Iapl/17/2007 Of M/S Kesharwani Sheetalaya Sahsaon Allahaad v. Commissioner Of Income Tax Allahabad

In Chamber ReservedAFR Case :- INCOME TAX APPEAL No. - 17 of 2007 Appellant :- M/s Kesharwani Sheetalaya Sahsaon AllahabadRespondent :- Commissioner of Income Tax AllahabadCounsel for Appellant :- R.R. Agarwal (Senior Advocate) assisted by Umesh Chandra KesarwaniCounsel for Respondent :- Manu Ghildyal Hon'ble Biswanath Somadder,J.Hon'ble Dr. Yogendra Kumar Srivastava,J. (Per : Dr. Yogendra Kumar Srivastava,J.) 1.The present appeal has been filed under Section 260-Aof the Income Tax Act, 1961 (in short 'the Act') against theorder of the Income Tax Appellate Tribunal, AllahabadBench, Allahabad (for short 'the I.T.A.T.') dated 30.10.2006,for the assessment year 1999-2000, whereby the Tribunalpartly allowed the appeal filed by the Revenue. 2.The instant appeal was admitted on the questions oflaw, as mentioned in the memo of appeal, which are asfollows:- “(i) Whether, on the facts and in the circumstances of thecase, the Tribunal was legally justified in upholding theorder of the assessing officer of making addition U/s 68 ofthe Income Tax Act at Rs.4,00,000/- in the hand of thefirm? (ii) Whether, on the facts and in the circumstances of thecase, the Tribunal was correct in holding that the assesseewas not able to prove the source of income of partnerswho have made the deposit with the firm in their capitalaccount therefore addition u/s 68 is justified?” 3.The records of the case before us indicate that theassessee has described itself as a partnership firm havingsixteen partners engaged in the business of cold storage. Forthe assessment year 1999-2000, the assessee filed a return INCOME TAX APPEAL No.17 of 2007 of income on 01.11.1999 declaring an income ofRs.36,92,056/-. The case was selected for scrutiny andnotices under Section 143(2)/142(1) of the Act were issued.The assessment was thereafter made under Section 143(3)and in terms of an order dated 26.03.2002 the AssessingOfficer noted the following credits in the names of thepartners:- 4.The Assessing Officer held the credits as unproved andmade an addition of Rs.4,00,000/- under Section 68 of theAct relying upon a decision of this Court in Commissionerof Income Tax, Lucknow v Kapur Borthers[1], which was acase where the assessee had entered deposits in the books offirm in the names of partners and upon the explanations fordeposits being rejected the same were treated as income of 1[1979] 118 ITR 741 (All) INCOME TAX APPEAL No.17 of 2007 the firm and not of the individual partners. 5.An appeal was filed by the assessee against theaforesaid order dated 26.03.2002 before the Commissionerof Income Tax (Appeals), Allahabad, which was partlyallowed and the addition made by the Assessing Officerunder Section 68 of the Act with regard to the cash creditsin the names of the partners in their capital accounts wasdeleted. 6.The deletion of the cash credits was made on theground that the partners had shown agricultural income intheir returns. It was taken note of that the partners wereidentifiable and separately assessed to tax and the firm hadexplained the source of investment as agricultural income ofthe partners, therefore, if at all additions were to be made,then the same had to be made in the hands of the partnersand not in the hands of the firm. 7.Aggrieved against the aforesaid order, the Revenuefiled an appeal before the Income Tax Appellate Tribunal,Allahabad being I.T.A. No.344/(Alld) of 2004 to which theassessee filed cross-objections, being C.O. No.16(Alld) of2006. The I.T.A.T. by the order impugned dated 30.10.2006partly allowed the appeal filed by the Revenue anddismissed the cross-objections filed by the assessee. TheTribunal held that credits in the names of partners asagricultural income were not proved within the meaning ofSection 68 and therefore the order of the Assessing Officertreating the same to be as the firm's deemed income, wasrestored and the order passed by the I.T.A.T., in that regard,was set aside. 7.Aggrieved against the aforesaid order, the Revenuefiled an appeal before the Income Tax Appellate Tribunal,Allahabad being I.T.A. No.344/(Alld) of 2004 to which theassessee filed cross-objections, being C.O. No.16(Alld) of2006. The I.T.A.T. by the order impugned dated 30.10.2006partly allowed the appeal filed by the Revenue anddismissed the cross-objections filed by the assessee. TheTribunal held that credits in the names of partners asagricultural income were not proved within the meaning ofSection 68 and therefore the order of the Assessing Officertreating the same to be as the firm's deemed income, wasrestored and the order passed by the I.T.A.T., in that regard,was set aside. INCOME TAX APPEAL No.17 of 2007 8.We have heard counsel for the parties and perused therecords. 9.The principal ground sought to be canvassed by theappellant assessee is that the partners having shown theagricultural income in their personal returns of the previousyears, which had been accepted by the Revenue as suchwithout any addition, and out of the said agriculturalincome the partners having made the deposits with the firmin their capital accounts, the appellant assessee had satisfiedthe conditions provided under Section 68 of the Act withregard to the identity and capacity of the depositors as wellas genuineness of the transactions. It is submitted that theonly point which was required to be considered on thequestion of making addition under Section 68 of the Act inthe hands of the firm was the nature and source of thetransaction and the appellant assessee was not required toprove the source of the source. 