ORDER
Pradeep Parikh, A.M.
1. The assesses is in appeal before us against the order of the learned CIT(A) dt. 2nd Sept., 1991, for asst. yr. 1987-88. The only ground raised in the appeal is against the addition of Rs. 2,75,000 as unexplained cash credits and also against the disallowance of interest thereon.
2. Assessee-firm declared a total income of Rs. 3,90,000 for the year under consideration which was assessed to Rs. 8,40,230 under Section 143(3) of the IT Act, 1961 (the Act). In the course of assessment proceedings, it was observed by the AO that following new loans had been received by the assessee.
Sr. No.
Name
Amount
Rs.
1.
Late P.S, Bhatia, HUF
60,000
2.
Miss Neha V. Bhatia
26,000
3
Smt. Shashi V. Bhatia
48,000
4.
Smt. P.P. Bhatia
47,000
1,10,000
5,000
5.
M/s Acme Sales Corporation
2,00,000
6.
Master Beepu Agarwal
75.000
7.
Miss Namita Agarwal
1,40,000
8.
Miss Puja Agarwal
55,000
7,55.000
3. Out of the above, loans of Rs. 3,15,000 from persons mentioned at serial numbers 4 and 5 were treated as explained. The remaining loans of Rs. 4,40,000 were treated as unexplained. However, in case of late P.S. Bhatia, HUF, only the peak amount of Rs. 50,000 was considered for addition. Accordingly A.O. made a total addition Rs. 4,15,000. Out of the total addition of Rs. 4,15,000 additions in case of Deepu. Namita and Puja Agarwal aggregating to Rs 2,70,000 were made on the basis of the decision of the Supreme Court in the case of Jamnapiasad Kanahiyalal v. CTT (1980) 130 ITR 244 (SC) as returns in these three cases had been filed under the Amnesty Scheme. In short, total additions constituted Rs. 1,45,000 in respect of Bhatia family and Rs. 2,70,000 in respect of Agarwal family.
4. In the first appeal, CIT(A) deleted the addition of Rs. 1,45,000 in respect of Bhatia family. However, with respect to Agarwal family, after considering the various facts and circumstances of the case, CIT(A) came to the conclusion that the creditors did not have any ostensible sources for advancing the loans to the assessee. Accordingly, he sustained the addition of Rs. 2,70,000 (though the amount mentioned by him is Rs. 2,75,000) and also disallowed interest thereon
5. The circumstances under which the addition of Rs. 2,70,000 was made, briefly stated are that summons under Section 131 were issued at the request of the assessee. In response to the summons, father and natural guardian of the creditors who were minors, appeared before the AO and their statements recorded. On examination of the bank pass-books of the three children, AO found cash deposits few days prior to the date of advances made to the assessee-firm. The guardians of the children confirmed about advance made to the assessee. When asked to show the sources of the cash deposits, it was explained by the guardians that they represented repayment of previous loans. When asked to furnish the details of previous loans, it was stated by the guardians that since returns of the children had been filed under the Amnesty Scheme and the returns having been accepted, it was not necessary for them to provide the details asked for. Finally, it was stated by the authorized representatives of the assessee that the assessee was not aware of the exact source of income of the children, that the Agarwals were men of status staying in the posh locality of Marine Drive, that they have a good regular business and that the assessee has no business connection with the Agarwals. AO rejected all the contentions made on behalf of the assessee, and relying on the decision in Jamnaprasad Kanhaiyalal (supra), treated the amount of Rs. 2,70,000 as assessee’s income from undisclosed sources As a consequence, interest on these loans was also disallowed. CIT(A) agreed with the findings of the AO and the conclusion arrived at by him and thus confirmed the addition of Rs. 2,75,000 plus interest thereon.
6. Shri Hiro Rai, the learned advocate, appeared for the assessee. After having narrated the facts in detail and as summarized by us above, he contended that the parents of the creditors appeared before the AO, produced their pass-books and confirmed having given the loans. However, since the returns of the children were accepted under the Amnesty Scheme, the parents were of the view that they need not given the details. In any case, it was contended by the learned counsel that the assessee had discharged its onus by explaining the source and the AO could not go into the sources of source.
7. Distinguishing the case of Jamnaprasad Kanhaiyalal. Shri Rai submitted that in that case the disclosure was in the name of the children of the partners of the assessee-firm itself. On the other hand, in the present case, the amnesty returns were filed by outsiders with whom the assessee had no connection at all. It was further contended that in that case, the disclosure was under Voluntary Disclosure Scheme of 1965 wherein if a person made a declaration, the CIT was under an obligation to assess him to tax whereas under the Amnesty Scheme of 1985, there was no such obligation on the CIT. Hence, having accepted the returns under the scheme, the Department could not say that the minors had no capacity to advance. Finally, for his various contentions, Shri Rai also relied on the decisions in Oriental Tdg. Co. Ltd. v. CTT (1963) 49 ITR 723 (Bom), Saraogi Credit Corpn. vs CIT (1975) 103 ITR 344 (Pat), CIT v. Daulat Ram Rawat Mull (1973) 87 ITR 349 (SC) and Satish Tea Co. v. ITO (1994) 74 Taxman 324 (Del).
