2016 (7) TMI 1290 - HC - Income Tax

Unexplained income u/s 68 - failure of one of the partners to satisfactorily explain the source for his capital contribution to the firm - income in the hands of the partners - explanation offered by the assessee that cash entry to the credit of the account of the partner was derived from the sale of agricultural land by the Hindu undivided family for the said partner - Held that - Since the stand taken was that the amounts had been derived from the sale of agricultural land the sale deed with regard to such sale was asked by the Assessing Officer and the assessee clearly failed to produce the sale deeds and no other cogent document or evidence could be produced by the assessee to satisfy the Assessing Officer that the partner of the assessee was in a position to contribute such an amount in cash to the assessee-firm. The submission of learned counsel for the appellant that the Assessing Officer cannot look into the source of source can only apply to the case of such third party and not where the party is closely connected with the assessee as in the present case. - Decided in favour of the Revenue

Summary

Issues Involved:
1. Whether the capital contribution by a partner, if unexplained, can be treated as unexplained income of the firm under Section 68 of the Income-tax Act.
2. Whether such unexplained capital contribution should be treated as income in the hands of the partners, especially in the absence of any material indicating that the amount was profit of the firm.

Issue-wise Detailed Analysis:

1. Capital Contribution by Partner as Unexplained Income of the Firm:
The court examined whether the unexplained capital contribution by a partner could be added as unexplained income of the firm under Section 68 of the Income-tax Act. The assessee, a partnership firm, was scrutinized for the assessment years 2004-05 and 2005-06. The Assessing Officer (AO) found credit entries in the capital account of a partner, Mohan Himatsingka, totaling Rs. 9,87,039. The assessee failed to provide satisfactory documentary evidence to explain the source of these funds, merely offering the ledger account of the partner, which was deemed self-serving and unacceptable. The AO concluded that the explanation regarding the sources and creditworthiness of the Hindu Undivided Family (HUF) of the partner was unsubstantiated. Consequently, the amount was treated as undisclosed income of the firm. This decision was upheld by the Commissioner of Income-tax (Appeals) and the Tribunal.

2. Income in the Hands of the Partners:
The court also addressed whether the unexplained capital contribution should be treated as income in the hands of the partners. The assessee argued that the onus was on the partner to explain the source of the funds and not on the firm. The court referred to various precedents, including the decisions of the Patna High Court, which emphasized that the onus of proving the source of credit entries lies heavily on the assessee when the entries are in favor of partners or closely connected individuals. The court concluded that the explanation provided by the assessee was unsatisfactory and unsupported by documentary evidence. Therefore, the unexplained capital contribution was rightly added to the income of the firm under Section 68 of the Act.

Conclusion:
The court affirmed that the unexplained capital contribution by a partner can be treated as unexplained income of the firm under Section 68 of the Income-tax Act. The substantial question of law regarding whether the amount should be treated as income in the hands of the partners was answered in the negative, indicating that the unexplained contribution was rightly added to the firm's income. Both appeals were dismissed, upholding the decisions of the lower authorities.