TMI Blog2020 (4) TMI 765X X X X Extracts X X X X X X X X Extracts X X X X ..... en shifts to the Revenue to show that the amount in question actually belong to, or was owned by the assessee himself. 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. 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. - Decided in favour of assessee. - Income Tax Appeal No. 17 of 2007 - - - Dated:- 24-4-2020 - Hon'ble Biswanath Somadder And Hon'ble Dr. Yogendra Kumar Srivastava, JJ. For the Appellant : R. R. Agarwal (Senior Advocate) assisted by Umesh Chandra Kesarwani For the Respondent : Manu Ghild ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash Chandra 50,000/010399 ---do--- ---do--- 6 Satish Chandra 50,000/010399 ---do--- ---do--- 7 Harish Chandra Kesharwani 50,000/010399 ---do--- ---do--- 4. The Assessing Officer held the credits as unproved and made an addition of ₹ 4,00,000/under Section 68 of the Act relying upon a decision of this Court in Commissioner of Income Tax, Lucknow v Kapur Borthers [1979] 118 ITR 741 (All) , 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. 5. 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 accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported the order passed by the Tribunal by submitting that the credits having been found in the hands of the firm the onus was on the firm to prove the creditworthiness of the partners as well as genuineness of the transaction and no evidence having been given with regard to agricultural operations of the partners, the transactions in the books of the firm were rightly held to be not genuine and proved within the meaning of Section 68 and there was no infirmity in the order passed by the Tribunal restoring the order of the Assessing Officer and setting aside the order passed by the C.I.T.(A). Reliance has been placed upon the decision in the case of Kapur Brothers (supra) to contend that the cash credits which are unexplained are to be added in the hands of the firm. 12. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows:- The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the words shall be charged to income-tax as the income of the assessee of that previous year . The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word may and not shall . Thus the un-satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 . 17. The question of addition under Section 68 in a case of capital introduced by the partners was considered in Commissioner of Income Tax v Taj Borewells [2007] 291 ITR 232 (Mad) , and taking note of the fact that Section 68 is a charging section and also a deeming provision it was held that once the firm had offered explanation and established that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfactorily explained as income of an assessee, but it was not obligatory to treat such source as income in every case where the explanation offered was found to be not satisfactory. 19. The nature and scope of Section 68 of the Act fell for consideration before the Supreme Court in Commissioner of Income Tax v P. Mohanakala [2007] 291 ITR 278 (SC) , and it was held as follows:- 16. The question is what is the true nature and scope of section 68 of the Act? When and in what circumstances section 68 of the Act come into play? A bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by an assessees; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessees of that previous year. The expression the assessees offer no explanation means where the assessees offer no proper, reasonable and acceptable explanation as regards the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, we answer the question referred to us by holding that the cash credit entries standing in the names of the partners in the account books of the firm could validly be treated as the income of the firm from undisclosed sources. As no one appeared on behalf of the assessee, there will be no order as to costs. 22. The question as to whether in a case where there are cash credit entries in the books of the assessee firm in which accounts of individual partners exist and it is found as a fact that the cash was received by the firm from its partners then in the absence of any material to indicate that there were profits of the firm, the sum so credited could be assessed in the hands of the firm was considered in the decision in Commissioner of Income Tax, Allahabad v Jaiswal Motor Finance [1983] 141 ITR 706 (All) , and it was stated thus:- ... It appears to be well settled that if there are cash credit entries in the books of the firm in which the accounts of the individual partners exist and it is found as a fact that cash was received by the firm from its partners then in the absence of any material to indicate that they were profits of the firm, could not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isfactorily explain the credit entry in the books of account of the previous year and in a case where satisfactory explanation had been given by establishing that the amount had been invested by a particular person, be he a partner or any individual then the burden of the assessee firm is discharged and the credit entry could not be treated to be income of the firm for the purposes of income tax. The relevant observations made in the judgment are as follows:- ... Section 68 of the Act of 1961 says that 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 Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Therefore, according to section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. In case th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idual partners, was upheld. 26. We may also refer to the decision in the case of Abhyudaya Pharmaceuticals v Commissioner of Income Tax [2013] 350 ITR 358 (All) , wherein the earlier decision in the case of Jaiswal Motor Finance was followed on the point that if there are cash credit entries in the books of the assessee firm in which accounts of an individual partner exists, and it is found as a fact that the cash was received by the firm from its partners then in the absence of any material to indicate that the same were profits of the firm, it could not be assessed in the hands of the firm. The judgment in the case of Kapur Brothers was also considered and distinguished on facts. The relevant observations made in the judgment are as follows:- 13. So far as the second limb of the argument that at whose hands the addition should be made is concerned, it is apt to have a look to section 68 of the Income-tax Act. Heading of the said section is Cash Credits and it reads that 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Brothers. The amount was deposited in the name of its partners. The deposits were entered as on October 20, 1966. The accounting period for the assessment year 1967-68 ended on November 11, 1968. The explanation offered by the assessee was not found satisfactory. In this factual background, it was noticed that the entries were made about three weeks prior to the end of the accounting period. In this factual background the High Court held that cash credit entries standing in the name of partners in the account books of the Firm would validly be treated as income of Firm from undisclosed source. 17. On a first flash, it appears that the ratio of the aforesaid decisions given in the case of Kapur Brothers [1979] 118 ITR 741 (All) and Jaiswal Motor Finance [1983] 141 ITR 706 (All) is conflicting, but on a meaningful reading thereof, would show that they were rendered in different factual matrix. The ratio laid down in the case of Kapur Brothers [1979] 118 ITR 741 (All) will be applicable in a case where a partner brings capital amount at the formation of the firm itself, before the commencement of business by the firm. It would not be applicable in a case where the deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added in their hands only and not in the hands of the assessee-firm. 19. On the facts and circumstances of this case, we are of the considered opinion that the authorities below have committed error as they have failed to take into account that this was the first year of the business of the assessee firm. The partnership firm was formed on July 5, 1990 and on July 7, 1990, Master Shishir Garg deposited ₹ 1,90,000 and ₹ 72,000 as capital money with the Firm through bank clearance of two bank drafts. The accounting period being financial year, i.e., ending on March 31, 1991, the Firm could not have any income at the time of its formation. The identity of the depositor, i.e., Master Shishir Garg was not in issue at any point of time before the income-tax authorities. They treated the said deposit by Master Shishir Garg. This being so, if for one reason or the other, they were not satisfied with the financial capability of Master Shishir Garg, the amounts could have been added at the hands of Master Shishir Garg and not at the hands of firm. 20. The decision relied upon by the learned counsel for the Department is clearly distinguishable on facts as it was not in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imself. 29. The question as to whether in a case where money has come from a partner, addition, if any, has to be made in the hands of the partner or of the firm came up for consideration upon the reference under Section 256(1) of the Act in the case of Commissioner of Income Tax v Kishorilal Santoshilal [1995] 216 ITR 9 (Raj) , and referring to the language used under Section 68 and various authorities on the point it was held that in this regard the following points are required to be noted: On the basis of the language used under section 68 and the various decisions of different High Courts and the apex court, the only conclusion which could be arrived at is : (i) that there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party, (ii) that the burden to prove the identity, capacity and genuineness has to be on the assessee, (iii) if the cash credit is not satisfactorily explained the Income-tax Officer is justified to treat it as income from undisclosed sources , (iv) the firm has to establish that the amount was actually given by the lender, (v) the genuineness and regularity i ..... 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