R.V. Raveendran, C.J.
1. This reference is made by the Tribunal. Jabalpur Bench, by Statement of Case dt. 5th May, 1999 (in RA No. 107, 105 and 111/Jab/1998) in respect of its common order dt. 28th May, 1998 in ITA Nos. 282/Jab/1994, 263/Jab/1994 and 376/Jab/1995 regarding the asst. yrs. 1989-90, 1990-91 and 1991-92. The four questions of law referred are :
Common questions for all three years
'(1) Whether the Tribunal was justified in holding that in respect of deposit against tenancy, the assesses was only required to prove the identity of the depositors and that the deposit was made by the tenants ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had discharged the burden in respect of deposits of Rs. 2,70,000, Rs. 1,05,000 and Rs. 85,000 received from tenants during accounting year relevant to asst. yrs. 1989-90, 1990-91 and 1991-92 ?'
Note : In the second question, the Tribunal had wrongly mentioned the asst. yrs. '1990-91, 1991-92 and 1992-93' instead of '1989-90, 1990-91 and 1991-92'. This typographical mistake has been corrected with the consent of both counsel.
Additional questions for the asst yr. 1990-91
'(3) Whether the Tribunal was justified in holding that reference to the DVO under Section 131(1)(d) can be made only during the pendency of assessment proceedings and neither earlier nor subsequent ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the valuation report of DVO and directing the AO to make the addition as per the valuation made by the approved valuer ?'
Re. Question No. (1)
2. Section 68 of the IT Act, 1961 ('Act' for short) provides that where any sum is . found credited in the books of an assessee, for which the assessee offers no explanation about the nature and source, or the explanation offered is not satisfactory in the opinion of the AO, the amount so credited may be charged to income-tax as income of the assessee.
3. The Revenue contends that whenever an assessee claims that he has received any sum from a third party as a loan or advance or deposit and such sum is credited in the books of the assessee, the onus lies on the assessee to establish (a) the identify of the party; (b) the capacity of such party to advance or deposit the money; and (c) the genuineness of the transaction. It is submitted that where the assessee fails to prove satisfactorily the source of the depositor, the nature of receipt and genuineness of the receipt of the deposit, the AO is entitled to draw an inference that the amount in question is the undisclosed income of the assessee. It is however not disputed that once those three conditions are established by the assessee, the onus would shift to the Department if it still wants to treat the amount as undisclosed income of the assessee.
4. On the other hand, the assessee submits that in respect of tenancy deposits it is sufficient if the assessee establishes the identity of the depositor and the genuineness of the transaction/deposit. It is submitted that it is not necessary for the assessee to prove the source of the funds which the tenant deposits with him. It is pointed out that the assessee cannot be presumed to have knowledge about the source of the depositor and the fact that the assessee is unable to disclose the source from which the depositor got the deposit amount, cannot be held against the assessee. The assessee contends that once he establishes that he has received the amount as a deposit relating to the tenancy, his onus is discharged and it is for the tenant to explain the source of the money. It is further contended that the deposit amount cannot be charged as the assessee's income in the absence of any material to show that it was the unexplained income of the assessee.
5. The position in regard to a deposit or advance paid by a tenant in regard to a lease of a premises, is different from 'a loan' from a third party. A lease or tenancy is governed by the terms of the lease deed or tenancy agreement. When the premises is let out on terms mutually agreed and one such term relates to the deposit or advance which the tenant agrees to pay, it is not necessary for the landlord to ascertain the source from which the tenant gets the amount to pay as a deposit/advance. Further, as the lessee/tenant will always be available for verification as he will be in occupation of the premises, the fact whether he has paid the deposit or not can be easily verifiable. Therefore, in regard to deposits from tenants, it is sufficient if the assessee proves the identity of the tenant and the genuineness of the transaction under which the deposit is made. It will not be necessary for the assessee to prove the capacity of the tenant to make the deposit/advance. It is well known fact that when persons take premises on rent, invariably they will organise the funds required to pay an advance or deposit.
