KAJAL KUMAR ROY,HOOGHLY vs. ITO, WARD - 1(4), HOOGHLY, HOOGHLY

The assessee in the present case is an individual who is engaged in the business of trading of potatos. The return of income for the year under consideration was filed by him on 25.09.2011 declaring a total income of Rs. 10,92,457/- including agricultural income of Rs. Kajal Kumar Roy 10,000/-. In the balance sheet filed along with the said return, loans received from six parties were shown by the assessee. In order to verify the same, notices under section 131 were issued by the A.O. to the four loan creditors viz. Sri Biswajit Ghosh, Sri Ashis Roy, Sri Nirmal Ghosh and Sri Ram Chandra Samanta. Their statements were also recorded by the A.O. and based on the deposition made by them, the following observations and findings were recorded by the A.O. in respect of each and every loan creditors: “1. Sri Biswajit Ghosh Sri Biswajit Ghosh had stated that he is a potato trader. From the copy of balance sheet and return of income of Shri Biswajit Ghosh it reveals tht during the relevant financial year 2010-11 he had earned Rs. 1,47,030/- from his business of potato trading out of gross sales at Rs. 16,33,370/-. Gross total income was shown at Rs. 1,58,990/-. In the balance sheet as on 31.03.2011unsecured loan to K.K. Roy was shown at Rs. 4,00,000/- and investment in Alok Dighi Hatchery (P) Ltd. Was shown at Rs. 1,00,000/-. No such entries in the balance sheet as on 31.03.2010 was noticed. In his statement deposed before this office Sri Biswajit Ghosh had stated the assessee is his maternal uncle. The loan was given on his request as he was in need of cash for his business. He had further stated that he had not given any further loan to the assessee and also stated that the previous loan was still outstanding as on the date of deposition i.e. 19.12.2013. No interest was charged on this loan. When asked whether he had any investment in Alok Dighi Hathcery (P) Ltd., he stated that he could not remember at that time. However, the balance sheet of the deponent as on 31.03.2011 shows that he had made investment in the company with an amount of Rs. 1,00,000/-. Further, from the statement of deponents it reveals that he had not given any further loan to Sri Kajal Kumar Roy is contrary to the fact that he had paid Rs. 3,80,000/- on 23.08.2011 through his bank account in BOI, Kable Branch (Account No. 425410100007248). Thus the assessee being of sound mind, is totally unaware of his transaction in his bank account and investment made is not at all believable.

Kajal Kumar Roy From the foregoing discussion there are many contradictions with the statement of alleged loan creditors with his balance sheet as on 31.03.2011. No other payments by issuing cheques were made by the assessee. All the payments in his business were therefore maintained by cash only. It is seen that after debiting the alleged loan as on 18.12.2010 for Rs. 4,00,000/- from his bank account, the balance amount stands at his account is only RS. 28,452/-. It must had made a crunch in his financial position and therefore will harshly hamper with the smooth proceedings in his potato business during February-March, 2011, which is the pick time of potato business. Further, the alleged loan creditor was a small trader, the alleged loans would taken out a fair chunk of his capital and he would be incapacitated by taking out a huge sum from his circulating fund. It is not in human nature to give loans without interest to relatives who are financially strong by stifling his own business. ii) Sri Ashis Rov Ashis Roy had stated that he is a potato trader. From the copy of the balance sheet and return of the income Sri A.shis Roy it reveals that he had earned Rs.1,43,750/- front his business of potato trading out of gross sales at Rs. 15.97 lakhs during the relevant financial year 2010-. Gross total income was shown at Rs. 1,85,370/-. In the balance sheet as on 3l/03/201I unsecured loan to K.K.Roy was .shown at Rs. 2,65,000/- In his statement deposed before this office Sri A.shis Roy had stated the assessee is his own uncle. The loan was given on his request as he was in need of cash for his business need. He had further stated that he had not given any further loan to the assessee and also stated that the previous loon was still outstanding as on the date of deposition. i.e. 19.12. 2013. No interest was charged on this loan. However, the balance sheet of the deponent as on 31.03.2012 shows there were no loan in his asset side. The credit entry of Rs. 2,65,000/- on 22.11.2011 credited by Kajal Kumar Roy shows that there were some payment made to him. Further, deponents statement that he had not given any further loan to Sri Kajal Kumar Roy is contrary to the fact that he had paid Rs. 5,00,000/- on 16.02.2012 through his bank account in BOI. Kable Branch (Account No. 425410100007248) which was repaid on 23.03.2012. Thus the deponent being of sound mind is totally unaware of his transaction in his bank account and investment made.