10.It has been further contended that the genuineness ofthe transactions having been proved and the firm havingduly explained the deposit, the impugned order passed bythe Tribunal was not justifiable, and deserves to be setaside. 11.Per contra, the learned counsel appearing for theRevenue has supported the order passed by the Tribunal bysubmitting that the credits having been found in the handsof the firm the onus was on the firm to prove thecreditworthiness of the partners as well as genuineness ofthe transaction and no evidence having been given withregard to agricultural operations of the partners, the INCOME TAX APPEAL No.17 of 2007 transactions in the books of the firm were rightly held to benot genuine and proved within the meaning of Section 68and there was no infirmity in the order passed by theTribunal restoring the order of the Assessing Officer andsetting aside the order passed by the C.I.T.(A). Reliance hasbeen placed upon the decision in the case of KapurBrothers (supra) to contend that the cash credits which areunexplained are to be added in the hands of the firm. 12.In order to answer the questions of law upon whichthe present appeal has been admitted it would be necessaryto advert to the provisions contained under Section 68 ofthe Act. For ease of reference, Section 68 of the Act, as itstood prior to the Finance Act, 2012, is being extractedbelow:- “68. Cash credits—Where any sum is found credited inthe books of an assessee maintained for any previous year,and the assessee offers no explanation about the natureand source thereof or the explanation offered by him isnot, in the opinion of the Assessing Officer, satisfactory,the sum so credited may be charged to income-tax as theincome of the Assessee of that previous year.” 13.As per Section 68, where any sum is found credited inthe books of an assessee maintained for any previous year,and the assessee offers no explanation about the nature andsource of the same or the explanation offered by theassessee is not satisfactory, in the opinion of the AssessingOfficer, the sum so credited may be charged to income taxas the income of the assessee of that previous year. 14.The conditions for the applicability of Section 68would therefore be as follows— (i) the existence of books of accounts made by the assessee itself; 13.As per Section 68, where any sum is found credited inthe books of an assessee maintained for any previous year,and the assessee offers no explanation about the nature andsource of the same or the explanation offered by theassessee is not satisfactory, in the opinion of the AssessingOfficer, the sum so credited may be charged to income taxas the income of the assessee of that previous year. 14.The conditions for the applicability of Section 68would therefore be as follows— (i) the existence of books of accounts made by the assessee itself; (ii) a credit entry in the books of account; and (iii) the absence of a satisfactory explanation by theassessee about the nature and source of the amountcredited. 15.The requirement under the Section is that the assesseeis to submit an explanation about the nature and source ofthe sum which has been credited. The explanation furnishedby the assessee is to be satisfactory and the creditworthinessor financial strength of the creditor is to be proved byshowing that it had sufficient balance in its accounts toexplain the source and the credits in the books of accountsof the assessee. The assessee would be required to explainthe source of credit in the books of accounts but not thesource of the source i.e. source of the creditor. It is seen thatalthough the requirement under Section 68 is that theAssessing Officer must be satisfied that the explanationoffered by the assessee is genuine, but it is also providedthat in the absence of a satisfactory explanation, theunexplained cash credit “may” be charged to income tax –therefore, the unsatisfactoriness of the explanation wouldnot automatically result in deeming the amount credited inthe books as income of the assessee. 16.A similar view was taken in the case of DeputyCommissioner of Income Tax v Rohini Builders[2], whereinreferring to the judgment of the Supreme Court in the caseof Commissioner of Income Tax v Smt. P.K. Noorjahan[3], 2[2002] 256 ITR 360 (Guj)3[1999] 237 ITR 570 (SC)3[1999] 237 ITR 570 (SC) INCOME TAX APPEAL No.17 of 2007 rendered in the context of Section 69 of the Act, itwas heldas follows:- “The phraseology of section 68 is clear. The Legislaturehas laid down that in the absence of a satisfactoryexplanation, the unexplained cash credit may be chargedto income-tax as the income of the assessee of thatprevious year. In this case the legislative mandate is not interms of the words “shall be charged to income-tax as theincome of the assessee of that previous year”. TheSupreme Court while interpreting similar phraseologyused in section 69 has held that in creating the legalfiction the phraseology employs the word "may" and not"shall". Thus the unsatisfactoriness of the explanation doesnot and need not automatically result in deeming theamount credited in the books as the income of the assesseeas held by the Supreme Court in the case of CIT v. Smt.P.K. Noorjahan [1999] 237 ITR 570.” 