ORDER
A. Satyanarayana, Vice President
1. This appeal filed by the assessee is against the order of the CIT(A) dated 8-12-1992 for the assessment year 1976-77 for which the previous year ended on 31-3-1976.
2. The assessee is a registered firm. The Assessing Officer (A.O. for short) noticed credits in the names of the following parties :
Rs.
1. Miss Asha Jain 4,000
2. ShriDesRaj 5,000
3. Smt. Santosh Rani Jain 3,000
4. Smt. Maina Devi 2,000
5. Smt. Ratan Mala Jain 2,000
6. Shri Hans Raj Mehta 4,500
20,500
The Assessing Officer vide letter dated 10-12-1986 requested the assessee to establish the identity of the creditors and to submit evidence regarding their creditworthiness and genuineness of the transactions. In response to the same, confirmations have been filed only from Smt. Ratan Mala Jain and Smt. Maina Devi. In respect of the credit in the name of Miss Asha Jain an undated letter signed by one Sushma Jain has been submitted. Confirmations have not at all been filed for the loans in the names of Shri Des Raj and Smt. Santosh Rani Jain. Vide letter dated 7-1 -1987, it has been submitted by the assessee that when business was so large small loans were received in routine course which were duly accounted for. Vide explanation dated 27-1-1987 it had been further submitted that the assessee received large number of deposits from the public against the serial receipts and interest had been paid by cheques and hence the credit should be accepted as genuine. The Assessing Officer mentioned that all the loans under consideration were by cash and that they were not deposits under any Public Deposit Scheme and that there was no evidence for the assessee having issued any public advertisement and received these deposits* The Assessing Officer held that confirmation filed for the loan in the name of Miss Asha Jain was not proper. Moreover, the confirmation signed by Sushma Jain was undated. The Assessing Officer further observed that no explanation had been submitted regarding the capacity of the party who advanced the loans and that none of the parties have been assessed to income-tax. He further observed that the payment of interest by bearer cheques are simple issued of serial receipts, by themselves, would not establish the genuineness of the transactions. Considering all these factors he held that the assessee-firm had not established the identity of the said creditors, their capacity to advance the loans and the genuineness of the loans. Accordingly he added Rs. 20,500 to the assessee’s income under Section 68. He also added Rs. 898 representing interest paid to above said parties. Penalty proceedings under Section 271 (1 )(c) were initiated. This addition of Rs. 20,500 was confirmed by the CIT(A) in the appeal proceedings.
3. The assessee did not respond to the penalty notice dated 5-2-1987. A detailed letter was written to the assessee on 19-1-1989 mentioning the facts of the case in brief and explaining to the assessee as to how it had concealed the particulars of its income by resorting to bogus cash credits. The assessee was requested to show cause as to why penalty under Section 271 (1 )(c) should not be imposed on it in the given circumstances. The assessee was requested to submit its explanation within 15 days from the receipt of the said show cause notice dated 19-1-1989. The assessee filed its reply dated 11-2-1989 wherein it has repeated the old arguments which have been discussed by the CIT(A) and the Assessing Officer. According to the Assessing Officer who passed the order under Section 271(l)(c) dated 9-3-1989, the creditors could not be produced and the evidence regarding the return of the said loans alleged to have been received was not filed. On 15-2-1989 the assessee’s accountant admitted that the assessee has nothing else to say in the matter. On 17-2-1989 the assessee was again asked to produce FDR register and to produce the creditors. The assessee could not produce them. The Assessing Officer concluded that it was obvious that the cash credits of Rs. 20,500 were bogus and that it had been established that the assessee had introduced its concealed income of Rs. 20,500 in the form of bogus cash credits. In that view he levied a penalty of Rs. 15,785 under Section 271(l)(c) of the Act by his order dated 9-3-1989. Aggrieved by the said levy of penalty the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A) the assessee’s counsel argued that the penalty was imposed for the failure of the assessee to substantiate the genuineness of the credits in the names of six parties, that the assessee had filed confirmatory letters in respect of three creditors and produce deposit receipts registers, that penalty proceedings were akin to criminal proceedings, that merely because the assessee’s explanation in regard to the genuineness of cash credits was not accepted by the revenue in assessment proceedings it would not give rise to any conclusion that the assessee had suppressed income, that there should be material on record to prove the nature of the income and that it was taxable, that penalty could not be levied solely on the basis of reasons given in the assessment order, that there was no finding in the penalty order that the credits were bogus, that the addition might be good for assessment proceedings, that in penalty proceedings something more had to be done by the revenue and that admittedly no such thing had been done in the assessee’s case. Accordingly it was admitted that the Assessing Officer was not justified in imposing the penalty under Section 271(l)(c).