8. The learned Departmental Representative’s stress was on the contention that the onus was on the assessee to prove the creditworthiness of the creditors even if they were outsiders. Hence, supporting the orders of the lower authorities, the sustenance of the addition was pleaded for.
9. We have carefully considered the rival contentions and the material on record. The short question before us is, whether on the facts and in the circumstances of this case, immunity is available to the assessee in respect of the income declared by the members of the Agarwal family under the Amnesty Scheme of 1985. Main reliance of the Revenue is on the decision of the Supreme Court in the case of Jamnaprasad Kanhaiyalal (supra), whereas the assessee is disputing its applicability to this case. Let us, therefore, first examine the facts, the context and the circumstances of the Supreme Court decision.
10. In that case, cash credits appeared in the names of the five persons, who were all sons of a partner and brothers of other partners of the assessee-firm. It was explained on behalf of the assessee that the credits represented the amounts disclosed by the five persons under the Voluntary Disclosure Scheme under Section 24 of the Finance (No. 2) Act, of 1965. The respective age of the five persons in 1965 ranged from 5 years to 18 years. Partner of the assessee-firm was examined on oath and would not satisfactorily explain the income allegedly earned by the minors. On a consideration of the fact that the minors did not carry on any business of their own and also in the light of the ages of the persons and their very close relationship to the partners of the assessee-firm, the ITO concluded that the money could not but be the undisclosed income of the assessee-firm and treated it as its income.
11. Three-fold contentions were made before the Supreme Court on behalf of the assessee.
(a) It is not permissible for the Department to go into the question of the nature and source of the amount so declared in a voluntary disclosure under Section 24 of the Finance (No. 2) Act, 1965, and to say that it does not represent the income of the declarant.
(b) Sec. 24(1) r/w Section 24(3) of the said Finance Act has an overriding effect over Section 68 of the Act, and, therefore, the ITO could not make any investigation as to the nature and source of the cash credits.
(c) There cannot be double taxation of the same income, once in the hands of the creditors and again in the hands of the assessee.
12. As regards the first contention, the Supreme Court referred to the provisions of Section 24(3) of the Finance Act which contained a legal fiction to the effect that income-tax shall be charged on the amount of the voluntarily disclosed income as if such amount were the total income of the declarant. It then observed that neither the Act of 1922 nor the Act of 1961 required a person to return an income not earned or deemed to have been earned by him. It, therefore, followed the declaration under the scheme had to relate to income actually earned by him which was not to be investigated into and which the CIT was under an obligation to assess to tax. By the legal fiction referred to above, it followed that even though the income did not actually belong to the declarant it would be treated to be his income for payment of income-tax under the scheme. Accordingly, the Supreme Court held that if a person made a false declaration with regard to income not earned by him, it was difficult to comprehend how the Department could be prevented from proceeding against the person to whom the income actually belonged.
13. With regard to the second contention, the Supreme Court referred to Section 24 of the Finance Act and observed that there was nothing which prevented the ITO, if he was not satisfied with the explanation of an assessee about the genuineness or source of an amount found credited in his books, in spite of its having already been made the subject of a declaration by the creditor and then taxed under the scheme. The Court held that there was no warrant for the submission that Section 24 had an overriding effect over Section 68 of the Act, insofar as the persons other than the declarants were concerned.
14. As regards the third contention, the Court observed that in a case of this description, there was no question of double taxation. The situation was of the assessee’s own making in getting false declarations filed in the names of the creditors with a view to avoid higher slab of taxation. Once it was found that the income declared by the creditors did not belong to them, there was nothing to prevent the same being taxed in the hands of the assessee to which it actually belonged.
15. Time and again, Government has made attempts to garner unaccounted resources from the parallel economy through voluntary disclosure schemes, By and large such schemes have been in statute form, as was the scheme of 1965 in the context of which the case of Jamnaprasad Kanhaiyalal (supra) was decided. However, the Amnesty Scheme of 1985 was not in the statute
form but was promulgated by press notes and circulars. If the scheme is in statute form, strict rules of interpretation should apply. However, the rule of strict interpretation cannot be applied to execute orders which do not have formal legislative approval. Nonetheless, certain principles and features may be common. Thus, keeping these observations in view, let us examine the present case is the light of the decision in Jamnapiasad Kanhaiyalal (supra).
16. Taking the last contention first, there cannot be any quarrel with the principle that in cases of such description, there is no question of double taxation. Under the 1985 scheme also it was only his own income which a person was suppose to declare. Hence, if a false declaration was made by the person, and such income was found to be the income of some other person, the latter could be taxed on that income even if it was already taxed in the hands of the declarant.
