Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income Tax vs Sanjay Waman & Co. on 28 November, 2001
ORDER
K.C. Singhal, J.M. March 2001
1. The only issue arising out of this appeal relates to the addition of Rs. 6 lacs on account of unexplained cash credits under Section 68 and addition of Rs. 49,241 on account of interest on the said cash credits.
2. The brief facts giving rise to this appeal are these : Following cash credits appeared in the books of assessee :
Rs.(1)
Master Rahul Dilip Sable 1,50,000 (2) Master Devendra Arun Sable 1,00,000 (3) Ms. Amruta Arun Sable 50,000 (4) Ms. Minoti Sudhir Sable 75,000 (5) Ms. Gayatri Sudhir Sable 75,000 (6) Master Nikhil Sanjay Sable 1,50,000 Total 6,00,000 The confirmative letters were fried in respect of the above cash credits. The AO asked the assessee to explain the genuineness of the cash credits in response to which the assessee has submitted as under :
(1) The amounts have been received from the creditors who are identifiable.
(2) The transactions are through banks and are genuine.
(3) The source of amount of gift received by the creditors from persons identifiable.
(4) The donors have disclosed these gifts to IT Department and have paid gift-tax as per law.
(5) Gift-tax returns of these donors have been accepted by the Department.
(6) The donors have furnished affidavit confirming the gifts made by them.
2.1. Thereafter, the AO asked the assessee to produce the creditors. The guardians of the creditors attended before the AO and their statements unders. 131 were recorded. It was stated by them that the amounts were received by gifts from agriculturists of Gujarat through drafts and these gifts were accepted by them on behalf of their minor children and the same were given as loans to the assessee-firm. It was also stated that these gifts were given out of love and affection and the donors were friends of the donees' fathers. From the statements, it was noticed by the AO that all the 16 donors were resident of villages near Bhadran in Kaira district of Gujarat. The guardians of the donees are real brothers who knew the donors through their fathers. It was also noted by him that none of the donors had been the donees' children and the minors and had never visited the places of the donors in Gujarat. The guardians of the children were also not sure whether the donors had ever visited their houses. Further, it was noticed that the donors were not related to them directly or indirectly. They were also not aware of the financial status of the donors. They were also not sure whether they had been inviting these donors for any social function in the family. Hence, he was of the view that donors were neither friends nor relatives of the guardians of the donors. In this connection, it was also noted by him that none of the guardian of the children was aware of the children of donors. On the basis of these factual aspects, the AO was of the view that the theory that the gifts was made out of love and affection was not proved by the facts.
2.2. Further inquiries were made by the AO to find and ascertain as to whether the close relatives of these children including maternal grandparents and uncles had ever made any gift for more than Rs. 5,000. It was found that no such gifts were made to these children. The guardians of the children categorically denied to have received any such gifts. It was also noticed that the donees are the children of four brothers viz. (1) Shri Sudhir S. Sable, (2) Shri Arun Sable, (3) Shri Sanjay S. Sable, and (4) Shri Dilip S. Sable. It was found that none of the family members of the four brothers had ever given any gift of Rs. 5,000 or more to the children of either of brothers out of love and affection. On the other hands, these donee children had received huge gifts of Rs. 6 lacs from the farmers of remote villages in Gujarat in the same year almost simultaneously particularly when guardians were not sure as to whether the donors had ever seen their children.
2.3. In other to get further facts, the AO sent a questionnaire to all the 16 donors. Replies were received from 15 persons. The information received indicated that all the donors were farmers of village Siswa and adjoining area in Gujarat. They were not assessed to income-tax being farmers. The gifts were sent by demand drafts either from Bank of Baroda, Bhadran or, State Bank of India, Siswa Branch, Gujarat. They had filed gift-tax returns at the advise of Shri Narendrabhai Patel. The D.D. had been purchased simultaneously. These donors had not given any such gifts to their own children or any grandchildren except two donors, Shri Dayabhai Patel and Shri Madanbhai Patel. Members of the Sable family of Pune had not given any gifts to their children.
2.4. The assessee was also requested to produce the donors for cross-examination in his office. Though sufficient opportunity was allowed, the donors were not produced by the assessee- However, at the instance of assessee, the camp was held by the AO in the income-tax office at Anand (Gujarat) between 18th July to 20th July, 1989. Notices of summons were issued to all these donors requesting them to attend the income-tax office at Anand during that period. During the period of the said camp, the statements of ten persons were recorded under Section 131 of the IT Act. Certain similarities were noticed by the AO : All the persons were farmers. Main source of the income was from the sale of tobacco. They sold their produce of tobacco to one firm, M/s Fulabhai Govindbhai of Bhadran who were the commission agent for purchase of Beedi Patti for the assessee. All these persons were having accounts in the mercantile cooperative, banks, Bhadran. All of them had issued cheques of gifts on another bank a/c without any convincing reasons. All of them had filed the gift-tax returns before the AO. Challans for payment of gift-tax had been prepared in all the cases by the same person. All the letters and affidavits in respect of gifts had been typed on the same typewriter. None of them were income-tax payer. None of them have ever made any gift of such amount even to their own children or grandchildren. None of them could prove satisfactorily with evidence that they had sufficient cash in hand on the particular date to make such gifts.
2.5. One of the donors Shri Dayabhai Patel stated that his uncle Shri Motilalbhai Patel knew Shri Shankar Seth, grandfather of the donees children, for the last 20 years and his uncle had told him that Shri Shankar Seth had helped them. Therefore, the gift of Rs. 50,000 was given by him to the son of Shri Dilip Sable to help him back. However, he could not tell the name of donee. When the question was asked as to what type of help was given, it was stated that Shri Shankar Seth had helped in opening a shop of tobacco.
2.6. One of the donors Shri Muljeebhai Patel had stated that he visited the house of Shri Sable family in Pune 2 to 3 years ago in the course of his pilgrimage and he was looked after by Sable family during his sickness. Therefore, he decided to give gifts to Master Nikhil San]ay Sable. A question was asked as to why the gift was given to their children when he was looked after by the partners. It was replied that the parents of such children would not have accepted the gift and, therefore, he gave the money to their sons.
2.7. In view of the above factual aspects, the AO was of the view that donors had no capacity to make such huge gifts to the outsiders who were not even known to them. The gifts were arranged through Shri Narendrabhai Patel, accountant of M/s Fulabhai Govindbhai of Bhadran who is the commission agent of the assessee. Accordingly, the assessee was asked to explain as to why the addition under Section 68 not be made. The assessee had submitted that no addition could be made since the confirmative letters had been filed by the creditors. The gifts were admitted by the donors and the same had been disclosed in the return under the GT Act. The assessee also relied on the various case law reported as Orient Tdg. Co. Ltd. v. CIT (1963) 49 ITR 723 (Bom), CIT v. Daulat Ram Rawat Mull (1973) 87 1TR 349 (SC), S. Hastimal v. CJT (1963) 49 ITR 273 (Mad). However, the AO was not satisfied with the explanation of the assessee and finally it was concluded by the AO that all the gifts were not genuine and the same were arranged through Shri Narendrabhai Patel accountant of M/s Fulabhai Govindbhai a commission agent of assessee for purchase of tobacco. There was a systematic tax planning and evidence had been created to give colour to the genuineness of the , transactions. He was also of the view that the possibility of the amount paid as purchase price coming up to the assessee in the form of gifts, could not be ruled out. Accordingly, the addition of Rs. 6 lacs was made under Section 68. Consequently, he also disallowed the interest of Rs, 49,241 on these cash credits.
