Supreme Court Upholds Addition of Unexplained Cash Credits as Income: Vijay Kumar Talwar vs. Commissioner of Income Tax (2010)

Date of the Judgment: 6th December 2010
Citation: (2010) INSC 721
Judges: D.K. Jain, J. and T.S. Thakur, J.

Can an assessing officer add cash credits found in an assessee’s books as income if the assessee fails to provide a satisfactory explanation for the source of those credits? The Supreme Court addressed this question in the case of Vijay Kumar Talwar vs. Commissioner of Income Tax, Delhi. The Court examined whether the Income Tax Appellate Tribunal (ITAT) had correctly upheld the addition of ₹3,49,991 as unexplained cash receipts to the assessee’s income. This case highlights the importance of providing adequate evidence to support claims about the source of funds.

Case Background

The appellant, Vijay Kumar Talwar, was a partner in M/s Des Raj Tilak Raj, a firm with a business in Delhi and a branch in Calcutta. The partnership was dissolved on April 1, 1982, and the appellant took over the Calcutta branch business. On October 21, 1982, the appellant started a proprietary concern under the name M/s Des Raj Vijay Kumar.

On May 27, 1983, a search was conducted at the appellant’s premises, during which incriminating documents were seized. During assessment proceedings for the assessment year 1983-1984, the assessing officer examined the seized records. A register revealed cash receipts of ₹3,49,991 in the names of 15 individuals, mostly between April 1982 and October 1982. The appellant claimed these were realisations from past debtors of the dissolved firm. The assessing officer requested the account books of the Calcutta branch of the former firm, but the appellant failed to produce them. The appellant’s brother, also a partner in the former firm, stated that the books were unavailable.

The assessing officer noted that the outstanding realisations of the Calcutta branch in prior years ranged from ₹25,000 to ₹30,000. He concluded that the appellant’s explanation was untenable and added ₹3,49,991 to the appellant’s income as “unexplained cash receipts” on February 20, 1986.

Timeline

Course of Proceedings

The assessee initially appealed to the Commissioner of Income Tax (Appeals), who dismissed the appeal on December 6, 1989, confirming the assessing officer’s addition. The assessee then appealed to the Income Tax Appellate Tribunal (ITAT), which partly allowed the appeal on September 27, 1994, remitting the matter back to the assessing officer for re-adjudication. The ITAT noted that some entries pertained to the period when the erstwhile firm was in existence, and some entries were prior to April 1982.

The assessing officer, on May 17, 1995, asked the assessee to provide confirmations from the 15 parties in whose names the cash credits appeared. The assessee stated that these were realisations from sales made by the erstwhile firm. The assessee was given multiple opportunities to provide evidence, but the assessee failed to do so. The assessee provided confirmations from 7 parties, which were identical and lacked dates or GIR numbers. The assessing officer sent letters to the parties, but many did not respond, denied any relationship with the firm, or were returned as “not known.”

The assessing officer confirmed the original assessment on March 19, 1996. The Commissioner of Income Tax (Appeals) dismissed the appeal on December 16, 1998, stating that the cash receipts belonged to the assessee. The ITAT partly allowed the appeal on October 23, 2000, but upheld the addition of ₹3,49,991, noting that the confirmations were of no use as they were not correlated with the transactions in the seized register.

The assessee filed a rectification petition under Section 254(2) of the Income Tax Act, which was rejected on September 25, 2001. The assessee then appealed to the High Court under Section 260-A of the Income Tax Act, which was dismissed on December 21, 2001, stating that the findings were pure findings of fact. The High Court also dismissed the review petition on February 19, 2002.

Legal Framework

The case primarily revolves around Section 68 of the Income Tax Act, 1961, which deals with unexplained cash credits. The provision states that if any sum is found credited in the books of an assessee for any previous year, it may be charged to income tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory.

Section 260-A of the Income Tax Act, 1961, outlines the conditions for appealing to the High Court from an order of the Appellate Tribunal. It specifies that an appeal lies only when a substantial question of law is involved.

Section 254(2) of the Income Tax Act, 1961, allows the Tribunal to rectify any mistake apparent from the record.

The Court also referred to the Code of Civil Procedure, 1908, which applies to appeals under Section 260-A of the Income Tax Act.

Arguments

Appellant’s Submissions:

• The Tribunal considered irrelevant materials, making its findings perverse.
• The High Court erred in holding that no substantial question of law was involved.
• The Tribunal had erred in observing that the assessee’s premises were raided due to heavy sales, and that cash amounting to ₹3,49,991 was seized.
• The assessing officer had issued ITNS 150, which the assessee had filed before the Commissioner (Appeals).
• The Tribunal did not take into consideration the arguments and various judgments relied on by the assessee.

Revenue’s Submissions:

• The High Court’s view was correct.
• The impugned orders deserve to be affirmed.
• The findings of the Commissioner of Income Tax and the Income Tax Appellate Tribunal were pure findings of fact.
• Appreciation of evidence does not fall within the jurisdiction of the High Court under Section 260-A of the Income Tax Act.

Innovation in the Argument: The appellant’s argument focused on the perversity of the Tribunal’s findings due to the consideration of irrelevant materials. This argument aimed to establish that the Tribunal’s decision was not based on a sound evaluation of the evidence, thus raising a substantial question of law.

