ORDER
1. This is an appeal under Section 260A of the Income Tax Act challenging the order passed by Income Tax Appellate Tribunal dated 20-7-2005. The assessment year is 2001-02. Following the two substantial questions of law has been pressed in this appeal :
1. Whether the ITAT was justified in deleting the addition of Rs. 7,55,428 made by the assessing officer towards commission paid to different whole-sellers that was purported to have been accounted for through credit-notes when not even a single party had actually been paid the said amount and the assessee had failed to establish conclusively that such payment during the year, was warranted by business/commercial expediency.
2. Whether the ITAT has erred in law and on facts in deleting the addition of Rs. 3,43,007 on account of addition of cash credits under Section 68, without appreciating that the assessee had failed to discharge its onus that these Sundry Creditors were genuine and they had the financial capacity to advance the indicated sum of money.
2. In regard to the commission to the tune of Rs. 7,55,428 paid by the assessee, which was disallowed by the assessing officer and that addition has been deleted by the Commissioner, Income-tax in appeal and this had been confirmed by the order of the Appellate Tribunal. The facts relevant are as follows:
The assessee had launched a new scheme (Sona Chandi Uphar Yojna) on 26-1-2001 and it continued up to 15-3-2001. This scheme was applicable till 15-3-2001 but orders received under the scheme were materialized till 31-3-2001. The total liability worked out by the assessee under the scheme was Rs. 20,11,715. Out of this total liability Rs. 3,08,248 was cleared by the end of March, 2001 leaving an amount of Rs. 17,03,467 which was disbursed to different CNF agents after 31-3-2001.
3. The necessary documentary evidences were filed.
4. It was also noted that on perusal of details mainly figures of turnover, it transpired that sales have increased two and half times in the months of February and March, 2001 under the scheme. The Commissioner, In come-tax (Appeals) on the assessment of the material on record found that amount of Rs. 7,55,428 was rightly claimed by the assessee. The Commissioner, Income-tax (Appeals) also accepted the explanation of the assessee that the assessee-company has introduced a new scheme with effect from 7-6-2001 and this was intimated to all CNF agents vide letter dated 7-6-2000. The new method of sale though maintained the same percentage of trade discount i.e., 15 per cent but reduced distributors and CNF margin from 10 per cent to 5 per cent and also that of cash discount from 4 per cent to 1 per cent. By introducing this system the assessee retained more profits. The CIT thus came to the conclusion that the change in the system for allowing different discounts and commissions by the assessee was not prohibited by as per business expediency and the finding of the assessing officer that nothing has been paid to the commission agent out of Rs. 7,55,428, was not correct. CIT thus accepted the explanation given by the assessee in regard to the change system of the business.
5. In regard to the finding of the assessing officer that in fact nothing was paid to the commission agent out of Rs. 7,55,788 in this year, the appellate authority on perusal of the details of sales, commission and freight given to various CNF agents during the year 2000-01, also recorded a finding that the commission has been made/paid through credit notes to concerned CNF agents for the period commencing 19-7-2000 to 31-3-2001. The total amount of commission through credit note was Rs. 7,55,428 i.e., the amount claimed by the assessee also.
6. The finding of the Commissioner, Income-tax (Appeals) is that liability of the payment through credit note has accrued, as the appellant was following mercantile system of accounting and that same has been paid subsequently. The commission credited in the account of CNF agent by the assessee is allowed and that cannot be faulted with nor can be said to be against legal principles. The Commissioner thus set aside the findings of the assessing officer in this regard.
7. The Income Tax Appellate Tribunal on appreciation of the entire evidence on record and the order passed by the assessing officer and that of the CIT (Appeals) has agreed to the findings recorded by the Commissioner (Appeals). We do not find any substantial question of law to be decided in this appeal as the aforesaid issue stands concluded by findings of fact namely payment of commission through credit notes under the mercantile system of accounting and the actual payment having been made subsequently.
