Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income-tax (Appeals)-III, Jaipur ('CIT (A)' for short) dated 25-08-2011, partly allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 08-12-2008 for the assessment year (A.Y.) 2007-08.
2.1 The bone of contention between assessee, a Jaipur based partnership firm dealing in sale of printed grey cloth (Jaipuri Dress Material), is the addition in the sum of Rs. 5,58,455/- made by invoking the provision of section 68 of the Act, since confirmed by the first appellate authority. The brief facts of the case are that the assessee was found to have credited the following sums to the capital account of its three partners as on the date of formation of the partnership, i.e., 11-07-2006:
| Name |
Amount |
Mode |
By way of |
Kanta Nowlakha |
3,68,455 |
Cash |
stock transfer plus Rs. 10,000/- by cheque. |
Nemi Chand Nowlakha |
1,00,000 |
Cash |
cash credit |
Pankaj Ghiya |
1,00,000 |
Cash |
cash credit |
2.2 Other than Rs. 10,000/- introduced by cheque by Smt. Kanta Nowalkha, the balance Rs. 5,58,455/- was considered by the Assessing Officer (AO) as having been not satisfactorily explained by the assessee, and thus deemed as unexplained income u/s. 68 of the Act. The same found confirmation by the ld. CIT(A), who found that there were glaring discrepancies in the assessee's explanation with regard to the transfer of stock by Smt. Kanta Nowalkha from her proprietorship firm M/s. Om Mahaveer Exports to the assessee at the, as stated, the commencement of the partnership, and which had not been explained by the assessee. Firstly, the goods were transferred on 01-06-2006 (vide bill no. 1001/PB pg. 49) on which date the firm was not in existence. How could that be? Secondly, the books of account of M/s. Om Mahaveer Exports, the proprietorship concern from which goods were transferred, were not produced to substantiate the claim of the transfer of stock. Even as much as its stock register was not produced to exhibit the same. As such, it is not proved that the goods were actually lying with M/s. Om Mahaveer Exports, for having been transferred to the assessee-firm on its inception by the partner. The bills from the suppliers were adduced by the assessee viz. Shree Ganesh Textile Mills, Somanur (Rs.77,347 / PB Page 9); Shree Balajee Exports (Rs. 1,34,159 /PB page 15, Meenakshi Mills (Rs. 90,727/ PB page 27) and A Subramanian (Rs. 56,222/- /PB page' 37). These bills again contained discrepancies and inconsistencies, viz. issued to a different firm, bore cuttings and unauthorized additions, etc. in fact, the assessee admitted to the manufacturing having started only much later in October 2006, but as the sales were shown earlier, to cover up the discrepancy, stock was shown as transferred by the partner as her capital. Similarly, in the case of the other two partners. Both of them had contributed in cash on 11-07-2006, and their income tax returns showed their income level to be very nominal and much below the taxable limit. As such, the basic ingredients of identity, capacity and genuineness were not proved. Reliance stood placed on the decision in the case of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC), A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC); Aravali Trading Co. v. ITO [2010] 187 Taxman 338 (Raj.),Rajshree Synthetics (P.) Ltd. v. CIT [2002] 256 ITR 331/[2003] 131 Taxman 391 (Raj.); CIT v. Kishorilal Santoshilal[1995] 216 ITR 9 (Raj.); and CIT v. Anupam Udyog [1983] 142 ITR 133/15 Taxman 259 (Pat.).
3. We have heard the parties, and perused the material on record, as well as the case law cited.
The case of the Respective parties
4. The main thrust of the assessee's arguments before us, as before the authorities below, was that the credit in the firm is from a partner on joining the firm; it having come into existence only on 11-07-2006, so that it could not possibly have earned any income prior thereto for section 68 to be applicable in respect of the sums credited in its books on that date. The addition if at all, i.e., if the explanation furnished in respect of the contributions to the firm by its partners at the commencement of its business is not found acceptable, could be made by proceeding in the hands of the individual partners. Reliance for the purpose stands placed, among others, on the decision in the case of CIT v. Kewal Krishan & Partners [2009] 18 DTR 121 (Raj.); CIT v. Metachem Industries [2000] 245 ITR 160/[2001] 116 Taxman 572 (MP); and India Rice Mills v. CIT [1996] 218 ITR 508/85 Taxman 227 (All.). The case law relied on by the Revenue was sought to be distinguished by the assessee. As such, while the assessee pleads its case on, primarily, legal basis, the Revenue relies on the fact of the assessee having been unable to prove the genuineness of the credits under reference, besides supporting its action qua inference as to non-satisfaction of the AO as well as qua invocation of section 68 in such cases, on case law.
The Law
5.1 We are, therefore, called upon to first examine the question as to whether the onus cast on the assessee-firm u/s. 68 is modified in any manner where the cash credit is from its partner, and if so, to what extent? The same we find has been squarely addressed by the hon'ble jurisdictional high court in the case Kishorilal Santoshilal (supra), wherein again a similar plea was raised for and on behalf of the assessee. It was explained as under:
"On the basis of the language used under section 68 and the various decisions of different High Courts and the apex court, the. only conclusion which could be arrived at is:
| (i) |
|
that there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party; |
(ii) |
|
that the burden to prove the identity, capacity and genuineness is on the firm; |
(iii) |
|
if the cash credit is not satisfactorily explained, the Income-tax Officer is justified to treat it as income from undisclosed sources; |
(iv) |
|
the firm has to establish that the amount was actually given by the lender; |
(v) |
|
the genuineness and regularity in the maintenance of accounts has to be taken into consideration by the taxing authorities; |
(vi) |
|
if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by section 68 of the Income-tax Act, 1961, can be invoked. |
In these circumstances, we are of the view that simply because the amount is credited in the books of the firm in the partner's capital account it cannot be said that it is not the undisclosed income of the firm and in all cases it has to be assessed as an undisclosed income of the partner alone." (see pgs. 13-14) [Emphasis supplied]
In the facts of that case too, it was explained by the assessee that it was the personal income of the partner, and had been so declared in his return. Neither the partner was produced nor any evidence in support of contention was produced either at the stage of the assessment or even before the appellate authority. Accordingly, it was held by the hon'ble court that the Tribunal was not justified in holding that the cash credits for Rs. 11,502/- in the account of one of the partners could not be assessed in the hands of the firm and in deleting the same. However, as the matter was not examined by the tribunal on merits, it remitted back the same thereto for a decision afresh after hearing the parties. Reference was made by the hon'ble court to, among others, the land mark decision by the apex court in the case of A. Govindarajulu Mudaliar (supra). As such, it cannot be laid down as a proposition that where a credit in the accounts of the assessee-firm is from or to the account of a partner, no addition can be made in the hands of the firm, treating it as an income from undisclosed sources, and though unexplained, had to be effected only in the hands of the individual partner. As explained by the hon'ble court (refer page 12 of the reports), the fact that the credit is ascribed to its partner is but only an additional argument that could be raised under the circumstances, and that, undisputedly, the burden is on the assessee-firm to explain and establish that it is a genuine credit in its books.
5.2 This in fact is also the understanding that emanates unequivocally from the conjoint reading of the other decisions by the hon'ble courts, including the apex court and the jurisdictional high court referred to above, and which in fact bear further reference to the decision by the apex court (as in the case of Sreelekha Banerjee v. CIT [1963] 49 ITR 112 (SC); Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC), with the decision in Metachem Industries (supra), relied upon by the assessee, again clarifying that the position remains essentially the same i.e., irrespective of whether the creditor is a partner or any other, so that the firm has to establish the fact that the sum under reference was actually given by the ostensible creditor, even as explained in the case of Kishorilal Santoshilal (supra) in fact, if this is taken as the qualifying test, which, as explained by the hon'ble high court, it indeed is, there would be no dichotomy whatsoever obtaining between the said decisions and that in the case of Kewal Krishan & Partners (supra), which decision stands rendered sans any reference to the precedents on the subject, including by the apex court or the said court itself, so that the observations by the hon'ble court have to be read as issued in the context, and the factual background, of the case (copy placed on record). In fact, as further explained by the hon'ble jurisdictional high court in the case of Aravali Trading Company (supra), the addition could be made in the hands of a person other than the creditor, i.e., the ostensible provider of the impugned credit, where he is shown to be a benami of such another. The only statement of law that thus emerges on a review of the case law on scope of the provision, including some celebrated judgments on the subject, as CIT v. Biju Patnaik [1986] 160 ITR 674/26 Taxman 324 (SC); Seth Kalekhan Mohamed Hanif v. CIT [1958] 34 ITR 669 (MP) (since affirmed by the apex court), is that the credit in the name of a partner in the books of a firm has to be established as a fact on the parameters of sec. 68, as in the case of any other creditor. Why, a credit is to be satisfactorily explained even where in the name of self; the said fact, as explained by the apex court, and time and again, being itself an evidence of receipt of income. This is precisely why the law in its' wisdom mandates a credit not satisfactorily explained, even where owned-up by the creditor, to be yet considered as the assessee's undisclosed income. The owning-up, though relevant, confirm as it does the identity of the creditor, can hardly be determinative of the matter, including as to the person in whose hands the income is to be taxed. When the transaction is not genuine, so that the credit does not represent a genuine liability, where is the question of it being taxed in the hands of the creditor? Likewise, where he does not have the requisite capacity to have advanced the sum found credited. One could, for example, book a huge sum in favour of a pauper, who may own-up the sum, shifting the as ability thereto. Any different construction would be even otherwise fraught with serious practical issues, as the creditor may be untraceable or subject to low or zero tax, etc, leaving the door wide open for manipulation. In fact, this aspect is not now, and finds elucidation per various decisions, as CIT v. Shiv Shakti Timbers [1998] 229 ITR 505/[1997] 90 Taxman 349 (Mad.):Nanak Chandra Laxman Das v. CIT [1983] 140 ITR 151/[1982] 9 Taxman 252 (All.). At the same time, we may hasten to add though, that there is no restriction in law, and it is well open for the Revenue to invoke the provision of s. 69/69A in the hands of the creditor. The hon'ble apex court in the case of A. Govindarajulu Mudaliar (supra) itself confirmed the taxing of unexplained credit in the firm in the hands of the creditor-partner. Why, unexplained deposits in banks are generally brought to tax in the hands of the depositors only as the genuineness of the credits in the bank's books is not in doubt, even as, technically speaking, section 68 is equally applicable to the assessee-banks as well. The matter essentially is not of law, but of its application, having regard to the facts and circumstances of the case.