5. The CIT(A) confirmed levy of the penalty by observing as under :
I have examined the contentions of the assessee’s A.R. The assessee had filed return on 14-9-1976 showing total income of Rs. 36,314. The matter went in appeal up to ITAT and came back to the ITO and finally assessment was done by the Assessing Officer on 5-2-1987. The learned CIT(A) passed his order on 6-12-1988. Within this span of 12 years the assessee could not file confirmatory letters in respect of cash credits in the names of Miss Asha Jain (Rs. 4,000), Des Raj (Rs. 5,000) and Smt. Santosh Rani (Rs. 3,000). The assessee could not prove creditworthiness of the six cash creditors. The addition made by the Assessing Officer to the tune of Rs. 20,500 being income of the assessee from undisclosed sources was confirmed in appeal by the learned CIT(A) VII, New Delhi vide his order dated 6-12-1988. In the course of penalty proceedings the Assessing Officer wrote a detailed letter to the assessee on 19-1-1989 which was served upon the assessee on 23-1-1989. This letter contained the facts of case in brief and it was explained to him as to how he had concealed the particulars of his income by resorting to bogus cash credits. The assessee was given sufficient opportunities even in the course of penalty proceedings to produce the creditors. The assessee miserably failed to produce them. The Assessing Officer arrived at the conclusion that cash credits of Rs. 20,500 were bogus and the assessee had introduced his concealed income in the form of bogus cash credits. Accordingly, he imposed a penalty of Rs. 15,785 and the order of penalty passed by the Assessing Officer appears to be legally correct in view of the facts mentioned above. I, therefore, confirm the order of penalty passed by the Assessing Officer.
Dissatisfied with the order of the CIT(A), the assessee presented the appeal before the Tribunal.
6. The assessee’s counsel filed a paper book of 20 pages and urged to the following effect: The Assessing Officer stated in the assessment order that all the loans in question are by cash. It is not correct. Some loans are through cheques also. In the case of Shri Hans Raj Mehta the amount of Rs. 4,500 is given in the form of two cheques for Rs. 2,500 and Rs. 2,000. This can be seen at pages 11 and 12 of the paper book where copies of these accounts are given. In the case of Smt. Santosh Rani Jain also the amount of Rs. 3,000 was given by cheque. This can be seen from the copy of her account given at page 10 of the paper book. In the case of Shri Des Raj also, Rs. 3,000 was given by cheque This can be seen at page 13 where copy of his account is given. In the case of Asha Jain, her mother Smt. Sushma Jain has signed the confirmation letter. The Assessing Officer noted that the confirmation letter signed by Smt. Sushma Jain on behalf of her daughter Asha Jain was undated. Even the confirmation letters from Smt. Maina Devi and Smt. Ratan Mala Jain placed at pages 6 and 7 of the paper book were also undated. Confirmation letters in respect of the creditors – Shri Des Raj, Smt. Santosh Rani Jain and Shri Hans Raj Mehta were not filed. In the confirmation letters full addresses have been given. Copies of accounts of all the six creditors with full addresses are filed before the Assessing Officer. Thus, the identity of the creditors, creditworthiness of the creditor and the genuineness of the transactions have been proved. The assessee has discharged the onus put on it by the Act. Whether the creditors are assessed to income-tax or not is irrelevant. During the course of the assessment proceedings the Assessing Officer never asked for production of the creditors. It is not the case of the Assessing Officer that the creditors were not produced even in spite of being asked to do so. Yet the Assessing Officer in his show-cause notice dated 19-1-1989 (placed at page 19 of the paper book) observed that “admittedly the creditors could not be produced”. This is a strange observation. How can the Assessing Officer find fault with the assessee for the alleged non-production of the creditors before him when there is no such demand from him? In the said letter dated 19-1-1989 he again observed that the assessee could not produce the evidence regarding the return of the loans alleged to have been received. This is also a strange observation. In the confirmation