M/S Kailash Chand Agarwal, Opposite Circuit House, Dholpur v. The Income Tax Officer, Ward-3, Income Tax Office, Bharatpur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 75 / 2006 M/S Kailash Chand Agarwal, Opposite Circuit House, Dholpur, through its partner Shri Ramesh Chand Agarwal. ----Appellant Versus The Income Tax Officer, Ward-3, Income Tax Office, Bharatpur. ----Respondent _____________________________________________________ For Appellant(s) :Mr. Naresh Gupta. For Respondent(s) :Mrs. Parinitoo Jain. _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment Per Hon’ble Jhaveri J. 17/01/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasreversed the finding of the CIT(A). 2.This Court while admitting the appeal on 23.08.2012, hasframed the following substantial questions of law: “(i)Whether the findings of the Tribunalare perverse in holding that the cashcredits of Rs.22.46 lacs are not genuine? (ii)Whether under the facts andcircumstances of the case the Ld. Tribunalwas justified in confirming the additions ofRs.22,46,000/- under Section 68 when theconfirmations and identity of such cashcreditors were assessed with the sameAssessing Officer and no attempt underSection 131 was made by the AssessingOfficer?” 3.Counsel for the appellant Mr. Gupta has taken us to the orderof the CIT(A) and contended that the observations are made by itat page 38. 3/1. The observation of the CIT(A) are as under: “I have considered the arguments of boththe sides and the evidences producedduring the course of appellate proceedings.I have also considered the various caselaws cited by the appellant. As per thedecision of Hon’ble Rajasthan High Court inthe case of CIT vs. Kishori Lal Santoshi lal216 ITR,9 14 where some cash credits arefound in the books of the firm the burden ofproviding the identity, capital andgenuineness is on the firm. The firm has toestablish that the amount was actuallygiven by the leaders. No distinction can bemade between the cash credit of a partnerof of a third party. If the cash credits arenot satisfactorily explained the AO isjustified to treat them as income fromundisclosed sources. If the explainedoffered is not supported by documentary forother evidences, then also the deemingfiction u/s 68 of the Income Tax Act can beinvoked. Therefore, simply because theamount is credited in the books of the firmin the partners capital account it cannot besaid that it is not the undisclosed income ofthe firms and in all cases it has to beassessed as an undisclosed income of thepartner alone. The AO is therefore, justifiedin examining the sources of the credits inthe capital accounts of the partnersappearing in the books of the firm. Thedecisions of the Hon’ble Allahabad HighCourt in the cases of India Rice Mills Vs. CITand Surendra Mohan Seth vs. CIT cited bythe appellant are not applicable on the factsof the case because the capitalcontributions made by the partners havenot been made prior to the commencementof the business by the appellant firm.However, if there are credit entries in thebooks of the firm through the capitalaccount of the partners and it is found as afact that the cash was received by the firmfrom its partners, then, in the absence ofany material to indicate that these were the profits of the firm, it could not be assessedin the hand of the firm. This is so becausein such a case the onus placed on theassessee firm by section 68 of the IT Actcould be deemed to h ave been discharged.(CIT Vs. Jaiswal Motor Finance 141 ITR706, All.) The fact that an assessee wasunable to satisfy the authorities as to thesource from which the depositor receivedthe money cannot be used against theassessee. (CIT Vs. Daulat Ram Rawat Mull87 ITR 349 SC). If the firm hassatisfactorily explained the nature andsource of the credit then it is absolved fromany further liability. The obligation will thenbe of the partner concerned to explain thesource etc. and his case may fall in section69 of the IT Act. Therefore, it is only inthose cases where the firm offers noexplanation or the explanation offered isfound false, that the capital contributions orthe cash credits in the names of thepartners can be treated as the unexplainedincome of the firm u/s 68 of the IT Act. Inthis case it is not so. The firm has offeredan explanation in regard to the sources ofthe capital contributions by the partners. Ithas also given enough evidences in theshape of entries in the books of accounts ofthe firm as well as the partners for thesecapital contributions, in the shape ofconfirmations from the creditor