17.The question of addition under Section 68 in a case ofcapital introduced by the partners was considered inCommissioner of Income Tax v Taj Borewells[4], and takingnote of the fact that Section 68 is a charging section andalso a deeming provision it was held that once the firm hadoffered explanation and established that the capital wascontributed by the partners, the same could not beassessable in the hands of the firm. The relevantobservations made in the judgment are as follows:- “7. Section 68 is a charging section and it is also adeeming provision. Unless the following circumstancesexist, the Revenue cannot rely on section 68 of the Act. (a) Credit in the books of an assessee maintained forthe year.the year. (b) the assessee offers no explanation or if theassessee offers explanation the Assessing Officer isof the opinion that the same is not satisfactory, thesum so credited is chargeable to tax as “income fromother sources”. x x x x x “7. Section 68 is a charging section and it is also adeeming provision. Unless the following circumstancesexist, the Revenue cannot rely on section 68 of the Act. (a) Credit in the books of an assessee maintained forthe year.the year. (b) the assessee offers no explanation or if theassessee offers explanation the Assessing Officer isof the opinion that the same is not satisfactory, thesum so credited is chargeable to tax as “income fromother sources”. x x x x x 13. ...Once the firm had offered an explanation and 4[2007] 291 ITR 232 (Mad) INCOME TAX APPEAL No.17 of 2007 established that the capital was contributed by thepartners, the same could not be assessable in the hands ofthe firm. Unless there are contradictions andinconsistencies in the statement of the partners, the creditcannot be treated as unexplained and cannot be addedunder section 68 of the Act in the hands of the assessee-firm...” 18.The issue relating to addition under Section 68 alsocame up in Commissioner of Income Tax v Pragati Co-operative Bank Limited[5], and taking note of the languageof Section 68 it was held that the word “may” indicates thatthe intention of the legislature is to confer a discretion onthe Assessing Officer in the matter of treating the source ofinvestment or credit which had not been satisfactorilyexplained as income of an assessee, but it is not obligatoryto treat such source as income in every case where theexplanation offered was found to be not satisfactory. It washeld thus:- “14. Section 68 of the Act requires that there has to be acredit in the books maintained by an assessee; such credithas to be of a sum during the previous year; and theassessee offers no explanation about the nature and sourceof such credit; or the explanation offered by the assessee isnot, in the opinion of the assessing authority, satisfactory,then the sum so credited may be charged to tax as incomeof the assessee of that previous year. The apex court in thecase of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 haslaid down that the word “may” indicated the intention ofthe Legislature that a discretion was conferred on theAssessing Officer in the matter of treating the source ofinvestment/credit which had not been satisfactorilyexplained as income of an assessee, but it was notobligatory to treat such source as income in every casewhere the explanation offered was found to be notsatisfactory.” 19.The nature and scope of Section 68 of the Act fell forconsideration before the Supreme Court in Commissioner of Income Tax v P. Mohanakala[6], and it was held asfollows:- “16. The question is what is the true nature and scope ofsection 68 of the Act? When and in what circumstancessection 68 of the Act come into play? A bare reading ofsection 68 suggests that there has to be credit of amountsin the books maintained by an assessees; such credit has tobe of a sum during the previous year; and the assesseesoffer no explanation about the nature and source of suchcredit found in the books; or the explanation offered bythe assessees in the opinion of the Assessing Officer is notsatisfactory, it is only then the sum so credited may becharged to income-tax as the income of the assessees ofthat previous year. The expression "the assessees offer noexplanation" means where the assessees offer no proper,reasonable and acceptable explanation as regards the sumsfound credited in the books maintained by the assessees. Itis true the opinion of the Assessing Officer for notaccepting the explanation offered by the assessees as notsatisfactory is required to be based on proper appreciationof material and other attending circumstances available onrecord. The opinion of the Assessing Officer is required tobe formed objectively with reference to the materialavailable on record. Application of mind is the sine quanon for forming the opinion.” 20.The aforementioned principle of law has beenreiterated and followed in a recent judgment in PrincipalCommissioner of Income Tax (Central)-I v NRA Iron andSteel Private Limited[7]. 