2017 (7) TMI 366 - HC - Income Tax

Addition on unexplained credit under Section 68 - Held that - Any sum which is found credited in the books of an assessee remains unexplained in the terms provided in Section 68 or the explanation is not found to be satisfactory by the Assessing Officer, the said sum can be charged to income tax as income of the assessee. Once it is determined that a sum which is credited to the account of the assessee is unexplained, then Section 68 gets triggered. It is well settled that under Section 68 of the said Act, once a credit in the books of assessee is found to be unexplained, a presumption is drawn against the assessee that the said credit is part of the income of the assessee. Of course, the presumption is rebuttable by the assessee by producing relevant cogent evidence in that behalf other than a bald statement about the nature of source of the credits in question. The stand adopted by the CIT(Appeals) was the appropriate one whereby he had directed that the addition of ₹ 18,00,704/- made by the Assessing Officer may be deleted but only after the assessment records of the partners were verified and checked and it was verified that the income had been properly assessed or accounted for in the hands of the partners. Therefore, this question is answered accordingly and the view taken by the Tribunal is set-aside and that of the Commissioner of Income Tax (Appeals) is upheld.

Summary

Issues:
1. Interpretation of net profit rate for assessment year 2005-06.
2. Treatment of agricultural income credited to partners' capital account under Section 68 of the Income Tax Act, 1961.

Interpretation of Net Profit Rate:
The High Court addressed the first issue regarding the net profit rate for the assessment year 2005-06. The Court noted that the Income Tax Appellate Tribunal (ITAT) had assumed a net profit rate of 7% instead of the 10.5% recorded by the Assessing Officer, despite the assessee suggesting a rate between 9% and 10%. The Court decided to remit the matter back to the Tribunal for reconsideration based on directions given in a previous decision related to the same assessee for the year 2007-08.

Treatment of Agricultural Income under Section 68:
Regarding the treatment of agricultural income credited to the partners' capital account under Section 68 of the Income Tax Act, 1961, the Assessing Officer had added an amount of ?18,00,704 as unexplained credits. The assessee claimed this amount to be agricultural income but failed to provide documentary evidence supporting this claim. The Commissioner of Income Tax (Appeals) directed the deletion of the addition only after verifying the assessment records of the partners. However, the Tribunal disagreed, stating that no addition could be made in the hands of the firm even if the capital invested remained unexplained.

The High Court disagreed with the Tribunal's stance, emphasizing that if a sum found credited in the books of an assessee remains unexplained or the explanation provided is unsatisfactory, it can be charged to income tax as the assessee's income. The Court clarified that under Section 68, once a credit in the books is unexplained, a presumption arises that it is part of the assessee's income, which can be rebutted only with relevant cogent evidence. The Court upheld the Commissioner's decision to delete the addition after verifying the partners' assessment records, as it ensured proper assessment and accounting of income in the partners' hands. Consequently, the Court set aside the Tribunal's view and upheld the Commissioner's decision.

In conclusion, the appeal was disposed of with the issues addressed in favor of the appellant on both counts, remitting the net profit rate interpretation issue back to the Tribunal and upholding the deletion of the addition related to agricultural income credits under Section 68.