Itta/318/2006 Of M/S Nova Medicare , Hyd v. The Income Tax Officer, Hyd

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY ,THE FIFTEENTH DAY OF FEBRUARYTWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANAr.,*DTHE HON'BLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 318 OF 2006 Appeal Under Section 2604 of the lncome Tax Act, 1961 aggrieved bythe order dated 28-10-2005 in ITA No. 949 / Hyd/ 03 on the file of the lncomeTax Appellate Tribunal, Hyderabad Bench A Hyderabad preferred against theorder dated 02-08-2002 in Appeal No. 1 19M-3(5yClT(A)-lV 12001-02 on the fileof the Court of the Commissioner of lncome Tax ( Appeals )lV Hyderabadpreferred against order of the lncome Tax Officer, Ward -3 (5), Hyderabaddated 31-12-1999 in PAN/GIR No. N-316M/.3(5) Between: M/S. Nova Medicare , Plot No.201, Satya Sai Apartments, SrinivasanagarColony, S.R. Nagar, Hyderabad, rep. by its Partner ...APPELLANT AND The lncome Tax Officer, Ward 6 l2l Ayakar Bhavan, Basheerbagh,..RESPoNDENTHyderabad ITTAMP. NO: 328 OF 2006 Petition under Section 151 CPC praying that in the circumstances stated inthe affidavlt filed in support of the petition, the High Court may be pleased stay allfurther proceedings in Assesment Order No. N-316/VV.3[5] passed by the lncomeTax Officer, Ward 3 [5] , Hyderabad dated 3'1-'l 2-1 999 for the assesment year1998-99 Counsel for the Appellant: Ms. K. MANASA FOR SRl. CHALLA GUNARANJAN Counsel for the Respondent: SRI J.V. PRASAD SC FOR l.T. DEPARTMENT The Court delivered the following: Judgment THE HON'BLE THE CHIEF JUSTICE UJJAL BHLIYANAND THE HON'BLE Szu JUSTICE N. TUKARAMJII.T.T.A.No.318 of 20O6 JUDGMENT: Per the llan'bte the Chief Justice ujjal Bhulan) Heard Ms. K.Manasa, learned counsel for theappellant and Mr. J.V.Prasad, learned Standing Counsel,Income Tax Department for the respondent. 2. This appeal has been preferred by the assessee as theappellant under Section 260A of the Income Tax Act, 1961(briefly, 'the Act' hereinafter), against the order dated28.10.2005, passed by the Income Tax Appellate Tribunal,Bench 'A' (SMC), Hyderabad (briefly, 'the Tribunal'hereinafter)lrl I.T.A.No.949/Hyd/03 for the assessmentyear 1998-99. 3. Though the appeal was admitted vide the order dated30.10.2006 with an interim stay, no substantial question\of law was framed. However, from the memo of appeal, we find that appellant [has proposed ][the following questions ][as]substaltial [questions ][of law:] I.Whether on the facts and in the circumstances ofthe case, Tribuna.l was [justified ]in upholding theinvestments made by the partners as addition ofRs.4,7O,966/- in the total income of the assesseeon the ground that the investment made by thepartners is undisclosed income of the firm? Whether on the facts and in the circumstances ofthe case, Tribunal was correct in law insustaining the addition of Rs.4,OO,OOO/- made bythe assessing ofhcer under Section 68 of the Acton account of alleged unexplained loans taken bythe partners and susta.ined the disallowance ofRs.7O,966 I - being the interest on the aforesaidloans? II. Whether the order of the Tribunal dated28- 10-2005 is not vitiated for ignoring t1.erelevant submissions/materials while sustainingthe impugned addition and disallowance ofinterest? II I. 4. From the above what is deducible is that the issuebefore us is whether Tribunal was [justified ]in upholding ) the addition ol Rs.4,70,966.00 to [the ]income of [the]appellant (also referred [to ][as ]the [assessee' hereinafter)]under Section 68 of the Act. 5. Section 68 of the Act says that where any sum isfound credited in the books of an assessee maintained forany previous year and the assessee offers no explanationabout the nature and source thereof or the explanationoffered by him is not, in the opinion of the assessingofficer, satisfactory, the sum so credited may be charged toincome tax as the income of the assessee for that [previous]year II I. 4. From the above what is deducible is that the issuebefore us is whether Tribunal was [justified ]in upholding ) the addition ol Rs.4,70,966.00 to [the ]income of [the]appellant (also referred [to ][as ]the [assessee' hereinafter)]under Section 68 of the Act. 5. Section 68 of the Act says that where