3. The matter was carried before the CIT(A), who has deleted the addition made by the AO after taking into consideration: (1) the identity of the cash creditors was not in dispute, (2) the funds had been received by minors by way of gifts from various persons who are known to the family, (3) the gifts were received by D.D. and all the gifts have been assessed to gift-tax, (4) the AO had wrongly ignored the evidence of gift-tax assessment in the cases of donors, (5) the donors had appeared before the AO in response to notice under Section 131 and had admitted the fact of giving gifts to the children donees, (6) the explanation of the donors had been rejected merely on the suspicion. Accordingly, he deleted the addition made by the AO. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
4. The learned Departmental Representative on behalf of the Revenue has vehemently assailed the order of the CIT(A). He took us through the entire assessment order giving detailed reasons for making addition under Section 68 which we have narrated in our own order in detail and, therefore, need not be repeated. According to him, all the transactions are contrary to the normal human behaviour and conduct. Further, a link has been established to prove that all gifts were arranged through Shri Narendrabhai Patel, accountant of M/s Fulabhai Govindbhai of Bhadran through whom the assessee purchases the Beedi Patties. It was contended by him that not only the identity and capacity of the creditors are to be established by the assessee but the genuineness of the transactions must also be established by the assessee. It was further submitted by him that considering the test of human probability as approved by the Hon'ble Supreme Court in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), the genuineness of the transactions was rightly rejected by the AO regarding the gift-tax return filed by the donors. It was also submitted by him that no scrutiny was made by the GTO and the same were accepted as a matter of policy of the Department without making inquiry. According to him, this fact cannot lead to the inference that gifts were genuine. Hence, he justified the addition made by the AO. The learned Departmental Representative has also relied on the decision of Ahmedabad Bench of the Tribunal in the case of ITO v. Dr. Jagdish Kansagara (1998) 60 TTJ (Ahd) 288 : (1998) 66 ITD 381 (Ahd) wherein on similar facts, the Tribunal had rejected the genuineness of the gifts after applying test of human probabilties and the decision of Supreme Court in the case of Sumati Dayal (supra) and the decision of Punjab & Haryana High Court in the case of Lal Chand Kalra v. CIT and the decision of Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd. (1994) 208 ITR 465 (Cal).
5. On the other hand, the learned counsel for the assessee has strongly supported the order of the CIT(A) by raising various submissions. Firstly, it has been submitted by him that all the tests laid down by the Courts have been satisfied. There is no dispute about the identity of the donors. The capacity of the donors cannot be doubted on the basis of material on the record. He has filed the copies of the bank a/c to prove that amounts were withdrawn from their own account and the DDs were purchased. It was also submitted by him that the donor's bank had no facility for issuing the DD for Pune and, therefore, the DDs had to be purchased through another bank. Accordingly, the AO was not justified in observing that the DDs were purchased from different bank without convincing reason. All the transactions are supported by bank entries. According to him, not only the source, but the source of the source has also been established. The capacity of cash creditors as well as donors are well established by evidence and, therefore, the AO was not justified in holding to the contrary. Secondly, it was submitted by him that there was no consideration for transferring the money by donors to the donees and, therefore, in law it amounted to a valid gift and, therefore, the genuineness of the same could not be rejected. It was also submitted by him that the donors wanted to make gifts to Shri Shankar Sable on 75th birthday, but the same could not be made, since, he had expired and, accordingly the gifts were made to the grandchildren. It was also submitted that there was no evidence that any money was paid by the assessee to the donors by any other means. Further, minors' assessments were also made under the IT Act which impliedly means that Department has accepted the genuineness of the gifts. Accordingly, it was submitted by him that genuineness of the gifts cannot be rejected on mere suspicion. He also relied on various Tribunal decisions Atma Ram J. Manghir Malani (HUF) v. ITO (1998) 62 TTJ (Mumbai) 357, Dy. CIT v. Ann Kumar (1997) 58 TTJ (Del) 340, Indian Ceramic Corpn. v. ITO (1997) 93 Taxman 83 (Del) (Mag) and CIT v. Shamshudin Manzoor Hague (1988) 172 ITR 606 (All). 5.1. Alternatively, it was contended by him that even assuming that gifts were not genuine, the additions could not be made in the hands of assessee-firm. If the fact of non-genuineness of gifts is taken to logical conclusion, then the only inference which can be drawn is that amounts represented by gifts represents the income of the fathers of minor children. In this connection, he drew our attention to the fact that assessee-firm comprises 7 partners out of which four partners namely, Shri Arun S. Sable, Smt. Mohini S. Sable, Smt. Mangla D. Sable and Smt. Seerna S. Sable belong to family of Shri Shankar Sable while remaining three partners i.e. S/Shri Govind R. Sable. Rajiv R. Sable and Nitin R. Sable belong to another family of Shri Govind Sable. The money has been brought only by the members of Shri Shankar Sable's family. According to him, assessing the cash credits in the hands of firm would amount to taxing the family of Shri Govind Sable without any reason. As far as firm is concerned, the onus has been fully discharged by proving the identity, creditworthiness or the creditor and genuineness of the transactions. The decision of Ahmedabad Bench of Tribunal reported as (1998) 60 TTJ (And) 288 : (1998) 66 ITD 381 (And) (supra) is distinguishable on facts since in that case the Tribunal was concerned with the case of donee himself while in the present case the assessee-firm and donees are totally different.
6. Rival submissions of the parties have been considered carefully in the light of case law referred to and the materials placed before us. In order to appreciate the controversy before us, it would be useful to refer to certain settled legal positions. Firstly, in the case of cash credits in the books of assessee, the initial burden is on the assessee to prove the identity and creditworthiness of creditor as well as genuineness of the transaction. If the creditor appears before the AO and proves that money was paid from his books of accounts, then it can be said that creditworthiness of cash credit is proved and no addition can be made even if the creditor fails to prove the source of source. Reference can be made to the decision of Bombay High Court in the case of Orient Trading Company (supra) which hold the field since long. This principle has been approved by the Supreme Court in the case of Daulatram Rawatmal (supra). Once this initial burden is discharged then the onus shifts to the Department to demolish the case of assessee by bringing material on the record. Secondly, the genuineness of transaction has to be seen with reference to human probabilities and surrounding circumstances. If on the basis of such test, the transaction appears to be non-genuine, then payment by cheque would not make the transaction as genuine one. Reference may be made to the decision of Supreme Court in the case of Sumati Dayal (supra), decision of Calcutta High Court in the case of Precision Finance Co. (supra) and the decision of Punjab & Haryana High Court in the case of Lal Chand Kalra (supra). Thirdly, merely because the explanation of assessee is found to be unsatisfactory, it cannot be said that addition under Section 68 is automatic. The legislature has used the word 'may' in Sections 68 and 69C while it has used the word 'shall' in Section 69D. That means that discretion has been vested with the AO to charge the same as taxable income in the hands of assessee in appropriate case. But such discretion should be exercised in judicial manner. If the circumstances do not warrant the addition in the hands of assessee then the AO may assess the same in the right hands. Reference can be made to the recent Judgment of the Supreme Court in the case of CIT v. P.K. Noorjahan (1999) 237 ITR 570 (SC).
