Itta/30/2023 Of M/S Durga Granites v. The Assistant Commissioner Of Income Tax, Circle - 1

IN THE . HIGI{ COURT ATHYDERABADFOR THE STATE OF TELANGANA MONDAY, THE FOURTH DAY OF SEPTEMBERTWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE SRI JUSTTCE P.SAM KOSHYANDTHE HON'BLE SRI JUSTICE LAXMI NARAYANAALISHETTY t.T.T.A 30 ot2023 lncome Tax Tribunal Appeal Under Section 260,4 of the Income Tax Act,against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ,A,,against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ,A,,Hyderabad in lrA No.1706 tHydl2o17, for assessment year zo14-1s dated 31-01_2022 preferred against the Order of the Commissioner of Income Tax (Appeals)-2,2022 preferred against the Order of the Commissioner of Income Tax (Appeals)-2,Hyderabad, lrA No.0346/2016-17 dated 30-06-2017 preferred against the order ofthe Commissioner of lncome TaxDepartment, Hyderabad, PAN/GlRNo. dated 21 - 1 2_20,1 B.Between:the Commissioner of lncome TaxDepartment, Hyderabad, PAN/GlRNo. dated 21 - 1 2_20,1 B.Between: Karimnagar - M/s Durga Granites. 505 001, Telangana2-1O-1-OZgl23, Flat No.406, SRR Enclave, Jyothinagar, ..APPELLANT AND The Assistant Commissioner.of lncome Tax, Circle -""'"_ 1, Karrmnagar, AayakarBhavan, Karimnasar - sos oO1, ir;ga;;:" .RESPONDENT Counset for the Appellant: SRI AV.A. SIVA KARTIKEYA counsel for the Respondent: smt. suNoARr R. prsupATr, sR sc FoR cEcAND ST The Court made the following: ORDER o THE HON'BLE SRI JUSTICE P.SAM KOSHYAND,fHE HON'BLE SRI JUSTICE LAXMI NARAYANA A,LISHETTY I.T.T.A.No.30 of 2o23 ORDER.'1per Hon'ble Sn Justice P.SAM KOSI-fl) The instalt appeal under Section 260-A of the IncomeTax Act, [,l96 ]1 , is prelerred bv the appellant/ast;essee. Theappellant in the in stalt appeal has challengeci the [order]dated 3l .0 ] .202',1 1;assed bv the FIon'ble Irtcome TaxAppellatc'l'ribur,al Ilvdcrabad Bench'A', IlI'derabad,ln l.T.A.No. \7Obit l,.r.1 i 20i7. lbr the assessrlent 3,'r;ar 201'4-20i 5. 2. Fk'r,uri Sr-r it \/,\. Srva l(artil<eya, lcarned [<:ottnsel for]Lhe appcliernt:urcl Srnt. Strndari R.Pisupati, learned counselfor the respon dc'n,. Department ll, TLrc bnti lacl s rcqr-rirecl lor adjudication of the presentilppeal air(l to ilns\i [('r ]thc clutt'sLit;ns lramed [r.l'hile: ]admittingrhe appcal irrt'ars irirrlcr: 3.1 'l-[-t t: a 1r t:,' lli t tr tIS 'Ipartncrship firtn. w'hich lorthe asst:ssur(--n I \ r'iir' 20 I -t 20 [1 ]5 lilcd its return of [incorne] on 3O.Og.2Ol4. [The ][appetlant ][had ][admitted ][an]income of Rs. 1,84,O8,23O/-. [The ][respondent-Department]subsequently subjected [the return ][of the ][appellant ][for ][a]limited scrutiny [on ][the ][ground ][that ][there ][is ][substantial]increase in the capital [in ][the ][year ][with ][mis-matching ][the]sales turnover [as ][reported ][in ][the ][audit ][report ][and ][ITR'] 3.2 During the [year ][under ][consideration, ][the ][fixed]capital account of [the ][partnership ][firm ][got ][enhanced ][by]Rs.3.51 crores on account [of ][introduction of ][new ][partners']The Assessing Offrcer [thereafter, ][called ][for the ][details ][from]the appetlant to [which the ][appetlant ][furnished his ][response]and also gave [explanation. ][The ][Assessing ][Officer,]subsequently', did [not ][accept ][the ][explzrnation ][provided ][b-y]the appellant and [passed ][the order of ][assessment ][again ][on]09. I I .2016. While [passing ][the ][impugned ][order, ][the]Assessiug Oflicer [made ][an ][addition ][of ][Rs.2,71,O0,OOO/]being the capital introduced [by ][the ][partners' That ][apart']the Assessing Officer added [another additional ][amounl ][ol]Rs.5.