6. In Orient Trading Co. Ltd. v. CIT : [1963]49ITR723(Bom) , a Division Bench of Bombay High Court enunciated the position thus :
'When, however, in a case where the entry stands in the name of the third party, the assessee satisfies the ITO as to the identity of the third party and also supplies such other evidence which will show, prima facie, that the entry is not fictitious, the initial burden which lies on him can be said to have been discharged by him. It will not, thereafter, be for the assessee to explain further how or in what circumstances the third party obtained money and how or why he came to make a deposit of the same with the assessee. The burden will then shift on to the Department to show why the assessee's case cannot be accepted and why it must be held that the entry, though purporting to be in the name of a third party, still represents the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the Department has to be in possession of sufficient and adequate material.'
(emphasis, italicised in print, supplied)
The above legal position was followed, and reiterated by the Patna High Court in Sarogi Credit Corporation v. CIT : [1976]103ITR344(Patna) and this Court in Ashok Pal Daga v. CIT : [1996]220ITR452(MP) .
7. Therefore, we are of the view that where the tenancy is established and the tenant is actually in occupation of the premises and a lease deed or tenancy agreement is produced showing the amount agreed to be paid as deposit and the deposit is paid by cheque or demand draft and is duly accounted in the books of account of the assessee as also the tenant, it should be held that the assessee has discharged his burden under Section 68 of the Act. If the AO still wants to treat such amount as unexplained income of the assessee, then the burden lies on the Revenue to establish that the deposit was not really a deposit by the tenant, but the unexplained income of the assessee channelised through the 'tenant'. The first question is, therefore, answered in the affirmative. It is however clarified that the identity of the depositor and the genuineness of the deposit have to be established by showing that the person making the deposit is in occupation of the assessee's premises as a tenant or had occupied the premises for a considerable time and the deposit was paid by cheque/bank draft and borne out by books of account of both assessee and tenant and by the lease agreement, wherever such lease agreement exists.
Re. Question No. (2)
8. The assessee along with his brother Rewa Chand Ahuja constructed and owned a, shopping complex, portions whereof had been let out to various tenants. The assessee showed that he had received sums of Rs. 2,95,000, Rs. 1,05,000 and Rs. 85,000 as deposits from the tenants during the accounting years relevant to asst. yrs. 1989-90, 1990-91 and 1991-92. The AO did not accept the creditworthiness of the depositors. He held that the tenants/depositors had credited cash to their accounts either on the date of issue of cheques or only a few days earlier to the issue of the cheques to the assessee; and that showed that the depositors had apparently helped the assessee by depositing the assessee's funds to their account and then issuing cheques to the assessee by way of deposit, for the tenancies. Therefore, he added Rs. 2,95,000, Rs. 1,05,000 and Rs. 85,000, respectively as unexplained income under Section 68 of the Act. On appeal, the CIT(A) granted relief only to an extent of Rs. 25,000 in regard to the asst. yr. 1989-90 and Rs. 60,000 in regard to asst. yr. 1991-92 and confirmed the addition of the balance of Rs. 2,70,000 for asst. yr. 1989-90, Rs. 1,05,000 for asst. yr. 1990-91 and Rs. 25,000 for asst. yr. 1991-92.
9. In further appeal by the assessee and appeal by the Revenue, the Income-tax Appellate Tribunal (for short, the Tribunal) in a common order recorded the following findings of fact : (a) that deposits were received by the assessee by cheques; (b) that the assessee had produced confirmation of deposit from the persons who deposited the amounts except in one case, namely, R.K. Ahuja (Sanjay Enterprises); and the bank statements confirmed the payments; (c) that the rental agreements were produced by the assessee to establish the depositors were tenants who were running their businesses in shops in the assessee's premises; and (d) that the assessee was receiving the rents from such tenants/depositors. The Tribunal was of the view that in regard to deposits received from the tenants, it is sufficient if the identity of the depositors as tenants and the payment of the deposits by tenants were established and it was not necessary for the assessee to further establish the creditworthiness or capacity of the tenants to pay the deposits. In the circumstances, the Tribunal held that the assessee had proved the identity of the tenants (depositors) and the genuineness of the transaction and, therefore, these tenancy deposits cannot be. added to the income under Section 68 of the Act. As a consequence, the entire additions of Rs. 2,95,000, Rs. 1,05,000 and Rs. 85,000 for the three assessment years were deleted by the Tribunal.
