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TMI Blog2010 (7) TMI 835X X X X Extracts X X X X X X X X Extracts X X X X ..... artner, Ch. Ravi in the hands of the assessee under section 68 of the Income-tax Act, 1961. 4. The Commissioner of Income-tax (Appeals) failed to note that the partners of the firm had explained the investments/loans as flowing from their own sources and therefore erred in confirming the aforesaid additions in the hands of the assessee under section 68 of the Income-tax Act, 1961. These grounds are with regard to sustenance of addition made under section 68. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer noticed that there were additions of Rs.2,25,08,914 and Rs. 73,73,244 in the capital accounts of Shri P. Thikka Reddy and Ch. Ravi respectively. Both of these partners had been admitted into the firm in the month of September, 2004. On being required to furnish the sources for the said amounts introduced as capital, the assessee submitted that Shri P. Reddy owns agricultural lands to the tune of 34.01 acres and the agricultural income earned therefrom had been introduced as capital. It was also submitted that in addition to the said capital, Rs.1,50,73,244 had been introduced in the firm as unsecured loans, again out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had not been able to file confirmation/gift deeds in respect of the amounts received from the partner's father, brother and could not even furnish the details of exact amounts received from each of them. He opined that mere ownership of agricultural lands is not conclusive proof of earning agricultural income and such claim of income was required to be supported with proof of agricultural activities undertaken, expenses incurred as also sale of the produce to identifiable persons and the final proof of receipts from them. He further noted that though the assessee had contended the constraint of time for the difficulty in production of details/evidence, it was the assessee who did not co-operate with the Department since the beginning and started responding to the notices only one month before the end of limitation date of assessment. He felt that even the certificate issued by the Tahsildhar was of no help as even though it spoke about the yield of about Rs. 65,000 per acre per crop, it did not state anything regarding expenditure towards seeds, fertilizers, pesticides, labour, etc. He noted that the assessee had not even given details regarding the expenditure towards maintena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed confirmation letters from them. He felt that even if it is considered that the amounts have been contributed by his father and brother, those were required to be added under section 68 as the assessee did not furnish any confirmation or bank account or evidence that the amounts had been received from them. The Assessing Officer observed that the assessee-firm had been converted into a company with effect from June 1, 2005 and the assets and liabilities of the firm were taken over by the company as a going concern. It is observed that Shri P. T. Reddy had been allotted shares in respect of his capital introduced only and the unsecured loans remained the same in the hands of the company. He, therefore, concluded that the unsecured loans would not have been contributed by him. Shri Reddy could have been allotted shares in respect of such amount also. Accordingly, he concluded that such unsecured loans were given by somebody else or the unaccounted income of the firm had been introduced in the form of unsecured loans. He further observed that in view of the finding in respect of the claimed contribution of capital, there was nothing further to substantiate the claim of contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Ravi, the Assessing Officer noted that similar questions had not been answered and, therefore, the claim of gift was not acceptable to the extent of Rs. 15 lakhs. However, the Assessing Officer generously accepted an amount of Rs. 5 lakhs as gift received by Shri Ravi from his father, concluding that confirmation in respect of Rs. 15 lakhs had been received only to suit his convenience. With regard to sources of Shri Ravi, the Assessing Officer noted that he had introduced a capital during the period April 2005 to June 2005 and, therefore, the income shown for the assessment year 2006-07 could not have been available for contribution as capital. Considering that Rs. 1.5 lakhs must have been spent by him towards family maintenance, he worked out the balance out of income shown in the returns at Rs. 3,32,642 for the assessment year 2005-06, Rs. 1,45,150 for the assessment year 200405 and Rs. 1,12,300 for the assessment year 2003-04 which totalled to Rs.5,91,092. In view of the above, the balance amount of Rs. 52,82,152 (Rs. 73,73,244 minus Rs. 20,91,092) introduced in the firm as share capital in the name of Shri Ch. Ravi was added to the income under section 68. Against the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d explained the nature and source thereof. The authorised representative for the assessee relied on the judgment of the Andhra Pradesh High Court in the case of CIT v. Lanco Industries Ltd. [2000] 242 ITR 357 contending that as per the said decision, if the ostensible shareholders have failed to explain the means of investment, that should have been treated as unexplained income in their hands. Reliance was placed on the decision in the case of India Rice Mills v. CIT [1996] 218 ITR 508 (All) to support the claim. The authorised representative of the assessee submitted that though the Assessing Officer had accepted the yield of Rs. 65,000 per acre, he was not satisfied about the extent of expenditure incurred for obtaining the crops. The assessee's counsel argued that initially, extensive expenditure has to be incurred for such cultivation. In the later years no expenses are required to be incurred as the fruit parent trees and crops do not require much time and attention for their natural growth. He averred that at Rs. 65,000 per acre, the assessee and his family members were in a position to earn agricultural income of Rs. 50 lakhs for 78 acres owned by them. He further stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , could have been considered in the hands of the partners alone. He averred that the investment/loans pertained to the period April 1, 2005 to June 31, 2005. The said persons had no balances in their accounts as on March 31, 2005. Accordingly, he argued that there was no question of making any addition in the hands of the firm, as the firm could not have earned the amount brought in within a span of 3 months. It was averred that in view of the unequivocal admission of contribution by the partner, no addition in the hands of the firm could have been made. He averred that the investments should have been considered as belonging to Shri P. T. Reddy and Shri Ch. Ravi as the firm is a compendium name for the partners. The authorised representative placed reliance on the decisions in the cases of Dhorajia Construction Co. v. ITO [1991] 39 TTJ (Ahd) 159 and Asst. CIT v. Patel Rajeshkumar Kantilal [1999] 64 TTJ (Ahd) 460 in this regard. He contended that the credit in the name of a partner of a firm who is an existing income-tax assessee, should ordinarily not be added in the hands of the firm after the partner has confirmed the correctness and genuineness of the capital contribution. Reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the