+.50,207/- being [the ][capital ][introduced ][b,Y ][the]appcllant, rvhich [was ]subsequently [said ][to ][have ][been ][p:rid]back to the partners in the [same ][year ][under ][Section ][68 ][ot] the Act. The Assessing Officer also disallowed [the ][interest]paid to the partners on the capital introducecl by themunder Section a0 [(b) ]of the [Act.] 3.3 The aforesaid order of the Assessing Officer [was] the Act. The Assessing Officer also disallowed [the ][interest]paid to the partners on the capital introducecl by themunder Section a0 [(b) ]of the [Act.] 3.3 The aforesaid order of the Assessing Officer [was] subjected to challenge b-\' [u'ay ][of ]an [appeal ][by tht: ][etppellant]before the Commissioner of lncome [Tax ][(Appe ][aJ ][s]-2 ][(for]short 'CIT (Appeals)'), Hvderabad, [vide ] [No.0l)46/2016-]17. The CIT (Appeals) bv its order dated 30.06.2017 [allowed]the appeal of the appellant holding that [the ][partnership]f,rrm is not required to explain the sources [of inc,lme of ][the]in of the arnount contributt:d [by ][the]partners respect partners towards the capital of the firm. 3.4 The said order ol the CIT [(Appeals) ][was further]subjected to challenge bv [tl.rc ]respondent-Department [by]way of an appeal before tlrt' Hon'ble [lncome Tax ][Appellate]Tribunal, Hyderabad Bcnch ['A', ][Hyderaba<1, ][vide]I.T.A.No. 1706/Hydl2O17. The Hon'ble [vide ][its ][order]dated 31.01 .2022 reversed thc lindings of [the ][CIl' ][(Appeals)]and in the process, [aftlrrnecl ][the ][order ][of ][the ][Assessing]Officer dated 09 I l.2O ltr [l'trc ][[{on'ble ] [also ][reversed] the findings of the CIT (Appeals) so far as deletion ofinterest payabte to the partners of the assessee firm holdingthat the assessees could not establish very cojentdocuments so far as the interest paid to the partners of theassessees firm being debited in the profit and loss accountof the assessee hrm. It is this order of the Honble Tribunalwhich is under challenge in the present appeal. 4. The appeal was admitted for hearing on 13.03.2023on the follou,ing substantial questions of law: 1 . Whether on tLE facts and in. theciranmstances of the case, Tibunal is ight in settingaside the uell-considered order of the Commissioryerof lncome Tax (Appeals) and in sustaining theaddition made by the Assessing Officer underSection 68 of the Act? 2. Whether on tl'Le facts and in thecircurtrstonces of the case, Tibunal is i!1ht in taxingthe credits in the hands of the firm, speciallg whenthe arnounts are alreadg taxed in tle hands of tleindiuidual pafiners, therebg resulting in doubletaratiort? 3. Whetler otr the facts and in tLEciranrnstances of the case, Tibunal is corect inholdinq thot interest poament made bg the firm is inuiolatiott of Sectiort 40(b) of the Act? Though r'''hile admitting the appeal there were three substantial questions of law framed. However, whilearguing the matter, the learned counsel for the appellant C', only stressed upon substantia-l question Nos.1 atrd 2 [and]did not make his submissions so far as :;ubstantialquestion No.3 is concerned. Hence, we tzd<e intoconsideration the contents of substantial question Nos.land 2, which would clearly reflect that they are ir-rtrinsicallyconnected to each other and thus the 1"' substantialquestion of law would be required to be ansrvered together.Hence, we take up both the questions to be consideredanalogously 5. It would be relevalt at this [juncture ]to t€ke note ofthe wordings of Section 68 ol the lncome Tax Act, I96 1, foradjudication of the two substantial questions of [aw, whichfor ready reference is being reproduced herein undr:r 'Sec.' [568. ][Wtere ][any ][surn is ]foturd [creditetT ][in ][the]books of an assessee maintained for orttl preuiots [gear,]and the assessee offers no explartatiort ctbottt the [nature]and source thereof or tLrc expLanatior,- offered bu hi,n is not,in the opinion of the Assessing Offic<zr, satisfacrc.try, thesum so credited may be charged to incorne-las. os theincome o.f the assessee of that preurolls [qear:] Provided that uthere the asse.s.see is <t cornp,ttty [(not]being a companA in uhich the [pttfi!1p ]rtre substantiallyinterested), and the sum so credited consists of shareapplication moneA, share capitttl, shore S;rerniurr, or [anA]such amotLnt by whateuer rrcurre cctllecl. [atrg ][explanation]offered bg such assessee-co;rl pany [slutll ][be deerrted ][to ][be]not satisfactory, unle ss 'Sec.' [568. ][Wtere ][any ][surn is ]foturd [creditetT ][in ][the]books of an assessee maintained for orttl preuiots [gear,]and the assessee offers no explartatiort ctbottt the [nature]and source thereof or tLrc expLanatior,- offered bu hi,n is not,in the opinion of the Assessing Offic<zr, satisfacrc.try, thesum so credited may be charged to incorne-las. os theincome o.f the assessee of that preurolls [qear:] Provided that uthere the asse.s.see is <t cornp,ttty [(not]being a companA in uhich the [pttfi!1p ]rtre substantiallyinterested), and the sum so credited consists of shareapplication moneA, share capitttl, shore S;rerniurr, or [anA]such amotLnt by whateuer rrcurre cctllecl. [atrg ][explanation]offered bg such assessee-co;rl pany [slutll ][be deerrted ][to ][be]not satisfactory, unle ss (o) The person, being a [resident ][in ][uthose ][name ][such]credit is recorded in the [books of such ][compang ][also offers]an explanation about the [nature ][and ][source ][of ][such ][sum]so credited; and (b) Such explanation in the opinion of [the ][Assessing]Officer aforesaid has been found [to ][be ][satisfactory.] Provided further that nothing [contained ][in ][th.e ]firstproui,so shall applg if the person, in u-those name [th.e ][sum]referred to therein is recorded, is a [uenture capital ]fund [or]a uenhre capital companA as [refened to ][in ][clause ][(23F8)]of Section 10." A plain reading of the aforesaid [provision ][of ][law ][would]clearly reflect that the said [provision ]of [law ][would ][be]in a situation [where, ]in the [course ][of]applicable assessment, the Assessing Officer [seeks ][an ][explanation]from the assessee in respect of certain [amounts wtrich ][are]found credited in the books of the [assessee ]hrm. [And ][to ][the]said sum, the explanation [provided ]by the [assessee ][was not]satisfactory 6. According to the learned counsel for the [appellant,] the Hon'ble ITAT has erroneously [mis-interpreted ][the]provisions of Section 68 of the Act and have also heldtaxing the credits b1 the partners in the hands of [the]assessee firm. It is further contended that the requirementunder Section 68 of the Act. so far as the explanation to [be] o as [regards ][the ][sources ][of income ][of ][tht: ][partners']provided the sarne should [not ][had ][been ][enquired ][from ][the]firm. [Rather, ][the ][sarne ][should ][had ][been]appellant's from [the ][respective ][partners ][u'ho ][had ][invested ][in]enquired the firm by [way of capital and ][loan' ][And ][that ][tht' ][Assessing]Officer and the Hon'ble [have ]['t\rrongl-y ][adderl ][the ][same]in the hands of [the ][appeltant as unexplained ][credit ][under]Section 68 of the [Income Tax ][Act, ][196 ][1'] 7. Learned [counsel ][for ][the ][respondent-Depa ][rtrlent ][on ][the]other hand, [opposing ][the ][appeal, ][submits ][that tht: ][order ][of]the Assessing Officer [which ][was ][affirmed ][bv ][the ][Hon'ble]ITAT reversing [the ][frnding ][of ][the ] [(Appeals;) ][does ][not]warrant interference [as ][the ][Hon'ble ITAT ][hacl ][e'xtensively]deatt with the [issue ][and ][have ][ansu'ered ][[lle ][s:'me ][in ][a]reasoned martner [by ][way ][of ][a ][speaking ][order' ][As ][such']there is no substantial [question ][of ][lau' ][nttrclc ][out ][by ][the]It is [further ][contended ][that ][stltc't: ][St'clion ][68 ][of]appellant. the Act requires [plausible ][explanation ][iri ][respt'ct' ][of ][the]arnount put by the [partners ][tou'ards ][cerpil ][ai ][sources ][of]income of the Partners. 8. According to the learned counsel for the respondent- Department, since the appellant had not established beforethe Assessing Offrcer so far as the cash introduced by thepartners in their respective books, but merely reflected inttre books of the assessee firm, the Assessing Oflicer andthe Hon'ble ITAT both were [justihed]tn dis-allowing theclaim of the appellant. 9. Having heard the content-ions put lorth on either side 8. According to the learned counsel for the respondent- Department, since the appellant had not established beforethe Assessing Offrcer so far as the cash introduced by thepartners in their respective books, but merely reflected inttre books of the assessee firm, the Assessing Oflicer andthe Hon'ble ITAT both were [justihed]tn dis-allowing theclaim of the appellant. 9. Having heard the content-ions put lorth on either side and on perusal of records, admittedly the appellant hereinis a partnership hrm. The return rvas filed by the appellantfor the assessment year 2014-15. On 3O.O9.2O14, uponlimited scrutiny of the said return filed by the appellant,somediscrepancy and mis-match rvas detected. TheAssessing Officer in the course ol the assessment, made anaddition under Section 68 of the Act to the extent ofRs.2,71,00,000/- being the capital introduced by thepartners. The Assessing Officer further made an addition anamount of Rs.54,50,207/ being the capital introduced bythe partners which was paid bacl< to the partners in thesaid year itself. The Assessing Officer subsequentlydisallowed the interest paicl to the p.rrtners on the capital o introduced by them. The appellant herein had oifered [his]explanation, which the Assessing Officer did not accept theexplanation and passed the assessment order. 10. The said assessment was subjected to challenge [by]the appellant before the CIT (Appeals). The sai,l [Appellate]Authority i.e. the CIT (Appeals) vide order dated [30.06.2017]partly allorved the appeal of the appellant and rejected theassessment made by the appellant so far as the [czrpital]invested by the partners into the partnership flrm. The CIT(Appeals) relied upon the judgement of this High Cor-rrt inthe case of the Commissioner of Income TcLr [u]M.Venkateshwar Roo and ottrerst. In the said irrdgement,the Divrsion Bench of this Court had helc that [the]parlnership firm is not required to explain the sources ofincome of partners so far as the amount contributed bv thepartners to$'ards the capital of the partnership firnr 11. Aggrieved by the aforesaid order of the CII [(r\ppeals)]datcd 30.06.2017, the respondent-Departrnt:nt [l.rad]prcfe rred the appea-l before the Honble ITAT. [u.hert: ]the'[201s] [tio ] [212 (T&AP)] case was registered as ITA No.1706lHyd/2017. The [Hon'ble]ITAT had reversed the order of the CIT [(Appeals) ]holdingthat the appellant has not been able to [provide ]sufficientmaterial to establish the source of income of the partnerswho had invested in the appellant's partnership firm.Undoubtedly, from the pleadings it [reflects ]that the stand [of]the appellant all along