6.1. In the present case, the controversy centres round the genuineness of gifts inasmuch as the AO made the addition under Section 68 on the ground of non-genuineness of gifts while the CIT(A) has allowed the appeal by holding the gifts to be genuine. So the question is to be considered about the genuineness of the gifts. We have given our deep thought to resolve this controversy. According to the test of human probabilities, in our opinion, no person would normally part with his money by way of gift unless there is a personal bond of love and affection between the donor and donee. Such gifts are normally made by relatives and friends irrespective of any occasions. However, sometimes gifts may be made to the strangers out of social obligations on certain occasions such as birthday, wedding ceremonies and other social functions. The quantum of such gifts would depend upon the social relations and the practice prevalent in the society. Sometimes the money is also parted with for charitable purposes. In all the cases there is some bond between the donor and donee either by way of personal love and affection or social obligation or on account of compassionate ground. Therefore, in the absence of such bond, in our opinion, it would be difficult to accept the genuineness of so-called gifts in view of the test of human probabilities as approved by the Supreme Court in the case of Sumati Dayal (supra).
7. Before applying the above test to the present case, it would be useful to refer to the undisputed facts which are set out as under :
(1) All the donees are the children of partners belonging to Shri Shankar Sable family in Pune while all the donors are farmers of a distant village Siswa, Tal. Borsad Dist. Kaira, Gujarat.
(2) There is no relation between donors and donees. Both belong to a different communities. There is also no friendship between them. The assessee has failed to prove the existence of any love and affection between the donors and donees. Even the donors have never met or seen the donees.
(3) The donors had never made such gifts to their own children or grandchildren or to any other person.
(4) The donees have also not received any such gifts from any other person including their own relatives.
(5) There was also no occasion for making such gifts.
(6) Even the guardians of the donees had never given any such gifts to the children of their own brothers.
(7) All the donors had given gifts at the advice of Shri Narendrabhai Patel, an accountant of M/s Fulabhai Govindbhai of Bhadran who is the commission agent of the assessee for purchase of Beedi Patties.
All donors sold their agricultural produce to this firm.
(8) All the gifts were given simultaneously on two dates i.e., 25th Nov., 1988, and 2nd Dec., 1988, by purchasing DDs either from Bank of India or the State Bank of India, Bhandran.
(9) All the donors have filed the gift-tax return at the advice of said Shri Narendrabhai Patel. All challans of gift-tax were prepared by one person. All the affidavits were typed on the same typewriter.
(10) All the donors had accepted the fact of giving gifts to the donees. Such gifts were given out of the sale proceeds of agricultural produce as is apparent from the entries in the pass-books.
8. Considering the above facts, we are of the view that the link has been established to prove that gifts were arranged through Shri Narendrabhai Patel, accountant of the firm of M/s Fulabhai Govindbhai of Bhandran who is the commission agent of the assessee for purchase of Beedi Patties. This is apparent from the facts that all the donors were strangers to each other. The donors had admitted that gifts were given at the advice of Shri Narendrabhai Patel who was also resident of the village Siswa in Gujarat. He was an accountant of M/s Fulabhai Govindbhai, a commission agent of the assessee. Further, there is no evidence to prove the existence of any love and affection between the donors and donees. There was also no occasion for making such gifts. Further, it is noted that huge gifts were made by various persons of the same village on the same dates to the strangers which in the normal course is not possible to happen. It is also difficult to believe that the farmers of lower status would give the huge gifts to the children of the family of a very high status. All the action of the donors and donees, in our opinion, are contrary to the human behaviour. The only inference that can be drawn from the facts and surrounding circumstances of the case is that the entire affair was an arranged one through the help of Shri Narendrabhai Patel. Therefore, we are of the view that evidence for making such gifts were created to make-believe the existence of the genuineness of the gifts. Our conclusion is also fortified by the decision of the Ahmedabad Bench of the Tribunal in the case of Dr. Jagadish Kansagara (supra) wherein it has been held on similar facts that such gifts were not genuine and it has been further held that amounts of gifts could be treated as income of the donees. Similarly, Punjab & Haryana High Courts in the case of Lal Chand Kalara (supra) had held that -valid gift could not be made to the strangers unless there was an occasion to make such gifts. Therefore, following the above decisions and applying the test of human probabilities, it is held that the gifts in the present case were not genuine.
9. Having given the above finding, the next question arises whether the addition can be justified under Section 68. As already mentioned, the initial burden is on the assessee to prove the identity and creditworthmess/source of the creditor as well as genuineness of the transaction. What the assessee is required to prove is the genuineness of transaction entered into by the assessee i.e., the transactions of loan between assessee and the creditor and not the transactions between the creditor and other parties. It is because of this principle that Courts have held that assessee is not required to prove the source of source. In our opinion, both the lower authorities were not justified in laying too much emphasis on the genuineness of the gifts. No doubt the taxing authorities as well as Courts are bound to discourage the dubious methods for laundering of black money and bring the transactions within the net of taxation. But such exercise must be made to tax the right person and the Revenue cannot be permitted to defend the wrong action of AO. This aspect was considered by Ahmedabad Bench of the Tribunal in the case of Dr. Jagdish Kansagara (supra) to which one of us was party. According to the ratio of that decision, the amount involved in money-laundering was treated as income of the donee and consequently held to taxable in the hands of donee. But in the present case, assessee is not the donee. It has also not been established that undisclosed money of assessee was the subject-matter of money-laundering. The AO has simply observed that there was possibility of coming back of the purchase price of Beedi Patties but such observations are without any basis. No addition could be made merely on suspicion.
9.1. It is also to be noted that assessee is partnership firm comprising of seven partners out of which four partners belong to Shri Shankar Sable's family while remaining partners belong to different family i.e., family of Shri Govind Sable. If the test of human probabilities is applied then undisclosed money of firm would not have been allowed to launder in the names of the children of one family only. This important aspect goes to indicate only one conclusion that money-laundering was done only by one group i.e. Shri Shankar Sable's family. In these circumstances the AO should have assessed the parents of the minor children and not the assessee. We are of the considered view that it is the right person which should be taxed.
