Section 68 Additions can't be made on Deposit in Partners Capital A/c in hands of firm: Allahabad HC

Updated: May 17

HIGHLIGHTS: When the Partners of the Firm are identifiable, nature of credits is duly explained and also recorded in the Partner's Individual Returns which has been accepted by the department. Than, no Addition can be made in Assessee's Firm. The source of Credits is as such explained by the assessee.


DETAILS OF CASE:

1. The records of the case before us indicate that the assessee has described itself as a partnership firm having sixteen partners engaged in the business of cold storage. For the assessment year 1999­-2000, the assessee filed a return of income on 01.11.1999 declaring an income of Rs.36,92,056/­. The case was selected for scrutiny and notices under Section 143(2)/142(1) of the Act were issued. The assessment was thereafter made under Section 143(3) and in terms of an order dated 26.03.2002 the Assessing Officer noted the following credits in the names of the partners:­

2. The Assessing Officer held the credits as unproved and made an addition of Rs.4,00,000/­ under Section 68 of the Act relying upon a decision of this Court in Commissioner of Income Tax, Lucknow v Kapur Brothers, which was a case where the assessee had entered deposits in the books of firm in the names of partners and upon the explanations for deposits being rejected the same were treated as income of the firm and not of the individual partners.


3. An appeal was filed by the assessee against the aforesaid order dated 26.03.2002 before the Commissioner of Income Tax (Appeals), Allahabad, which was partly allowed and the addition made by the Assessing Officer under Section 68 of the Act with regard to the cash credits in the names of the partners in their capital accounts was deleted.

4. The deletion of the cash credits was made on the ground that the partners had shown agricultural income in their returns. It was taken note of that the partners were identifiable and separately assessed to tax and the firm had explained the source of investment as agricultural income of the partners, therefore, if at all additions were to be made, then the same had to be made in the hands of the partners and not in the hands of the firm.

5. Aggrieved against the aforesaid order, the Revenue filed an appeal before the Income Tax Appellate Tribunal, Allahabad being I.T.A. No.344/(Alld) of 2004 to which the assessee filed cross objections, being C.O. No.16(Alld) of2006. The I.T.A.T. by the order impugned dated 30.10.2006partly allowed the appeal filed by the Revenue and dismissed the cross objections filed by the assessee. The Tribunal held that credits in the names of partners as agricultural income were not proved within the meaning of Section 68 and therefore the order of the Assessing Officer treating the same to be as the firm's deemed income, was restored and the order passed by the I.T.A.T., in that regard, was set aside.

6. In order to answer the questions of law upon which the present appeal has been admitted it would be necessary to advert to the provisions contained under Section 68 of the Act. For ease of reference, Section 68 of the Act, as it stood prior to the Finance Act, 2012, is being extracted below: ­

“68. Cash credits—Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the Assessee of that previous year.”

7. As per Section 68, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source of the same or the explanation offered by the assessee is not satisfactory, in the opinion of the Assessing Officer, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

8. The conditions for the applicability of Section 68would therefore be as follows—(i) the existence of books of accounts made by theassessee itself;(ii) a credit entry in the books of account; and(iii) the absence of a satisfactory explanation by theassessee about the nature and source of the amount credited.

9. The requirement under the Section is that the assessee’s to submit an explanation about the nature and source of the sum which has been credited. The explanation furnished by the assessee is to be satisfactory and the creditworthiness or financial strength of the creditor is to be proved by showing that it had sufficient balance in its accounts to explain the source and the credits in the books of accounts of the assessee. The assessee would be required to explain the source of credit in the books of accounts but not the source of the source i.e. source of the creditor. It is seen that although the requirement under Section 68 is that the Assessing Officer must be satisfied that the explanation offered by the assessee is genuine, but it is also provided that in the absence of a satisfactory explanation, the unexplained cash credit “may” be charged to income tax –therefore, the satisfactoriness of the explanation would not automatically result in deeming the amount credited in the books as income of the assessee

10. It is therefore seen that in a case where a sum is credited in the books of account of a firm from a partner, the assessee firm could discharge its onus by proving three things:


  • identity of the creditor;

  • creditworthiness of the creditor; and

  • genuineness of transaction in question.


Once the assessee proves all the three things its onus is discharged. It has also been consistently held that the assessee only needs to prove the source of credit entries and he is not required to prove the source of the source or the creditors' credit. (para 30)

11. In a case where the integrity of the creditors is established and the entries are shown to be not fictitious, the burden would shift on the Revenue


12. In the case at hand, the partners have shown the agricultural income in their personal returns of the past years which had been accepted by the department as such. The partners are all identifiable and separately assessed to tax. The source of investment having been explained, in the event the Assessing Officer was not satisfied the addition could have been considered in the hands of the partners and not in the hands of the firm. The burden of proving the source of the credits having been sufficiently explained the addition could not have been made in the hands of the firm in the facts of the present case.

13. In view of the facts and circumstances the questions of law are answered in favour of the assessee and against the Revenue.

14. The appeal stands, accordingly, allowed.


For Detailed Judgement, Please click here:

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