My lender is a genuine assessee and paid me by cheque, but the Assessing Officer says the people who lent to him have no means, and has added the loan to my income. Can he do that?
No, not on that reasoning alone. The Gauhati High Court held that the assessee's burden under section 68 stops at his own transaction: identity of the creditor, genuineness of the transaction with that creditor, and that creditor's creditworthiness. Section 106 of the Evidence Act puts on him only what is within his special knowledge, and what his creditor's own lenders did is not. The Assessing Officer may investigate the sub-creditors, but a failure by them proves nothing against the assessee. Unless there is evidence that the money was in truth the assessee's own, the addition belongs in the creditor's or sub-creditor's hands, not his.
Decided by the High Court (Gauhati High Court - P.P. Naolekar and I.A. Ansari JJ; judgment by Ansari J) on 2003-09-02, reported as (2004) 1 GLR 504; [2003] 264 ITR 254 (Gauhati). It bears on section 68 of the Income Tax Act 1961, in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters.
This is the decision that fixed where the burden stops on a cash credit, and it did so by reading section 68 alongside section 106 of the Evidence Act rather than in isolation. It concedes the Department its full power of enquiry - nothing in section 68 confines the Assessing Officer to the assessee's own transaction - and then holds that the power to enquire is not a power to shift the burden. The corollary the Court refuses is the one every such assessment rests on: that a weak sub-creditor means the money must have come from the assessee. The Court also fixes the standard the Department must then meet, direct evidence or circumstantial evidence that is conclusive and unerring, and holds that where the assessment rests on a wrong view of the law the resulting findings are not mere findings of fact but raise a substantial question of law - which is how the assessee got into the High Court at all.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The appellant carried on a bamboo supply business as sole proprietor of Bamboo Bagicha. For assessment year 1992-93 the Assessing Officer found two loans taken in the year ended 31 March 1992: Rs 4,35,000 from Nemichand Nahata and Sons (HUF) and Rs 5,00,000 from Pawan Kumar Agarwalla. The Hindu undivided family was examined under section 131 and confirmed advancing Rs 4,35,000 by cheque on two dates, explaining that Rs 70,000 was its own and Rs 3,65,000 had come by account payee cheques from three sub-creditors, Jhumku Devi Nahata, Shanti Devi Nahata and Madhu Devi Nahata. All were income tax assessees, but the Assessing Officer found that the three sub-creditors had filed returns for the first time on 17 February 1992 showing seasonal business income without giving purchase or sales figures, and concluded the returns were filed only to enable the loans. He added the whole Rs 4,35,000 under section 68. As to Agarwalla, the Assessing Officer found he had borrowed Rs 4,25,000 from five parties by account payee cheques; those sub-creditors were examined and confirmed the advances, and all were assessees, but he held their files were a capital building exercise to accommodate others, accepted the balance as genuine and added Rs 4,25,000. The Commissioner (Appeals) deleted both additions on 29 February 1996, finding identity and genuineness established. On the Revenue's appeal the Tribunal, on 27 May 2002, restored the additions on the ground that neither the creditors nor the sub-creditors had the creditworthiness to advance the loans. The assessee appealed.
The appeal succeeded, the impugned orders were set aside and quashed, with no order as to costs. The substantial question, whether the Tribunal was justified in demanding proof of the sub-creditors' creditworthiness and drawing an adverse inference from the failure to give it, was answered in the negative. The assessee had established the identity of both creditors and had shown that the amounts came to him by cheque, which was not in dispute, and on that footing he had proved the creditors' creditworthiness for these transactions. The burden then shifted to the Assessing Officer, who failed to show that the money reaching the creditors from the sub-creditors had come from the assessee. The Tribunal seriously erred in treating the amounts as the assessee's undisclosed income merely because the sub-creditors could not prove their creditworthiness. The Court rejected the Revenue's preliminary objection that only questions of fact arose: where findings rest on a wholly erroneous view of law going to the very basis of the assessment, they are not mere findings of fact. It also rejected the argument that this made cheque payments sacrosanct, saying it held no such thing.