17. This leads us to the second principle laid down by the Supreme Court, and that is, the declaration does not have an overriding effect over Section 68 of the Act. In other words, AO can enquire into the genuineness of a credit appearing in the books even if the said credit is the subject of declaration under the Amnesty Scheme. In this regard also there is no distinction between the 1965 scheme and 1985 scheme.
18. The above in turn leads us to the first principle laid down by the Supreme Court and which according to us, is the most important one, having a direct bearing on the case before us. On the basis of the provisions of Section 24 of the Finance Act, Supreme Court held that declaration under the scheme had to relate to income actually earned by him which was not to be investigated into and which the Commissioner was under an obligation to assess to tax. On the other hand, under the 1985 scheme, as per Circular No. 441, dt. 15th Nov., 1985, (sJc-Circular No. 451, dt. 17th Feb., 1986) the AOs could not make roving inquiries against the declarants. But certainly, as is evident from the reply to question No. 31 reproduced below, the AO could enquire as to whether the income declared really belong to the declarant or not.
Q. No. 31 ; If an assessee has declared income, would he be required to give evidence of his having earned if and possessing it such as by way of entries in the books of account, etc.?
Answer : He would be well advised to do so.
Thus, unlike the 1965, scheme, under the 1985 Scheme, the CIT could enquire
and even reject the return filed under the Amnesty Scheme.
19. Now, we revert to the facts of the present case. Credits were found in assessee’s books in the names of three minor children of Agarwal family which had no connection with the assessee-firm. The parents of the minor had explained that the incomes of the minors had been declared under the Amnesty Scheme. Since the returns were filed under Amnesty Scheme and the returns having been so accepted. The parents refused to give further details. It was, therefore, held by the Revenue authorities that the income declared did not belong to the declarants. So far so good. But the real question arises now. Can it be treated as the income of the assessee ?
20. Under normal circumstances, it would have been treated as the income of the assessee. What would be the normal circumstances? Normal circumstances
would be one where the creditor and the debtor that is, in whole books the credit is found, are related to each other. Generally, it would be the guardian who would declare income belonging to any family member or a close relative, in the name of a minor. This was the circumstances which, as a matter of fact, prompted the AO to enquire further into the matter in the case of Jamnapiasad Kanhaiyalal. The Supreme Court also observed in no uncertain terms, in the case of Jamnaprasad Kanhaiyalal (supra) as follows :
“The scheme of the Act makes it abundantly clear that it was to protect only those who preferred to disclose the income they themselves had earned in the last and which they had failed to disclose at the appropriate time. It is undoubtedly true that the Act was brought on the statute book to unearth the unaccounted money. But there is no warrant for the provision that by enacting the scheme, the legislature intended to permit, or connive at, any fraud sought to be committed by making Benami declarations. If the contentions were to be accepted, it would follow that an assessee in the higher income group could, with impunity, find out a few near relatives who would oblige him by filing returns under Section 24 of the Act disclosing unaccounted income of the assessee as their own and claiming that the said income was kept by them in deposit with the assessee.”
21. As against the above normal circumstances, in the present case, the assessee has no relationship at all, business or otherwise, with the Agarwal family. This is not to suggest that in all cases where the creditor and the assessee in whose books the credit appears are not related to each other, no addition can be made in the hands of the assessee at all. However, to make such an addition, besides giving a finding that the income does not belong to the creditor, an additional finding will have to be arrived at to the effect that such income belongs to the assessee. In the instant case, the finding that the credits appearing in the assessee’s books are not the income of the creditors may perhaps, be true, But if it is not the income of the creditors, normal presumption would be that it is the income of some related person. The onus is then on the Revenue to overcome this presumption. The parents of the creditors having confirmed that loans have been given to the assessee and the fact that returns of the creditors have been accepted under Amnesty Scheme, the assessee can be said to have discharged its onus. It is farfetched proposition to assume that the assessee would make a Benami declaration through an outside. Reply to question No. 11 in Circular No. 451 is quite pertinent in this regard.
Question No. 11 : Whether ladies and minors can avail of the immunity given by the circulars ?
Answer : Yes, in respect of their own income or wealth certainly. But taxpayers who try to introduce black money and Benami investments in the names of ladies or minors will be doing so at their own risk.
The reference to “taxpayers” in the above reply is obviously to the relatives of the ladies and minors. Therefore, in the instant case, the returns of the minors having been accepted, assessee, in view of the clarification to question No. 31, can be said to be under a bona fide belief that the loans given to it by the minors were from their own income. The assessee would not be blamed if it
could not go further to show the creditworthiness of the minors. The Department did not overcome the presumption that the income declared in the names of minors belonged to the relatives of the minors, Therefore, in our opinion, to treat the credit of Rs. 2,70,000 as the income of the assessee was quite unjustified, and hence, we delete the same. Consequently, disallowance of interest on the said loans is also deleted.
22. In the result the appeal of the assessee is allowed.