letters filed by Smt.. Maina Devi and Smt. Ratan Mala Jain they have confirmed the repayment of the earlier loans. In the case of Smt. Santosh Rani Jain the amount of Rs. 3,000 was paid back to the creditor on 15-10-1975 by cheque No. 510823 as can be seen from page 10 of the paper book. During the course of the assessment proceedings the Assessing Officer has never asked for the evidence regarding the return of loans to the creditors under consideration. Hence, the non-filing of the evidence in that regard does not arise. In the cases of Smt. Maina Devi and Smt. Ratan Mala Jain earlier loans of Rs. 5,000 each have been accepted. Thus it would be seen that the Assessing Officer was not at all justified in adding the impugned amount of Rs. 20,500 under Section 68 of the Income-tax Act, 1961.
7. The arguments of the Departmental Representative were to the following effect: Apart from filing the self serving statements from the creditors, no extraneous evidence to prove the cash credits was filed by the assessee. If the credit is by cash, the onus is more on the assessee. If it is by cheque, the position is explained by the Patna High Court in the case of Addl CIT v. Hanuman Agarwal[1985] 151ITR150. If the creditwor-thiness and genuineness of the transactions are not proved, the case falls under Clause (b) of Explanation 1 under Section 271 (1). In the present case, the assessee is not able to substantiate the explanation given by it. It failed to prove that such explanation was bona fide. Reliance is placed on the decision in the case of Kan dial Manilal v. OT[1981] 130 ITR 411 (Guj.) where the decision of the same High Court in the case of CIT v. Drapco Electric Corpn. [1980] 122 ITR 341 was followed and Banaras Textorium v. CIT[ 1988] 169 ITR 782 (All). Though not specifically invoked by the Assessing Officer, Explanation 1 to Section 271(1) applies. For this proposition, reliance is placed on the decision of the Tribunal dated 3-2-1995 in the case of D.R. Thapar v. ITO in IT Appeal No. 5320 (Delhi) of 1990 copy of which has been filed before the Tribunal.
8. In reply, the assessee’s counsel stated that the assessee requested the Assessing Officer in its reply dated 11-2-1989 to give it an opportunity to lead evidence in regard to the genuineness of credits, if the Assessing Officer is not satisfied with the submissions made therein. The assessee’s counsel further urged that the Assessing Officer should have informed the assessee that he was not satisfied with the submissions made by the assessee and that he should lead evidence in regard to genuineness of the credits as prayed by it. The Assessing Officer has not done so. Hence the assessee cannot be blamed.
9.1 have considered the rival submissions, case law cited and perused the papers filed before me. As already stated in para 2 there were cash credits in the names of six parties. The assessee filed confirmation letters in respect of the credits in the names of Miss Asha Jain, Smt. Maina Devi and Smt. Ratan Mala Jain. It is true that Smt. Sushma Jain has signed the confirmatory letter for her daughter Miss Asha Jain. The assessee has not filed any confirmation letters in respect of Shri Des Raj, Smt. Santosh Rani Jain and Shri Hans Raj Mehta. The Assessing Officer in his assessment order dated 5-2-1987 held that the assessee-firm had not established the full identity of the said creditors, their capacity to advance the loans and the genuineness of the loans. Accordingly, he invoked Section 68 of the Income-tax Act, 1961 and added the amount of Rs. 20,500 in the total income of the assessee. The Departmental Representative contended that as the creditworthiness and the genuineness of the transactions were not proved, the case falls under Clause (b) of Explanation 1 to Section 271(1). The Departmental Representative contended that even though the Assessing Officer has not specifically invoked the said Clause (b) of Explanation 1 to Section 271 (1), the Tribunal has to consider the applicability of the said Explanation 1 as held by the Punjab and Haryana High Court in the case of CIT v. Shri Rajeshwar Singh [ 1986] 162ITR 173. Respectfully following the said judgment of the Punjab and Haryana High Court, I have to see how far this Clause (b) of Explanation 1 under Section 271(1) is applicable to the facts and circumstances of the assessee’s case.