The Court found neither side entirely right. On the Department's side it accepted that nothing in the words of section 68 confines the enquiry to the transaction between assessee and creditor, so the Assessing Officer is free to investigate the creditor's and the sub-creditor's sources, and no limitation on that power should be read in. But the assessee's burden is a different thing, and it is set by section 106 of the Evidence Act, which puts on a person only the proof of facts especially within his knowledge. What his creditor did to raise the money is not within the assessee's special knowledge, and the Court would not place a burden the Evidence Act does not impose. Reading the two provisions harmoniously, so that neither is made redundant, the assessee must prove the identity of his creditor, the genuineness of the transaction and the creditworthiness of the creditor, all judged against the transaction he himself had; he need not prove the genuineness of the dealings between creditor and sub-creditor or the sub-creditor's means. Once he discharges that, the onus shifts. To assess the amount as his undisclosed income the Department must then show, by direct evidence or by circumstantial evidence that is conclusive, that the money actually belonged to him and flowed from him to the sub-creditor and on to the creditor. The circumstantial evidence must be consistent with that hypothesis and inconsistent with any other; if the money may or may not have been his, the addition cannot be made against him. A person may hold funds from any source and there is no bar on borrowing from him; if the creditor cannot explain his own money it may be assessed as the creditor's or the sub-creditor's undisclosed income, but that failure cannot travel down to the assessee. The Court followed Tolaram Daga v CIT (1966) 59 ITR 632 (Assam), which had held on similar facts that requiring proof of the depositor's own sources places a burden not justified by law and that no adverse inference may be drawn from failure to give it.
it is not the burden of the assessee to show the source(s) of his creditor nor is it the burden of the assessee to prove the creditworthiness of the source(s) of the sub-creditors.
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Handle my notice → Ask a CA on WhatsAppNo, not on that reasoning alone. The Gauhati High Court held that the assessee's burden under section 68 stops at his own transaction: identity of the creditor, genuineness of the transaction with that creditor, and that creditor's creditworthiness. Section 106 of the Evidence Act puts on him only what is within his special knowledge, and what his creditor's own lenders did is not. The Assessing Officer may investigate the sub-creditors, but a failure by them proves nothing against the assessee. Unless there is evidence that the money was in truth the assessee's own, the addition belongs in the creditor's or sub-creditor's hands, not his. This was decided by the High Court (Gauhati High Court - P.P. Naolekar and I.A. Ansari JJ; judgment by Ansari J) and bears on section 68 of the Income Tax Act 1961. It is reported as (2004) 1 GLR 504; [2003] 264 ITR 254 (Gauhati). This is the decision that fixed where the burden stops on a cash credit, and it did so by reading section 68 alongside section 106 of the Evidence Act rather than in isolation. It concedes the Department its full power of enquiry - nothing in section 68 confines the Assessing Officer to the assessee's own transaction - and then holds that the power to enquire is not a power to shift the burden. The corollary the Court refuses is the one every such assessment rests on: that a weak sub-creditor means the money must have come from the assessee. The Court also fixes the standard the Department must then meet, direct evidence or circumstantial evidence that is conclusive and unerring, and holds that where the assessment rests on a wrong view of the law the resulting findings are not mere findings of fact but raise a substantial question of law - which is how the assessee got into the High Court at all. If it applies to you, the first step is this: Discharge the three limbs on your own transaction and stop there: confirmation and identity of the creditor, the banking trail, and enough about the creditor to show he could lend what he lent.
