2013 (3) TMI 48 - HC - Income Tax

Addition u/s 68 - cash credit - nature and source of the deposits - held that - In the case of Anil Rice Mills (2005 (7) TMI 44 - ALLAHABAD HIGH COURT ), this Court has held that the assessee cannot be asked to prove the source of source or the origin of origin. Tribunal had erred in holding that the amount deposited by the two partners is liable to be added under section 68 of the Act on the ground that the gifts received by the respective partners from the various persons could not be explained as the credit-worthiness of the donors had not been established. The Tribunal had wrongly drawn an adverse inference upon the fact that the donors had filed their Income Tax Return for the Assessment Years 1988-89 to 1991-92 on a single day and further the return for the Gift Tax was filed on 25.08.1992, which was well within the due date. - Decided in favor of assessee.

Summary

Issues:
1. Burden of proof under section 68 of the Income Tax Act - nature and source of deposits explained
2. Relevance of genuineness of gift in proving burden of proof

Analysis:

Issue 1: Burden of proof under section 68 of the Income Tax Act - nature and source of deposits explained

The appeal pertains to the Assessment Year 1992-93, where two partners of a partnership firm deposited sums in their capital account. The Assessing Authority questioned the source of these deposits under section 68 of the Act. The appellant provided explanations and evidence, stating that the amounts were received as gifts from various individuals, who had filed their Income Tax and Gift Tax Returns. The Commissioner of Income Tax (Appeals) accepted the explanation, but the Income Tax Appellate Tribunal reversed this decision, leading to the current appeal.

During the hearing, the appellant argued that the partners had proven the nature, source, and credit-worthiness of the deposits beyond doubt. They contended that the donors' tax compliance and acknowledgment of gifting the amounts supported their case. Reference was made to a Division Bench decision emphasizing the establishment of the credit-worthiness of the depositor, not the source of the source.

The Court noted that the partners were tax-paying individuals who had received gifts from persons who also filed tax returns and paid Gift Tax. The Court highlighted a precedent stating that proving the source of the source was not required. The Tribunal's decision to add the deposits under section 68 was deemed erroneous, especially considering the donors' tax compliance and timely filing of returns.

Ultimately, the Court found that the appellant had sufficiently explained the nature and source of the deposits, meeting the burden of proof under section 68. Consequently, the Tribunal's decision was set aside, and the appeal was allowed.

Issue 2: Relevance of genuineness of gift in proving burden of proof

The genuineness of the gifts received by the partners played a crucial role in establishing the nature and source of the deposits. The appellant successfully demonstrated that the gifts were genuine by presenting evidence of tax filings and compliance by the donors. The Court emphasized that the credit-worthiness of the donors had been established through their tax records, dismissing the Tribunal's adverse inference based on the timing of tax filings.

In conclusion, the Court upheld the importance of proving the genuineness of gifts in meeting the burden of proof under section 68. The successful demonstration of the gifts' authenticity, along with the donors' tax compliance, was pivotal in overturning the Tribunal's decision and allowing the appeal.