2019 (2) TMI 657 - HC - Income Tax

Addition u/s 68 - unexplained cash credit - Whether the Tribunal was correct in having deleted the additions, since the creditworthiness of the donor, to the three partners, who are said to have given advances to the firm, had not been established? - Held that - The assessee firm has been able to point out the persons, from whom the firm had received credits. With respect to M.A. Unneeri Kutty 1991 (9) TMI 31 - KERALA HIGH COURT , it has to be noticed that the decision is an authority for the proposition that the assessee has to prove the identity of the creditor as also his creditworthiness and the genuineness of the transactions. Here, the creditors, as pointed out by the assessee firm, were the three partners. The three partners had also produced credible material to show their source of income for the specific advances made to the firm. If at all the source of the donor/ creditor is doubted, then there could be an assessment made only on that donor or creditor and not on the firm, who has proved the identity and creditworthiness of their creditor. To that end is the various decisions placed on record by the learned Amicus Curiae. We agree with the learned Amicus Curiae that no question of law arises from the order of the Tribunal and hence we reject the above appeal.- Decided in favour of assessee

Summary

Issues:
1. Interpretation of Section 68 of the Income Tax Act, 1961 regarding unexplained credits in a firm's Books of Accounts.
2. Whether the Tribunal was correct in deleting the additions due to lack of established creditworthiness of the partners providing advances to the firm.

Analysis:
1. The case involved a firm facing additions of unexplained credits totaling ?13,60,000 under Section 68 of the Income Tax Act, 1961. The firm claimed the amounts were received from partners, prompting the need to establish the creditworthiness of the donors. Despite notice, the firm was not represented, leading to the appointment of an Amicus Curiae.

2. The central question revolved around whether the Tribunal rightfully deleted the additions due to the partners' failure to prove the creditworthiness of their sources. The partners admitted advancing amounts to the firm but couldn't establish the creditworthiness of the persons from whom they received the funds.

3. The Revenue argued for reliance on precedents like M.A. Unneeri Kutty v. Commissioner of Income-Tax to support the addition of unexplained credits. However, the Tribunal emphasized that being the first year of business was not relevant, citing Commissioner of Income-Tax V. Bhadra Enterprises. The concept of partnership as distinct from individual entities under tax laws was discussed.

4. The Amicus Curiae contended that the firm adequately explained the credits by pointing out the partners as creditors. The partners' admission of advancing money to the firm, especially in the first year of business, established genuineness. The focus should be on the creditworthiness of the donor pointed out by the firm, not the donor's source.

5. Detailed analysis of each partner's transactions revealed efforts to explain the sources of funds. For instance, discrepancies regarding the timing of advances and documentation were addressed, indicating efforts to establish the legitimacy of the transactions.

6. The Court ultimately agreed with the Amicus Curiae that no legal question arose from the Tribunal's order. The firm had successfully identified the creditors (partners) and demonstrated their creditworthiness. If doubts existed regarding the donor's source, assessment should focus on the donor, not the firm that proved the identity and creditworthiness of its creditors.

7. The judgment emphasized the importance of satisfying the three grounds for explaining unexplained credits: the identity of the creditor, their creditworthiness, and the genuineness of the transaction. The firm's ability to establish these aspects regarding the partners' advances led to the rejection of the appeal.

In conclusion, the judgment clarified the requirements under Section 68 of the Income Tax Act, highlighting the need for firms to prove the identity and creditworthiness of creditors to explain unexplained credits successfully.