9.2. In the present case, in our opinion, all the conditions are satisfied by the assessee. There is no dispute about the identity. The AO had doubted the capacity of the donors. The assessee is not bound to prove the source of the source. However, it has been established by producing the pass-book of the donors that transactions of gift were effected after withdrawing the amounts from their own accounts and the money in their accounts was deposited by cheques which represented the sale proceeds of their agricultural produce. Since all the transactions are through bank, the genuineness of the transactions between the assessee and the minors cannot be doubted particularly when no inference can be drawn that money of firm was utilised for money-laundering. At this stage, it would be useful to refer to the decision of Hon'ble Supreme Court in the case of Smt. P.K. Hoorjahan (supra), wherein the Court has clearly held that addition under Section 69 is not automatic because of the language employed. The discretion is with AO which should be excercised judicially. This principle can be applied to Section 68 also because the legislature has used the word 'may' both in Sections 68 and 69 while the word 'shall' has been used in Section 69D. Facts of the case warrant that addition should have been made in the hands of parents of the minor children for the reasons given by us in the preceding sub-para. Similar conclusion was drawn by this Bench in the case of Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. v. Dy. CTT (ITA No. (SS) 2/Pn/97. The Tribunal vide order dt. 18th Feb., 2000 Isince reported at (2002) 74 TTJ (Pune) 793--Ed] held as under :
33. "Despite all these findings as given in the preceding paragraphs, we are of the view that still on the facts of the case additions cannot be made in the hands of the assessee. The provisions of Section 68 provide that where the explanation offered by the assessee is not satisfactory, the sum so credited may be charged to income-tax as income of the assessee of that previous year. The word 'may' gives discretion to the AO to assess in the hands of the assessee Which should be exercised judicially considering the facts and circumstances of each case. If the facts of the case indicate that such cash credits could not be considered as income of the assessee, then he shall not make addition in this regard. Reference can be made to the recent judgment of the Hon'ble Supreme Court in the case of CIT v. Smt P.K. Noorjahan (1999) 237 ITR 570 (SC).
34. In the present case, it has been established on the record that deposits with the assessee were in fictitious names. This is the finding of the AO as is apparent from various observations in the assessment order. When the AO himself has accepted that the assessee is accepting money from various persons in benami/bogus names, it itself implies that such deposits belong to somebody other than the assessee. Further, the learned Departmental Representative's submission that the assessee was engaged in 'money-laundering' implies that the assessee was engaged in the business of laundering of somebody else's money and hence the addition is not possible in the hands of the assessee."
10. In view of the above discussions, it is held that no addition can be made in the hands of firm. The order of the CIT(A) is therefore, upheld, though on different grounds. The AO is at liberty to take action against the right person in accordance with law.
11. In the result, appeal of the Revenue is dismissed.
B.L. Chhibber, A.M. 29th March, 2001
1. Regretting my inability to persuade myself to the view taken in the order of my learned brother, I proceed to write a dissenting order.
2. The facts of the case have been elaborately given by my learned brother in his order and I need not repeat the same. After discussing the facts in detail and the arguments of both the parties, my learned brother arrived at a judicially correct conclusion in para 8 of his order that, "Therefore, following the above decisions and applying the test of human probabilities, it is held that the gifts in the present case were not genuine." So far so good and I have no dispute to this extent. But having held that the gifts were not genuine, I do not agree with him that the addition of Rs. 6,00,000 is not justified under Section 68 of the Act. For this proposition, my learned brother has relied upon the decision of this Bench in the case of Shri Mahavir Nagari Sahakari Pat Sanstha Ltd. Kolhapur [ITA (SS) Wo. 2/Pn/97] [reported at (2002) 74 TTJ (Pn) 793--Ed] where this Bench has followed the judgment of the Hon'ble Supreme Court in the case of CIT v. Smt. P.K. Noorjahan (1999) 237 ITR 570 (SC).
3. Section 68 of the Act reads as under :
"68. Cash credits : Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year."
It is an admitted fact that credits aggregating to Rs. 6,00,000 were found credited in the books of the assessee-firm and the onus was on the assessee-firm to prove the genuineness of the deposits.
4. In A Govindrajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC), the Hon'ble Supreme Court has held that it is for the assessee to prove the sources and the nature of the receipts appearing in its books of account. The Department has to prove neither the source nor the nature of the receipts, as has been held by the Madhya Pradesh High Court in Seth Kalekhan Mohamed Hanif v. CIT (1958) 34 ITR 669 (MP) which decision has been affirmed by the Hon'ble Supreme Court in Kalekhan Mohd. Hanif v. CIT (1963) 50 ITR 1 (SC). The same principle has been reiterated by the Hon'ble Supreme Court in CIT v. Dew Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC), by Calcutta High Court in Shankar Industries Ltd. v. CIT (1978) 114 ITR 689 (Cal). C. Kant & Co. v. CIT (1980) 126 ITR 63 (Cal), Oriental Wire Industries (P) Ltd. v. CIT (1981) 131 ITR 688 (Cal). In view of the above, the entire burden is upon the assessee and the assessee has to prove the following :
(1) Identity of the creditor;
(2) Capacity of.the creditor;
(3) Genuineness of the transaction.
In the present case, the creditors are minors of Sable family and on their behalf, their respective guardians appeared and confirmed that the minors had got gifts from the said agriculturists. Thus, the first test of identity of the creditors is fulfilled. As regards the second test, i.e. capacity of the creditor, it is noted that the creditors are the said agriculturists, they are semi-literate, not related to Sable family even distantly, had some dealings with the firm and surely their resources were not enough to gift huge amounts aggregating to Rs. 6,00,000. The capacity of the creditors is, therefore, beyond any shadow of doubt not there. The third test, i.e., genuineness of the transaction is the most important test and here, the assessee-firm has failed miserably. It has been conclusively held by my learned brother that the gifts by the said agriculturists are not genuine and once it is held that the gifts are not genuine, it cannot be said that the transactions are genuine. In fact, the giving of gifts by the said agriculturists was a stage-managed show, because no person would normally part with his hard-earned money by way of gift, unless there is a personal bond of love and affection between the donor and the donee. In the present case, it is an admitted fact that the donors had no relation with the donees; even they had not seen the donees, but strangely enough they made the gifts of huge amounts. Thus, the two tests which prove a cash credit as genuine and hence acceptable fail in the case of the assessee-firm.
5, The facts in the case of Pat Sanstha (supra) are distinguishable from the facts of the assessee-firm before us. In the case of Pat Sanstha (supra), this Bench was dealing with a banKing company and there also this Bench held that provisions of Section 68 are applicable even to a banking company (para 27 of the order). Thereafter, in para 29, this Bench has observed as under :
"Having held that provisions of Section 68 are applicable to banking concerns, the next question would be whether the initial onus has been discharged by the assessee. At this stage, it would be useful to mention that the nature of onus would depend upon the facts of each case. In some cases, it may be very heavy, while in some eases, it may be very light. For example, where the cash credit is in the name of relatives or friends of the assessee, the burden would be heavy one and the assessee would have to prove the identity, capacity and genuineness of the cash credits. However, where the cash credit is in the name of third parties, the onus on the assessee may not be heavy and it would be sufficient if the identity of the cash creditor is established and the said creditor confirms the same. The assessee cannot be asked to prove source of the source. Reference may be made in this connection to the decision of the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT (1963) 49 ITR 723 (Bom) and the decision of the Patna High Court in the case of Sarogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat). In the case of a company where the cash credit is in the form of share application money, it has been held by the Full Bench of the Delhi High Court in the case of CIT v. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB) that the onus on the assessee would be discharged, if the identity of the assessee has been proved. The case of a banking concern is rather on the better footing, since the bankers are not supposed to ask the depositors about the source of money. Therefore, for the similar reasons, in the case of banking concerns, it can be said that the onus on the assessee would be discharged if it is established that such assessee has acted with due diligence and caution while accepting the deposits."