Issues Framed by the Supreme Court

The Supreme Court did not frame any specific issues. However, the core issue was whether the High Court was correct in holding that no substantial question of law arose from the order of the Tribunal, which had upheld the addition of ₹3,49,991 as unexplained cash credits.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the High Court correctly concluded that no substantial question of law arose from the Tribunal’s order. The Court noted that the Tribunal and other authorities had consistently observed that the assessee failed to provide evidence to rebut the presumption against him under Section 68 of the Income Tax Act, 1961. The assessee did not produce the parties in whose names the amounts were credited in his books. The Court emphasized that a bald explanation about the source of credits was not satisfactory.

The Court reiterated that under Section 68 of the Income Tax Act, if any sum is found credited in the books of the assessee, it may be charged to income tax if the explanation offered by the assessee is not satisfactory. The Court concluded that the Tribunal’s finding that the assessee failed to prove the source of the cash credits was not perverse and did not give rise to a substantial question of law.

The Court also stated that the Tribunal is a final fact-finding authority, and in the absence of demonstrated perversity in its findings, interference by the Court is not warranted.

The Court dismissed the appeals with costs of ₹20,000.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The authorities were used to establish the legal principles and definitions of “substantial question of law” and the burden of proof under Section 68 of the Income Tax Act.

• Sir Chunilal V. Mehta & Sons, Ltd. Vs. Century Spinning and Manufacturing Co. Ltd. AIR 1962 SC 1314: Used to explain the definition of a “substantial question of law.”
• Santosh Hazari Vs. Purushottam Tiwari (2001) 3 SCC 179: Used to further elaborate on the definition of a “substantial question of law.”
• Hero Vinoth (Minor) Vs. Seshammal (2006) 5 SCC 545: Used to explain the exceptions to the rule that the High Court will not interfere with concurrent findings of lower courts.
• Madan Lal Vs. Mst. Gopi & Anr. (1980) 4 SCC 255, Narendra Gopal Vidyarthi Vs. Rajat Vidyarthi (2009) 3 SCC 287, Commissioner of Customs (Preventive) Vs. Vijay Dasharath Patel (2007) 4 SCC 118, Metroark Ltd. Vs. Commissioner of Central Excise, Calcutta (2004) 12 SCC 505, and West Bengal Electricity Regulatory Commission Vs. CESC Ltd. (2002) 8 SCC 715: Used to support the principle that a finding of fact may give rise to a substantial question of law if it is based on no evidence or if relevant evidence is not considered.
• Sumati Dayal Vs. Commissioner of Income Tax, Bangalore 1995 Supp (2) SCC 453 and Commissioner of Income Tax Vs. P. Mohanakala (2007) 6 SCC 21: Used to establish the principle that the onus is on the assessee to explain the source of cash credits.

What weighed in the mind of the Court?

The Supreme Court primarily focused on the lack of evidence provided by the assessee to explain the source of the cash credits. The Court emphasized that the assessee had the burden to prove the source of the funds, and a mere explanation was not sufficient. The Court also noted that the Tribunal, as the final fact-finding authority, had not acted perversely.

Fact:Law Ratio

The Court’s reasoning was heavily influenced by the factual aspects of the case, particularly the lack of evidence presented by the assessee to support his claims about the source of the cash credits. The legal aspects, such as the interpretation of Section 68 of the Income Tax Act and the definition of a substantial question of law, played a supporting role in the decision.

The Court considered the alternative interpretation that the cash credits might have been legitimate realisations from past debtors. However, this interpretation was rejected due to the lack of supporting evidence and the assessee’s failure to produce the necessary documentation or witnesses. The final decision was reached by applying the principle that the burden of proof lies with the assessee to explain the source of cash credits and that the Tribunal’s findings, as a final fact-finding authority, should not be interfered with unless there is perversity.

The Court’s decision was based on the following reasons:

• The assessee failed to provide satisfactory evidence to explain the source of the cash credits.
• The Tribunal’s findings were based on the facts and evidence presented.
• The Tribunal, as a final fact-finding authority, did not act perversely.
• No substantial question of law arose from the Tribunal’s order.

The Court quoted the following from the judgment:

“All the authorities below, in particular the Tribunal, have observed in unison that the assessee did not produce any evidence to rebut the presumption drawn against him under Section 68 of the Act, by producing the parties in whose names the amounts in question had been credited by the assessee in his books of account.”

“It is well settled that in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory.”

“The Tribunal being a final fact finding authority, in the absence of demonstrated perversity in its finding, interference therewith by this Court is not warranted.”

Key Takeaways

• Burden of Proof: The assessee has the burden to prove the source of cash credits found in their books of account.
• Importance of Evidence: A mere explanation without supporting evidence is not sufficient to rebut the presumption under Section 68 of the Income Tax Act, 1961.
• Finality of Tribunal Findings: The Income Tax Appellate Tribunal is a final fact-finding authority, and its findings will not be interfered with unless there is demonstrated perversity.
• Substantial Question of Law: An appeal to the High Court under Section 260-A of the Income Tax Act, 1961, requires a substantial question of law, which is not present in cases that involve only findings of fact.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the assessee has the burden to prove the source of cash credits found in their books of account, and a mere explanation without supporting evidence is not sufficient to rebut the presumption under Section 68 of the Income Tax Act, 1961. This case reinforces the existing legal position regarding the onus of proof in cases of unexplained cash credits.

Conclusion

The Supreme Court dismissed the appeals, affirming the High Court’s decision. The Court held that the Tribunal’s order was based on a proper assessment of facts and that the assessee failed to provide satisfactory evidence to explain the source of the cash credits. The Court emphasized the importance of providing adequate evidence to support claims about the source of funds and reiterated that the Tribunal’s findings, as a final fact-finding authority, should not be interfered with unless there is perversity.