5.3 The issue that next needs to be considered and commented upon is the modification in the onus on the assessee where the credit is on the first day of its constitution or at the commencement of business. Again, we find, on a review of the case law, including the decision in the case of Roshan Di Hatti (supra),also relied upon by the assessee, that no new proposition in law can be said to have been laid down thereby or arises there-from. The apex court examined the facts of the case, including that of a large business in Lahore (Pakistan): commencement of a fresh business by the assessee upon coming to India, with no evidence of any economic activity in India prior thereto, and on the basis of its appreciation thereof, held in that case that the nature and source of the credit stood satisfactorily explained by the assessee in terms of capital, being goods and founds, brought by him to India on partition of the country in 1947, i.e., as claimed; the fact of bringing the goods and cash from Pakistan being in fact a proven, admitted fact, so that the controversy essentially centered around its value. The very fact that the facts were examined and a decision pronounced on its basis itself shows that the issue stood decided on the fact as inuis of the case, and which thus assumes prime significance, No ratio decidendi, as is being advocated by and on the assessee's behalf, and which alone has precedent value, thus, arises. In another set of circumstances, perhaps, the assessee's explanation may not have been found satisfactory and application even as the said decision is under the old (1922) Act which had no provision similar or equivalent to sec. 68 of the Act. In fact, such was indeed found to be the case in Gordhandas Hargovandas v. CIT [1980] 126 ITR 560 (Bom.), again a decision based on the facts of the case (as found by the tribunal), wherein the said decision by the apex court was found distinguishable. In fact, as far as the law is concerned, the hon'ble court drew upon the statement of law as expressed by the apex court in its said judgment (at pg. 946), reproducing the same in its judgment (at pg. 577 of the reports), and which being relevant is also extracted hereinbelow:
"Now, the law is well settled that the onus of proving the source of sum of money found to have been received by the assessee is on him. If he disputes the liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Revenue is entitled to treat it as taxable income.''
Once the assessee's explanation is not found satisfactory by the AO, who though is obliged to act reasonably and judiciously in so finding or concluding, taking all the aspects of the explanation into account, including the plea that the credit flows from a partner on his joining the firm, which has a direct bearing on the genuineness of the transaction, or that there has been no business in the firm prior to the date of the credit, there is no further obligation on the Revenue to state the source from where the funds representing the unexplained credit may have come to the assessee. That would indeed, i.e., if so, amount to laying an impossible obligation at the door of the Revenue. Reference in this context may be made to the decision, inter alia, in the case of Sreelekha Banerjee (supra); CIT v. Devi Prasad Vishwanath [1969] 72 ITR 194 (SC); and CIT v. Manick Sons [1969] 74 ITR 1 (SC). It must, we may add, be appreciated that the plea that a capital contribution by the partner in a capital receipt in the hands of the firm and, thus, not taxable, is equally applicable for any other creditor, the amount received being only on capital account, and is of no consequence in view of sec. 68; the genuineness of the transaction, for it to represent a genuine liability, having not been established or proved. Similarly, the plea of the assessee having no prior business, though not extraneous, assumes significance only once the credit is established to be a genuine credit, i.e., it is shown, if not conclusively, at least on the basis of preponderance of probabilities, that the credit did indeed flow from the partner and represents a genuine liability of the assessee-firm to the said partner. Rather, why only qua a partner, if it is so even in the case of any other creditor as well, there being no essential and substantial difference between the two, the assessee has successfully discharged the burden of proof that lay on it in respect of the same. In fact, this aspect of the matter, i.e., credit to the partner's account by the firm on the first day of its business, finds exposition in the case of Anupam Udyog (supra), again relied upon by the Revenue. In that case the tribunal deleted the addition u/s. 68 of the Act on the basis of it being the initial capital of the firm on the first day of its existence, with no business prior thereto, so that it could not have been earned by the firm, and thus could not be taxed as its income. It was explained by the hon'ble court that while it was possible to so contend under the old (1922) Act, it is not so in view of the clear provision of section 68. Section deems both the year in which the credit is to be brought to tax and, further, does not provide that the cash credits are necessarily be deemed to be the profits of the business for which books are maintained. By the tribunal's own finding, i.e., the assessee being unable to explain the nature and source of the credit entries in the books of the firm of the previous year, the onus on the assessee had not been discharged by it.
5.4 Accordingly, we find that the factum of the ostensible creditor being a partner or the date of credit during the previous year does not after the legal position qua the application of sec. 68 of the Act in respect of a firm, though may add a factum dimension to the explanation, which needs to be considered while applying the said provision to the facts of the case. The matter, thus, is essentially factual, and is to be decided on that basis. The decisions in the hon'ble courts relied upon by the assessee stand also been reviewed by us, as would also be apparent from reference to some of them in the foregoing discussion, and rather for most part rendered in the fact setting of the respective cases. The same do not opposite is described in any manner the basis, settled legal position flowing from a series of decisions by the hon'ble courts, including the apex court and the jurisdictional high court, that the onus to explain satisfactorily a credit in its books, be it a partner or any other, is on the assessee, and where it fails to discharge the same, section 68 could be invoked by the Revenue, treating the same as the assessee's income from unexplained sources, with no further obligation on it to show the source from where the same may have arisen, as where its business has not commenced. We may though clarify that the decision in the case of Indian Rice Mills (supra), relied upon by the assessee, marked a departure by the hon'ble court from its earlier decisions, and that the said court has per its later decision in the case of Jagmohan Ram Chandra v. CIT [2005] 274 ITR 405/[2004] 141 Taxman 574 (All.), after an extensive review of precedents, including by the said court itself, including in the case of Indian Rice Mills (supra), followed its earlier decisions, as in the case of Sundar Lal Jainv. CIT [1979] 117 ITR 316 (All.) and CIT v. Kapur Bros. [1979] 118 ITR 741/1 Taxman 25 (All.) and, rather, has gone on to hold that sec. 68 would apply in respect of unexplained credits in the case of a firm even where the individual partner may have been taxed in respect of the relevant sum u/s. 69 of the Act or may have returned the corresponding income; the two being different persons and assessee under the Act. Reference, for the said proposition, stands also made, inter alia, to the decision by the hon'ble jurisdictional high court in the case of CIT v. Jairamdass Lokesh Kumar [2001] 250 ITR 526/[2002] 126 Taxman 188 (Raj.). In fact, the decision in the case of Kishorilal Santoshilal (supra) applies squarely in the facts and circumstances of the case (refer para 5.1. pgs. 4, 5 of this order). The law in the matter having been clarified thus, we hope amply, we proceed to discuss the facts of the case.
The Facts
6. We may now proceed to examine the validity or otherwise of the application of sec. 68 of the Act, in the fact and circumstances of the case, which shall be required to be dealt with separately for each credit:
| (a) Smt. Kanta Nowalkha |
Rs. 3,58,455/- |
The explanation furnished by the assessee in respect of the goods transferred to it is that the same is from M/s. Om Mahaveer Exports, a proprietary concern of the partner. The books of account of Om Mahaveer Exports without doubt have relevance, if only to establish satisfactorily the holding of the relevant goods by the said firm (in fact as its owner) at the relevant time, i.e., the date/s of the transfer of goods to the assessee, that being a pre-requisite for it to effect transfer thereof in favour of any other. No doubt, it is open to the assessee to equally exhibit so through some other relevant and credible material/evidence/s, but the absence of the relevant records, which the transferor-firm is even otherwise obliged to maintain, if only for its purposes, seriously impugns the assessee's case, particularly considering that neither any reason for non-production of the same (which therefore can only be assumed to have been maintained, even as statutorily required to, and being not furnished for a reason adverse to the assessee), has been furnished. Besides, the same is all the more incomprehensible as the same are only by a person, engaged in the same business, transferring stock only in consequence of her decision to henceforth undertake the said business in partnership in the transferee-firm, formed, as we see it, only for the said purpose. The same would go toward establishing the capacity as well as the genuineness of the transaction. It also raises issues of propriety inasmuch as the other partners would definitely wish to be assured that the goods are transferred at cost, as a higher cost would imply crediting the account of the partner at an amount inflated to that extent and which may not be acceptable to them for obvious reasons; the relevant or equivalent goods being available from the open market, wherefrom the same had been ostensibly purchased by the seller-partner.
The assessee has though submitted the bills from four suppliers to support the 'fact' of transfer of goods firstly, even as indicated above, the same do not by itself ensure availability of goods with the transferor firm; the corresponding sales position having not been furnished. In other words, the purchase vouchers, though relevant, do not establish the availability of goods with the said transfer firm as on the transfer date. Why, we wonder, as do the authorities below, the books of account could not be produced to establish the availability and, therefore, the ability to transfer the goods under reference? The availability of goods with the transferor-partner gets confirmed only if not actually sold by the transfer date. In fact, the said date itself raises considerable doubts, the relevant sale bill raised on the assessee-firm being dated '01-06-2006', whereat the assessee-firm, the transferee, was not in existence, having come into existence only on 11-07-2006 (PB pgs. 4 to 6). The only positive inference that could be drawn from the said date, being prior to 11/7/2006, is that it suggests, perhaps, a decision to form a new (assessee) firm, and carry on the said business therein. In fact, even if so, i.e., such a firm was in contemplation, how could it be known that the goods would remain unsold till such time that the new firm actually comes into existence? However, despite taking such a charitable view of the matter, it does not shed any light on the moot question, i. e., to whom were the goods sold? The same could not possibly be sold to the assessee-firm as it came into existence only on 11-07-2006. At any rate, the transfer of goods to a non-existent firm is of no consequence in law.
