2015 (11) TMI 389 - HC - Income Tax

Addition made in the hands of the firm with regard to the amounts related to capital account of the partners in the books of the firm - Held that - In the present matter, the partners were also assessees and had been summarily assessed under Section 143 (1) of the Act for several years prior to the assessment year 1991-92. They have brought in the said amount to be included as a capital to the firm. Evidently, it is for the partner to explain the source of the said funds and it was not open to the Assessing Officer to have treated the said amounts as income of the firm as there was no business of the firm to carry forward such income, and it was not in dispute that the amounts had been brought in by the partners into the firm. In the said circumstances, the Tribunal has rightly held that if at all the assessments had to be made, they may be of the partners of the firm and not the firm itself and such amounts could not have been treated as income of the firm by relying upon Section 68 of the Act. - Decided against revenue.

Summary

Issues:
1. Interpretation of Section 68 of the Income-tax Act.
2. Treatment of capital contributions by partners in a firm as income of the firm.

Analysis:

Issue 1: Interpretation of Section 68 of the Income-tax Act
The High Court examined the interpretation of Section 68 of the Income-tax Act in the context of cash credits in the accounts of the assessee or a third party. Referring to the decision in Commissioner of Income-tax vs. Anupam Udyog, it was highlighted that the burden of proof lies upon the assessee to explain credit entries, and the onus may shift to the Income Tax Officer under certain circumstances. The Court noted that under Section 68, if cash credits are found in the accounts of individual partners of a firm and it is established that the cash was received by the firm from its partners, such amounts cannot be assessed as income of the firm but may be assessed in the hands of the individual partners.

Issue 2: Treatment of capital contributions by partners in a firm as income of the firm
The Court addressed the question of whether capital contributions made by partners in a firm should be treated as income of the firm itself. Relying on the decision in Anupam Udyog's case, it was argued that if partners bring in capital and the source of funds is not explained, the assessment should be made on the partners and not on the firm. The Court further cited a judgment of the Andhra Pradesh High Court, emphasizing that contributions made by partners to the capital of the firm should not be treated as income of the firm under Section 68. It was clarified that such contributions form the substratum for the business of the firm and should be assessed at the individual partner level if necessary.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision that the capital contributions brought in by the partners should not be treated as income of the firm but may be assessed at the individual partner level. The Court emphasized that the burden of explaining the source of funds lies with the partners, and it was not within the Assessing Officer's authority to treat such amounts as income of the firm.