R.N.Pyne, J. - (1.) In this reference under Section 256(2) of the I.T. Act, 1961, we are concerned with the assessment year 1963-64, the corresponding account period being the year ended March 31, 1963. The assessee carried on business of manufacturing strand wire, barbed wire, staple hooks and wire nails. In the course of the assessment of the assessee for the said assessment year on a scrutiny of the books of the assessee-company, the ITO found, in the books of account, credits amounting to Rs. 2 lakhs in the name of one M/s. Surajmull Ganeshram on different dates. Thereafter, summons under . Section 131 of the J.T. Act was issued to M/s. Surajmull Ganeshram (hereinafter referred to as " the creditor firm " and in response thereto one Bhudhar-mal Khaitan, a partner of the creditor-firm, appeared on September 6, 1966, and produced the cash book and ledger of the firm. The concerned ITO examined these books and took necessary extracts from the cash book. It was found by the ITO from these extracts that the creditor-firm credited in their cash book in the names of parties who had already admitted that loans appearing in their respective books of accounts in the name of the creditor-firm were their own funds. The ITO also found some discrepancy with regard to the date of one of the credit entries. In the above circumstances, the ITO again issued a summons under Section 131 on May 19, 1967, to the creditor-firm requesting it to produce its books of account and ledger and the bank statement for the period from April 1, 1962, to March 31, 1965. The said documents were, however, not produced by the creditor-firm. The ITO, by his letter dated Februay 28, 1968, requested the assessee to produce the creditor with its books of account of March 5, 1968. In reply to the said letter, the assessee sent a letter dated March 5, 1968, stating that it had already filed a copy of the accounts of the lending firm as also a certificate from it and that one of the partners of 'the creditor-firm appeared before the ITO with the books of accounts. The assessee also filed an affidavit of Shri Bhudharmal Khaitan, a partner of the creditor-firm, wherein it was admitted that the loans made to the assessee-company from year to year were out of cash balance held by the firm. As the assessee failed to produce the creditor with its books of account for verification, the ITO declined to accept the aforesaid affidavit. It appears that the ITO relied on certain enquiries made by him which revealed that the creditor firm was doing the business of name lending only and some of the parties who had received similar loans from the creditor-firm admitted that the loans were not genuine and the credits represented their own money. The ITO was of the view that unless there was positive evidence to show that the creditor was in a position to advance funds, the statements that the money belonged to them could not be accepted. The ITO held that the loans were not proved to be genuine and, therefore, he treated the sum of Rs. 2 lakhs as the assessce's suppressed income from undisclosed sources and made an addition of Rs. 2 lakhs. He also disallowed the interest of Rs. 1,649 in respect of the above loan.
(2.) Being aggrieved by the aforesaid assessment order, the assessee preferred a first appeal to the AAC. It was urged before the AAC that the creditor was a third party, one of its partners appeared before the ITO and produced the books of account and the creditor was assessed to income-tax on substantially high income. The assessment orders of the creditor-firm for the assessment years 1960-61 to 1963-64 were filed before the AAC. It was observed by the AAC that the assessment order, for the year 1963-64 on the creditor-firm, revealed that the loans advanced as per the books exceeded Rs. 185 lakhs whereas the creditor in that year had no such capacity to lend and some of the parties, figuring as debtors, have admitted that the loans shown were their suppressed income. The AAC declined to place any reliance on the said affidavit of the partner of the creditor-firm, Shri Bhudharmal Khaitan. It was held by the AAC that the loans were not proved to be genuine and, therefore, he upheld the addition.
(3.) Against the said order of the AAC, the assessee preferred a second appeal to the Tribunal. After hearing the rival contentions of the parties, the Tribunal was of the view that the loans were genuine. It was found by the Tribunal that the assessee-company maintained accounts in the regular course of business and got receipts showing the repayment of the money. The cash book and ledger of the creditor-firm were produced by one of its partners before the ITO on September 6, 1966, who examined the books and took extracts from them. According to the Tribunal, the assessee-company could be required to prove the source of the loan but not the source of that source. The Tribunal also accepted the affidavit of Shri Bhudharmal Khaitan who had also appeared before the ITO with the books of account of the lending firm on an earlier occasion. The Tribunal perused the assessment orders on the creditor-firm for the assessment years from 1960-61 to 1963-64. From those assessment orders, certain conclusions were drawn by the Tribunal, viz., (i) that the lending-firm had been doing business in jute and money-lending for a long number of years on substantial scale ; (ii) it had been assessed on sufficiently large amounts ; (iii) that each partner of that firm had a large carry forward capital. On a consideration of the entire evidence, the Tribunal was of the view that the creditor was a genuine party and the entries were also genuine. Regarding the enquiries made by the ITO, it was observed by the Tribunal that the ITO could get an enquiry made through an Inspector and rely on the result of such an enquiry, but before doing so he should communicate the substance of the result of the enquiries to the assessee. According to the Tribunal, in the instant case, that was not done. With regard to the onus of proof, the Tribunal observed that the assessee should prove that the person from whom he claims to have received the money is a genuine and not fictitious person and, further, that the entry is also genuine. Thus, the initial burden is on the assessee to explain the receipt of cash and to prove the genuineness of the transaction. The Tribunal applied the ratio laid down by the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723. It was held by the Tribunal that the assessee had discharged the initial burden. It was observed that the Department did not challenge the genuineness of the creditor. According to the Tribunal, the assessee had succeeded in proving that the creditor had the capacity to advance the loan and the entry was genuine. It further observed that the assessee could not be called upon to prove as to how and where from the creditor obtained this money, and why, it advanced the loan to the assessee. It was, therefore, held by the Tribunal that the sum of Rs. 2 lakhs could not have been treated as assessee's income from undisclosed sources and it deleted the addition of Rs. 2 lakhs and also allowed the interest of Rs. 1,649.;