Further, the bill raised by M/s. Om Mahaveer Exports on the assessee itself cannot be said to be a valid document (PB pg. 49). It bears no signature. There is no mention of any sales tax registration or VAT No., which is mandatory under the law. It is numbered as '1001', while no previous bills have been admittedly issued, as apparent from the financial statements of the proprietor joining the partnership on 11/7/2006. At it appears, the firm M/s. Om Mahaveer Exports came into being, assuming so, during the financial year 2006-07, and closed shop in that year itself; there being no investment by the proprietor, Smt. Kanta Nowalkha, in the said firm as on 31-03-2006, not any transaction, save the stock stated to be transferred to the assessee, during either financial year 2005-06 or 2006-07 (PB pages 63, 64, 67). Continuing further, the purchase bills of M/s. Om Mahaveer Exports, the extensible seller, adduced by the assessee to substantiate its claim in this regard, again, raise more doubts and questions than they resolve. The bill from M/s. Shree Balajee Exports Jaipur (PB page 15) is not in the name of seller M/s. Om Mahaveer exports, but issued to one M/s. Mahaveer Tex Prints Jaipur a different firm. The corresponding freight voucher, however, is, firstly, dated 18-07-2006, i.e., four months later, and secondly, is from Erode to Sanganer (PB page 16). How could that be, when the goods have been purchased from Jaipur? The third bill is from M/s. Meenakshi Mills, Coimbatore (PB page 27). The same is a computerized bill, not bearing the name of the purchaser-firm, i.e., M/s. Om Mahaveer Exports, which is written by hand, apparently in the same hand as is the name of the said firm written on the bill from M/s. Shree Ganesh Textile Mills, Somanur (PB page 9). The fourth bill (PB page 37) is again in respect of a different firm, i.e., M/s. Mahaveer Prints, Jaipur. Further, the same is dated 27-07-2006 with the L.R. of the transporter being again dated 27-07-2006, so that the same were purchased only on that date and received in Jaipur, as it appears, only on 10-08-2006 or whereabouts (PB page 37). How could such goods be thus sold on 01-06-2006 or even on 11-07-2006, which question also arises in respect of the goods purchased from Shree Balajee Exports (supra) (PB page 15-16). In other words, to purchases of the goods stated to be sold to the assessee-firm by the transferor are not proved, if not disproved. Also, the goods have been transferred at bill value, so that it is at below cost, which is not understandable as the seller would at least recover the cost. In fact, as stated by the assessee, the grey cloth purchased in bales is opened, washed, printed and ironed in various sizes of lots. This results in change of sizes, apart from being subject to shrinkage/wastage. In fact, we do observe this inasmuch as the goods stated to be transferred bear a different size 30x30 (15") (PB page 49), while the goods purchased by the assessee bore the size 68x68 (PB page 9). These processes only entail cost, which would be required to be recouped, besides cost of raw material, including, freight. In any case, even if the transfer of goods is at loss, there is no indication of the same in the final accounts of M/s. Om Mahaveer Exports, the very existence of which has not been established; the firm's registration, which is absent, serving as its identity. In fact there is nothing to link Smt. Kanta Nowalkha with M/s. Om Mahaveer Exports, except a debit in its name as on 31/3/2007 (PB pg. 68).
The observation by the AO that the claim of transfer of goods by way of capital contribution is only an after thought to firm up the subsequent transactions, appears to be valid, when considered in the light of foregoing observations and findings by us, highlighting the various inconsistencies and discrepancies revealed on an examination of the material on record. We are conscious that our observations exceed that by the Revenue, but, firstly, the same are only on the basis of the material on record, furnished by the assessee itself and, secondly, only toward the Revenue's case and findings in the matter, i.e., that the claim of stock transfer bears glaring discrepancies, and which the assessee singularly failed to meet in any manner, on the same being pointed out and confronted thereto by the Revenue; rather, basing its case only on the legal edifice/plea instead (refer para 2.2, 4 of this order). No doubt, the assessee has furnished written submissions before us, seeking to explain the same. The same, again, are without substantiation by any material much less the material on record. The assessee, of course, cannot he allowed to make out a new case at this stage. It can thus be said without doubt that the transfer of goods by Smt. Kanta Nowalkha to the assessee firm valuing Rs. 3.58 lacs, as appearing in the books of the assessee-firm, is not established; rather is subject to serious infirmities. Not only the same is not established at any rate; rather, the claim is inflicted with a series of inconsistencies and discrepancies, besides absence of substantiation by any reliable material. The application of section 68 of the Act in respect of the credit of Rs. 3,58,455/- is thus upheld. That the scope section 68 would include credits other than by way of cash, though not disputed, we may add, is a subject matter of settled law. We decide accordingly.
| (b) Sh. Nemi Chand Nowalkha |
Rs. 1,00,000/- |
The documents adduced in support of this credit, which is by way of cash, at PB page 65-70, are the acknowledgements of his income-tax returns for the assessment years 2006-07 and 2007-08 as well as the capital account and balance sheet (including operating statements) for the relevant years, forming part of the said refunds. The investment in the assessee-firm is duly reflected in the balance-sheet as on 31-03-2007 (PB page. 70), though it is only the income statement of the preceding year that would be relevant, or the cash book. i.e., if day to day accounts are kept, and form the basis of the assessee's final accounts as adduced. It is, however, observed that the said balance-sheet, which is the only document reflecting the payment, is unsigned. No credence can understandably be placed thereon. At the same time, if the said balance-sheet is the same as filed by the creditor, along with other supporting documents, as a part of his return of income as filed with the Revenue for the relevant year, the same would without doubt go to discharge the onus on the assessee to establish the impugned credit in the name of the said partner, and which would in that case shift to the Revenue, so that the same could be impugned only on the strength of some adverse material/s. The matter is restored back to the file of the assessing authority to allow the assessee an opportunity to present its case in the matter, and adjudication afresh per a speaking order in accordance with law. We decide accordingly.
| (c) Sh. Pankay Ghiya |
Rs. 1,00,000 |
In the case of the Shri Pankaj Ghiya, in contradistinction to Nemi Chand Nowalkha, no such documents, i.e., as in that case, have bean enclosed along with the return and, as it appears, have not been prepared, so that the capacity or the fact of transfer cannot be considered as established. However, as it may well be that transfer of cash is from the built-up capital/saving, and not from current income, an opportunity to the assessee to establish its claim in this regard is, therefore, considered only fit and proper, particularly considering that the matter is being restored to the AO in the case of another partner. We, therefore, restore the matter likewise, i.e., as in the case of Shri. Nem Chand, to the file of the AO for affording an opportunity to the assessee to establish its claims in this regard. We decide accordingly.
7. In the result, the appeal of the assessee is partly allowed for statistical purposes.
ORDER
R.K. Gupta, Judicial Member - This is an appeal by assessee against the order of Ld. CIT (A) relating to assessment year 2007-08.
2. The assessee has objected in confirming the addition of Rs. 5,58,455/- under section 68 of the IT Act.
3. The appeal of the assessee was heard on 4.4.2012 and the case was allotted to Ld. Brother Shri Sanjay Arora, Accountant Member. I have received the order of learned Brother and after going through the same, I could not persuade myself to the conclusion drawn by him. So I am writing my own order on the basis of material available on record and on the basis of arguments advanced by both the parties.
4. The brief facts of the case are that Assessee firm was constituted vide partnership deed dated 11.07.2006 to carry out the business of trading in printed Jaipuri dress material. The firm is having three partners whose name, profit sharing ratio & capital contribution is as under:—
| Name of the Partner |
Profit Sharing Ratio |
Amt. of Capital Contribution |
Smt. Kanta Nowalkha |
33.34% |
Rs. 3,68,455/- |
Sh. Nem Chand Nowalkha |
33.33% |
Rs. 1,00,000/- |
Sh. Pankaj Ghiya |
33.33% |
Rs. 1,00,000/- |
4.1 AO held that assessee firm failed to explain the source of capital introduced by the partners. In doing so, he made the following observations:—
(i) |
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Assessee's firm claim as to the introduction of capital by Smt. Kanta Nowalkha in the form of stock from her proprietorship concern M/s Om Mahaveer Exports is not acceptable due to following discrepancies: — |
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The bill issued by M/s Om Mahaveer Exports in the name of assessee firm is dated 01.06.2006 which is much before the constitution of assessee firm. |
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The supporting bills from where M/s Om Mahaveer Exports purchased such goods also bears certain defects as under:- |
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Bill issued by Shree Balajee Exports is in the name of M/s Mahaveer Tex Prints instead of M/s. Om Mahaveer Exports. Thus, goods sold vide this bill were not available with M/s. Om Mahaveer Exports for giving it to assessee firm. |
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The total value of goods shown in the bill issued by Meenakshi Mills has been changed from Rs. 90,727/- to Rs. 89,803/- by hand to suit the total amount of goods given as capital. |
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In the bill issued by Shree Ganesh Textiles Mills, original amount has been cut down & amount required for total amount of goods claimed to have been brought as capital has been written in hand. |
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Assessee firm failed to produce the books of account of M/s Om Mahaveer Exports in the absence of which it cannot be proved that such goods were actually lying with M/s Om Mahaveer Exports for bringing it as capital of Smt. Kanta Nowalkha. |
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As per assessee's reply vide letter dt. 19.11.2009, process of manufacturing & sale started only in the month of October. However, since the sales have been shown much before, therefore, in order to cover such discrepancy, it was shown that Smt. Kanta Nowalkha brought capital as stock from her proprietorship concern |
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No evidence was filed to prove that cash of Rs. 1 lacs each was available with Sh. Nem Chand Nowalkha & Sh. Pankaj Ghiya to be brought in as capital in assessee firm. |
Accordingly, AO made addition of Rs. 5,58,455/- by treating the capital introduced by the partners as unexplained.
