2004 (7) TMI 18 - HC - Income Tax

Unexplained income of Rs. 15, 000 - Whether Tribunal was justified in taking the view that the deposits made by the partners on the first day of the accounting period could not be treated as the income of the assessee from unexplained sources? - assessee which is an AOP runs a store - During the assessment proceedings ITO noticed that the three partners invested Rs. 5, 000 each on August 1 1975 the first day of the accounting period relevant to the assessment year in question. ITO added the entire amount of Rs. 15, 000 as income from undisclosed sources - it does appear that the deposit of Rs. 5, 000 by each of the partners was made on the first day of the start of the assessee s business. On the first day of the business it cannot be assumed by any stretch of imagination that the assessee which is a firm though assessed in the status of an AOPs (association of persons) had unexplained income of Rs. 15, 000 Thus Tribunal had rightly deleted the addition

Summary

Issues:
Whether deposits made by partners on the first day of the accounting period can be treated as income from unexplained sources.

Analysis:
The case involved a dispute regarding the treatment of deposits made by partners on the first day of the accounting period as income from unexplained sources. The Income-tax Officer added the entire amount of the deposits as income from undisclosed sources, leading to an appeal by the assessee. The Appellate Assistant Commissioner upheld the Income-tax Officer's decision, stating that the case of the assessee was not substantiated. Subsequently, the assessee appealed to the Appellate Tribunal, which held that since the deposits were made on the first day of starting the business and the assessee had no business prior to the assessment year, the deposits could not be treated as unexplained income. The Tribunal deleted the addition, leading to the current reference to the High Court.

The Revenue contended that once an explanation offered by the assessee regarding the deposit is disbelieved, it should be treated as the income of the assessee for that year, citing relevant case laws. However, the High Court observed that the deposits were made on the first day of starting the business, and it would be unreasonable to assume unexplained income at that point. The High Court distinguished previous case laws cited by the Revenue, noting that those cases involved deposits made after the business was established, unlike the present case where deposits were made at the start of the business. The High Court relied on its previous decisions where similar issues were considered and distinguished from the current case.

After considering the arguments and facts presented, the High Court concluded that the Tribunal had rightly deleted the addition of the deposits as income from unexplained sources. The High Court answered the question of law in favor of the assessee and against the Revenue. Since nobody appeared on behalf of the assessee, no order was issued regarding costs.