who havegiven the money to the partners and in theshape of the copies of the returns ofincome/ statements of computation ofincome/ capital accounts of all the creditorsfor AY 92-93, 93-94 & 94-95, to support theexplanation. The onus cast upon theappellant firm in regard to the capitalcontributions made by the partners as persection 68 of the IT Act has therefore beenduly discharged. This fact has even beenadmitted by the present AO in his remandreport dated 11.3.2003 wherein he hassuggested that action should have beentaken in the hands of the partners. But inthis case even the sources in the hands ofthe creditors to the partners have also beenprima facie explained. All the 25 creditorsare assessed to tax since past sevral yearsand have incomes from various businessessuch as trading in consmetics, kiranagoods, garments etc., running printingpress and agency of life insurance etc. besides income from house rent, interest,salary and agriculture. Though it has beenalleged by the AO that no interest has beenpaid to the depositors by the partners butactually interest has been duly paid by thepartners on the loans obtained by themfrom these creditors. The returns filed bythese creditors have also been accepted bythe AO who incidentally is the AO of thefirm. There is no evidence on recordsbrought by the AO to indicate that thefunds brought in by the partners as thecapital were from the profits of the firm.Under these facts, the AO is not at alljustified in treating the capital contributionsmade by the partners of Rs.22.46 lacs asundisclosed income of the firm accordingthe provision of section 68 of the IT Act.The addition made to the income of the firmon this account of Rs.22.46 lacs is thereforedeleted.” 4.From the perusal of the order of the CIT(A) it is clear thatwhile considering the case of the assessee, it has accepted thatthe partners have taken loan for 25 persons who have filed returnand the same was shown in the return. 5.It is also observed that all the creditors like assessee of theIncome Tax have filed return for last several years inspite of thatthe Tribunal has in its para 9 has observed as under: 4.From the perusal of the order of the CIT(A) it is clear thatwhile considering the case of the assessee, it has accepted thatthe partners have taken loan for 25 persons who have filed returnand the same was shown in the return. 5.It is also observed that all the creditors like assessee of theIncome Tax have filed return for last several years inspite of thatthe Tribunal has in its para 9 has observed as under: “We heard the rival submissions andperused the materials available on recordsince the partners do not have any source ofincome and the expenses have to be metout of the withdrawals from the firm. Nodetails of expenses have been provided bythe assessee firm regarding expenses ofeach partners on withdrawals. Thewithdrawals of each partner appear to bevery low and the additions made by the AOappear to be on higher side. Therefore, werestrict the addition on account of lawwithdrawal at Rs.25,000/- thus giving arelief to the assessee by Rs.47,000/- fromthe order of the AO. Thus, both the groundsof the Department are partly allowed.” 6.Counsel for the respondent Mrs. Jain has taken us to para 5 order of the Tribunal which reads as under: “We heard the rival submissions andperused the materials available on record.The assessee firm has received the cashcredits of Rs.23.46 lacs as capital ofpartners out of which Rs.1.00 lac has beenpaid back thus, retaining Rs.22.46 lacs. Thesource of the said amount by the partnerswas the sum received from almost all thetwenty five ladies to each partners in cashand each deposit was less than Rs.20,000/- during the year and total of thebalance sheet of each lady was Rs. 1.00 lacapproximately and total amount advancedto all the partners together was almost thesame amount i.e. Rs.1.00 lac. The returnsof income of all these ladies were filed onthe same date through one advocate. Asper the notes in the balance sheet, theinterest income in the hands of these ladieswas from farmers and other needy personswhereas the partners are not the farmers orthe small needy persons. It cannot bebelieved that all the twenty five ladies lentcash to the all the partners without anypurpose i.e. without receiving any interest,because the interest income shown bythese ladies is not from these partners butfrom farmers and other needy persons andno evidence has been brought on record bythe assessee to prove the genuineness ofthese transactions. Therefore, these cashcreditors