21.The judgment in the case of Kapur Brothers, whichforms the basis of the order passed by the Assessing Officerand also that of the Tribunal, and upon which strongreliance has been placed by the Revenue, was a case wherethe entries had been made in the books of account of theassessee firm about three weeks prior to the end of theaccounting period and the different explanations furnished 6[2007] 291 ITR 278 (SC)7[2019] 412 ITR 161 (SC)7[2019] 412 ITR 161 (SC) INCOME TAX APPEAL No.17 of 2007 by the assessee at different stages of the proceedings weredisbelieved for the reason that the assesee had failed toestablish that the partners had actually deposited the moneyand that the entries were not fictitious, and it was in view ofthe said facts that the court proceeded to answer thequestion referred to it by holding that the cash credit entriesstanding in the names of the partners in the account booksof the firm could validly be treated as income of the firmfrom the undisclosed sources. The operative portion of thejudgment in the case of Kapur Brothers is being extractedbelow:- “In that case, the entries were alleged to have been made aweek before the end of the accounting period. In thepresent case, the entries were made about three weeksprior to the end of the accounting period. Identicalamounts were entered as deposited in the name of eachpartner. Different explanations were given by the assesseeat different stages of the proceedings. They weredisbelieved. In this view of the matter, the Tribunal wasnot justified in treating the amount as the income of theindividual partner in view of the finding that the assesseehad failed to establish that the partners have actuallydeposited the money and that the entries were notfictitious. Accordingly, we answer the question referred to us byholding that the cash credit entries standing in the namesof the partners in the account books of the firm couldvalidly be treated as the income of the firm fromundisclosed sources. As no one appeared on behalf of theassessee, there will be no order as to costs.” 22.The question as to whether in a case where there arecash credit entries in the books of the assessee firm in whichaccounts of individual partners exist and it is found as a factthat the cash was received by the firm from its partners thenin the absence of any material to indicate that there wereprofits of the firm, the sum so credited could be assessed inthe hands of the firm was considered in the decision in INCOME TAX APPEAL No.17 of 2007 Commissioner of Income Tax, Allahabad v Jaiswal MotorFinance[8], and it was stated thus:- “...It appears to be well settled that if there are cash creditentries in the books of the firm in which the accounts ofthe individual partners exist and it is found as a fact thatcash was received by the firm from its partners then in theabsence of any material to indicate that they were profitsof the firm, could not be assessed in the hands of the firm.We are, therefore, of the opinion that the Tribunal did notcommit any error of law and rightly held that the depositsshown in its accounts were satisfactorily explained.” INCOME TAX APPEAL No.17 of 2007 Commissioner of Income Tax, Allahabad v Jaiswal MotorFinance[8], and it was stated thus:- “...It appears to be well settled that if there are cash creditentries in the books of the firm in which the accounts ofthe individual partners exist and it is found as a fact thatcash was received by the firm from its partners then in theabsence of any material to indicate that they were profitsof the firm, could not be assessed in the hands of the firm.We are, therefore, of the opinion that the Tribunal did notcommit any error of law and rightly held that the depositsshown in its accounts were satisfactorily explained.” 23.The questions with regard to burden of proof inrespect of an addition under Section 68 came up forconsideration in India Rice Mills v Commissioner ofIncome Tax[9], and it was held that where capitalcontributions are made by the partners prior to thecommencement of the business by the assessee firm, it is forthe partners to explain the source of such capitalcontribution and if they failed to discharge such onus thensuch capital contributions, although entered in the books ofaccounts of the assessee firm, cannot be regarded as incomeof the assessee firm but the same were to be added in handsof the partners. Distinguishing the judgment in the case ofKapur Brothers, it was held as follows:- “Reliance on Kapur Brothers' case [1979] 118 ITR 741(All) is misplaced, inasmuch as in that case deposits wereentered in the books of the firm when it was alreadycarrying on its business. The firm was called upon toexplain the source of the deposits. The explanation of thefirm was that the deposits represented the sale proceeds ofcertain assets belonging to the partners. When no evidencewas adduced to substantiate that explanation, theassessing authority added the amount as income of thepartnership-firm. These facts are materially different fromthe fact of the Infant case. Most striking feature of the caseon hand is that all the deposits came to be made during 8[1983] 141 ITR 706 (All) 9[1996] 218 ITR 508 (All) INCOME TAX APPEAL No.17 of 2007 the accounting year in the books of he