8. Second substantial question of law is in respect of cash credit of Rs. 3,43,007 which was added to the income of assessee company under Section 68 of the Income Tax Act though has been deleted by CIT(Appeals) and confirmed by Income Tax Appellate Tribunal.
9. The relevant facts are that the assessing officer asked the assessee company to file details of sundry creditors amounting to Rs. 6,49,446 besides the trade creditors. The assessee has filed the details which was placed on record. Thereafter the assessee company was further asked by notice dated 9-12-2000 the 'identity, genuineness of the sundry creditors (staff/director)' together with the nature and source, which reply was again submitted by the assessee.
10. assessing officer gave the benefit of a part of the amount from the aforesaid amount of Rs. 6,49,446 but held that amount of Rs. 3,43,007 could not be primarily explained and therefore, it was credited to the income of assessee-company. Commissioner, Income-tax (Appeals) upset the said findings after holding that the company has credited salary in the accounts of director/staff who are either family members of the director or their relatives and it has not been disputed that they had worked in the company to the entire year and therefore the company had credited salary in their accounts. The view expressed by the assessing officer cannot be upheld as the assessing officer has not brought anything on record to show that the employee/director have no other source of income except their salary and it was not possible for them to survive without drawing salary from the company. On the basis of aforesaid observations the Commissioner (Appeals) recorded the finding that the creditworthiness of the director/ employees cannot be disputed. In appeal before ITAT, same finding was confirmed.
11. Section 68 of the Income Tax Act requires three ingredients to be established :
(i) the identity of the creditors
(ii) the capa CIT of said creditors to advance the money
(iii) the genuineness of the transactions.
12. It could not be seriously challenged that the identity of the creditors was not established as the assessing officer himself made the following observations. 'It is seen, the following persons - who are either family members of the director or relatives have not withdrawn any salary during the entire year:
Rs.
13. Learned counsel for the revenue has also not made any effort to assert that there was any dispute about the identity of the creditors though observations made by the assessing officer has been followed by the appellate authorities but they do not record any finding about actual relationship of the creditors with the assessee. Since it is not in dispute and has not been disputed, we do not intend to delve upon this question any further.
14. It could also not be disputed by the revenue that these persons, who are either director or family members of the staff actually had not worked in the company for the entire year and that they were not entitled for the salary and not only this but it could also not be denied by the revenue that the salary was not paid to them by virtue of credit notes in the books of account. The only question which has been urged by Sri Chopra is that prima facie onus lay upon the assessee to prove the nature and source of credit notes and also the creditworthiness of the creditors which the assessee had failed to prove and the finding recorded in this regard by the appellate authority cannot be sustained. His submission is that the assessee did not bring on record any material to indicate that these creditors were having any other source of income or that they were having no necessity of withdrawing even a single shell from the salary and therefore allowed it to be shown in the books of account, for which purposes it was obligatory upon them to produce at least minimal evidence to show their creditworthiness.
15. Sri Rohit Nandan Shukla appearing for the assessee strongly refuted the aforesaid argument by urging that when the CIT (Appeals) as well as ITAT on the scrutiny of the material evidence on the record has recorded two findings that the identity of the creditors was established and that entitlement of their salary and this payment under the mercantile account system has been made, the plea raised by the revisionist cannot be accepted as the creditworthiness of these creditors can well be presumed and it also stands established, they are the family members of the directors or that of the staff.
16. We have perused the orders passed by the CIT as well as ITAT. In none of the orders aforesaid findings of the creditworthiness of the creditors has been recorded nor there is material or evidence on record. The presumption in that regard as has been sought to be, put into service by the learned counsel for the respondent cannot be accepted, as it raises a question of fact, requiring the assessee to adduce minimal evidence at least to show the creditworthiness of the creditors. Once the assessee discharges its onus prima facie, about creditworthiness, the onus shifts upon the department to prove otherwise.