4.2 The Ld. C1T (A) confirmed the addition by giving the following findings:- (Page 5-7, Para 2.3 & 2.3.1)
"2.3 I have carefully examined the rival stands of the AO and the Ld. AR, viz. the addition made u/s 68 of the Act, towards the capital introduced by the partners of the appellant firm. The basic facts of the issue are that this is the first year of the appellant firm and the partner have introduced their capital in the form of goods and cash as well, as discussed in earlier Para's. In the light of the above my findings are discussed as under:—
(i) |
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In the case of Smt. Kanta Nowalkha - She was found introducing the goods worth of Rs. 3,68,455/- (correct amt. Rs. 3,58,455/-) as capital contribution. The AO disallowed such transaction u/s 68 of the IT Act, for the various reasons including improper supporting bills/purchases vouchers, manipulations noticed in the bills of suppliers to the proprietary concern of Smt. Kanta Nowalkha and other defects in the documents submitted on this account. During the appellate proceeding, I have also examined such documents and found that the AO's observation were correct and irrefutable, as such. In this regard, it is found that in support of the contribution of goods worth Rs. 3,68,455/- (correct amt Rs. 3,58,455/-), it was claimed that such items were purchases from three different concern namely Sh. Ganesh Textile Mills - Somanur Sh. Balaji Export Jaipur Mahaveer Mills Coimbatore, by her proprieties concern, i.e. Om Mahaveer Exports on different occasions. In this regard it is observed that the respective bills were manipulate by changing the figures thereof, the name of buyers in such bills have been mention other then the proprieties concern of partner i.e. Om Mahaveer Exports, the transpiration bills were having different names and dates then shown in the respective sale bills of the suppliers etc. Moreover, I also found that the there was significant gap in between the goods purchases by Smt. Kanta Nowalkha (i.e. in the month of March to July 2006) and the introduction of the same in the appellant firm (i.e. on 11-07-2006) as capital by her. Moreover, such goods were actually shown removed from Transport Company on 26-12-2006 (i.e. after six month of purchases made by the partners) by the appellant firm, on behalf of Smt. Kanta Nowalkha. The appellant could not clarify such glaring discrepancies, therefore, I uphold the decision of the AO that the appellant could not discharge his onus u/s 68 of the Act, which was essential in the light of the following decision :- |
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Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) |
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Aravali Trading Co. v. ITO [2010] 220 CTR 622 (Raj.) |
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Rajshree Synthetics (P.) Ltd. v. CIT [2002] 256 ITR 331 (Raj.) |
(ii) |
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In the cases of Sh. Nem Chand & Pankaj Ghiya- Both the partners were found, introducing Rs. 1 lacs each in cash, as capital contribution and the AO added back the same as the source of the same were not proved, as required u/s 68 of the Act. In this regard the Ld. AR claimed that both are assessed to tax and filed the copies of the returns for the relevant years. However, on verification it is found that both of them were having income below taxable level and their respective banks accounts were showing the balances of below Rs. 5,000/-, throughout the relevant period and even in the past. Accordingly, I am fully agreed with the AO that all the three basic ingredients, i.e. identify, capacity and genuineness of the cash credits of above kind have not been proved, as contemplated in the decision of Hon'ble Rajasthan High Court in the case of M/s. Rajshree Syntheic (P.) Ltd. v. CIT [2002] 256 ITR 331 and other cases, as cited hereinabove. |
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2.3.1 As far as the issue of making addition, towards unsubstantiated cash credit in the form of partners capital accounts in the hands of firms is concern, in my considered opinion the same is permissible, as also already upheld in the following case laws:- |
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CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.) |
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CIT v. Anupam Udyog [1983] 142 ITR 133 (Pat.) |
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A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC) |
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In the light of above factual and legal position, I inclined to confirm the addition made by the AO in respect of the addition of Rs. 5,58,455/- u/s 68 of the IT Act. towards unsubstantiated capital introduction by the partners as discussed above." |
5. Against the order of Ld. C1T (A), now assessee is in appeal here before the Tribunal.
6. The Ld. A/R filed copy of written submission and placed heavy reliance on the same. It was further submitted that in view of direct decision of Hon'ble Rajasthan High Court in case of Kewal Krishan & Partners (supra), no addition can be made in the hands of the firm as capital contribution made by partner was made on 1st day of start of the partnership business.
7. On the other hand, the Ld. D/R has placed reliance on the orders of Assessing Officer and Ld. CIT (A).
8. After considering the orders of Assessing Officer, Ld. CIT (A) and submissions of both the parties including the material placed on record, I find that assessee deserves to succeed in its appeal. I noted that Assessing Officer has made additions by making his observations which are tabulated in this order somewhere above. Thereafter, Ld. CIT (A) has confirmed the same. After going through the relevant material, it is seen that all the partners of the film are assessed to tax. Copies of their IT Returns were filed before Assessing Officer as well as before Ld. CIT(A). The Assessing Officer has pointed out certain discrepancies in respect to maintenance of book of account of one of the partner i.e. Smt. Kanta Nowalkha. Certain over writings were noted in the bills of purchases. There were some mistakes in noting the date of transfer of stocks from proprietorship concern to partnership concern as capital contribution. Same discrepancies have been noted by Ld. CIT (A) also. These discrepancies have been explained by Ld. A/R through his written submission. Thereafter, the Ld. A/R has distinguished various case laws relied upon by Assessing Officer and Ld. CIT (A). The Ld. A/R has also placed reliance on various case laws including the decision of Hon'ble Jurisdictional High Court in case of Kewal Krishan & Partners (supra). It will be useful to reproduce the brief submissions submitted by Ld. A/R. These written submissions are as under :—
"Through a catena of cases, Courts had laid down the following three fundamental tests which have to be established to discharge the burden u/s 68 of the Act
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Identity of the creditor |
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Creditworthiness of the creditor and |
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Genuineness of the transaction |
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In the present case, all the three ingredients are proved as evident from the following:- |
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All the partners are assessed to tax. Copy of their ITR, Computation of Total Income & Statement of affairs for A.Ys. 06-07 & 07-08 is at PB 57-75. Thus, the identity of the partner is proved. |
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As far as creditworthiness of the creditor is concerned, Hon'ble Gauhati High Court in case of Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 held that the assessee's burden is confined to prove the creditworthiness of the creditor with reference to transaction between assessee & creditor & it is not the business of the assessee to find out the source of money of his creditor or of genuineness of transaction which took place between the creditor & sub creditor and/or the creditworthiness of the sub creditors. |
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In the present case assessee firm not only explained the source of capital contribution in the form of goods by Smt. Kanta Nowalkha from her proprietorship concern M/s Om Mahaveer Exports by furnishing copy of bill issued by such concern (PB 49) but also explained the source of such goods by producing documentary evidences in the form of bills issued by suppliers of those goods (PB 9-43) & the payment made by M/s Om Mahaveer Exports to the suppliers in respect of these goods from its bank account (PB 44-46). |
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So far as specific discrepancies pointed out by the lower authorities is concerned, the same are incorrect as explained under:- |
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Discrepancies |
Explanation |
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Bill issued by M/s Om Mahaveer Exports in the name of assessee firm is dated 01.06.2006 (PB 49) which is much before the constitution of assessee firm |
The same is just a typographical error. Instead of taking the date as 01.09.2006, the same is mistakenly taken as 01.06.2006 & accordingly corresponding entries were made. However, this cannot negate the fact that Kanta Nowlakha, contributed the stock of Om Mahaveer Exports to the assessee firm as explained hereunder. |
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Bill issued by Shree Balajee Exports (PB 15) is in the name of M/s Mahaveer Tex prints instead of M/s Om Mahaveer Exports. Thus, goods sold vide this bill were not available with M/s Om Mahaveer Exports for giving it to assessee firm |
Though the bill issued in the name of M/s Mahaveer Tex Prints but the fact remains that the payment of such goods to the supplier from the bank account of M/s Om Mahaveer Exports only (PB 44). |
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Total value of goods shown in the bill issued by Meenakshi Mills (PB 27) has been changed from Rs. 90,727/- to Rs. 89,803/- by hand to suit the total amount of goods given as capital |
The amount of Rs. 89,803 written by hand is a calculation for giving 6308.64 qty. of goods @14.60 - 2.50% discount instead of per meter rate of 14.75 charged by the supplier of goods. After adding interest of Rs. 886/- for delayed payment, actual payment against this bill was made from the bank account of M/s Om Mahaveer Exports (PB 44) for Rs. 90,689/-. |
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In the bill issued by Shree Ganesh Textiles Mills (PB 9), original amount has been cut down & amount required for total amount of goods claimed to have been brought as capital has been written in hand |
From the bill amount of Rs. 79,330/-, 2.5% cash discount is claimed as payment is made within 45 days of the bill. Accordingly, the actual payment against this bill is made for Rs. 77,347 after reducing the cash discount of Rs. 1,983 from the bill amount as evident from the copy of bank account of M/s Om Mahaveer Export (PB 44). |
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Assessee firm failed to produce the books of account of M/s. Om Mahaveer Exports in the absence of which it cannot be proved that such goods were actually lying with M/s Om Mahaveer Exports for bringing it as capital of Smt. Kanta Nowalkha |
The fact that all the payment are made by cheque from the bank account of M/s Om Mahaveer Exports (PB 44-46) proves that the purchases were made by this concern transferred to the assessee firm at the same value. Since there is no other transaction in M/s. Om Mahaveer Exports, the non production books of account of this concern is an irrelevant issue to ascertain the transfer of goods to the assessee firm. |
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Assessee replied vide letter dt. 19.11.2009 that process of manufacturing & sale started only in the month of October (PB 8). However, since the sales have been shown much before, therefore, in order to cover such discrepancy, it was shown that Smt. Kanta Nowalkha brought capital as stock from her proprietorship concern |
The reply dt. 19.11.2009 regarding the start of business for all practical purposes from Diwali 2006 (PB 8) was a general reply. On this basis no adverse inference can be drawn particularly when the assessee made purchases between July to Sept 2006 from other parties also (PB 50) Therefore the assumption of AO is incorrect. |
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Significant gap in between the goods purchased by Smt. Kanta Nowalkha (i.e. in the month of March to July 2006) and introduction of the same in the appellant firm i.e. on 11-07-2006 as capital by her |
Nothing adverse can be inferred if there is a gap between the goods purchased by partner & introduction of same in the appellant firm. |
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Goods were actually shown removed from Transport Company on 26-12-2006 (i.e. after six month of purchases made by the partners) by the appellant firm, on behalf of Smt. Kanta Nowalkha |
The observation of ld. CIT(A) is incorrect. In practice, when goods are sent to the printer for printing purpose, he makes payment for transportation charges & thereafter the assessee reimburses the transportation charges paid by him. Therefore, the freight payment in respect the said purchases is recorded in the books on 26.12.2006. |
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As far as source of capital contribution of Rs. 1 lakh each in cash by Sh. Nem Chand Nowalkha & Sh. Pankaj Ghiya is concerned, it is to be noted that both these partners are income tax assessee's. Copy of their ITR's, Computation of Total Income & Statement of Affairs for A.Ys. 06-07 & 07-08 is at PB 65-75. The contribution of Rs. 1 lacs by Sh. Nem Chand Nowalkha is duly reflected in his Balance Sheet (PB 70) at Rs. 99,647/- being the amount contributed by him minus the balance in his current account with the firm at Rs. 353/-. Similarly contribution of Rs. 1 lacs by Sh. Pankaj Ghiya cannot be doubted in view of the fact the in earlier years he was having a salary income & in A.Y. 06-07 he has shown salary income of Rs. 96,000/- (PB 72) & during the year before joining the firm, he has salary income of Rs. 60.000/-. Thus, the source of capital contribution by other two partners is fully explained. |