assessee-firm beforeit started its business. Therefore, the onus was on thepartners to explain the source in the case on hand and ifthey failed, the amount could have been added in theirhands only and not in the hands of the assessee-firm.” 24.The question as to whether in a case where there wascredit in the capital account of partners in books of the firm,addition thereof could be made in the hands of the firm orthe same had to be considered in the hands of the partners,came up in a reference under Section 256(1) of the Act inCommissioner of Income Tax v Metachem Industries[10],and it was held that according to Section 68 the burden wason the assessee to satisfactorily explain the credit entry inthe books of account of the previous year and in a casewhere satisfactory explanation had been given byestablishing that the amount had been invested by aparticular person, be he a partner or any individual then theburden of the assessee firm is discharged and the creditentry could not be treated to be income of the firm for thepurposes of income tax. The relevant observations made inthe judgment are as follows:- “...Section 68 of the Act of 1961 says that where any sumis found credited in the books of an assessee maintainedfor any previous year, and the assessee offers noexplanation about the nature and source thereof or theexplanation offered by him is not, in the opinion of theIncome-tax Officer, satisfactory, the sum so credited maybe charged to income-tax as the income of the assessee ofthat previous year. Therefore, according to section 68, thefirst burden is on the assessee to satisfactorily explain thecredit entry in the books of account of the previous year. Ifthe explanation given by the assessee is satisfactory, thenthat entry will not be charged with the income of theprevious year of the assessee. In case the explanationoffered by the assessee is not satisfactory or the sourceoffered by the assessee-firm is not satisfactory, then in that INCOME TAX APPEAL No.17 of 2007 case, the amount should be taken to be the income of theassessee. In the present case, the Assessing Officer did notfeel satisfied with the explanation given by the assesseeand accordingly assessed all the three credit entries to theaccount of the assessee as the income. ...Once it is established that the amount has been investedby a particular person, be he a partner or an individual,then the responsibility of the assessee-firm is over. Theassessee-firm cannot ask that person who makesinvestment whether the money invested is properly taxedor not. The assessee is only to explain that this investmenthas been made by the particular individual and it is theresponsibility of that individual to account for theinvestment made by him. If that person owns that entry,then the burden of the assessee-firm is discharged. It isopen to the Assessing Officer to undertake furtherinvestigation with regard to that individual who hasdeposited this amount. So far as the responsibility of the assessee is concerned, itis satisfactorily discharged. Whether that person is anincome-tax payer or not or from where he has brought thismoney is not the responsibility of the firm. The momentthe firm gives a satisfactory explanation and produces theperson who has deposited the amount, then the burden ofthe firm is discharged and in that case that credit entrycannot be treated to be the income of the firm for thepurposes of income-tax. It is open to the Assessing Officerto take appropriate action under section 69 of the Act,against the person who has not been able to explain theinvestment...” 25.A similar question was considered in Commissioner of Income Tax v Burma Electro Corporation[11] wherein thedeletion of the addition made by the Tribunal, on theground that though there was no evidence on record toshow availability of funds with partners at the time ofinvestment with the assessee firm the concerned partnershaving admitted to have made those investments and therebeing no material to indicate that those investments wereprofits of the assessee firm, the sum so credited could not beassessed as income of the firm in terms of Section 68 but11 [2001] 252 ITR 344 (P&H) INCOME TAX APPEAL No.17 of 2007 could be assessed in the hands of the individual partners,was upheld. 26.We may also refer to the decision in the case ofAbhyudaya Pharmaceuticals v Commissioner of Income Tax[12], wherein the earlier decision in the case of JaiswalMotor Finance was followed on the point that if there arecash credit entries in the books of the assessee firm in whichaccounts of an individual partner exists, and it is found as afact that the cash was received by the firm from its partnersthen in the absence of any material to indicate that the samewere profits of the firm, it could not be assessed in thehands of the firm. The judgment in the case of KapurBrothers was also considered and distinguished on facts.The relevant observations made in the judgment are asfollows:- could be assessed in the hands of the individual partners,was upheld. 