2014 (3) TMI 467 - HC - Income Tax

Deletion made u/s 69 of the Act Unexplained and ingenuine credit in the capital account Held that - The amount was own money of the assessee firm which was introduced by way of gift in the name of partner from a Non-Resident account The decision in Jaspal Singh v. CIT 2006 (9) TMI 143 - PUNJAB AND HARYANA High Court followed - NRI gift from a stranger was neither genuine nor valid - the assessee discharged onus on him to prove the genuineness of the gift - NRI gift could not be accepted as genuine unless the assessee was able to prove natural love and affection and financial capacity of the donor - The legal position involved clearly did not engage the attention of the Tribunal, deserved from it - partners of the assessee firm had not been maintaining their own books of accounts. Any credit found unexplained and ingenuine was to be accounted for in the books of accounts of the assessee firm only - sequelly such credit was to be treated as income of the firm for the year in such ingenuine and unexplained credits were found in its books of accounts - thus, the finding of the Tribunal and that of the CIT(A) had gone wrong in reversing the finding of the AO which are restored, as unexplained and ingenuine credit in the capital account of the partner Sat Pal Singh in the book of accounts of the assessee firm in absence of any separate account books having been maintained by the partners, was to be credited in the account of the assessee firm only Decided in favour of Revenue.

Summary

Issues:
- Challenge to order under Section 260A of the Income Tax Act, 1961
- Addition of Rs.1,00,000 as unexplained credit in partner's capital account
- Dispute over genuineness of gift and its treatment as income

Analysis:
1. The appeal challenged an order under Section 260A of the Income Tax Act, 1961 regarding the addition of Rs.1,00,000 as unexplained credit in a partner's capital account. The substantial question of law revolved around the justification of dismissing the appeal by the Income Tax Appellate Tribunal (ITA) and sustaining the deletion of the addition made by the Assessing Officer (AO).

2. The AO had added Rs.1,00,000 to the income of the assessee for the assessment year 1989-90, citing lack of reasonable connection between the gift amount and the partner or the firm. The Commissioner of Income Tax (Appeals) (CIT(A)) later deleted this addition, emphasizing that the donor's identity, paying capacity, and genuineness of the transaction had been established, thus refuting the AO's claim of undisclosed income.

3. Despite agreeing that the gift was not genuine, the Tribunal upheld the CIT(A)'s decision to delete the addition, stating that the amount credited to the partner's account could not be added to the income of the assessee firm. The Tribunal's decision was based on the credit being in the partner's capital account, not warranting its addition to the firm's income.

4. The High Court analyzed the uncontroverted aspects of the case, highlighting the lack of a genuine relationship between the donor and the donee, the absence of any previous gifts to close relatives, and the substantial amount involved. Citing precedents, the Court emphasized the need to prove natural love and affection, as well as the financial capacity of the donor in cases involving foreign gifts.

5. The Court referred to legal provisions such as Section 68 of the Income Tax Act and judicial precedents like Smt. Shanta Devi v. CIT to establish that unexplained and ingenuine credits in the absence of separate account books maintained by partners should be accounted for in the firm's books. Consequently, the Court ruled in favor of the revenue, allowing the appeal and restoring the AO's finding regarding the treatment of the credit in the partner's capital account.