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So far as case laws relied by ld. C1T(A) in Para 2.3(i) are concerned, the same rather support the assessee's case as explained hereunder:- |
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In case of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC), assessee introduced a capital of Rs. 3,33,414/- at the start of the business on 30.03.1948 comprising of gold ornaments, stones, bank & cash balances. AO treated only Rs. 20,000/- as explained & made addition for balance. CIT(A) considered Rs. 1 lakh as explained & balance as unexplained. This was affirmed by ITAT/HC. Hon'ble Apex Court revered the decision of lower authorities by holding that considering the facts that there is utter improbability amounting almost to impossibility of assessee having earned a large amount of Rs. 2,33,414/- as profit within a few months in the disturbed conditions which then prevailed in India was a circumstance which ought to have been taken into account by the Tribunal which it failed to do so. This case rather supports the case of assessee inasmuch as assessee firm has not only proved that capital contribution has been made by the partners but also the source of such capital contribution in the hands of the partner. |
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The decision of Aravali Trading Co. v. ITO [2010] 220 CTR 622 (Raj.) (HC) also supports the facts of assessee's case inasmuch as in this case it was held that merely because the depositors explanation about the sources of money was not acceptable to AO, it cannot be presumed that the deposit made by creditor is money belonging to the assessee itself. If the creditor's explanation about the source of deposits is not found to be acceptable, investment owned by such persons may be subjected to proceedings for inclusion of amount as their income from undisclosed sources, or if they arc found benami, the real owner can be brought to tax. In the absence of anything to establish that the sources of creditor's deposits flew from assessee, cash credit cannot be treated as unexplained income of the assessee. |
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In case of Rajshree Synthetics (P.) Ltd. v. CIT [2002] 256 IT 331 (Raj.) (HC); addition made by AO for unexplained cash credit was restored since in that case assessee merely filed an affidavit of the alleged creditor confirming that the amount was deposited with assessee & also repaid but creditor was not produced & source from which amount has been deposited with assessee was also not given. However, in present case, the identity of the partners is not in dispute at all. Further, the partners of the firm have established with evidence that the capital contributed by them in the firm is from their own funds & therefore in these circumstances the same cannot be assessed as income of the firm. |
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Otherwise also, the treatment of credit appearing in the capital account of the partners in the books of the firm depends on the fact whether the credit appears at the start of the business or subsequent thereto. Where the capital is introduced by the partners before the firm starts the business, the same cannot be regarded as income of assessee firm u/s 68. Reliance in this connection is placed on the following cases:- |
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CIT v. Kewal Krishan & Partners [2009] 18 DTR 121 (Raj.) |
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AO made assessment by making certain addition on account of unexplained cash credit standing in the name of the partners of the firm. It was held that there is no dispute that the amount was deposited as capital contribution on the first day of the commencement of the business by the firm. All the partners have confirmed that they had introduced those amounts as their capital contribution. Obviously, it was for the partners to explain the source of the deposits & if they failed to discharge the onus then, such deposits could be added in the hands of the partners only & not in the hands of the assessee firm. In any case, such capital contribution entered into the books of account of assessee firm prior to the commencement of business cannot be treated to be income of assessee firm. Such unexplained credit may be added to the income of the partners concerned in terms of section 69 & not u/s 68. |
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CIT v. Metachem Industries [2000] 245 ITR 160 (MP) (HC) |
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It was held that once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over. The assessee firm cannot ask that person who makes the investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual & it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, then, the burden of the assessee firm is discharged. It is open for the AO to undertake further investigation with regard to that individual who has deposited this amount. So far as responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payee or not and where he had brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount then the burden of the firm is discharged and that case that credit entry cannot be treated to be the income of the firm for the purpose of the income-tax. It is open for the AO to take appropriate action u/s 69 against the person who has not been able to explain the investment. |
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India Rice Mills v. CIT [1996] 218 ITR 508 (All.) (HC) |
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In this case, partners of the assessee firm made capital contributions in the firm before the firm started its business. It was held that it was for the partners to explain the source of such deposits & if they fail to discharge such onus, then such capital contribution, although entered in the books of account of assessee firm, cannot be regarded as income of assessee firm u/s 68. |
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Asstt. CIT v. Megh Malhar Developers [2012] 134 ITD 437 (Ahd.) (Trib.) |
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Assessee firm received fresh capital contribution from its four partners and furnished copies of capital accounts of partners, their individual cash books, bank pass books and statement, their B/S, computation of income and income tax returns. AO treated the said amount as unexplained cash credit on the ground that assessee could not furnish the source of cash credited in the cash books of the partners. It was held that assessee had discharged the initial onus laid upon it when it furnished the abovementioned documents to explain that amount in question was brought in by respective partners. Therefore, AO was not justified in holding that assessee had not explained the source of amount in question and doubt entertained, if any, by AO as to the genuineness of source, could have been considered in the hands of partners only and not in the case of firm. |
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G.L. Foods v. ITO [2012] 134 ITD 159 (Luck.) (Trib.) |
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AO noticed that the partners of assessee introduced initial capitals out of the gifts received by them before the commencement of the business of the firm. Though the assessee filed the confirmations from the donors, AO made addition to its income as income from undisclosed sources on the ground that assessee could not prove the capacity of the donors & genuineness of the gifts. It was held that where certain amount were deposited by the partners of the assessees firm as their initial capital before commencement of business of the said firm, it could not be treated as undisclosed income of assessee firm & no addition could be made in the hands of firm, even if AO was not satisfied with the explanation offered by the assessee firm explaining the source of the said income; at most, addition could only be made in the hands of the individual partners of the assessee firm. |
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So far as decisions relied by ld. CIT(A) in Para 2.3.1 of its order are concerned, it is to be noted that the same are distinguishable to the facts of the assessee's case as under :— |
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In case of CIT v. Kishorilal Santoshlal [1995] 216 ITR 9 (Raj.) (HC), the facts were that AO recognized the capital account of the partner of the firm & found certain sum credited in his account in the books of firm the source of the said capital was explained by the assessee firm as out of recovery from the money lending business carried by the partner of sale proceeds of groundnut on agricultural land of the partner, the income of which were declared in his individual return. However, it was found that the contention raised by the firm was absolutely income in as much partner has not filed any return, there was failure to furnish the details of the persons from whom recovery was alleged to have been made & no evidence of surplus from agricultural income was furnished. Accordingly, the Court held that simply because the money belongs to the partner, it cannot be said that no addition can be made in the hands of the firm. |
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However, in assessee's case, the credit is appearing in a new business (as the assessee firm was constituted vide partnership deed dt. 11.07.2006) & not in a running business as in the case supra. Further, in present case, assessee's firm explanation regarding the source of introduction of capital by the partners were properly supported by documentary evidences in the form of bills of suppliers of the goods which were introduced by one of the partner as its capital contribution & ITR's of the partners. Therefore, capital contribution made by the partners although entered in the books of account of assessee firm, cannot be regarded as income of assessee firm u/s 68. |
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In case of CIT v. Anupam Udyog [1983] 142 ITR 133 (Patna) (HC), the facts of the case were that assessee firm started its business from 14.12.1967. On that date, partners brought in capital which was credited in the books of the firm on the first day of its business. The source of the credits was stated to be agriculture income. However, in the absence of evidence, certain amount was treated as income from undisclosed sources. Tribunal found that there was no evidence regarding the source of the agricultural income of the partners but, however, took the view that the film had no business prior to the date of the credits and that it could not be said that the firm itself earned the income on the first day of its existence before any transaction had been made and, therefore, held that the amounts could not be treated as the income of the firm. Accordingly, it deleted the addition. However, Court held as under:— |
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"Though the Tribunal was not satisfied with regard to the explanation given by the partners that they had invested the so-called capital from out of their agricultural income, yet the Tribunal held that since the partners had owned that the sums had been advanced by them as capital outlay for the formation of the firm, they entered diem as cash credits in the relevant previous year. The tribunal arrived at its finding on the basis of surmises that the explanation of the assessee might be true. It was for the partners of the firm to explain to the satisfaction of the ITO with regard to the nature and source of the cash credit entries in the books of the firm of the previous year and on the Tribunal's own finding the onus had not been discharged. Therefore, the Tribunal was not right in deleting the addition from the assessment of the firm." |
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From the above findings, it can be noted that addition in the hands of the firm even when the credit was appearing on the first day of its business was confirmed since no evidence regarding the source of the agricultural income of the partners was furnished the burden of which was on the partners of the firm. However, in assessee's case, not only the credit is appearing on the first day of the business of the assessee firm but the source of such capital contribution by the partners is also properly explained by assessee firm by furnishing documentary evidences in the form of bills of suppliers of the goods & ITR's of the partners. Further, in view of the decision of Jurisdictional High Court as referred supra, this decision cannot be applied in case of the assessee. |
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In case of A. Govinda Rajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC), it was held that where assessee fails to prove satisfactorily the source & nature of certain amount of cash received during the accounting period, ITO is entitled to draw the inference that receipts are of assessable nature. There is no difference on this proposition of law. However, in the assessee's case, the partners of the firm have established with evidence that the capital contributed by them in the firm is from his own funds & therefore in these circumstances the same cannot be assessed. |
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In view of above, addition of Rs. 5,58,455/- confirmed by CIT(A) be deleted." |
9. The above submissions made by ld. A/R through his written submissions are self-explanatory. If the explanations of the assessee are taken into consideration, then it is noted that there was minor mistakes which have been explained. It is also a matter of fact that all the partners are assessed to tax and their balance sheets etc. were filed before Assessing Officer as well as before ld. CIT(A). Copies of purchase bills along with Profit & Loss account of Smt. Kanta Nowalkha and other partners and IT returns are placed in the paper book from these facts, in my humble opinion, the onus lay upon assessee has been duly discharged. Therefore, I am of the view of the Assessing Officer was not justified in making addition under section 68. The ld. CIT (A) was also not justified in confirming the action of the Assessing Officer.