The appellant carried on a bamboo supply business as sole proprietor of Bamboo Bagicha. For assessment year 1992-93 the Assessing Officer found two loans taken in the year ended 31 March 1992: Rs 4,35,000 from Nemichand Nahata and Sons (HUF) and Rs 5,00,000 from Pawan Kumar Agarwalla. The Hindu undivided family was examined under section 131 and confirmed advancing Rs 4,35,000 by cheque on two dates, explaining that Rs 70,000 was its own and Rs 3,65,000 had come by account payee cheques from three sub-creditors, Jhumku Devi Nahata, Shanti Devi Nahata and Madhu Devi Nahata. All were income tax assessees, but the Assessing Officer found that the three sub-creditors had filed returns for the first time on 17 February 1992 showing seasonal business income without giving purchase or sales figures, and concluded the returns were filed only to enable the loans. He added the whole Rs 4,35,000 under section 68. As to Agarwalla, the Assessing Officer found he had borrowed Rs 4,25,000 from five parties by account payee cheques; those sub-creditors were examined and confirmed the advances, and all were assessees, but he held their files were a capital building exercise to accommodate others, accepted the balance as genuine and added Rs 4,25,000. The Commissioner (Appeals) deleted both additions on 29 February 1996, finding identity and genuineness established. On the Revenue's appeal the Tribunal, on 27 May 2002, restored the additions on the ground that neither the creditors nor the sub-creditors had the creditworthiness to advance the loans. The assessee appealed. The matter was decided on 2003-09-02 by the High Court (Gauhati High Court - P.P. Naolekar and I.A. Ansari JJ; judgment by Ansari J). On those facts the High Court held as follows. The appeal succeeded, the impugned orders were set aside and quashed, with no order as to costs. The substantial question, whether the Tribunal was justified in demanding proof of the sub-creditors' creditworthiness and drawing an adverse inference from the failure to give it, was answered in the negative. The assessee had established the identity of both creditors and had shown that the amounts came to him by cheque, which was not in dispute, and on that footing he had proved the creditors' creditworthiness for these transactions. The burden then shifted to the Assessing Officer, who failed to show that the money reaching the creditors from the sub-creditors had come from the assessee. The Tribunal seriously erred in treating the amounts as the assessee's undisclosed income merely because the sub-creditors could not prove their creditworthiness. The Court rejected the Revenue's preliminary objection that only questions of fact arose: where findings rest on a wholly erroneous view of law going to the very basis of the assessment, they are not mere findings of fact. It also rejected the argument that this made cheque payments sacrosanct, saying it held no such thing.
The Court found neither side entirely right. On the Department's side it accepted that nothing in the words of section 68 confines the enquiry to the transaction between assessee and creditor, so the Assessing Officer is free to investigate the creditor's and the sub-creditor's sources, and no limitation on that power should be read in. But the assessee's burden is a different thing, and it is set by section 106 of the Evidence Act, which puts on a person only the proof of facts especially within his knowledge. What his creditor did to raise the money is not within the assessee's special knowledge, and the Court would not place a burden the Evidence Act does not impose. Reading the two provisions harmoniously, so that neither is made redundant, the assessee must prove the identity of his creditor, the genuineness of the transaction and the creditworthiness of the creditor, all judged against the transaction he himself had; he need not prove the genuineness of the dealings between creditor and sub-creditor or the sub-creditor's means. Once he discharges that, the onus shifts. To assess the amount as his undisclosed income the Department must then show, by direct evidence or by circumstantial evidence that is conclusive, that the money actually belonged to him and flowed from him to the sub-creditor and on to the creditor. The circumstantial evidence must be consistent with that hypothesis and inconsistent with any other; if the money may or may not have been his, the addition cannot be made against him. A person may hold funds from any source and there is no bar on borrowing from him; if the creditor cannot explain his own money it may be assessed as the creditor's or the sub-creditor's undisclosed income, but that failure cannot travel down to the assessee. The Court followed Tolaram Daga v CIT (1966) 59 ITR 632 (Assam), which had held on similar facts that requiring proof of the depositor's own sources places a burden not justified by law and that no adverse inference may be drawn from failure to give it. In the words reproduced by the source cited on this page: "it is not the burden of the assessee to show the source(s) of his creditor nor is it the burden of the assessee to prove the creditworthiness of the source(s) of the sub-creditors."