26.We may also refer to the decision in the case ofAbhyudaya Pharmaceuticals v Commissioner of Income Tax[12], wherein the earlier decision in the case of JaiswalMotor Finance was followed on the point that if there arecash credit entries in the books of the assessee firm in whichaccounts of an individual partner exists, and it is found as afact that the cash was received by the firm from its partnersthen in the absence of any material to indicate that the samewere profits of the firm, it could not be assessed in thehands of the firm. The judgment in the case of KapurBrothers was also considered and distinguished on facts.The relevant observations made in the judgment are asfollows:- “13. So far as the second limb of the argument that atwhose hands the addition should be made is concerned, itis apt to have a look to section 68 of the Income-tax Act.Heading of the said section is “Cash Credits” and it readsthat where any sum is found credited in the books of anassessee maintained for any previous year, and theassessee offers no explanation about the nature and sourcethereof or the explanation offered by him is not, in theopinion of the Assessing Officer, satisfactory, the sum socredited may be charged to income-tax as income of theassessee of that previous year. 14. It may be noted that section 68 of the Income-tax Act,1961 is a new provision in the sense that there was nosuch provision under the old Act, i.e., the Indian Income-tax Act, 1922. Even then the underlying principle ofsection 68 was given judicial recognition by courts. Inother words, the principle has been developed on the basisof judicial decisions which has been given statutoryrecognition by section 68. 15. CIT v. Jaiswal Motor Finance [1983] 141 ITR 706 (All)is a Division Bench authority of this court wherein it hasbeen laid down that if there are cash credit entries in the 12 [2013] 350 ITR 358 (All) INCOME TAX APPEAL No.17 of 2007 books of the assessee-firm in which accounts of anindividual partner exists, and it is found as a fact that thecash was received by the firm from its partners then in theabsence of any material to indicate that they were profitsof the firm, it could not be assessed in the hands of thefirm. The learned counsel for the appellant submits thatthe aforesaid decision applies with full force to the facts ofthe case on hand. Noticeably, this was also a case where itwas the first year of assessment of the firm. Theobservations made therein if read in the context of thefacts of the present case, the submission of the appellant'scounsel is well founded. The relevant extract is reproducedbelow (page 707):- "It appears to be well settled that if there are cashcredit entries in the books of the firm in which theaccounts of the individual partners exist and, it isfound as a fact that cash was received by the firmfrom its partners then in the absence of any materialto indicate that they were profits of the firm, it couldnot be assessed in the hands of the firm. We are,therefore, of the opinion that the Tribunal did notcommit any error of law and rightly held that thedeposits shown in its accounts were satisfactorilyexplained." "It appears to be well settled that if there are cashcredit entries in the books of the firm in which theaccounts of the individual partners exist and, it isfound as a fact that cash was received by the firmfrom its partners then in the absence of any materialto indicate that they were profits of the firm, it couldnot be assessed in the hands of the firm. We are,therefore, of the opinion that the Tribunal did notcommit any error of law and rightly held that thedeposits shown in its accounts were satisfactorilyexplained." 16. At this stage, the learned standing counsel for theDepartment places reliance upon another Division Benchdecision of this Court in the case of Kapur Brothers [1979]118 ITR 741 (All). It is apt to examine the facts of the caseof Kapur Brothers (supra). The Assessing Officer found adeposit of certain amount while making assessment ofM/s. Kapoor Brothers. The amount was deposited in thename of its partners. The deposits were entered as onOctober 20, 1966. The accounting period for theassessment year 1967-68 ended on November 11, 1968.The explanation offered by the assessee was not foundsatisfactory. In this factual background, it was noticed thatthe entries were made about three weeks prior to the endof the accounting period. In this factual background theHigh Court held that cash credit entries standing in thename of partners in the account books of the Firm wouldvalidly be treated as income of Firm from undisclosedsource. 17. On a first flash, it appears that the ratio of theaforesaid decisions given in the case of Kapur Brothers[1979] 118 ITR 741 (All) and Jaiswal Motor Finance[1983] 141 ITR 706 (All) is conflicting, but on ameaningful reading thereof, would show that they wererendered in different factual matrix. The ratio laid down in INCOME TAX APPEAL No.17 of 2007 the case of Kapur Brothers [1979] 118 ITR 741 (All) willbe applicable in a case where a partner brings capitalamount at the formation of the firm itself, before thecommencement of business by the firm. It would not beapplicable in a case where the deposit is reflected in theaccount books of the firm during the currency of thebusiness of the firm. The underlying idea in the case ofKapur Brothers [1979] 118 ITR 741 (All) is that when theassessee-firm has no business, it cannot possibly have anyincome. Therefore, in such a case the question ofpresumption of income of the assessee-firm would notarise generally. But it is not appropriate when theassessee-firm is earning income from its business and inthat situation the assessee-firm has to explain the cashcredit standing in its account. If the above line ofdistinction is kept in mind, we find that both the decisionsare standing on a different factual background. 