10. It cannot be expected that every person who takes a shop on rent, will have a bank account or ready funds to meet the rental advance/deposit. When a person takes a shop on rent to open a new business, it is quite normal for him to open a bank account, mobilise the funds required to meet the rental deposit and capital for the business, either from his own sources or from friends, relatives, financial institutions or lenders, and when the deal regarding lease is finalised, issue a cheque for the advance/deposit. There is also nothing strange about the tenants remitting the cash to their bank accounts to meet the amount of the cheques issued by them towards rental deposit. Once the identity of the tenant is established and the genuineness of the transaction is also established by producing the lease agreement and by proving that such tenant continues in possession and by showing that the books of account of the tenant also reflected the deposit, the fact that the tenants did not have the funds earlier to meet the cheques and had remitted the amount to their accounts to meet the cheques only a few days before issue of the cheque, is not relevant. In fact in this case, some of the tenants were also income-tax assessees.
11. We, therefore, find that the onus of proof under Section 68 has been discharged by the assessee, and the burden shifted to the Revenue. The Revenue has not shown that the deposits were really funds of the assessee. Even if the AO has some doubt about the capacity of the tenant, at best, that would be a good ground for taking action against the tenant and not against the assessee.
12. However, we find that in regard to one tenant (Sanjay Enterprises), who is said to have paid deposit of Rs. 40,000 (Rs. 20,000 + Rs. 20,000), there was absolutely no documentary evidence. Neither bank statements establishing the payments, nor any confirmation by the tenant were furnished. In the absence of any kind of evidence, the AO and the appellate authority were justified in holding that the assessee had failed to prove that the transaction was genuine. We find that the Tribunal has not given any reason to disagree with the finding of fact recorded by the AO and the appellate authority, nor assigned any reason to hold the transaction relating to Rs. 40,000 as genuine. We agree that the said sum of Rs. 40,000 will have to be added to the income of the assessee. We, therefore, hold that the Tribunal was justified in holding that the assessee had discharged the burden in respect of deposits aggregating to Rs. 2,55,000, Rs. 1,05,000 and Rs. 85,00.0, respectively received from the. tenants during the accounting years relevant to asst. yrs. 1989-90, 1990-91 and 1991-92. Second question is answered accordingly
Re. Question No. (3)
13. In regard to asst. yr. 1990-91, the AO found that the assessee and his brother Rewa Chand Ahuja had disclosed the cost of construction of a building owned by them along with one Deepchand as Rs. 8,00,000, of which Rs. 4,40,000 was shown as contributed by the assessee and his brother Rewachand and the balance of Rs. 3,60,000 by the other co-owner Deepchand. The AO referred the matter to the Departmental Valuation Officer (DVO) on 29th Nov., 1989 who estimated the cost of construction of the portion owned by the assessee and his brother Rewachand at Rs. 6,51,000. The difference in cost of construction, namely, Rs. 2,11,000 was held to be unexplained investment. As a consequence, Rs. 1,05,500 being 50 per cent of Rs. 2,11,000 was added to the assessee's income under Section 69 of the Act and the remaining Rs. 1,05,500 was added to the income of Rewachand Ahuja.
14. On appeal, the CIT(A) reduced the addition to Rs. 81,000. Both the assessee and the Revenue challenged the order of the CIT(A) before the Tribunal. The Tribunal found that the reference to DVO was made by issue of a commission under Section 131(1)(d) of the Act on 29th Nov., 1989, whereas the return of income for the said year was filed on 31st Jan., 1991; and that the notice under Section 143(2) for initiation of assessment proceedings was issued on 30th Nov., 1992. Thus, no proceeding relating to the asst. yr. 1990-91 was pending as on 29th Nov., 1989, when the reference was made to the DVO. The Tribunal was of the view that a commission under Section 131(1)(d) of the Act could be issued only during the pendency of the assessment proceeding and that reference by the AO to the DVO on 29th Nov., 1989 being long prior to the initiation of the assessment proceeding, was not valid. Consequently, the Tribunal held that the valuation report of DVO should be ignored. As the assessee had produced the valuation report from a Government approved valuer showing the entire cost of construction as Rs. 8,50,000, the Tribunal directed the AO to adopt the cost of construction of the entire commercial complex at Rs. 8,50,000 and make corresponding addition in the hands of the assessee.