9.1 There may be certain discrepancies or technicalities in preparing bills or producing the same but the crux of the matter is that all the partners are identifiable. They are filing their Income-tax returns. It means identification of all the partners and genuineness of transaction has been proved. They have filed their computation of income as well as Profit & Loss account from which they have transferred the stock or have transferred the cash capital to the account of the partnership firm. Therefore, creditworthiness is also proved. Various decisions relied upon by assessee are fully in support of the assessee.
9.2 The Hon'ble M.P. High Court in case of Metachem Industries (supra), has held that once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over. The assessee firm cannot be asked that person who makes the investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual & it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, does the burden of the assessee firm is discharged. It is open for the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount. So far as responsibility of the assessee is concerned, it is satisfactory discharged. Whether that person is an income-tax payee or not and where he had brought this money is not the responsibility of the firm. According, the addition deleted by Tribunal was confirmed by Hon'ble High Court.
9.3 Facts in the present case are similar. All the partners have confirmed having given capital contribution either in form of stock or in form of cash. They are identifiable and they are assessed to tax also. Therefore, if any addition could have been made that would have been made in the hands of the partner and not in the hands of the assessee firm.
9.3.1 The Hon'ble Rajasthan High Court in case of Kewal Krishan & Partners (supra) has held that—
"It is not in dispute that the members of the AOP deposited Rs. 5,00,000/-, Rs. 3,00,000/- and Rs. 50,000/- as capital contribution on the first day of commencement of business by the firm i.e. 1st April, 1989. All the partners have confirmed that they have introduced those amounts as their capital contribution. Obviously, it was for the partners to explain the source of deposits end if they fail to discharge the onus, then, such deposits could be added in the hands of the partners only and not in the hands of the assessee-firm. In any case, such capital contribution entered into books of account of the assessee-firm prior to commencement of business, cannot be treated to be income of the assessee-firm. Such unexplained credits may be added to the income of the partners concerned in terms of section 69 and not under section 68."
Accordingly, the Hon'ble High Court concluded that capital contribution made by partners on the first day of commencement of the business could not be added in the hands of the firm under section 68.
9.3.2 Facts are identical in the present case as all the three partners have contributed their capital before commencement of business and they have confirmed this fact. They are assessed to tax. Therefore, in view of the decision of Hon'ble Jurisdictional High Court, no addition could be made in the hands of the firm under section 68. If any adverse inference can be drawn that can be drawn in the hands of the partners but not in the hands of the firm.
9.4 I even find further support from the decision of Hon'ble Supreme Court in the case of CIT v. P.K. Noorjahan, [1999] 237 ITR 570/103 Taxman 382 (SC). In this case also an addition was made under section 69. Tribunal held that even though the explanation about the nature and source of purchase money was not satisfactory but in the facts and circumstances of the case it was not possible for the assessee to earn the amount invested in the properties and that by no stretch of imagination could the assessee be credited with having earned this income in the course of the assessment year or was even in a position to earn it for a decade or more. This view was confirmed by the Hon'ble High Court and thereafter the Hon'ble Supreme Court by holding that the Tribunal had held that the discretion had nut been properly exercised by the Income-tax Officer and the Appellate Assistant Commissioner taking into account the circumstances in which the assessee was placed and the Tribunal has found that the investment could not be treated as income of the assessee, confirmed the order of Hon'ble High Court.
9.5 In the present case also, the assessee-firm cannot be held that firm has earned this profit when the firm has not started its business activity before contributing the capital by the partners.
9.6 I also find support from another decision of Hon'ble Supreme Court in case of CIT v. Bharat Engineering & Construction Co. [1972] 83 ITR 187. In this case also there were several cash credit entries in the first year of the business totalling to Rs. 2,50,000/-. Though the explanation regarding the cash credit entries was found to be false, the Appellate Tribunal held that these cash credits could not represent the income or profits of the assessee as they were all made very soon after the company commenced its activities. This view of the Tribunal was confirmed by the Hon'ble High Court and was also confirmed by the Hon'ble Supreme Court by holding that an inference drawn from the facts proved was a question of fact and the Tribunal's findings on that question was final. A construction company takes time to earn profits and it could not have earned a huge profit within a few days, after the commencement of its business. Hence, it was reasonable to assume that the cash credit entries represented capital receipts though for one reason or other the assessee had not come out with the true story as regards the source of receipts. Accordingly the findings of the Tribunal were confirmed by which the addition was made on account of cash credit entries were deleted.
10. I have also gone through various other cases relied upon by ld. Counsel of the assessee. Ratio of all those decisions have been reproduced somewhere above in this order while incorporating the written submissions of the assessee in the order. In the written submissions, the assessee has explained the distinguished features of various cases relied upon by Assessing Officer as well as by ld. CIT (A) and I find that they have been satisfactorily distinguished by the ld. AIR of the assessee by filing written submissions which are reproduced somewhere above in this order.
10.1 The ratio in the case of Roshan Di Hatti (supra) considered by Assessing Officer against assessee, it is seen that even the ratio of this decision is in support of the case of the assessee wherein it has been held that "there is utter improbability amounting almost to impossibility of assessee having earned a large amount of Rs. 2,33,414/- as profit within a few months in the disturbed conditions which then prevailed in India…………….".
10.2 Here in the present case even there was no period at which it can said that firm could have earned this profit as undisputedly partners contributed their capital either in shape of stock or in shape of cash prior to commencement of business. Therefore, it cannot be presumed that assessee firm has earned this profit. Therefore, the ratio of decision of Hon'ble Apex Court in case ofRoshan Di Hatti (supra) goes in favour of the assessee.
10.3 In view of all these facts and circumstances. I hold that the addition made and sustained by lower authorities was not justified. Accordingly, delete the impugned addition.
11. In the result, appeal of the assessee is allowed.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
As there is a difference of opinion between us i.e. Judicial Member and ld. Accountant Member, therefore, the following questions are being referred to be answered by a Third Member appointed by your Honour, as per provisions of law.