genuineness of the credits can be proved by the assessee by establishing the identity of the creditor and his creditworthiness with some plausible evidence. Similarly in the case of CIT v. Anupam Udyog [1983] 142 ITR 133, the hon'ble Patna High Court observed that it is for the partners of the firm to explain to the satisfaction of the Income-tax Officer with regard to the nature and source of the cash credit entries in the books of the firm of the previous year. However, if such onus is not discharged, the addition could not have been deleted from the assessment of the firm on the basis of surmises that such explanation might be true as the partners had owned the sums advanced towards capital. The fact that the Assessing Officer need not locate the source of the credits was reaffirmed by the hon'ble Madhya Pradesh High Court in the case of Banshidher Agarwal Panna v. CIT [1984] 148 ITR 523. The hon'ble Rajasthan High Court also in the case of CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 had opined that there is no distinction between the cash credit entry existing in the books of the firm, whether it is in the name of a partner or any third party. They opined that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is not the case of the assessee that it was the first year of its operation. The assessee-firm was engaged in the business of manufacture of liquor in the past also and during the relevant year there was reconstitution of the firm whereby Shri P. T. Reddy and Ch. Ravi joined the partnership firm after introducing the aforesaid capital contributions. Even though it was contended by the firm during its assessment proceedings that both of these persons had introduced their capital out of certain sources, the said explanation was found to be unsatisfactory. The assesseefirm attempted to explain away the introduction of capital by Shri P. T. Reddy on the basis of a mere certificate from the Tahsildhar to the effect that the annual yield per acre could have been Rs. 65,000. No details with regard to the expenditure incurred for earning such income however, was filed at any stage. It could also not be explained as to on what acreage of land, what crops were grown or that how much land was so cultivated for obtaining such crops. Obviously, it is not the case of the assessee that the partners concerned have disclosed such income in their returns of income regularly in the past also. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have been substituted by the Assessing Officer. In fact, the Assessing Officer accepted the gift to the extent of Rs. 10 lakhs from the father-in-law of Shri Ch. Ravi and Rs. 5 lakhs from his father only after considering the custom existing in the State of Andhra Pradesh and such liberal acceptance could not have been extended to the consideration of entire amount shown as gift received by them, though there was no evidence to support the same. Similarly, there is no strength in the argument that the agricultural income of the assessment year 2006-07 had also been received by him in the months of April and May itself. Under the circumstances, hence the Assessing Officer has been very reasonable in accepting the total contribution of Rs. 20,91,092 by Shri Ch. Ravi are genuine. The remaining addition of unexplained credit of Rs. 52,82,152 is, therefore, to be upheld. We have heard both the parties and perused material on record. It is observed that there existed entries in the books of account of the assesseefirm by way of capital introduced by partners and loan taken in the name of the partner. It is not the case of the assessee that it was the first year of its business oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case, under section 68 of the Act, the assessee is required to explain the identity, capacity and genuineness of the credit entry existing in the books of account. The provisions of this section apply to partnership firms also. There is no distinction between the capital contributed by the partner or third party or unsecured loan received by the assessee. If the cash credit, even though in the capital account of the partner, is not satisfactorily explained, the Assessing Officer is justified to treat it as income from undisclosed sources. If the explanation is not supported by any documentary evidence, then the deeming fiction created by section 68 is squarely applicable. Simply because the amount is credited in the books of the partnership firm, it cannot be said that it is not the undisclosed income of the assessee and that in all cases, it has to be assessed as income of the partners. The above point of discussion is fortified by the Rajasthan High Court in the case of CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 which was followed by the Tribunal in the case of Durga Wines in I. T. A. No. 25/Hyd/ 2001 dated September 14, 2007 for the assessment year 1998-99. It is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest the impugned amount as capital and as such this addition is justified. Further, even if the parties are having agricultural income, the assessee has to put before the Assessing Officer the proper material which would enable him to come to a conclusion that the impugned income is indeed agricultural income. It is not for the Assessing Officer to prove that the source of credit is agricultural income. The onus of proof considered in the legislations of various statutes pertaining to agricultural income, cannot straightaway be borrowed for the purpose of the Income-tax Act, 1961. If the assessee claims the sources of investment is an agricultural income, the onus would be on the assessee to prove that it is agricultural income. In the present case, though the assessee claimed the source of investment is an agricultural income, it failed to lead substantial evidence in support of it. Just holding of land is not enough to hold that the assessee has actually earned the impugned income from agricultural land. The certificate from Tahsildhar is not well sufficient to substantiate the assessee's claim that it is an agricultural income. The assessee did not discharge the burden cast u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1977-78, the Income-tax Officer required the firm to explain the nature and source of two cash credits standing in the names of two partners. Rs. 10,000 on June 8, 1976 in the name of U and Rs. 7,500 on June 5, 1976, in the name of G. The explanation offered by the firm was that these two partners had surrendered the amounts in question in their individual returns and that they had been assessed thereon. The Income-tax Officer rejected the explanation and treated the sum of Rs. 17,500 as its income, by invoking the provisions of section 68 of the Income-tax Act, 1961. In the individual assessment of the partner G, the Income-tax Officer assessed the surrendered income of Rs. 7,500 which was the amount of deposit standing in his name in the firm by way of protective measure. The Tribunal upheld the additions. On a reference : That if an entry of cash credit is found in the books of account of the firm, it is for the firm to give an explanation and if the same is disbelieved then it is to be added as an income under section 68 of the Income-tax Act, 1961 in the hands of the firm. Similarly, if an assessee, who is a partner in the firm, has made investment, which is not recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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