15. The Revenue does not dispute that the AO had issued a commission to the DVO under Section 131(1)(d) of the Act to value the premises on 29th Nov., 1989 long prior to the commencement of assessment proceedings relating to asst. yr. 1990-91. Section 131(1) of the Act provides that the AO shall have the same powers as are vested in a Court under the CPC, 1908, when trying a suit, in respect of the matters enumerated including issue of commission. What is significant is use of the words 'when trying a suit'. A Court can issue a commission only during the pendency of the suit. As the powers, vested in the AO are the same powers as are vested in a Court, it follows that the AO can issue a commission only if a proceeding is pending before him.
16. The Bombay High Court in Jamnadas Madhavji & Co. & Am. v. J.B. Panchal, ITO and Anr. : [1986]162ITR331(Bom) held that:
'It will be noticed that the officers mentioned in Section 131(1) of the IT Act, 1961, viz., the ITO...... Commissioner are conferred with the same powers as are vested in a Court under the. CPC, 1908, when trying a suit. The CPC confers upon the Court powers, for the exercise whereof, existence of a suit or a proceeding is a sine qua non. Pari materia, therefore, powers in respect of matters mentioned in Sub-section (1) of Section 131, viz., (a) discovery and inspection; (b) enforcing the attendance of any person and examining him on oath; (c) compelling the production of books of account and other documents; and (d) issuing commissions, can be exercised only if a proceeding is pending before the concerned officer and not otherwise. For the exercise of such power, existence or pendency of a proceeding is, therefore, a must........ The Taxation Laws (Amendment) Act, 1975, introduced Sub-section (1A) in Section 131. Under this subsection, if the Asstt.. Director of Inspection has reason to suspect that any income has been concealed........ then, for any enquiry or investigation relating thereto, it shall be competent for him to exercise the powers conferred under Sub-section (1) of Section 131, 'notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other IT authority'.
Absence of this non obstante clause in Section 131(1) is significant. Reading Section 131(1) and Section 131(1A) together, it is obvious whereas an officer mentioned in Sub-section (1) can exercise powers thereunder only if a proceeding is pending before him, the officer mentioned in Section 131(1A), viz., the Asstt. Director of Inspection, can exercise such powers notwithstanding that no proceedings are pending before him or before any other officer.
Also relevant to the context is the form of the summons under Section 131(1) which commences with the words : 'whereas your attendance is required in connection with the proceedings under the IT Act in your case'. The form also assumes and presupposes the existence of a pending proceeding before the concerned officer. Further, Expln. 2 to Section 132 of the Act also indicates that but for its artificial and extended definition of the word 'proceeding', proceeding would mean one actually pending and not one completed and concluded.'
16.1 In Smt. Rina Sen v. CIT : [1999]235ITR219(Patna) , the High Court held as follows (placitum) :
'The existence of a pending proceeding is a condition precedent and sina qua non for the exercise of power under Section 131(1) of the IT Act, 1961. The words 'notwithstanding that no proceeding with respect to such person or class of persons are pending' occurring in Sub-section (1A) of Section 131 leave no room for doubt that while the authorities specified under Section 131(1A) of the Act are empowered to take action if there is 'reason to suspect' that any income has been concealed or is likely to be concealed by any person or class of persons even though no proceeding with respect to such person or class of persons is pending before him or any other IT authority, the authorities specified in Section 131(1) of the Act can do so only if a proceeding is pending before them. The proceeding within the meaning of Section 131(1) of the Act must, therefore, be an independent proceeding pending from before and it is only in connection with that proceeding that commission can be issued.'
17. We respectfully agree with the above observations. In this case, as no proceeding in regard to asst. yr. 1990-91 was pending before him on 29th Nov., 1989, obviously he could not have issued the commission under Section 131(1)(d).
Third question is answered accordingly in the affirmative.
Re. Question No. (4)
18. In view of our answer to question No. (3), it follows that issue of a commission by the AO on 29th Nov., 1989 prior to the initiation of the assessment proceedings relating to asst. yr. 1990-91 was not valid and consequently, the valuation report of the DVO received in pursuance of invalid commission cannot be made use of. If the same is excluded, what was available was the valuation report of the approved valuer which showed the value of the commercial complex as Rs. 8,50,000 as against Rs. 8,00,000 declared by the assessee and other two owners. Therefore, the question No. (4) is also answered in the affirmative.
The reference is disposed of accordingly.