2020 (4) TMI 765 - HC - Income Tax

Addition u/s 68 - unexplained cash credit - onus to prove - HELD THAT - Under Section 68, the onus is on the assessee to offer explanation where any sum is found credited in the books of account and where the assessee fails to prove to the satisfaction of the Assessing Officer, the source and nature of the amount of cash credits an inference may be drawn that the credit entries represent income taxable in the hands of the assessee. This does not however absolve the responsibility of the Assessing Officer to prove that the cash credits constitute the income of the assessee. The onus on the assessee has to be understood with reference to the facts of each case and if the prima facie inference on the basis of facts is that the assessee's explanation is probable, the onus shifts to the Revenue. Once the assessee has proved the identity of its creditors, the genuineness of the transactions and the creditworthiness of the creditors vis-a-vis the transactions which it had with the creditors, the burden stands discharged and the burden then shifts to the Revenue to show that the amount in question actually belong to, or was owned by the assessee himself. In a case where the integrity of the creditors is established and the entries are shown to be not fictitious, the burden would shift on the Revenue. In the case at hand, the partners have shown the agricultural income in their personal returns of the past years which had been accepted by the department as such. The partners are all identifiable and separately assessed to tax. The source of investment having been explained, in the event the Assessing Officer was not satisfied the addition could have been considered in the hands of the partners and not in the hands of the firm. The burden of proving the source of the credits having been sufficiently explained the addition could not have been made in the hands of the firm in the facts of the present case. - Decided in favour of assessee.

Issues Involved:
1. Justification of addition under Section 68 of the Income Tax Act, 1961.
2. Proving the source of income of partners who made deposits in their capital account.

Detailed Analysis:

1. Justification of Addition under Section 68 of the Income Tax Act, 1961

The primary issue addressed was whether the Tribunal was legally justified in upholding the addition of ?4,00,000/- under Section 68 of the Income Tax Act, 1961. Section 68 states: "Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the Assessee of that previous year."

The conditions for applicability of Section 68 include:
- Existence of books of accounts made by the assessee.
- A credit entry in the books of account.
- Absence of a satisfactory explanation by the assessee about the nature and source of the amount credited.

The Tribunal held that the credits in the names of partners as agricultural income were not proved within the meaning of Section 68, thereby restoring the Assessing Officer's order treating the same as the firm's deemed income. The assessee argued that the partners had shown agricultural income in their personal returns of previous years, which had been accepted by the Revenue, and thus the firm had satisfied the conditions under Section 68 regarding the identity and capacity of the depositors and the genuineness of the transactions.

2. Proving the Source of Income of Partners

The second issue was whether the assessee was required to prove the source of income of the partners who made deposits in their capital account. The Tribunal held that the assessee failed to prove the source of the partners' income, thereby justifying the addition under Section 68. The assessee contended that the firm had explained the source of investment as agricultural income of the partners, who were identifiable and separately assessed to tax. Therefore, if any addition was to be made, it should be in the hands of the partners and not the firm.

The court referred to several precedents, including:
- Commissioner of Income Tax v. Kapur Brothers: Cash credit entries standing in the names of partners in the account books of the firm could validly be treated as income of the firm from undisclosed sources.
- Commissioner of Income Tax v. Jaiswal Motor Finance: If cash was received by the firm from its partners, in the absence of any material indicating profits of the firm, the sum could not be assessed in the hands of the firm.
- India Rice Mills v. Commissioner of Income Tax: Where capital contributions are made by partners before the commencement of business, it is for the partners to explain the source of such capital contribution.
- Commissioner of Income Tax v. Metachem Industries: Once the firm establishes that the amount was invested by a particular person, the burden of the firm is discharged.
- Abhyudaya Pharmaceuticals v. Commissioner of Income Tax: Similar principles were reiterated, emphasizing that if the cash was received from partners and the firm had no business, the question of presumption of income of the firm would not arise.

The court concluded that the firm had satisfactorily explained the source of the credits, and the burden of proving the source of the credits having been sufficiently explained, the addition could not be made in the hands of the firm. The questions of law were answered in favor of the assessee and against the Revenue.

Conclusion:
The appeal was allowed, and the court held that the addition under Section 68 of the Income Tax Act, 1961, could not be justified in the hands of the firm when the partners had shown the agricultural income in their personal returns, which had been accepted by the Revenue. The firm had sufficiently explained the source of the credits, and any addition should be considered in the hands of the partners.

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