any sum isfound credited in the books of an assessee maintained forany previous year and the assessee offers no explanationabout the nature and source thereof or the explanationoffered by him is not, in the opinion of the assessingofficer, satisfactory, the sum so credited may be charged toincome tax as the income of the assessee for that [previous]year 6. From the materials on record it is seen that appellantis an assessee under the Act having the status of aregistered lirm. Assessment year under consideration isl99A-99. Assessee is engaged in the business of export ofmedicines ald l.V.fluids etc. In the return of income forthe said assessment [year, ]assessee declared exportturnover and claimed deduction under Section 80HHC of {( \ the Act. Thus, assessee declared nil income. Case of theassessee was selected for scrutiny and in the course ofassessment proceedings it was found that assessee hadclaimed to have taken loals from the following parties andin the following manner: 7. We may mention that out of the above three persons,Smt. K.Sujatha and Sri K.Prabhakar Reddy are partners ofthe assessee Iirm. Smt. K.Sujatha had introducedRs.2,0O,OO0.0O towards capital of the assessee firm whichwas therea-fter transferred to the unsecured loan accountby way of a journal entry. Assessing officer examined herand came to the conclusion that she did not have thecreditworthiness to advance the cash credit as above anddoubted the genuineness of the transaction. Accordingly, (1 Section 68 of the Act was invoked whereafter the aforesaidamount was added to the income of the assessee. Similaradditions were made in respect of the other two parties. B. Aggrieved by the above additions, assessee preferredappeal before the Commissioner of Income Tax (Appeals)IV, Hyderabad (hereinafter referred to as, 'CIT (A)'). By theappellate order dated 02.O8.2OO2, CIT (A) held thatassessing officer \\ras not satisfied vvith thecred itri'orthi ne s s ol the creditors u,ho had failed to furnishsatisfactory evidence in the course of the assessmentproceedings to prove the genuineness of the credits"Hence, assessing officer treated the credits as not genuinewhereafter the same were added to the income of theassessee under Section 68 of the Act; so also the interestamounts relatable to the cash credits. Upholding the ordero__L the assessing oflicer CIT (A) dismissed the appeal of theASSCSSCC. l) \ 9. It was thereafter that assessee preferred furtherappeal before the Tribunal. By the order dated28. 10.2005, Tribunal held that there was no infirmity rnthe order of CIT (A) and accordingly dismissed the appealthereby conlirming the addition of Rs.4,70,966.00. 10. Learned counsel for the appellant Ms. K.Manasasubmits that Tribunal was not [justified ]in confirming theentirety of the addition. Referring to a [judgment ]of thisCourt in Commissioner of Income Tax vM.Venkateswara Raor she submits that contribution ofthe partners of the firm cannot be added to the income ofthe firm under Section 68 of the Act even if the explanationis not satisfactory. At the most, such credits can bequestioned in the assessment proceedings of the concernedpartners. She further submits that the aforesaid decisionof this Court in M.Venkateswara Rao (supra) has beenfollowed by the Patna High Court in Commissioner of \ )) Income Tax-I v. Anurag Rice Mills2. In thecircumstances, learned counsel submits that thesubstantial questions of law may be answered in favour ofthe appellant and against the revenue \ )) Income Tax-I v. Anurag Rice Mills2. In thecircumstances, learned counsel submits that thesubstantial questions of law may be answered in favour ofthe appellant and against the revenue 11. On the other hand, Mr. J.V.Prasad, learned StandingCounsel referred to the proviso to Section 68 of the Act,though it came into the statute book only with effect from0 I .04.20 13 post the assessment year under consideration.However, justifl,ing the order of the Tribunal he has placedrelialce on a decision of the Rajasthan High Court inCommissioner of Income Tax v. Kishorilal Santoshilalsto contend that Section 68 of the Act makes no distinctionbetween the cash credit entry in the books of the firmwhether it is of a partner or of a third party. 