18. It is interesting to note that the aforesaid two decisionsone given in the case of Jaiswal Motor Finance [1983] 141ITR 706 (All) and another in the case of Kapur Brothers[1979] 118 ITR 741 (All) were again up for considerationbefore a Division Bench of this court in the case of IndiaRice Mill v. CIT (1996) 218 ITR 508. The relevant extract isreproduced below (page 510 of 218 ITR): "However, the Tribunal relying on CIT v. KapurBrothers [1979] 118 ITR 741 (All), held that sincethe amount was credited in the books of theassessee-firm, it is for the assessee to explain thesource of the deposits and as the assessee-firm failedto discharge that onus, the deposits were rightlytaken to be the income of the assessee-firm fromundisclosed sources by the assessing authority..." 18. It is interesting to note that the aforesaid two decisionsone given in the case of Jaiswal Motor Finance [1983] 141ITR 706 (All) and another in the case of Kapur Brothers[1979] 118 ITR 741 (All) were again up for considerationbefore a Division Bench of this court in the case of IndiaRice Mill v. CIT (1996) 218 ITR 508. The relevant extract isreproduced below (page 510 of 218 ITR): "However, the Tribunal relying on CIT v. KapurBrothers [1979] 118 ITR 741 (All), held that sincethe amount was credited in the books of theassessee-firm, it is for the assessee to explain thesource of the deposits and as the assessee-firm failedto discharge that onus, the deposits were rightlytaken to be the income of the assessee-firm fromundisclosed sources by the assessing authority..." Reliance on Kapur Brothers' case [1979] 118 ITR741 (All) is misplaced, inasmuch as in that casedeposits were entered in the books of the firm whenit was already carrying on its business. The firm wascalled upon to explain the source of the deposits.The explanation of the firm was that the depositsrepresented the sale proceeds of certain assetsbelonging to the partners. When no evidence wasadduced to substantiate that explanation, theassessing authority added the amount as income ofthe partnership-firm. These facts are materiallydifferent from the fact of the instant case. Moststriking feature of the case on hand is that all thedeposits came to be made during the accountingyear in the books of the assessee-firm before itstarted its business. Therefore, the onus was on the partners to explain the source in the case on handand if they failed, the amount could have beenadded in their hands only and not in the hands ofthe assessee-firm." 19. On the facts and circumstances of this case, we are ofthe considered opinion that the authorities below havecommitted error as they have failed to take into accountthat this was the first year of the business of the assesseefirm. The partnership firm was formed on July 5, 1990 andon July 7, 1990, Master Shishir Garg depositedRs.1,90,000 and Rs.72,000 as capital money with the Firmthrough bank clearance of two bank drafts. The accountingperiod being financial year, i.e., ending on March 31,1991, the Firm could not have any income at the time ofits formation. The identity of the depositor, i.e., MasterShishir Garg was not in issue at any point of time beforethe income-tax authorities. They treated the said depositby Master Shishir Garg. This being so, if for one reason orthe other, they were not satisfied with the financialcapability of Master Shishir Garg, the amounts could havebeen added at the hands of Master Shishir Garg and not atthe hands of firm. 20. The decision relied upon by the learned counsel for theDepartment is clearly distinguishable on facts as it was notin respect of first year of the business and has noapplication whatsoever. The argument put by him that theincome was liable to be added in the hands of firm asMaster Shishir Garg being minor could not be prosecuted,has no substance. 21. It may be noted that the decision given in the case ofJaiswal Motor (supra) is being constantly followed by thiscourt in the subsequent decisions. Reference can be madeto Surendra Mohan Seth v. CIT [1996] 221 ITR 239 (All). 22. The Rajasthan High Court in CIT Vs. Kewal Krishnaand Partners [2009] 18 DTR 121 (Raj) has also takensimilar view.” 27.Section 68 requires the Assessing Officer to satisfyitself of the source of the credit and if during the course ofenquiry undertaken, the entries are found to be not genuinethen the sum represented by such credit entry is to be addedas income of the assessee. The satisfaction of the AssessingOfficer thus forms the basis for invocation of the provisionsof Section 68. The satisfaction in this regard, however, must INCOME TAX APPEAL No.17 of 2007 22. The Rajasthan High Court in CIT Vs. Kewal Krishnaand Partners [2009] 18 DTR 121 (Raj) has also takensimilar view.” 27.Section 68 requires the Assessing Officer to satisfyitself of the source of the credit and if during the course ofenquiry undertaken, the entries are found to be not genuinethen the sum