10. As on 14-9-1976 (date of filing the return of income) Explanation 1 under Section 271(1) was as under :
Explanation 1. Where in respect of any facts material to the computation of the total income of any person under this Act,
(a) such person fails to offer an Explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner to be false, or
(b) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :
Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (b) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.
The proviso was omitted with effect from 10-9-1986.
11. In the present case, the assessee explained that the impugned cash credits represented loans from six parties names of whom have been mentioned in para 2. The assessee filed confirmation letters in respect of three creditors, viz., Miss Asha Jain, Smt. Maina Devi and Smt. Rattan Mala Jain. So, it cannot be said that the assessee is not able to substantiate its explanation in respect of the loans from Miss Asha Jain, Smt. Maina Devi and Smt. Ratan Mala Jain. It has to be seen whether it can be said that the assessee has not been able to substantiate its explanation in respect of the other three creditors, namely, Shri Des Raj (Rs. 5,000), Smt. Santosh Rani (Rs. 2,000) and Shri Hans Raj Mehta (Rs. 4,500). In the case of Shri Hans Raj Mehta the amount of Rs. 4,500 was given by two cheques – No. 547825 for Rs. 2,500 and No. 547826 for Rs. 2,000. This can be seen from pages 11 and 12 of the paper book filed by the assessee. There is no material brought on record by the Assessing Officer that these cheques were not issued by the said creditor Shri Hans Raj from his account in the bank. Similarly in the case of Smt. Santosh Rani Jain also the creditor advanced the amount by way of cheque No. 686922 on Punjab National Bank, Gandhi Nagar. This can be seen from page 7 of the assessee’s paper book. There is no material brought on record by the Assessing Officer that this cheque was not issued by the said creditor Smt. Santosh Rani Jain from her account in the bank. In the case of Shri Des Raj, the amount of Rs. 3,000 was given through cheque No. 031557. This can be seen at page 13 of the paper book filed by the assessee. There is no material brought on record by the Assessing Officer that this cheque was not issued by the said creditor Shri Des Raj. Regarding these loans obtained through cheques no material was brought on record by the Assessing Officer on which it could be held that the assessee’s explanation was not bona fide. It can only be said that the assessee is not able to substantiate its explanation that loan of Rs. 2,000 was obtained from Shri Des Raj on 2-12-1975 as mentioned in the copy of the account given at page 13 of the assessee’s paper book. This is because the said creditor was not produced by the assessee before the Assessing Officer. Even a confirmation letter from the said creditor was not filed before the Assessing Officer in respect of the said amount of Rs. 2,000. However, even this loan transaction of Rs. 2,000 is covered by the said proviso under Explanation 1. Since the facts relating to the said transaction and material to the computation of his total income have been disclosed by the assessee and that there was no material on which it could be held that it was not bona fide. .Hence I hold that Clause (b) of Explanation 1 under Section 271(1) cannot be applied here. It cannot be said that the assessee has concealed particulars of its income and furnished inaccurate particulars of such income. On the facts and circumstances of the case I hold that the Assessing Officer was not at all justified in imposing the penalty of Rs. 15,185 under Section 271 (1 )(c) of the Income1tax Act, 1961. Accordingly I delete the impugned penalty.
12. In the result, the appeal is allowed.