It was decided by the High Court on 2003-09-02 and is reported as (2004) 1 GLR 504; [2003] 264 ITR 254 (Gauhati). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 68, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal succeeded, the impugned orders were set aside and quashed, with no order as to costs. The substantial question, whether the Tribunal was justified in demanding proof of the sub-creditors' creditworthiness and drawing an adverse inference from the failure to give it, was answered in the negative. The assessee had established the identity of both creditors and had shown that the amounts came to him by cheque, which was not in dispute, and on that footing he had proved the creditors' creditworthiness for these transactions. The burden then shifted to the Assessing Officer, who failed to show that the money reaching the creditors from the sub-creditors had come from the assessee. The Tribunal seriously erred in treating the amounts as the assessee's undisclosed income merely because the sub-creditors could not prove their creditworthiness. The Court rejected the Revenue's preliminary objection that only questions of fact arose: where findings rest on a wholly erroneous view of law going to the very basis of the assessment, they are not mere findings of fact. It also rejected the argument that this made cheque payments sacrosanct, saying it held no such thing. It arises in Cash Credits & Unexplained Money and Evidence & Burden of Proof matters, on section 68 of the Income Tax Act 1961, and was decided by Gauhati High Court - P.P. Naolekar and I.A. Ansari JJ; judgment by Ansari J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. When the notice asks about the source of the source, answer that the enquiry is open to the officer but the burden is not yours, and cite section 106 of the Evidence Act with this case. Make the Department state its positive case. Ask what evidence shows the money was yours before it reached the sub-creditor, since without that the addition cannot stand. Do not rest on the cheque alone. The Court expressly declines to treat payment by cheque as sacrosanct; it is the discharge of all three limbs that shifts the burden. For assessment years from 2023-24, check the present text of section 68 before relying on this case for a loan, because the statute now requires the creditor's own source to be explained in specified situations.
Still good law. This is among the most cited High Court decisions on the burden under section 68 and I found nothing in the judgment casting doubt on it, but I checked no later decision and cannot say whether it was appealed. It binds only in the Gauhati High Court's jurisdiction and is persuasive elsewhere. Its practical reach has been narrowed by statute in ways this judgment could not address, and which I state from my own knowledge without having verified them here: section 68 now carries a proviso requiring a closely held company to have the source of its share capital and share premium explained by the resident shareholder, and a further proviso extending a source of the source requirement to sums borrowed, which a reader must check in the current text before applying this case to a recent year. Section 115BBE also now taxes such additions at a special rate. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment does not say what became of the additions in the hands of the creditors or the sub-creditors, whom the Court thought were the proper persons to assess if anyone. It also does not tell us what enquiry, if any, the Department made into whether the money had originated with the assessee, beyond recording that no such evidence was on record. The statutory changes to section 68 noted in the validity field were not checked against a source in this session. I have not traced any appeal from this decision or read the Tribunal order. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal succeeded, the impugned orders were set aside and quashed, with no order as to costs. The substantial question, whether the Tribunal was justified in demanding proof of the sub-creditors' creditworthiness and drawing an adverse inference from the failure to give it, was answered in the negative. The assessee had established the identity of both creditors and had shown that the amounts came to him by cheque, which was not in dispute, and on that footing he had proved the creditors' creditworthiness for these transactions. The burden then shifted to the Assessing Officer, who failed to show that the money reaching the creditors from the sub-creditors had come from the assessee. The Tribunal seriously erred in treating the amounts as the assessee's undisclosed income merely because the sub-creditors could not prove their creditworthiness. The Court rejected the Revenue's preliminary objection that only questions of fact arose: where findings rest on a wholly erroneous view of law going to the very basis of the assessment, they are not mere findings of fact. It also rejected the argument that this made cheque payments sacrosanct, saying it held no such thing.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
Can the whole of a bogus purchase be added, rather than a percentage?