QUESTIONS FRAMED
| 1. |
|
Whether in the facts and circumstances, the addition of Rs. 3,58,455/-made by one of the partners Smt. Kanta Nowalkha is liable to be deleted or to be confirmed ? |
2. |
|
Whether in the facts and circumstances, the addition of Rs. 1,00,000/-each in the name of Shri Nem Chand Nowalkha and Shri Pankaj Ghiya of the assessee firm made as capital contribution is liable to be deleted or liable to be set aside to the file of the Assessing Officer ? |
3. |
|
Whether in view of the decision of Hon'ble Jurisdictional High Court in case of Kewal Krishan & Partners (supra), the entire capital contribution made/contributed prior to commencement of business is liable to be deleted or to be confirmed in part and partly to be set aside to the file of Assessing Officer? |
We also request your goodself that if the abovementioned questions are not suitable, then you may frame the questions as you think fit.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
I have carefully perused the questions as proposed by my Id. brother, JM, and also discussed the same with him. However, with respect, I am unable to agree with him of the same as projecting the actual points of difference as arising out of our separate orders. Accordingly, I propose my separate questions, including the larger issues involved, for reference aforesaid to the Hon'ble President:
"1. |
|
Whether section 68 of the Income-tax Act, 1961 can be invoked where the assessee fails to satisfactorily explain the nature and source of a cash credit found recorded by him in his books of account for the relevant year, or is the Revenue also required to establish that the assessee had in existence a source of income before the date on which such cash credit was recorded, i.e., in order to treat the same as unexplained u/s. 68? |
2. |
|
Whether the addition of the impugned sums as unexplained credits u/s. 68 can be deleted on the sole ground that the assessee had no source of income prior to the date on which the same were found recorded in the assessee's books of account, notwithstanding the fact that it has completely failed to discharge the burden of satisfactorily explaining the nature and source thereof? |
3. |
|
Whether, the view that a cash credit recorded in the books of account of a partnership firm ostensibly as capital contributed by a partner cannot be treated as unexplained u/s. 68 in the hands of the firm even if the assessee-firm fails to satisfactorily explain the nature and source thereof, and more particularly if it fails to adduce evidence to establish that the alleged capital was actually contributed by the partner, is sustainable in law in view of the decision by the hon'ble jurisdictional high court in CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.)? |
4.1 |
|
Whether can capital be contributed by a partner to a partnership-firm prior to the coming into existence of the said firm? In any case, whether the claim of capital contribution by way of transfer of goods on June 1, 2006 can be accepted in view of the fact that the assessee-firm itself came into existence only on July 11, 2006? |
4.2 |
|
Is the remand in the case of two cash credits of Rs. 1 lakh each in the name of two partners justified under the facts and circumstances of the case, even as contemplated by the hon'ble jurisdictional High Court in the case of Rajshree Synthetics (P.) Ltd. v. CIT [2002] 256 ITR 331 (Raj.)?" |
THIRD MEMBER ORDER
G.C. Gupta, Vice-President (AZ) (As A Third Member) - On account of difference in opinion between the learned Judicial Member and learned Accountant Member of ITAT, Jaipur Bench, this matter has been referred to me by the Hon'ble President, ITAT for consideration and disposal under Section 255(4) of the Income tax Act, 1961. There is a difference of opinion between the learned Members of the Jaipur Bench on the issue of framing of points of difference between the Members. Accordingly, the learned Judicial Member and the learned Accountant Member have framed point of difference separately. The learned Judicial Member has framed the following point of difference for disposal by the Third Member:
"1. |
|
Whether in the facts and circumstances, the addition of Rs.3,58,455/- made by one of the partners, Smt. Kanta Nowalkha is liable to be deleted or to be confirmed ? |
2. |
|
Whether in the facts and circumstances, the addition of Rs. 1,00,000/- each in the name of Shri Nem Chand Nowalkha and Shri Pankaj Ghiya of the assessee firm made as capital contribution is liable to be deleted or liable to be set aside to the file of the Assessing Officer ? |
3. |
|
Whether in view of the decision of Hon'ble jurisdictional High Court in case of CIT v. Kewal Krishan & Partners[2009] 18 DTR 121 (Raj.) the entire capital contribution made/contributed prior to commencement of business is liable to be deleted or to be confirmed in part and partly to be set aside to the file of the Assessing Officer ? |
The learned AM has framed the following point of difference as under:
1. |
|
Whether section 68 of the Income-tax Act, 1961 can be invoked where the assessee fails to satisfactorily explain the nature and source of a cash credit found recorded by him in his books of account for the relevant year, or is the Revenue also required to establish that the assessee had in existence it net of income before the date on which such cash credit was recorded, i.e. in order to treat the same as unexplained u/s. 68? |
2. |
|
Whether the addition of the impugned sums as unexplained credits u/s. 68 can be deleted on the sole ground that the assessee had no source of income prior to the date on which the same were found recorded in the assessee's books of account, notwithstanding the fact that it has completely failed to discharge the burden satisfactorily explaining the nature and source thereof? |
3. |
|
Whether, the view that a cash credit recorded in the books of account of a partnership firm ostensibly as capital contributed by a partner cannot be treated as unexplained u/s. 68 in the hands of the firm even if the assessee firm fails to satisfactorily explain the nature and source thereof and more particularly if it fails to adduce evidence to establish that the alleged capital was actually contributed by the partner is sustainable in law in view of the decision by the Hon'ble jurisdictional High Court in CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.)? |
4.1 |
|
Whether, can capital be contributed by a partner to a partnership-firm prior to the coming into existence of the said firm? In any case, whether the claim of capital contribution by way of transfer of goods on June 1, 2006 can be accepted in view of the fact that the assessee-firm itself came into existence only on July 11, 2006 ? |
4.2 |
|
Is the remand in the case of two cash credits of Rs. l lakh each in the name of two partners justified under the facts and circumstances of the case, as contemplated by the hon'ble jurisdictional High Court in the case of Rajshree Synthetics (P.) Ltd. v. CIT [2002] 256 ITR 331 (Raj.)?" |
2. I have carefully considered the above points of difference drawn by the learned Members of the Jaipur Bench, and have perused the proposed orders of the learned JM and the learned AM. I have heard the learned CIT-DR and the learned counsel of the assessee.
3. The contentions of learned CIT-DR and the learned counsel for the assessee were broadly the same as advanced before the regular Bench and recorded in the proposed draft orders of the learned JM and the learned AM. The learned counsel for the assessee submitted that the assessee is partnership firm constituted on 11.07.2006 with three partners viz. Smt. Kanta Nowalkha, Nem Chand Nowalkha and Pankaj Ghiya. He submitted that all the three partners were existing income-tax assessee with the department. There was a credit entry of Rs. 3,68,455/- in the capital account of Smt.Kanta Nowalkha in the form of stock from her proprietary concern M/s. Om Mahaveer Exports ("OME" for short) and supporting bills issued by "OME" was filed before the AO. He submitted that supporting bills, from where "OME" purchased such goods were also produced before the AO. He submitted that the copy of return of income along with copy of her statement of account including balance sheet, capital account etc. of Smt. Kanta Nowalkha for the year ending 31.3.2007 and the preceding year ending 31.3.2006 were filed before the AO, and copy thereof has been placed in the compilation before the Tribunal. He submitted that a perusal of the statement of account of Smt. Kanta Nowalkha for the period ending 31.3.2006 shows that her capital as on 31.3.2006 was Rs. 13,73,604/-. He submitted that two other partners, viz. Shri Nemi Chand Nowalkha and Shri Pankaj Ghiya have introduced a sum of Rs. 1,00,000/- each as their capital contribution to newly constituted assessee-firm. Both these partners were existing income-tax assessees and their copies of acknowledgement of return along with statement of accounts for the relevant assessment year 2007-2008 as well as immediately preceding assessment year 2006-2007 were filed before the AO, copy of which has been filed in the compilation before the Tribunal. All three partners have confirmed their credit entries in the books of the assessee-firm. In these facts, he argued that the identity and creditworthiness of the partners and genuineness of the credit entries have been proved beyond doubt by the assessee. The learned counsel for the assessee submitted that no adverse action was taken by the AO in the case of any of three partners detailed above. He submitted that the assessee has raised one legal issue also that the credit entry in the account of Smt. Kanta Nowalkha, partner, on account of transfer of goods is dated 1.9.2006, and cash deposit entries in the account of Shri Nem Chand Nowalkha and Shri Pankaj Ghiya of Rs. 1,00,000/- each are dated 11.7.2006, and the business of the assessee-firm could start on 5.9.2006, and therefore, the assessee-firm could not have generated any unaccounted money, and therefore in view of the decision of Hon'ble Rajasthan High Court in the case of Kewai Krishan & Partners (supra), the capital contribution prior to the commencement of business could not be added as income in the hands of the assessee-firm. For this proposition, the assessee has relied on series of decisions in Aravali Trading co. (supra), Roshan Di Hatti (supra), Smt. P.K. Noorjahan (supra), Abhyudaya Pharmaceuticals v. CIT [2013] 350 ITR 358/214 Taxman 61/32 taxmann.com 68 (All)and Bharat Engg. & Construction co. (supra).
4.5. The learned CIT-DR has opposed the submissions of the learned counsel of the assessee. He submitted that there were number of mistakes pointed out by the AO in the transfer entry of stock from the partnership business of "OME" of Smt. Kanta Nowalakha, partner of the assessee-firm. He submitted that the plea of the assessee that the errors were in the nature of typographical error, were not raised before the AO or the CIT(A). He submitted that no stock register of "OME" was produced before the AO, and it is quite possible that the stock of "OME" were sold by its proprietor, Smt. Kanta Nowalkha elsewhere. Onus was on the assessee to prove that the stock was transferred from Smt. Kanta Nowalkha to the assessee-firm, which the assessee has failed to prove. He referred to the relevant observations in the proposed order of the learned AM, where a number of defects in the bills of purchase of goods of "OME" and the freight vouchers dated 18.7.2006 have been detailed. He submitted that regarding the cash entries of Rs. 1,00,000/- each in the account of partner Shri Nemchand Nowalkha and Shri Pankaj Ghiya, the same are not supported by any cash book, which were never produced before the AO. He submitted that in the case of Shri Nemchand Nowalkha the cash in hand as per balance sheet as on 31.3.2006 was Rs. 11,982/-, and therefore, how the amount of Rs. l,00,000/- could be deposited in cash by him with the assessee-firm. With regard to the credit entry in the name of Shri Pankaj Ghiya, he submitted that no balance sheet of Shri Pankaj Ghiya was filed before the AO. With regard to the legal issue of applicability of decision of Hon'ble Rajasthan High Court in the case of Kewal Krishan & Partners (supra), the learned CIT-DR submitted that the decision of the Hon'ble Rajasthan High Court in Kishorilal Santoshilal (supra) was not referred in the case ofKewal Krishan & Partners (supra). He relied on the decision in the case of Anupam Udyog (supra), A. Govindarajulu Mudaliar (supra), Rajshree Synthetics (P.) Ltd. (supra). He submitted that the case laws cited by the learned AR of the assessee are distinguishable on facts. The learned CIT(A) submitted that although the identity of three partner-creditors is proved, but other two conditions of creditworthiness and genuineness of the transaction are not proved in this case.