72. In her reply submissions, learned counsel for theappellant submits that reliance placed by iearned StandingCounsel on the proviso to Section 68 of the Act is '[2O17] [88 ][taxmann.com ][420 ]{Patna)\' [199s] 2 16 ITR 9 (RAJ)\' [199s] 2 16 ITR 9 (RAJ) I thoroughly misplaced inasmuch as the said [proviso]introduced by the Finance Act, 2012, catne into effect [from]Ol.O4.2Ol3, whereas the assessment year in the appeal [is]l99B-99. Therefore, the proviso will not be applicable tothe facts of the present case. Insofar reliance placed bylearned Standing Counsel on the decision of the RajasthanHigh Court in Kishorilal Santoshilal (supra) is concerned,she submits that even in a case of share application moneyreceived by an assessee company from alleged bogusshareholders, Supreme Court has taken the view inCommissioner of Income Tax v. Lovely Exports (P.l Ltd4that in such a scenario, department would be free toproceed to reopen the individual assessment in accordancewith iaw but would not be entitied to invoke Section 68 ofthe Act to add such share application money to the incomeof the assessee company. 13. Submissions made by learned counsel for the parties\have received the due consideration of the Court. o l2oo\) 2t6 crR 19s (sc) \ 14. After thorough consideration of ali relevant aspects,we are of the view that issue raised in this appeal1Ssquarely covered by the decision of this Court inM.Venkateswara Rao (supra) u,hich is binding on us.That u,as also a case u,here certain cash credits wereadvanced by the partners, which according to the revenueauthorities remained unexplained and accordingly\\rereadded to the income of the firm. In the facts of that case,this Court held as follows: 7. It is a matter of record that the respondent-hrmcomprises of ten partners and each of them madecontributions, be it in the form of cash or bankguarantees to be furnished to the Government, at thecommencement ol business. The returns submitted bythe respondent-firm were processed, and the facts andfigures furnished by it were accepted. However, thematter was reopened at a later point of time. TheAssessing Offrcer treated the capital raised by the firm inthe form of contributions made by the [partners ]asincome. This conclusion was arrived at on the ground'that source of income for the partners was notexplained. Learned counsel for the appeilant placedreliance upon the judgment of the Patna High Court inCII' u. Anupam Udyog I1983i 142 rrR 133 / 15 Ta-xman II 259. The Tribunal rested its conclusions upon thejudgment of the Bombay High Court in ['Naragandos]Kedarnath u. CIT [119521]22 ITR 18 arld that of AllahabadHigh Court in CIT u. Jaistual Motor Finance [19831 141ITR 706. 8. Section 68 of the Act no doubt directs that if anassessee fails to explain t1.e nature and source of creditentered in the books of account of alty previous year,the same can be treated as income. In this case, theamount, that is sought to be treated as income of thefirm, is the contribution made by the partners, to thecapital. In a way, the ainount so contributed constitutesthe very substratum for the business of the firm. It isdifficult to treat the pooling of such capital, as credit. Itis only when the entries are made during the course ofbusiness that can be subjected to scrutiny underSection 68 of the Act. 8. Section 68 of the Act no doubt directs that if anassessee fails to explain t1.e nature and source of creditentered in the books of account of alty previous year,the same can be treated as income. In this case, theamount, that is sought to be treated as income of thefirm, is the contribution made by the partners, to thecapital. In a way, the ainount so contributed constitutesthe very substratum for the business of the firm. It isdifficult to treat the pooling of such capital, as credit. Itis only when the entries are made during the course ofbusiness that can be subjected to scrutiny underSection 68 of the Act. 9. Even otherwise, it is evident that the respondentexplained the amount of Rs.76,57,263 as thecontribution from its partners. That must result in asituation, where Section 68 of the Act carr no longer bepressed into service. However, in the name of causingverification under Section 