was that the investment to [the]partnership lirm was contributed by the partners. L2. Now the only question that needs to be considered atthis juncture,ls that, in the event of the appellant'spartnership firm disclosing that it was the partners whohad contributed in the capital, the source of income of thepartners was to be explained by the partners themselvesand not by the firm. In the case ol M.Venkateshwar Rao,supra, the Division Bench of this Court in paragraph No.7held as under: 'It is a matter of record that the [responde:ri ]Jinn [cornprises]ten partners and eoch of tlem made contributi<lts, be it in theform [of ][ca.sh ][or ][bonk ][guarantees ][lo ][be ]funislrcrl [to ][the]Gouentment, at the commencement of [busitte-s-s. ]Thr: [returns]submitted bg tLte respondent-firm Luere [processed, ]and thefacts [and ]figares furnished [bg ][it ][Ltere ][acceptr:rl ][. ][Hou.)euer, ][the]mqtter u)a.s reopened at a later [point ][oJ' ][tirne. ][I'ltc ][As-scs-sin4]Officer treated the capital raised bg [tlrc ]ilnn [ut ][tLte ]fonn ofcontibution^s made bg the [partners ][as ]irtgrne. [?hi-s]conclusion u-tas arriued at on [the ][ground ]tltttl source [ctf],income for [the ][partners ][u)as ][tTot ][e-xpLained. ][Lr:anu:cl ][counsel] e 'It is a matter of record that the [responde:ri ]Jinn [cornprises]ten partners and eoch of tlem made contributi<lts, be it in theform [of ][ca.sh ][or ][bonk ][guarantees ][lo ][be ]funislrcrl [to ][the]Gouentment, at the commencement of [busitte-s-s. ]Thr: [returns]submitted bg tLte respondent-firm Luere [processed, ]and thefacts [and ]figares furnished [bg ][it ][Ltere ][acceptr:rl ][. ][Hou.)euer, ][the]mqtter u)a.s reopened at a later [point ][oJ' ][tirne. ][I'ltc ][As-scs-sin4]Officer treated the capital raised bg [tlrc ]ilnn [ut ][tLte ]fonn ofcontibution^s made bg the [partners ][as ]irtgrne. [?hi-s]conclusion u-tas arriued at on [the ][ground ]tltttl source [ctf],income for [the ][partners ][u)as ][tTot ][e-xpLained. ][Lr:anu:cl ][counsel] e for [the ][appellant ][placed ][reliance ][upon ][the ][judgment ][of ][the]Patna High Court in CIT u. Anupam Udgog [1983] 142 ITR133 (Pat). The Tribunal rested its conclusions upon thepdgment of the BombaA High Court in Nan.ayondasKedarnath u. CIT [1952] 22 ITR 18 (Bom) and th,tt of theAllahabad High Court in CIT u. Jaisutal Motor Finance| [1 ][9831 ][1 ][4 ][1 ][rrR ][706(Arr)."] 13. Recentlv, again the Division Bench of tl-^,is Court insomewha[ similar case between M/ s. Noua Medicare uersusThe Inconrc Tax Officer, decided on 75.O2.2C2.3, relyingupon the decision of M.Venkateshwar Rao, supra, inparagraph No.I5 held as under: "Follotuttq and applying the aforesaid decbiort of thtsCourt, Potna Htgh Court in Anurag Rlce Mllls (supra) heldthat in such circumstances the unexplained caslt creditsCourt, Potna Htgh Court in Anurag Rlce Mllls (supra) heldthat in such circumstances the unexplained caslt creditstuould haue to be assessed at the lnnd.s of the portrters ofthe Jinn and nol the firm ttself. Such amounts could not hauebeen treeted as income of the firm bg relging upon &tclion 68of tLLe Act.. ["]the Jinn and nol the firm ttself. Such amounts could not hauebeen treeted as income of the firm bg relging upon &tclion 68of tLLe Act.. ["] 14. The Hon'ble Supreme Court of India also in the case of the Comnussioner of Income Tax u. Louelg Export:; (P) LTD- it-r a short judemcnt at paragraph No.2 held as und,3r: ''('rrrr rlr<, amount of share moneg be regord,etd asurttlrscloserJ rLcome under s. 68 of IT Act, 1961 ? We f.nd nonlenl Ln tlri-s .S)rccial Leaue Petitin for the simple reason that ilthe shurc ttpplication money b receiued bg the c'ssesser:conlpenr.l Jion'L allegedbogus shareholders, utlase names arenlenl Ln tlri-s .S)rccial Leaue Petitin for the simple reason that ilthe shurc ttpplication money b receiued bg the c'ssesser:conlpenr.l Jion'L allegedbogus shareholders, utlase names areqtL'en lo titr, ,,\(), then the Department is free to proceed k)reopen ll,er rrrdluiclual cssessments in accordance with lau,.Ilcrrce. tL,e'.lirr<l tto inftnnity with the impugned judgmcnt."Ilcrrce. tL,e'.lirr<l tto inftnnity with the impugned judgmcnt." 