6. The learned counsel for the assessee, in his rejoinder, submitted that the case laws relied upon by the learned DR are distinguishable on facts. He submitted that minor mistake of the accountant, should not be made a basis for sustaining the addition, otherwise uncalled for. He submitted that the maintenance of accounts by the partner-creditors in their individual cases is not required under the law.
7. I have considered rival submissions carefully and have perused the proposed orders of the learned JM and the learned AM on this issue. I have also perused the copies of various documents filed in the compilation by the assessee. The only issue before me as Third Member is to adjudicate that whether in the facts and circumstances of the case, the addition made on account of credit entries in the accounts of three partners was in accordance with law or not. I find that the assessee-firm is constituted by three partners, viz. Smt. Kanta Nowlakha, Shri Nemchand Nowalkha and Shri Pankaj Ghiya. All three partners were existing income-tax assessees with the department. They have confirmed that they have deposited the amount in question as their capital contribution to the assessee-firm. The identity of three creditors has not been doubted by the department. Smt.Kanta Nowalkha was the proprietor of "OME" and has filed her return of income in the past years along with the statement of account of her proprietorship concern. Merely because the stock register of "OME" was not maintained or was not produced before the AO, it could not be said that the transfer of goods from "OME" to the assessee-firm was not genuine. A perusal of the acknowledgement of the return filed along with statement of account of Smt. Kanta Nowalkha for the relevant financial year ending 31.3.2007 and preceding year ending on 31.3.2006, shows that her capital balance as on 31.3.2006 was at Rs. 13,73,604/-. Her returned income for the year ending on 31.3.2006 was Rs. 89,240/- and for the financial year ending 31.3.2007 was Rs. 88,590/-. The minor discrepancy in the purchase vouchers of goods of "OME" have been explained by the assessee and a detailed note in the form of explanation has been filed. Likewise, I find that Shri Nemchand Nowalkha has contributed Rs. 1,00,000/- in cash as his capital, and he is existing income-tax assessee and has filed return of income year after year. He has also filed his statement of account for the relevant year ending 31.3.2007 and also preceding year ending on 31.3.2006 in the compilation before the Tribunal. A perusal thereof shows that he was having a capital balance of Rs. 4,02,217/- as on 31.3.2006 which far exceeded the amount of Rs. 1,00,000/- deposited by the assessee with the assessee-firm in the succeeding year. The plea of the Revenue is that cash in hand as on 31.3.2006 was Rs. l1,982/- only, and therefore, he could not have deposited Rs. 1,00,000/- with the assessee-firm, in the following year, is devoid of any merit. The capital is reflected with various components apart from cash in hand, such as, bank deposits, debtors, stock etc. and in the case of Shri Nemchand Nowalkha, the debtors as on 31.3.2006 were Rs. 14,29,578, apart from closing stock of Rs. 3,25,944/- as on 31.3.2006. His returned income for assessment year 2006-07 was Rs. 21,090/- and for the assessment year 2007-2008 was Rs. 73,770/-. With regard to credit entry of Rs. 1,00,000/- in the account of Shri Pankaj Ghiya, I find that he is also existing I.T. assessee for the relevant year as well as past many years, and has filed copy of acknowledgement of filing of the return along with his statement of accounts in the compilation before the Tribunal. His returned income for the assessment year 2006-2007 was Rs. 97,260/- and for the assessment year 2007-2008 was Rs. 1,19,260/-. There is no law that every individual should maintain the account books and should produce the same before the AO to prove the genuineness of the credit entries. The credit entries of Shri Nemchand Nowalkha and Shri Pankaj Ghiya of Rs. 1,00,000/- are covered with the statement of account filed along with return of income for the relevant year, and there is no material placed before me to doubt the genuineness thereof. In these facts of the case, I have no hesitation in holding that the assessee has discharged its onus by proving the identity and creditworthiness of the three creditor-partners, and the genuineness of the credit entries in the account of the assessee-firm, and therefore, no case of addition on this count could be made out by the Revenue.
8. Regarding the legal issue, I find that the credit entry in the account of Smt. Kanta Nowalkha on account of transfer of goods from her proprietorship concern, "OME" was dated 1.9.2006 and the credit entry of Rs. 1,00,000/- each in the account of Shri Namchand Nowalkha and Shri Pankaj Ghiya are dated 11.7.2006, whereas the business of the assessee-firm could be started only on 5.9.2006, and therefore, in accordance with the decision of the Hon'ble jurisdictional High Court in Kewal Krishan & Partners (supra), the capital contribution made by the partners prior to the commencement of the business of the assessee-firm could not be added as income in the hands of the assessee and the assessee is entitled to succeed on this legal ground also. The Hon'ble Rajasthan High Court in this case wherein capital was introduced on the first day of commencement of the business held as not addable in the hands of the firm u/s.68 and has held that such unexplained credits may be added to the income of the partners concerned in terms of section 69 and not under section 68.
9. In the case laws relied upon by the learned CIT-DR are distinguishable on facts. In Anupam Udyog (supra) the finding was that there was no evidence regarding the source of agricultural income, and therefore, the amounts were assessed as income in the hands of the assessee-firm. In the case before us all the creditors were existing income tax assessees and the amount deposited with the assessee were covered with their statement of account. In A. Govindarajulu Mudaliar (supra) the issue was where the assessee has failed to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, it was held that the ITO is entitled to draw the inference that the receipts are of an assessable nature. In Rajshree Synthetics (P.) Ltd. (supra), the amount was shown as a loan from a lady, who has filed an affidavit, but the assessee failed to produce her before the AO. Hon'ble High Court held that the Tribunal was justified in not quashing but only setting aside the addition on account of the unexplained alleged cash credit of Rs. 50,000/- in the name of 'M' and remitting the matter for fresh enquiry. I am of the view that these facts of the case are totally distinguishable with the facts of the present case of the assessee.
10. I find that the case law relied upon by the learned counsel for the assessee support the case of the assessee. The legal issue raised by the assessee is covered in favour of the assessee with the decision of the Hon'ble jurisdictional High Court in Kewal Krishan & Partners (supra) and is of binding nature on me as Third Member deciding the issue. In Bharat Engineering & Construction Co. (supra) wherein the cash credit entries were made in the first year of business, the Hon'ble Supreme Court held that a construction company took time to earn profits and it could not have earned a huge profit within a few days after the commencement of its business, and the appeal preferred by the Revenue was dismissed. In Abhyudaya Pharmaceuticals(supra), the Hon'ble Allahabad High Court held that the authorities below had failed to take into account that this was the first year of business of the assessee. There was no material before the Tribunal to hold that the capital introduced by the minor partner at the time of starting of the business, was income of the assessee-firm, and the Tribunal erroneously came to the conclusion that the deposits represented undisclosed income of the assessee-firm. I find that the other decisions relied upon by the learned counsel for the assessee are of not much help to the case of the assessee.
11. I find that in the facts of the case of the assessee, the addition made on account of credit entries in the accounts of three partners was not in accordance with law. All the three partners of the assessee-firm were existing income-tax assessees with the department and have confirmed the factum of capital contribution made to the assessee-firm. The identity of the three creditors has not been doubted by the department. The amounts contributed by the three partners to the assessee-firm are covered with the statement of account filed by three partner-creditors along with their return of income for the relevant financial year ending 31.3.2007 and preceding year ending on 31.3.2006. In the facts and circumstances of the case of the assessee, I hold that the assessee had discharged its onus by proving the identity and creditworthiness of creditor-partners and the genuineness of the credit entries in the account of the assessee-firm and accordingly the questions referred to me by the learned Members of Jaipur Bench have to be answered in favour of the assessee. I find that the assessee is also entitled to succeed on the legal issue of addition of credit entries prior to commencement of the business of the assessee-firm, as the ratio of decision of the Hon'ble jurisdictional High Court in the case of Kewal Krishan & Partners (supra) is applicable to the facts of the case of the assessee. Accordingly, I agree with the order of the learned Judicial Member on the issues recorded in the point of difference by the learned JM and the same is decided in favour of the assessee and against the Revenue and point of difference referred to me by the learned JM and the learned AM are answered accordingly.
12. The matter will now go back to the Division Bench for passing order in accordance with majority view.
ORDER
N.K. Saini, Accountant Member - Since there was a difference of opinion between the learned Members, constituting a Division Bench of I.T.A.T., Jaipur and the Hon'ble President, I.T.A.T. nominated Shri G.C. Gupta, Hon'ble Vice-President, Ahmedabad Zone (AZ) as Third Member. The Hon'ble Third Member vide order dated 20th November, 2013 concurred with the findings of the Hon'ble Judicial Member and held as under:—
"The assessee had discharged its onus by proving the identity and creditworthiness of creditor-partners and the genuineness of the credit entries in the account of the assessee-firm and accordingly the questions referred to me by the learned Members of Jaipur Bench have to be answered in favour of the assessee. I find that the assessee is also entitled to succeed on the legal issue of addition of credit entries prior to commencement of the business of the assessee-firm, as the ratio of decision of the Hon'ble jurisdictional High Court in the case of Kewal Krishan & Partners (supra) is applicable to the facts of the case of the assessee."
2. Therefore, in accordance with majority view, the appeal of the assessee is allowed.