2013 (10) TMI 1565 - HC - Income Tax

Summary

Issues involved:
The issues involved in the judgment are whether the Income Tax Appellate Tribunal was justified in dismissing the appeal of the revenue and upholding the deletion of addition made on account of unexplained and ingenuine credits in the capital accounts of partners, and whether the addition representing ingenuine credits in the capital accounts of the partners should be made in the respective hands of the partners or in the case of the assessee.

Issue 1: Unexplained and ingenuine credits in capital accounts of partners
The revenue challenged the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) regarding the addition made on account of unexplained credits in the capital accounts of partners. The revenue argued that the partners received money from abroad, which was then transferred to the firm's account, and should be treated as income of the firm. However, the Tribunal and the Commissioner held that since the source of funds was known to the Assessing Officer, the firm was not liable for the addition. The firm disclosed that the funds were received from its partners, absolving it from further liability. The Tribunal affirmed that the onus to explain the source of funds lay upon the partners, not the firm. Therefore, the appeal of the revenue was dismissed.

Issue 2: Addition of ingenuine credits in capital accounts
The second issue revolved around whether the addition representing ingenuine credits in the capital accounts of the partners should be made in the hands of the partners or in the case of the assessee. The Commissioner of Income Tax (Appeals) held that if partners contribute money towards the firm's capital accounts, the money introduced cannot be taxed in the hands of the firm. The firm explained that the money came from the partners, and as the partners' identities were established, no further addition was required in the hands of the firm. The Tribunal upheld this decision, stating that the revenue should proceed against the partners to examine the nature and source of the cash credits. The firm was absolved of any further liability as it had disclosed the source of funds, and the onus was on the partners to explain the receipts of money.

In conclusion, the judgment favored the firm, holding that the revenue should proceed against the partners to explain the source of funds, as the firm had already disclosed receiving funds from its partners. The onus to explain the source of funds lay upon the partners, absolving the firm from further liability.