15. The ratio laid down in the aforesaid [three ][decisions]clearly indicate that if in a [proceeding ]under [Section ][68 ][of]the Act, the assesse has been [able ]to explain [the ][sources of]income, which in the instant case, the appellant [had ][been]stating that the capital investment [made ][by ][the ][partners ][of]the said firm is sufficient to meet [the ][requirement ][under]Section 68 of the Act. Thereafter, if at all, [if ][the ][respondent-]Department was not satisfied with the [explanation, ][it ][was]for them to have got it verihed from the [partncrs. ][Ratirer]tha-lr still pursing the matter before the [appellant's]partnership firm, which is otherwise impermissible in [the]light of the [judgement ]referred to in the [preceding]paragraphs. 15. The ratio laid down in the aforesaid [three ][decisions]clearly indicate that if in a [proceeding ]under [Section ][68 ][of]the Act, the assesse has been [able ]to explain [the ][sources of]income, which in the instant case, the appellant [had ][been]stating that the capital investment [made ][by ][the ][partners ][of]the said firm is sufficient to meet [the ][requirement ][under]Section 68 of the Act. Thereafter, if at all, [if ][the ][respondent-]Department was not satisfied with the [explanation, ][it ][was]for them to have got it verihed from the [partncrs. ][Ratirer]tha-lr still pursing the matter before the [appellant's]partnership firm, which is otherwise impermissible in [the]light of the [judgement ]referred to in the [preceding]paragraphs. 16. In the instant case also the appellant [having ][said ][that]the capital investment is that made [b1' ][the ][partners.]Applying the aforesaid [judicial ][precedet.rts, ][tl.re ][burden ][nor'r']shifts upon the respondent-Department [to ][gct ][it ][counter]verified from the partners from their [books ][of ][accounts]ascertaining whether such [investmenls havc ht:cn ][made ][or]not. In the absence of such [an ][enquiry/ r'erificaAofi from ][the]p:rrtners by the respondent-Departmcnt, the ordt:r ol [the] E Assessing Olficer, as also the stand taken by the Hon'bleITAT would not be sustainable and the same dese.:ves to beand is accordingly' set aside/quashed. The order passed bythe CIT (Appeals) dated 30.06.20 17 stands affirmedand is accordingly' set aside/quashed. The order passed bythe CIT (Appeals) dated 30.06.20 17 stands affirmed 17. Accordingll , the present appeal stands allow.ed. Thereshall be no order as [o costs As a sequel, rnisccllaneous petitions, if any pending,shall stand clrrsed sd/- K. sRtNtvAsA RAoJOINT STRAR //TRUE COPY// SECTION OFFICER To, 1, The lncome Tax Appellate Tribunal, Hyderabad Bench 'A, Hyderabad. 2, The Commissioner of lncome Tax (Appeals)-2, Hyderabaci [.] 3. The Commissioner of lncome Tax Department, Hyderabacl. 4. One CC to SRI A.V,A SIVA KARTIKEYA, Advocate 5. One CC to Smt SUNDARI R. PISUPATI [(SR ]SC FOR CEC AND ST) 6- Two CD Copies6- Two CD Copies kam/D[- ,t, HIGH COURTDATED:041091202tORDER|TTA.No.3O ot 20231y\E S T41e/7^0 4 2023az\L,\4/a+,+\-<[.'l.i: ].: [-: ][i11.."']/,,:---::: -:.-- --:-r-iTHE APPEALIS ALLOWEDtr.lrD-\