2014 (11) TMI 548 - AT - Income Tax

Addition of unexplained deposit of credit in bank account u/s 68 - addition in the hands of partner - Addition u/s 69 when in the notice section 68 was mentioned - Books of account are not maintained Held that - There is no justification of the Department in treating the deposits in the bank pass book of the firm M/s Dixit & Company as unexplained income in the hands of the assessee who is a separate legal entity - even if no addition is justified u/s 68 of the Act, addition can be made u/s 69 of the Act in respect of deposit in bank account if the assessee cannot satisfactorily explain the source of deposit - merely because a wrong section has been invoked by the AO, the addition cannot be deleted and such order is not illegal and at the best it is irregular which can be regularized by substituting the correct section in place of wrong section - merely on the basis of these objections, it cannot be concluded that the firm is not in existence - any deposit in the bank account in the name of M/s Dixit & Co. cannot be added in the hands of the assessee and it can be examined only in the hands of the firm M/s Dixit & Co. there was force in the claim of the assessee and it has been held that for deposits in the bank account in the name of M/s Dixit & Co., no addition can be made in the hands of this individual thus, the entire matter is to be remitted back to the AO for fresh consideration Decided in favour of assessee.

Issues Involved:
1. Addition of unexplained deposit of credit in bank account where books of account are not maintained.
2. Addition of unexplained income of amounts appearing as credit in bank statement of the firm.
3. Application of peak credit/telescoping of deposits/withdrawals.

Issue-Wise Detailed Analysis:

1. Addition of unexplained deposit of credit in bank account where books of account are not maintained:

The assessee argued that since no books of account were maintained, the addition of unexplained deposits in the bank accounts should not be sustained. The assessee cited the case of I.T.O. Vs. Kamal Kumar Mishra, where it was held that bank passbooks cannot be equated with books of account, and thus, Section 68 of the Income Tax Act cannot be invoked. However, the Tribunal observed that even if Section 68 is not applicable, the addition can be made under Section 69 if the source of the deposit is not satisfactorily explained. The Tribunal concluded that the mere invocation of a wrong section does not invalidate the addition, and thus, this contention of the assessee does not hold.

2. Addition of unexplained income of amounts appearing as credit in bank statement of the firm:

The assessee contended that credits in the bank passbook of M/s Dixit & Co., a partnership firm, should not be added to the individual's income as the firm is a separate legal entity. The Tribunal noted that the case had been remanded to the Assessing Officer (AO) for fresh consideration, and the AO had found inconsistencies in the partnership deeds and the replies provided by the assessee. Despite these inconsistencies, the Tribunal held that merely based on these objections, it cannot be concluded that the firm does not exist. As per Section 184 of the Income Tax Act, a firm evidenced by an instrument and specifying individual shares of partners should be assessed as a firm. Therefore, the Tribunal held that deposits in the bank account of M/s Dixit & Co. should not be added to the individual's income but can be examined in the hands of the firm.

3. Application of peak credit/telescoping of deposits/withdrawals:

The assessee argued that the Department did not provide the benefit of peak credit theory or telescoping. The Tribunal agreed that if the assessee can establish that deposits in the individual bank account or any expenses/investments were made from withdrawals from the firm's bank account, then the assessee deserves telescoping. The Tribunal emphasized that no addition should be made in the hands of the individual if the source of funds is explained through withdrawals from the firm's account. However, the AO is at liberty to examine the source in the hands of the firm as per law.

Conclusion:

The Tribunal set aside the orders of the CIT(A) and remanded the matter back to the AO for fresh consideration. The AO was directed not to make any addition in the individual's income for deposits in the firm's bank account. Additionally, the AO should allow telescoping if the assessee can establish that deposits, expenses, or investments were made from withdrawals from the firm's bank account. The appeals of the assessee were allowed for statistical purposes.

← Previous Next →