Further, in the case of Pat Sanstha, there was a search and seizure operation, during the course of which books of account and documents were found and the case was decided "on the facts of the case" (para. 33). In the case before us, the facts are that the partners of the assessee-firm got bogus gifts for their minor children from semi-literate and not well to do agriculturists. As held by the Tribunal, Ahmedabad Bench 'A' in the case of ITO v. Dr. Jagdish J. Kansagara (1998) 60 TTJ (Ahd) 288 : (1998) 66 ITD 381 (Ahd) to which one of us (A.M.) was a party, when a rich man approaches a poor man for gift, it is a "queer" behaviour which is contrary to the normal human behaviour and cannot be ignored of. It was further held that it was well-settled law that the taxing authorities can take note of the surrounding circumstances--CIT v. Durga Prasad More (1971) 82 ITD 540 (SC). In Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), the apex Court has held that surrounding circumstances and applying the test of human probabilities is a must. In Lall Chand Kalra v. CIT, before the Hon'ble Punjab & Haryana High Court, the donor was a stranger to the assessee and the Hon'ble High" Court held that there was no reason why he should make a gift of Rs. 10,000 to the assessee. It was further held in that case that gift from a relative who had other more important, liability like marrying four sisters of his own would not be a genuine gift and especially when there was no occasion for such a gift.
6. In CIT v. Smt. P.K. Noorjahan (supra), the assessee before the Hon'ble Supreme Court was a Muslim lady who was aged about 20 years during the previous year relevant to the asst. yr. 1968-69. On 15th Nov., 1967, she had purchased 16 cents of land in Ernakulam and the amount spent by her, inclusive of stamp and registration charges, for this purchase was Rs. 34,628. On 27th Nov., 1968, she purchased another 12 cents of land at Ernakulam and the total investment for this purchase was Rs. 25,902. The explanation of the assessee regarding the source of the purchase money for these investments was that the same were financed from out of the savings from the income of the properties which were left by her mother's first husband. The said explanation offered by the assessee was rejected except to the extent of Rs. 2,000 by the ITO who made an addition of Rs. 32,628 as income from other sources in the asst. yr. 1968-69 and an addition of Rs. 25,902 in the asst. yr. 1969-70. The said orders were affirmed in appeal by the AAC. On appeal, the Tribunal held that even though the explanation about the nature and sources of the purchase money was not satisfactory, but in the facts and circumstances of the case it was not possible for the assessee to earn the amount invested in the properties and that by no stretch of imagination could the assessee be credited with having earned this income in the course of the assessment year or was even in a position to earn it for a decade or more. The Tribunal took the view that although the explanation of the assessee was liable to be rejected, Section 69 of the Act conferred only a discretion on the ITO to deal with the investment as income of the assessee and that it did not make it mandatory on his part to deal with the investment as income of the assessee as soon as the latter's explanation happened to be rejected. The judgment of the Tribunal was confirmed by the Hon'ble Supreme Court holding that Section 69 confers a discretion on the ITO in the matter of treating the source of investment which has not been satisfactorily explained by the assessee as the income of the assessee. No doubt, we have followed the above judgment of the Hon'ble Supreme Court in the case of Shri Mahavii Nagari Sahakari Pat Sanstha Ltd. (supra), but that was based on the facts and circumstances of that case. I do agree that the AO has discretion under Section 68 to accept the explanation of the assessee. But, it is well-settled that such discretion has to be exercised "judiciously". In Premchand Sitanath Roy v. Addl. CIT and Ors. (1977) 109 JTR 751 (Cal), the Hon'ble Calcutta High Court has observed, "Discretion means sound discretion guided by law. It must be governed by law, not by honour, it must not be arbitrary, vague and fanciful." Again, the same High Court in the case of Hindustan Sanitary Ware & Ltd. v. CIT (1978) 114 ITR 85 (Cal) has held, "Judicial discretion must be governed by rule, not honour; it must be legal as well as regular. The grounds of such exercise must, therefore, appear from the order of the reasoning of the authority." In the case before us, the AO has rightly not exercised his discretion, because here is an assessee-firm constituted of rich partners--all coming from higher strata society--who took undue advantage by inducing semi-literate agriculturists who used to sell to the firm their agricultural produce, i.e. tobacco leaves; obviously coming from lower strata of society to make gifts of huge amounts and then guided them in filing gift-tax returns to give legal tenor to the bogus gifts to the advantage of the assessee-firm (in whose books gifts appeared as credits); its partners and their wards. Such an unethical and dubious practice has to be frowned upon. In essence, the assessee-firm which is a compendium of its partners has committed a social crime. In such case, in my considered opinion, a discretion in favour of the assessee will be gross miscarriage of justice.
7. In the light of above discussion, I hold that the credits aggregating to Rs. 6,00,000 have rightly been added by the AO under Section 68 of the Act. Accordingly, I reverse the finding of the learned CIT(A) and restore that of the AO.
8. In the result, the appeal of the Revenue is allowed.
29th March, 2001 REFERENCE UNDER 3 255(4) OF THE IT ACT, 1961 As there is a difference of opinion between the AM and the JM, the matter is being referred to the President of the Tribunal with a request that the following question may, be referred to a TM or to pass such orders as the President may desire :
"Whether, on the facts and circumstances of the case, credits aggregating to Rs. 6,00,000 appearing in the books of account of the assessee-firm are income of the assessee under Section 68 of the IT Act, 1961 ?"
R.V. Easwar, J.M. 31st Oct., 2001
1. The following question has been referred to me by the Hon'ble President under Section 255(4) on a difference of opinion between the learned Members who heard the appeal :
"Whether, on the facts and circumstances of the case, credits aggregating to Rs. 6,00,000 appearing in the books of account of the assessee-firm are income of the assesses under Section 68 of the IT Act, 1961 ?"
2. I will briefly notice the facts leading up to the difference of opinion. The assessee is a partnership firm consisting of 7 partners, out of which 4 belonged to the family of one Shankar Sable, who was himself not a partner of the firm, and 3 belonged to the family of one Govind Sable, who was himself a partner of the firm. There were credits aggregating to Rs. 6 lakhs in the accounts of minors who belonged to the family of Shankar Sable. The AO enquired into the genuineness of the credits. The assessee-firm filed confirmatory letters. The AO on further enquiry found that the money came into the accounts of the minors from certain agriculturists in Gujarat. They were explained to be gifts from them to the minors. The AO probed further and found that the so-called gifts were all arranged through the same person by name Narendrabhai Patel, accountant of a firm by name M/s Fulabhai Govindbhai which was acting as the commission agent of the assessee in procuring Beedi Patties. He recorded statements from the Gujarat agriculturists and from the replies given by them held that they had no valid reasons for making any gifts to the minor children of Shankar Sable. For the sake of brevity the AO's reasons are not. reproduced here. Suffice to state that he held that the gift theory was opposed to human probabilities despite the agriculturists having filed gift-tax returns and paid the tax thereon. He therefore, disbelieved the genuineness of the credits and added the same to the income of the assessee-firm.
3. On appeal the CIT(A) accepted the assessee's explanation and deleted the credits from the assessment. The Revenue preferred an appeal to the Tribunal.