On the basis of the findings and observations recorded by him as above, the A.O. was of the view that the concerned loan creditors were financially weak and the alleged loans given to the assessee had made a crunch in their financial position adversely affecting their potato business. According to him, the relevant loan transactions as shown by the assessee with the said four creditors thus were unbelievable. He accordingly issued a notice to the assessee requiring him to show cause as to why the relevant four loans should not be treated as unexplained and the amount of such loan credits aggregating to Rs. 13,03,000/- should not be added to his total income under section 68. In reply, it was submitted by the assessee that all the four loan creditors have advanced the loans to him by cheques on different dates and they have also filed their loan confirmations. It was also explained by the assessee that the loans from the said creditors were taken for business exigencies and the transactions involved in the said loans were genuine. This explanation of the assessee was not found acceptable by the A.O. According to him, the concerned four loan creditors had no financial capacity to give the loans to the assessee and they were not even aware of the transactions reflected in their bank accounts. He also noted that the loans given to the assessee by the said creditors were still outstanding even on the date of deposition i.e. 19.12.2013. He Kajal Kumar Roy accordingly treated the loans claimed to be received by the assessee from the concerned four creditors as unexplained and added the amount of such loans aggregating Rs. 13,03,000/- to the total income of the assessee under section 68 in the assessment completed under section 143(3) vide an order dated 25.03.2014.

Against the order passed by the A.O. under section 143(3), an appeal was preferred before the Ld. CIT(A) challenging the addition of Rs. 13,03,000/- made by the A.O. on account of loans received from the concerned four creditors by treating the same as unexplained. During the course of appellate proceedings before the Ld. CIT(A), the following submissions were made by the assessee in writing in support of his case: “In the instant case, the Ld. Assessing Officer has misread the statements given by the loan creditors by taking into consideration the superfluous and irrelevant part of the statement which has no bearing on the issue. Whether the loan creditors have provided further loan to the appellant was not the parameter for consideration for the Ld. Assessing Officer for deciding the issue. It is not the case of the Assessing Officer that the loan creditors appearing in response to summons u/s 131 of the Act denied the loan transactions. In fact, they have categorically admitted giving loans to the appellant. The loan creditors are all adults who are compos mentis, i.e. competent to enter into contracts. In other words, they entered into the loan transactions in full possession of their faculties and there is no contradiction involved as misconceived by the Ld. Assessing Officer in order to disregard such statements anyhow. In any case, the Ld. Assessing Officer has not specifically recorded any adverse finding that the evidence adduced on record by the appellant in support of the loan transactions, e.g. copies of bank statements, P/L Accounts, Balance Sheets, confirmations, copies of return etc. of the respective lenders, were vague or depicted an untrue state of affairs of those loan creditors. In spite of that, the Ld. Assessing Officer presumed the loans given by these loan creditors as the income of the appellant from other sources. It was for the Ld. Assessing Officer to prove this possibility by bringing proper evidence on record for the burden of showing that the loan amount was actually Kajal Kumar Roy paid by the appellant to those persons who only acted as conducts for its ultimate destination to the appellant himself and that it represented the concealed income of the appellant was on him. So neither a priori nor a posterior, the Ld. Assessing Officer could not derive an adverse conclusion against the appellant. Assailing this specious approach of the Ld. Assessing Officer in the facts and circumstances of the case, it is vehemently pointed out that the Ld. Assessing Officer had made an addition of Rs. 13,03,000/- by invoking the provisions of section 68 of the Income Tax Act, 1961 by misconceiving that the loans received by the appellant constituted cash credit and added the same to the total income of the appellant. There is no dispute that the appellant maintained books u/s 44AA of the Income Tax Act, 1961 which were duly audited under the statutory requirement of section 44AB of the Act. In fact, the details of the amounts received by the appellant on account of loan are duly incorporated therein. The provisions of section 68 of the Income Tax Act, 1961 came into play only where the Assessing Authority finds that a cash credit is recorded in the books and the taxpayer offers no explanation as to the nature and source thereof or the explanation offered is not satisfactory in his opinion then such credit may be deemed to be the income of the taxpayer for the corresponding assessment year. Thus, the conditions precedent for assuming jurisdiction u/s 68 of the Act are that (1) there shall be a credit appearing in the books of accounts of the assessee, (2) an opportunity for submitting an explanation as to the nature and source of such credit entry appearing within the books of account is to be provided to the assessee and (3) the assessee offers no explanation or the explanation offered by him is not satisfactory in the opinion of the Assessing Authority, only then the amount may be deemed to be the income of the assessee. Thus the statutory parameters for the non application of the mischief of the provisions of section 68 of the Act are that the assessee has to fulfil two conditions simultaneously. Firstly, he has to offer an explanation about the nature and source of credit appearing in the books and the explanation offered should be satisfactory in the eyes of the Assessing Authority and secondly, the transaction must be a genuine one. The appellant did not fall short of such yardstick by any stretch of imagination. In the instant case, the identities of the four loan creditors are individuals who are also independently assessed to tax. In fact, their identities were established beyond any doubt before the Ld. Assessing Officer by their appearance in response to notice u/s 131 of the Act. As to the genuineness of the transactions undertaken with the said loan creditors, such loans were received by account payee cheques through Kajal Kumar Roy banking channel which is traceable from the origin to the destination of such payment. Further, the impugned loan transactions were recorded in the balance sheets and duly reflected in their returns filed with the respective Assessing Officers of the loan creditors and therefore, the genuinity of the transactions cannot be called into question. Apropos the credit worthiness of the loan creditors, they had disclosed substantial capital balances in their return. The Ld. Assessing Officer had no grounds to pronounce himself dissatisfied in respect of any of the relevant criteria in this respect. Therefore, all the criteria as mandated in the provisions of section 68 of the Act stood satisfied. However, the Ld. Assessing Officer disbelieved such genuine transactions on a tenuous pretext. Nonetheless, there is no grievance on the part of the Ld. Assessing Officer that there was any dearth of proof in support of the loan transactions received by the appellant from the loan creditors as the copies of the returns of income along with Financial Statements, Bank Statement and Confirmation were filed with him. The entire gamut of transactions was undertaken by way of account payee cheques only. In respect of all the loan creditors there were more than enough funds available to advance loans to the appellant which is proved from the records adduced before the Ld. Assessing Officer.”