68 of the Act, the AssessingOfficer has proceeded to identify the source for tl.erespective partners, to make that contribution. Such arlenquiry can, at the most be conducted against t1-leindividual partners. If the pa-rtner is an assessee, theconcerned Assessing Officer can require him to explain I( the source of the money contributed by him to the firm.If on the other hand, the pa-rtner is not an assessee, hecan be required to file a return and explain the source.Undertaking of such an exercise, vis-a-vis ltrepartnership Iirm itself, is impermissible in law. In thejudgment relied upon by the appellalt itself, the PatnaHigh court held as under (page 137 of 142 ITR): "lf there are cash credits in the books of a firmin the accounts of the individual partners andit is found as a fact that cash was received bythe firm from its partners, then in the absenceof any material to indicate that they are theprofits of the firm, they cannot be assessed inthe hands of the firm, though the], may beassessed in the hands of the individualpartners. Cash credits in the individualaccounts of members of a [joint ]family withthird party cannot be assessed as the income ofthe family unless the Department dischargesthe burden of proof to the contrary." 10. Therefore, the view taken by t1 e Assessing Officerthat the partnership Iirm must expla.in the source ofincome for the pa-rtners rega-rding the amountcontributed by them towards capital of the firm cannotbe sustained in law. I 1 . As regards the other amount i.e., unexplainedcredit entries, the Tribunal took the view that thearnount represented the security deposits made by theretail dealers, and the source thereof was properly (( explained. Nowhere in the order o[ assessment, theAssessing Of{icer recorded any finding to the effect thathe verifred the matter from the respective retail dealersand that such dealers have denied of making deposits.In the field of Arrack business, it is not uncommon thatthe retail dealers are required to keep security depositswith the supplier. At arry rate, it is a pure question offact. 12. Therefore, the appeal is dismissed. 15. Following and applying the aJoresaid decision of thisCourt, Patna High Court in Anurag Rice Mills (supra) heldthat in such circumstances the unexplained cash creditswould have to be assessed at the hands of the partners ofthe firm and not the firm itself. Such amounts could nothave been treated as income of the firm by reiying uponSection 68 of the Act. 16. In view of the above position, we answer thesubstantial questions of law in favour of the appellant-)assessee and against the respondent-revenue insofar thdcash credits pertaining to the two partners of the appellant I firm i.e., Smt. K.Sujatha and Sri K.Prabhakar Reddy onlyare concerned. 17. Consequently, order of the Tribunal dated28.10.2005 would stand modified accordingly. lB. Appeal is disposed of. Miscellaneous applications pending, if any, shallstand closed. However, there shal1 be no order as to costs.stand closed. However, there shal1 be no order as to costs. Sd/- M VIJAYA JOINT REGISTRARI //TRUE GOPY// SECTION OFFICER 16. In view of the above position, we answer thesubstantial questions of law in favour of the appellant-)assessee and against the respondent-revenue insofar thdcash credits pertaining to the two partners of the appellant I firm i.e., Smt. K.Sujatha and Sri K.Prabhakar Reddy onlyare concerned. 17. Consequently, order of the Tribunal dated28.10.2005 would stand modified accordingly. lB. Appeal is disposed of. Miscellaneous applications pending, if any, shallstand closed. However, there shal1 be no order as to costs.stand closed. However, there shal1 be no order as to costs. Sd/- M VIJAYA JOINT REGISTRARI //TRUE GOPY// SECTION OFFICER Toi] Tn" ln"orn" Tax Appellate Tribunal, Hyderabad Bench A (SMc) 'Hyderabad.z. i6e bommissioner [of lncome Tax ][( ][Appeals ][) ][lV ][Hyderabad']3. The lncome [Tax Officer ], [Ward ][-3 ][(5),liyqergq1t]+. o"L cc t" [sRl. ][J.v. ][PRASAD SC FOR l.T. ] s. o;; cc to [tr,t.. ][K. ][MANASA, ][Advocate ][IoPUCI]6. Two CD [CoPies]Kul pIN HIGH COURT DATED:1 510212023 ORDER ITTA.No.318 of 2006 DISPOSING OF THE ITTA WITHOUT COSTS gflq$\o ffi,)r\=$iFs*()vi:r(a.:;'t\*i'i-lc