After discussing the matter elaborately, the learned Judicial Member (JM), who wrote the leading order, for reasons elaborately" given therein and relying on the judgment of the Supreme Court in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), agreed with the AO that the gifts were . not genuine. He however accepted the alternative contention put forth by the assessee that even if the gifts are not genuine, the credits cannot be added as the 'firm's (assessee) income and the person in whose hands they could be added was Shankar Sable since the credits were all found in the accounts of the minors who belonged to Shankar Sable's family. In his view, taxing the assessee-firm on the credits would amount to taxing the family of Govind Sable without any reason. The argument was accepted by the learned JM on the basis of the judgment of the Supreme Court in the case of CIT v. P.K. Noorjehan (1999) 237 ITR 570 (SC). He held that applying the test of human probabilities the right person to be taxed was Shankar Sable and not the assessee-firm, because if the monies were the undisclosed income of the assessee-firm they would not have been allowed to be brought into the books of the firm in the name of the family members of one partner only. He therefore, held, applying Noorjehan's case (supra), that the AO had not exercised the discretion vested in him under Section 68 properly. In this view of the matter, he deleted the credits.
4. The learned Accountant Member (AM) agreed with the learned JM that the gifts said to have been made by the Gujarat agriculturists were not genuine. However, he could not agree with the view taken by the learned JM on the alternative contention of the assesses, viz., that even if the gilts are not genuine, the assessee-firm cannot be assessed in respect of the credits since they appeared in the accounts of the minors belonging to Shankar Sable's family and the taxing thereof in the hands of the assessee-firm would amount to taxing Govind Sable, who was a partner in the firm, without any valid reason. In the learned AM's opinion, the alternative contention cannot be accepted even on the basis of the judgment in the case of Noorjehan (supra). He held that though as held by the Supreme Court in the case of Noorjehan (supra) the use of the word "may" in Section 68 denoted a discretion conferred upon the AO either to assess or not to assess the credit, such discretion should be exercised judicially. According to him, where the creditworthiness of the creditors or the genuineness of the transactions have not been proved satisfactorily, a decision not to tax the person in whose books of credits appear would not amount to exercise of the discretion judicially even as per the parameters prescribed by the Supreme Court. He opined that considering the device adopted by the assessee-firm--that of introducing monies into the firm in the guise of gifts which were found to be non-genuine--the AO was justified in refusing to exercise the discretion in favour of the assessee. In this view of the matter, he held, differing from the learned JM that the credits were rightly assessed in the assessee-firm's hands.
5. It is in the above circumstances that the question extracted above has been referred to me for decision.
I have heard the rival contentions. Mr. K. Srinivasan, the learned Departmental Representative, in an able argument before me contended that the learned JM had gone wrong in exercising the discretion vested under Section 68 in favour of the assessee after having held that the gift-theory was untrue. He submitted that the explanation given by the assessee-firm cannot be compartmentalised or dissected into genuine and non-genuine parts and that once the gifts have been found to be non-genuine it must follow that the credits are not genuine and that they must be assessed in the hands of the firm. He was at pains to point out that the 'genuineness of the gifts cannot be delinked from the chain of events". He further submitted that if the credits appear in the names of the minors belonging to the partner's family the principle that the assessee need not prove the source of the source would not apply in all its rigour. In his submission, the principle laid down in Noorjehan's case (supra) would be applicable only if the explanation of the assessee regarding the credits has not been found to be non-genuine in its entirety and would cease to apply where a part of the same has been found to be non-genuine, as in present case. He contended that it is difficult to appreciate as to how the credits could be accepted as genuine in the firm's assessment when the source of the monies viz., the gifts from Gujarat agriculturists, coming into the accounts of the creditors (minors) has been found to be non-genuine. He pointed out that on the aspect of genuineness of the gifts to the minors both the learned Members are agreed and that it is only on the alternative contention taken by the assessee that there is a difference between them. He strongly contended that it would be indefensibly inconsistent to hold that though the gifts to the minors- their source for the credits--are not genuine, the credits in their names in the books of the assessee-firm are genuine.
6. Mr. Srinivasan further contended on the basis of the judgment of the Supreme Court in the case of Jamnaprasad Kanhaiyalal v. CIT (1981) 130 ITR 244 (SC) that the learned JM committed an error in holding in effect, that the AO had a choice under Section 68 with regard to the assessee who is to be assessed in respect of the credits. He submitted that the finding to this effect in paras. 9.1 and 9.2 of the order of the learned JM is not legally correct. He also submitted that the view that the monies belonged to Shankar Sable who indulged in money-laundering and, therefore, it is not proper that the firm be assessed on the credits is not relevant or sufficient to attract the principle laid down in Noorjehan's case (supra). In support of his contention, Mr. Srinivasan relied on the following judgments :
1. L.N. Gupta & Sons v. CTT (1980) 124 JTR 94 (Pat);
2. S.L. Jain v. CIT (1979) 11? ITR 316 (A3);
3. Velji Deoraj & Co. v. CIT (1968) 68 ITR 708 (Bom); and
4. Smt. Shantadevi v. CIT (1988) 171 ITR 532 (P&H)
7. He further contended that the finding of the learned JM (in paras 9.2) that the addition should be made in the hands of Shankar Sable, the father of the minors in whose names the credits appear, is not a proper finding on the facts brought on record and is not a finding necessary for the purposes of Section 68. All that was required to be done, within the scope of the section, was to enquire into the explanation of the assessee-firm regarding the nature and source of the credits and if the same is found to be not genuine or unsatisfactory the only option was to add the credits as income. To elaborate, if the credit appears in the books of the assessee and if the explanation is not genuine or satisfactory, Section 68 leaves no choice in the matter as to who is to be assessed. The section, according to Mr. Srinivasan, clearly says that the credit is to be assessed in the hands of the person in whose accounts it appears. The rationale behind this, according to him, is that such person is the beneficiary of the funds and is, therefore, liable to be assessed. An enquiry as to who is the real owner of the funds is beyond the scope of enquiry contemplated by the section. He, therefore, contended that the order of the learned AM should be preferred because it is based on a correct understanding of the judgment of the Supreme Court in Noorjehan's case (supra).