The Ld. CIT(A) did not find merit in the submissions made on behalf of the assessee before him and proceeded to confirm the additions made by the A.O. under section 68 for the following reasons given in paragraph no 5 and 6 of his impugned order: “5. I have considered the facts of the case and the appellant’s submissions. The AO’s case has already been summarised above. In brief, the relied upon circumstantial evidence to the effect that there were many contradictions in the statements of the lenders and the financial capacity of the lenders was not credible. Further, the fact that the alleged lenders were not aware of the transactions in their own bank accounts showed that the appellant was controlling their bank accounts and financial transactions. The appellant’s case is that the appellant had furnished necessary documents like copies of income tax returns, bank statements and balance sheets to discharge his onus under section 68 of the Act to prove the genuineness of transactions which had been done by way of account payee cheques and the creditworthiness and identity of the loan creditors. Moreover, the loan creditors appeared before the AO in response summons u/s 131 of the Act and confirmed the transactions. The Kajal Kumar Roy AO did not have any direct evidence to disbelieve the evidence presented by the appellant. I find that the appellant had only harped on the apparent evidence available on paper but brushed aside the circumstantial evidence cited by the AO by terming it as irrelevant. It is an established proposition of law that income tax authorities are not expected to put blinkers on while examining the evidence presented before them and can go behind the apparent state of affairs to infer the reality on the basis of preponderance of probabilities. Further, the fact that loans have been received by way of cheques does not automatically make them immune from further certification and inquiry. The AR has stated that the loans are reflected in the audited balance sheet of the appellant but that is only stating the obvious. That is only the starting point of the inquiry, i.e. the question regarding nature and source of the credits arose because they were appearing in the books of account of the appellant. The issue is not whether the appellant has disclosed the loans in his books of account but whether they are genuine. The appellant has furnished the copies of the income tax returns of the loan creditors for the A.Y. 2011-12 along with the respective balance sheets but it is not known whether income tax returns were filed by them for earlier years also. The alleged loan creditors have declared substantial opening capital and cash balances and opening outstanding balances of debtors (which have been apparently liquidated during the previous year to generate cash which was deposited in the respective bank accounts before advancing loans to the appellant), which cannot be considered sacrosanct in the light of low incomes declared by them and the absence of any evidence to show their ability to save out of them meagre incomes. The details of income, capital, cash balances and balances of debtors of the loan creditors as are evident from the balance sheets, cash flow statements and copies of income tax return acknowledgements furnished by the appellant are as under: Sl Names of Amount Total income Opening Opening Closing Opening Closing No lenders of declared in capital b/f as cash cash debtors debtor as loan(Rs) A.Y. 2011-12 on balance balance as on on (Rs) 01.04.2010 as on as on 01.04.20 31.03.20 (Rs) 01.04.20 31.03.2 10 (Rs) 11 (Rs) 10 (Rs) 011 (Rs) 1 Biswajit 4,00,000 1,58,990 1,79,506 21,994 49,214 3,50,740 Nil Ghosh 2 Nirmal 3,18,000 1,57,980 9,75,693 2,68,583 8,059 Nil 6,70,500 Ghosh 3 Ashis Roy 2,65,000 15,863 8,11,690 1,70,466 4,896 2,50,500 Nil 4 Ram 3,20,000 1,57,993 8,32,065 40,895 47,305 2,00,000 Nil Chandra Samanta It can be noted from the above that:

It has been held in various judicial pronouncements that the buden under section 68 of the Act is discharged by the assessee only when the assessee proves three things to the satisfaction of the AO viz, identity of the creditor, capacity of the creditor and genuineness of the transactions. The Hon’ble Jurisdictional High Court in CIT vs Korlay Trading Co. Ltd. (1998) 232 ITR 820 (Cal) has held that mere filing of the income tax file number of the creditors is not enough to prove the genuineness of the cash credit. The creditor should be identified. There should be creditworthiness. There should be a genuine transaction. In K.M. Sadhukhan & Sons P. Ltd vs CIT (1999) 239 ITR 77 (Cal), it has been held that the burden lies on the assessee to prove the genuineness of loan. The Hon’ble High Court has held that the initial burden is on the assessee to prove the identity of the Kajal Kumar Roy creditor, the capacity of the creditor to advance the loan and the genuineness of the transaction. In CIT vs Precision Finance P. Ltd. (1994) 208 ITR 465 (Cal), the Tribunal deleted the additions on the ground that the transactions were through banking channels and hence they were presumed as genuine. Setting aside the tribunal’s order, the Hon’ble High Court held that: “It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough” Similar view has been taken in several other cases. On going through the above judgments, it is clear that the onus u/s 68 can be said to have been discharged only when the assessee proves identity and capacity of the creditor along with the genuineness of transaction to the satisfaction of the AO. All the three conditions are required to be cumulatively satisfied. If one or more of them is absent, then the AO can make the addition as per section 68 of the Act. This is the settled position of law. In spite of the furnishing of various documents, the appellant cannot be said to have established the capacity of the creditors to lend. Further, it was held in the case of Sumati Dayal vs CIT (SC) 214 ITR 801 by the Hon’ble Supreme Court that where any sum is found credited in the books of the assessee for any previous year it may be charged to income tax as the income of the assessee for that previous year if the explanation offered by assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In that case the Hon’ble Court referred to its own judgement in the case CIT vs Durga Prasad More (197) 82 ITR 540 and held that the matter had to be considered in the light of human probabilities. It was further held that “In our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant’s claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and the finding that the said amounts are income of the appellant from other sources is not based on evidence”. In view of the factual and legal position described above, the addition of Rs. 13,03,000/- is confirmed. The last two grounds of appeal are general in nature and need no separate adjudication. In the result, the appeal is dismissed.

The Ld. CIT(A) in his impugned order has already relied on the decisions of the Hon’ble Supreme Court in the case of CIT vs Durga Prasad More (supra) to hold that the matter was required to be considered in the light of human probabilities. It is, however, observed that the facts involved in the said case were materially different from the facts involved in the case of the assessee in as much as in the said case had claimed to have earned substantial amount by way of winning from races and the issue was relating to the genuineness of the said claim. In the present case the issue involved is relating to the genuineness of the loans received by the assessee which is required to be explained by the assessee in terms of section 68. The onus, in this regard, is on the assessee to establish the identity as well as the capacity of the concerned creditors and genuineness of the relevant loan transactions. Keeping in view the voluminous Kajal Kumar Roy documentary evidence placed on record by the assessee in the form of income tax returns and final accounts of the concerned creditors, these loan confirmations and bank statements, I am of the view that the onus is satisfactory discharged by the assessee and the authorities below are not justified in treating the loans in question as unexplained on some flimsy grounds and by applying the test of human probabilities which, in my opinion, is not relevant in the facts of the case. I, therefore, delete the addition made by the A.O. and confirmed by the Ld. CIT(A) under section 68 on account of loans taken by the assessee from the concerned four creditors by treating the same as unexplained and allow this appeal of the assessee 9. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 22nd December, 2017. Sd/- (P.M. Jagtap) ACCOUNTANT MEMBER Dated: 22/12/2017 Biswajit, Sr. PS Copy of order forwarded to: