180 (P&H); 

Instrumed (India) International v. ITO [1999] 63 TTJ 191 (ITAT) (Delhi) 

assist the claim of the assessee. The assessee has explained satisfactorily the cash credits in the books of account of the firm and discharged the burden. The Department has not brought out material or evidence to rebut the same. As such the cash credits are not the income of the firm.

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