8. Mr. Srinivasan wound up his arguments by referring to the following decisions :
1. Roshan D. Hatti v. CIT (1977) 107 ITR 938 (SC);
2. Lata Mangeshkar v. CIT (1973) 88 JTR 336 (Bom);
3. R.B. Mittal v. CIT (2000) 246 ITR 283 (AP);
4. CIT v. Devi Prasad Viswanatha Prasad (1969) 72 ITR 194 (SC);
5. ITO v. Sky Jet Aviation (P) Ltd. (1999) 66 TTJ (Ahd) 21 : (2000) 243 ITR (AT) 1;
6. Shankar Industries v. CIT (1978) 114 ITR 689 (Cal);
7. CIT v. Precision Finance (1994) 208 ITR 465 (Cal);
8. Oriental Wire Industries (P) Ltd. v. CIT (1981) 131 ITR 688 (Cal); and
9. CIT v. Sophia Finance (1994) 205 ITR 98 (Del) (FB).
9. On the other hand, Mr. Sathe. the learned counsel for the assessee pointed out that the credits from the minors are all by cheques and that they are all assessed to income-tax. According to him, the learned JM has found that the transactions between the assessee-firm and the minors are genuine and in the light of this finding it is really not necessary or relevant to examine whether the gifts to the minors by the Gujarat agriculturists are genuine or not. Even if they (gifts) are to be treated as non-genuine that would not affect the genuineness of the credits in the minors' accounts with the assessee-firm. He contested the argument of the learned Departmental Representative that no compartmentalisation or dissection of the assessee's explanation is permissible and urged that it is possible and permissible to hold, despite the finding that the gifts are not genuine, that the credits are genuine. In fact, he contended that one has to see the transaction in the present case only in compartments. He proceeded to submit that the same test of human probabilities adopted and applied by both the learned Members to hold that the gifts from the Gujarat agriculturists cannot be accepted to be genuine was rightly adopted and applied by the learned JM also to hold that the credits cannot be assessed in the firm's hands and that they can be added only in the hands of Shankar Sable, the father of the minors in whose accounts the credits appeared. According to Mr. Sathe, this conclusion of the learned JM was also logically correct. In his submission, the discretion vested in the AO under Section 68 by the use of the word "may" includes the discretion, to be exercised in a proper and fit case on the basis of the material on record, to hold that though the explanation or a part thereof with regard to the credits is not genuine or satisfactory, the proper person to be assessed is not the assessee but somebody else. This is what the learned JM has held, which according to Mr. Sathe, was well within the parameters of Section 68 as expounded by the Supreme Court in Noorjehan's case (supra).
10. Mr. Sathe further contended on the strength of the following authorities that once the genuineness of the gifts is accepted there is an end of the matter and no further enquiry is required :
1. CWT/CIT v. K.N. Shammughasundaran (1998) 232 ITR 354 (SC); and
2. CIT v. Shamshuddin Mansoor Hague (1988) 172 ITR 696 (All).
It may be clarified that the above argument was put forth by Mr. Sathe on the assumption that the gifts to the minors by the agriculturists in Gujarat were genuine. When it was pointed out to him that the finding of both the learned Members is that the gifts were not genuine, he submitted that in this respect there is some factual confusion or contradiction in paras. 2 and 4 of the learned JM's order. He submitted that in these paragraphs the learned JM has himself made observations to the effect that the gifts are genuine, on the basis of the bank statements, etc. of the Gujarat parties produced before him in the course of the hearing of the appeal and that in the light of these observations his ultimate conclusion that the gifts are not genuine cannot be sustained. It was made clear to Mr. Sathe at this juncture that my jurisdiction, as TM, is limited and I cannot enter into this aspect of the matter, i.e., the genuineness of the gifts. So far as I am concerned, it is the ultimate findings or conclusions of the learned Members that matter. The final conclusion of both the learned Members as regards the gifts by the Gujarat agriculturists to the minors is that they are not genuine. This conclusion has been clearly recorded by the learned JM in para. 8 of his order with which the learned AM has agreed without any reservation and the same has been expressed in para 2 of his order. I have to, therefore, proceed only on the basis that the gifts are not genuine. It is beyond the scope of the proceedings before me to examine the question over again, I cannot, therefore, give effect to the argument attempted by Mr. Satire that the gifts by the agriculturists are genuine. However, in fairness to him I must add that once I made my position on this aspect clear in the course of the hearing he did not pursue the matter further. 11. Mr. Sathe cited the following authorities in support of his contentions :
1. CIT v. Dayachand Jain Vaidya (1975) 98 ITR 280 (All):
2. Indian Ceramic Corpn. v. ITO (1997) 93 Taxman 83 (Magazine) (Del);
3. CIT v. Jaiswal Motor Finance (1983) 141 ITR 706 (All);
4. Saraogi Corporation (supra); and
5. Balurghat Transport Co. Ltd. v. Asstt. CIT (1999) 63 TTJ (Cal) 302.
12. He also pointed out that the facts before the Courts/Tribunals is the cases cited by the learned Departmental Representative are quite different from the facts of the present case and that in all of them the question decided was different. He contended that those decisions are not applicable to the present case. He therefore, submitted that the order of the learned JM should be upheld.
13. In his brief reply, Mr. Srinivasan, the learned Departmental Representative . submitted that since both the learned Members are agreed that the gifts to the minors by the Gujarat agriculturists are not genuine it follows that the conclusion of the learned AM is correct and must be upheld. He also submitted that Noorjehan's case (supra) was rendered under the provisions of Section 69 and not Section 68 and hence not applicable to the present case.
14. On a careful consideration of the rival contentions I am of the view that the decision of the learned AM is to be upheld. My reasons are given below. Both the learned Members are agreed that the gifts by the agriculturists in Gujarat to the minor children of Shankar Sable are not genuine. The difference arises only with the regard to the consequence of this finding. The learned JM says that despite this it is still possible to hold that the assessee-firm is not assessable in respect of the credits under Section 68. He says that the right person to be taxed is only Shankar Sable because the credits appear only in the accounts of his minor children and it would be unreasonable to hold the assessee-firm liable for the same as that would make Govind Sable, the other partner, assessable in respect of amounts which do not belong to his family. He has held that money-laundering (i.e.; conversion of undisclosed income into disclosed income) has been done only by Shankar Sable's family and therefore, he is the right person to be assessed on the same. The learned AM does not accept that this consequence must follow. In his view, once the gifts are held to be non-genuine and the device adopted by the assessee-firm is unravelled, it is the assessee-firm which must be assessed in respect of the credits.
15. The first question to be answered is whether it is necessary, within the scope of enquiry envisaged by Section 68, to find out the real owner of the monies ? In my humble opinion, the answer should be in the negative. Though Section 68 has been introduced in the 1961 Act formally, under the earlier Act it was always understood that the IT authorities have the power to assess cash credits if no satisfactory explanation as to the nature and source thereof was forthcoming. The power has been recognised by the 1961 Act. Now the use of the word "may" in Section 69 has been held by the Supreme Court in Noorjehan's case (supra) to confer upon the AO a discretion either to assess the amount in the hands of the assessee or not, having regard to the evidence led and explanation filed. In my humble opinion, Section 68 does not contemplate an enquiry as to who, in the light of the evidence and the explanation submitted, is the right person to be assessed in respect of the credit. All that it says is that if the explanation regarding the nature and source of the credit is not satisfactory the amount may be assessed as the income of the assessee. To hold that the explanation and the evidence must be so examined as to find out the real owner of the monies is to put upon the AO a burden which cannot possibly be discharged. It must be remembered that the section is an anti-tax evasion provision. The legislature, fully aware that undisclosed income is being brought in under the guise of credits, has introduced the section. The object is to assess such income when it surfaces and assess it in the hands of the persons in whose books it surfaces. Having regard to the object, it cannot be said that the AO, even where the explanation has been found to be non-genuine, exercised his discretion arbitrarily by taxing the credit in the hands of the person in whose books it appeared. It cannot be expected of the AO to let go the person who is before him and whose assessment is being made and to go on a wildgoose chase in a bid to tax the "right person". That course, in my opinion, is not envisaged by the section. It would result in a waste of all the effort that had been made by the AO. It may possibly open the floodgates if it is to be held that the AO exercised his discretion arbitrarily in taxing the credit in the hands of the assessee before him even. though the enquiry revealed that the explanation offered by the assessee is not genuine.