17. It cannot be presumed in the absence and particularly of the given facts in this case where actual relationship of the creditors with the director/staff members of the company as has not been disclosed by the assessing officer. There cannot be a presumption about their creditworthiness in the absence of disclosure of close relationship of the assessee with the creditors/director or family member of the staff or that the creditors had not withdrawn any amount from the salary as they were living jointly or their expenses were being borne by such close family member.
18. The assessee having failed to give the details of the relationship of family members and the staff member and also having not adduced any evidence to show that they were not under any compulsion to withdraw any amount from the salary or they have their own source of income and have been allotted PAN number, it cannot be said that even, prima facie that primary onus stood discharged.
19. Plea of the learned counsel for the assessee that the identity of the creditors have been established and that the employment of these persons also being not disputed along with the entitlement of salary, the presumption should have been raised about the creditworthiness misses the very essential ingredient of Section 68 of the Income Tax Act, which requires all the three ingredients to be proved and for which the onus shifts at different stages that is initially it lies upon the assessee and when the assessee primarily discharges that onus, then it shifts on the department.
20. The findings recorded by the CIT and ITAT that the department did not adduce any evidence to prove that the creditors were not having any other source of income in fact places even the primary onus of proof upon the department. The onus of proof would come upon the department only when assessee discharges its obligation prima facie.
21. lathe case of CIT v. United Commercial & Industrial Co. (P.)Ltd. Calcutta High Court made the following observations:
In our view, the assessee failed to discharge the primary onus which lay on it to prove the nature and source of the credits. It was necessary for the assessee to prove prima facie the identity of his creditors, the capacity of such creditors to advance the money and lastly the genuineness of the transactions. Only when these things are proved by the assessee prima facie and only after the assessee has adduced evidence to establish the aforesaid facts, the onus shifts on to the department. It is not enough to establish the identity of the creditors. Mere production of the confirmation letters before the Income Tax Officer would not by itself prove that the loans have been obtained from those loan creditors or that they have creditworthiness....(p. 599)
22. Learned counsel for the assessee placed reliance on the case of CIT v. Orissa Corpn. (P.) Ltd. in support of his submission that identity of the creditors having been established, it was duty of the department to take proper course for finding out creditworthiness of the creditors either by exercising powers under Section 131 of the Act or by adducing such evidence which was necessary to discredit creditworthiness. In the aforesaid case Hon'ble Supreme Court was considering the case under Section 271C and the question of shifting onus from the assessee to the creditors in the matter of deleting penalty. The Apex court observed as under:
In this case, the assessee had given the names and address of the alleged creditors. It was in the knowledge of the revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the revenue. The revenue, apart from issuing notices under Section 131 at the instance of the assessee, did not pursue the matter further. The revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises.(p. 84) The aforesaid was a case where creditors were income-tax assessee this fact was known to the department, their index number were in the file of the revenue and that revenue had also issued notice under Section 131 at the instance of the assessee but obviously did nothing about the creditworthiness or their identity which was necessary. The department did not pursue the matter any further. It was in these circumstances that the court observed that the revenue did not examine the source of income of the creditors, to find out whether they were creditworthy or were such who could advance the alleged loan. In the instant case such pleas have neither been pleaded nor raised. The record does not shows that these creditors were income-tax assessee or that they were allotted any PAN. If they were income-tax assessee whether this fact was in the knowledge of the department. No effort or no prayer was made by the assessee to initiate action under Section 131 of the Act and therefore it cannot be said that the assessee discharged primary onus upon him.
23. For the reasons said above, the findings recorded on the deletion of Rs. 3,43,000 by the Commissioner of Income-tax (Appeal) and confirmed by ITAT are not sustainable in law as the absence of the finding on the aforesaid issue of creditworthiness, vitiates the order passed by the Tribunal. We set aside the aforesaid finding and remand the matter to the Commissioner (Appeals) for deciding afresh in accordance with law after affording opportunity to the parties including that of adducing evidence if asked for, by them. The rests of the judgment under appeal is upheld.
24. This appeal is thus partly allowed. The matter is remanded to the Commissioner (Appeals) and it may be decided expeditiously.