represented by such credit entry is to be addedas income of the assessee. The satisfaction of the AssessingOfficer thus forms the basis for invocation of the provisionsof Section 68. The satisfaction in this regard, however, must INCOME TAX APPEAL No.17 of 2007 not be illusory or imaginary but is required to be based onthe facts and the evidence and on the basis of a properenquiry of the material before the Assessing Officer. Theenquiry envisaged under the provision is to be reasonableand just. 28.Under Section 68, the onus is on the assessee to offerexplanation where any sum is found credited in the books ofaccount and where the assessee fails to prove to thesatisfaction of the Assessing Officer, the source and natureof the amount of cash credits an inference may be drawnthat the credit entries represent income taxable in the handsof the assessee. This does not however absolve theresponsibility of the Assessing Officer to prove that the cashcredits constitute the income of the assessee. The onus onthe assessee has to be understood with reference to the factsof each case and if the prima facie inference on the basis offacts is that the assessee's explanation is probable, the onusshifts to the Revenue. It has been consistently held that oncethe assessee has proved the identity of its creditors, thegenuineness of the transactions and the creditworthiness ofthe creditors vis-a-vis the transactions which it had with thecreditors, the burden stands discharged and the burden thenshifts to the Revenue to show that the amount in questionactually belong to, or was owned by the assessee himself. 29.The question as to whether in a case where money hascome from a partner, addition, if any, has to be made in thehands of the partner or of the firm came up forconsideration upon the reference under Section 256(1) ofthe Act in the case of Commissioner of Income Tax v INCOME TAX APPEAL No.17 of 2007 Kishorilal Santoshilal[13], and referring to the language usedunder Section 68 and various authorities on the point it washeld that in this regard the following points are required tobe noted:- “On the basis of the language used under section 68 andthe various decisions of different High Courts and the apexcourt, the only conclusion which could be arrived at is : (i) that there is no distinction between the cash creditentry existing in the books of the firm whether it is of apartner or of a third party, (ii) that the burden to prove the identity, capacity andgenuineness has to be on the assessee, (iii) if the cash credit is not satisfactorily explained theIncome-tax Officer is justified to treat it as income from"undisclosed sources", (iv) the firm has to establish that the amount was actuallygiven by the lender, (v) the genuineness and regularity in the maintenance ofthe account has to be taken into consideration by thetaxing authorities, (vi) if the explanation is not supported by anydocumentary or other evidence, then the deeming fictioncredited by section 68 can be invoked.” 30.It is therefore seen that in a case where a sum iscredited in the books of account of a firm from a partner,the assessee firm could discharge its onus by proving threethings: (i) identity of the creditor; (ii) creditworthiness ofthe creditor; and (iii) genuineness of transaction inquestion. Once the assessee proves all the three things itsonus is discharged. It has also been consistently held thatthe assessee only needs to prove the source of credit entriesand he is not required to prove the source of the source orthe creditors' credit. 31.In a case where the integrity of the creditors is 13 [1995] 216 ITR 9 (Raj) INCOME TAX APPEAL No.17 of 2007 30.It is therefore seen that in a case where a sum iscredited in the books of account of a firm from a partner,the assessee firm could discharge its onus by proving threethings: (i) identity of the creditor; (ii) creditworthiness ofthe creditor; and (iii) genuineness of transaction inquestion. Once the assessee proves all the three things itsonus is discharged. It has also been consistently held thatthe assessee only needs to prove the source of credit entriesand he is not required to prove the source of the source orthe creditors' credit. 31.In a case where the integrity of the creditors is 13 [1995] 216 ITR 9 (Raj) INCOME TAX APPEAL No.17 of 2007 established and the entries are shown to be not fictitious,the burden would shift on the Revenue. 32.In the case at hand, the partners have shown theagricultural income in their personal returns of the pastyears which had been accepted by the department as such.The partners are all identifiable and separately assessed totax. The source of investment having been explained, in theevent the Assessing Officer was not satisfied the additioncould have been considered in the hands of the partners andnot in the hands of the firm. The burden of proving thesource of the credits having been sufficiently explained theaddition could not have been made in the hands of the firmin the facts of the present case. 33.In view of the aforementioned facts and circumstancesthe questions of law are answered in favour of the assesseeand against the Revenue. 34.The appeal stands, accordingly, allowed. Order Date :- 24.04.2020Shahroz (Biswanath Somadder,J.) (Dr. Y.K. Srivastava,J.)