16. In Noorjehan's case (supra), on which heavy reliance has been placed by both the learned JM as well as the learned counsel for the assessee, the explanation offered by the assessee was not accepted by the IT authorities, but the Tribunal held that though the explanation was liable to be rejected, Section 69 gave a discretion to the AO because of the use of the word "may" and despite rejection of the explanation he can still hold that the amount of investment is not assessable in the hands of the assessee. The decision of the Tribunal was affirmed by the Kerala High Court whose judgment was affirmed by the Supreme Court. The use of the word "may" in Section 68 also, therefore, must be held to give a discretion to the AO but if he chooses hot to exercise it in favour of the assessee in a case where the explanation has been found to be non-genuine it cannot be held that he has exercised the discretion arbitrarily, in other words, it cannot be held that despite the non-genuineness of the explanation, he should have exercised the discretion in favour of the assesses. There was no falsity or non-genuineness in the explanation given by the assessee in the case of Noorjehan (supra). Her explanation was inherently probable.
Despite that the AO did not accept the same, though he could have, in exercise of the discretion. The case before me is different. A crucial part of the assessee's explanation--the part which links the credits with the sources of the creditors--has been found to be non-genuine. In the light of this finding, the AO cannot be blamed for not exercising the discretion in favour of the assessee. Exercising the discretion in favour of the assessee would have put him on the mat.
17. In the light of my understanding of the judgment in Noorjehan's case (supra) as above, 1 proceed to examine the next question as to whether the AO had rightly refused to exercise the discretion in favour of the assessee in the case before me. As already noted, both the learned Members are agreed that the alleged gifts by the Gujarat agriculturists to the minors are not genuine. As rightly submitted by Mr. Srinivasan on behalf of the Revenue, it is difficult to delink the non-genuineness of the gifts from the explanation offered by the assessee and hold that though the gifts are not genuine the credits in the minors' accounts are genuine. It would be too much of a hair-splitting to do so. It cannot be disputed that it is part of the duty of the assessee to furnish evidence regarding the creditworthiness of the creditors and that burden in the present case has been sought to be discharged by showing that the minors received gifts from agriculturists in Gujarat. This part of the explanation has been found by the AO to be non-genuine after a deep probe. This conclusion has received the approbation of both the learned Members. The explanation of the assessee as a whole, therefore, becomes vulnerable and open to serious doubt and the AO cannot be compelled to accept the same. Further, as already noted by me, the AO while acting under Section 68 is entitled to stop the enquiry when it is found that the assessee's explanation is not substantiated or satisfactory or is unsupported by evidence or where the evidence adduced has been found to be non-genuine, as in the case before me. He would be acting well within his powers under Section 68, including the exercise of the discretion given to him by the section, if he thereafter holds the assessee in whose books the credits appear, liable to tax. No further duty is cast upon him under the section. He cannot thereafter be found fault with for not having exercised his discretion in favour of the assessee or with not having attempted to find the real owner of the monies. To hold otherwise does not appeal to my mind to be consistent with the object, tenor and purport of Section 68. In my view, it would amount to extending the principle laid down in Noorjehan's case (supra) a little too far.
18. It was said on behalf of the assessee that the facts found by the AO himself showed that there was inherent probability that the monies belonged not to the assessee-firm but to the family of Shankar Sable and it was, therefore, open to the AO to exercise the discretion in favour of the assessee by holding that the credits were not assessable in the firm's assessment. I am unable to agree. As rightly pointed out by the learned AM, any discretion must be exercised judicially and must be based on reason and not humour. It should be legal and not arbitrary or fanciful. There are inherent limitations on the exercise of the discretion placed by Section 68 itself. The monies have surfaced in the books of the assessee-firm. Neither Shankar Sable nor his family members have come forward claiming that the monies represent their undisclosed income. Both the learned Members are agreed that the evidence points out unmistakably to the non-genuineness of the so-called gifts from the agriculturists to the minors. It would be flying in the teeth of such evidence if the AO is expected to exercise his discretion in favour of the assessee simply on the logic that since the monies belonged to Shankar Sable's family he is the right person to be assessed on them and not the assessee-firm. It would be a risky proposition to hold that the AO under these circumstances should go after the illusory and elusive "right person". He has to contend with the law of limitation in case action is to be taken against the "right person". There may be so many other imponderables or hurdles in the way of tackling the "right person". Shankar Sable may raise all kinds of objections to any action taken in his case on the footing that he is the "right person" to be taxed. He may not submit to the jurisdiction of the IT authorities. He may try to shift the burden to some other person. Lapse of time may cause the disappearance of the evidence or the evidence may lose its effect. All these are uncertainties. Why should the AO be told to go in search of the so-called "right person" when the beneficiary of the monies is right there before him--in the present case, the assessee-firm--and the nature and source of the monies have not been explained to the satisfaction of the AO? I am, therefore, satisfied in the present case that the AO cannot be faulted at all on the ground that he did not exercise the discretion vested in him under Section 68 in favour of the assessee.
19. Both the learned Members have agreed with the AO that the gift-theory advanced by the assessee-firm cannot be accepted as genuine. This itself in my opinion justifies the refusal of the AO to exercise the discretion vested in him in favour of the assessee. In my view, the enquiry in all such cases is limited to examining whether there was material before the AO to justify the exercise of his discretion one way or the other. May be the appellate authorities might have on the same material exercised the discretion the other way, but so long as the AO's exercise of the discretion is supported by material on record and cannot be considered to be arbitrary, capricious, fanciful or perverse it should not be lightly interfered with. Noorjehan's case (supra) offers guidelines in this regard but in my humble view, it cannot be understood as a "cane blanche" to interfere with the AO's powers even where the assessee's explanation has been found to be non-genuine, either in part or in full.
20. In the view I have taken, I do not consider it necessary to refer to the various authorities cited by both the sides. The question before me involves a limited enquiry as to whether on the facts found by the learned Members of the Tribunal it can be said that the discretion vested in the AO under, Section 68 has not been properly exercised. The learned AM has not disagreed with the learned JM on the existence of the discretion. He has differed from him only on the question whether the AO had properly exercised the discretion. I agree with his conclusion that the discretion has been properly exercised by the AO.
21. I therefore, answer the question posed to me in the affirmative.
22. The appeal will now be placed before the Bench for passing appropriate orders.
B.L. Chhibber, A.M. 28th Nov., 2001
1. As there was a difference of opinion between the AM and the JM, the following question was referred to a TM :
"Whether, on the facts and circumstances of the case, credits aggregating to Rs. 6,00,000 appearing in the books of account of the assessee-firm are income of the assessee under Section 68 of the IT Act, 1961 ?"
2. The learned JM, Shri R.V. Easwar, sitting as TM by his opinion dt. 31st Oct., 2001. has concurred with the views of the AM and has answered the question in the affirmative. In accordance with the majority view, the issue stands decided in favour of the Revenue and against the assessee. 3. In the result, the appeal is allowed.