2015 (3) TMI 153 - HC - Income Tax

Unaccounted cash credit - contributions made by as many as 10 partners - Held that - If there are cash credits in the books of a firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partners, then in the absence of any material to indicate that they are the profits of the firm, they cannot be assessed in the hands of the firm, though they may be assessed in the hands of the individual partners. Cash credits in the individual accounts of members of a joint family with third party cannot be assessed as the income of the family unless the Department discharges the burden of proof to the contrary.Therefore, the view taken by the Assessing Officer that the partnership firm must explain the source of income for the partners regarding the amount contributed by them towards capital of the firm, cannot be sustained in law. As regards the other amount i.e., unexplained credit entries, the Tribunal took the view that the amount represented the security deposits made by the retail dealers, and the source thereof was properly explained. Nowhere in the order of assessment, the Assessing Officer recorded any finding to the effect that he verified the matter from the respective retail dealers and that such dealers have denied of making deposits. In the field of Arrack business, it is not uncommon that the retail dealers are required to keep security deposits with the supplier. At any rate, it is a pure question of fact. - Decided against revenue.

Summary

Issues:
1. Verification of returns submitted by a partnership firm for the year 1993-94 under Section 143(1)(a) of the Income Tax Act, 1961.
2. Dispute regarding contributions made by partners and undisclosed credit entries.
3. Appeal before the Commissioner (Appeals) and the Income Tax Appellate Tribunal.
4. Procedural defect in the appeal before the High Court.
5. Treatment of partner contributions as income by the Assessing Officer.
6. Interpretation of Section 68 of the Income Tax Act.
7. Explanation of unexplained credit entries.
8. Legal principles regarding assessment of income in partnership firms.

The judgment involves a case where a partnership firm engaged in the business of Arrack faced scrutiny for the returns submitted for the year 1993-94. The principal controversy revolved around contributions made by partners and undisclosed credit entries. The Assessing Officer rejected the explanations provided by the firm regarding these aspects. The matter was taken to the Commissioner (Appeals) and the Income Tax Appellate Tribunal, resulting in different outcomes for various appeals filed by both the firm and the Revenue.

The High Court noted a procedural defect in the appeal before them, as the Tribunal had passed a common order for three appeals with distinct subject matters. Despite this defect, the appellant raised two main points for consideration: the unexplained income from partner contributions and the undisclosed credit entries. The Assessing Officer treated the partner contributions as income due to a lack of explanation regarding their sources. Legal arguments were made citing judgments from various High Courts to support both the appellant and the respondent's positions.

Regarding the treatment of partner contributions as income, the High Court analyzed Section 68 of the Income Tax Act, emphasizing that the pooling of capital by partners for the firm's business cannot be equated to unexplained credit entries. The Court highlighted that the firm had explained the partner contributions, making Section 68 inapplicable to the situation. It was deemed impermissible for the Assessing Officer to demand explanations from the partnership firm itself regarding the sources of partner contributions.

On the issue of undisclosed credit entries, the Tribunal's view was that these entries represented security deposits from retail dealers, which were adequately explained. The High Court observed that the Assessing Officer had not provided evidence of verifying the deposits with the dealers or any denials from them. The Court considered this a factual matter and upheld the Tribunal's decision.

Ultimately, the High Court dismissed the appeal, emphasizing that the Assessing Officer's demand for the partnership firm to explain the sources of partner contributions was legally unsustainable. The judgment concluded by disposing of the miscellaneous petition with no order as to costs.