appear to be name lenders to thepartners where firm has credited thesesums in the form of partners capital.Therefore, the sum invested by the partnersdoes not prove the creditworthiness andavailability of funds with the partners andalso does not the genuineness of thetransactions. When the availability of fundswith the partners and genuineness of theamount invested by the partners is notestablished and the explanation offered bythe assessee firm is not satisfactory, then itcannot be said that the partners have madethe investment in the firm of their owncapital and the argument of the Id. AR thatit should be taxed in the hands of thepartners does not have nay merit since theamount has been found credited in thebooks of the firm and the cash credit has been routed through the ladies and thepartners in the firm. The sum so foundcredited in the books of the firm remainedunexplained to the satisfaction of the AO.We rely upon the decision in the case ofJagmohan Ram Chandra Vs. CIT, 274 ITR405 (All) Wherein it has been held that if anentry of cash credit is found in the books ofaccount of a firm, it is for the firm to givean explanation regarding their identity andsource of such deposits and if theexplanation is disbelieved then it is to beadded as an income u/s 68 of the Income-tax Act, 1961, in the hands of the firm. Wealso rely upon the decision of Hon’bleJurisdictional High Court in the case of CITVs. Kishorilal Santoshilal, 216 ITR 9,13,14where it has been held as under:- “On the basis of the language used u/s 68and the various decisions of different HighCourts and the apex court, the onlyconclusion which could be arrived at is: (I)That there is no distinction betweenthe cash credit entry existing in the booksof the firm whether it is of a partner or of athird party. (II) That the burden to prove the identity,capacity and genuineness has to be on theassessee. (III) If the cash credit is not satisfactorilyexplained the Income Tax Officer is justifiedto treat it as income from ‘undisclosedsources’ (IV) The firm has to establish that theamount was actually given by the lender. (V) The genuineness and regularity in themaintenance of the account has to be takeninto consideration by the taxing authorities. (Vi) If the explanation is not supported byany documentary or other evidence thenthe deeming fiction credited by section 68can be invoked. In these circumstances, we are of the viewthat simply because the amount is creditedin the books of the firm in the partner’scapital account it cannot be said that it isnot the undisclosed income of the firm andin all case it has to be assessed as anundisclosed income of the partner alone. In these circumstances, we are of the view that the Tribunal was not justified in holdingthat the cash credits of Rs 11,502/- in theaccount of Shri Kishorilal, one of thepartners could not be assessed in the handsof the firm and in deleting the same”. Also, we rely upon the decision in the caseof CIT Vs. Jai Ram Dass Lokesh kumar, 250ITR 526,527,528 (Raj.) where it has beenheld as under:- “In the present case, it has been found bythe Tribunal that the income actuallybelongs to the assessee. Therefore, therewas no impediment in levying tax on theincome of the assessee irrespective ofwhether some other persons have alreadybeen made to submit returns in respect ofthe income and have been assessed on thebasis of the declaration submitted by them. We are not concerned with the remedieswhich other persons may follow. We accordingly hold that the Tribunal wasnot justified in directing to delete theaddition of Rs.84,769/- and Rs.22,127/-,from the income of the assessee firm whichthe Tribunal has found to be the income ofassessee firm and not of the other personsnamed above. Accordingly, we answer thequestion referred to us in the negative i.e.against the assessee and in favour of theRevenue.” 7.We have heard learned counsel for both the parties. 8.Taking into consideration the loans which are acceptedmerely on some amount of the ladies for which return was filed onthe same date through one advocate is not a ground for reversingthe finding but reasoning adopted by the CIT(A) is genuine and noreasons are adopted by the Tribunal while reversing the finding ofthe CIT(A). 9.In that view of the matter, the Tribunal has seriouslycommitted an error in reversing the finding of the CIT(A) and theappeal deserves to be allowed. 10.Both the issues are answered in favour of the assessee andthe view taken by the CIT(A) is required to be confirmed thefinding arrived at by the Tribunal is reversed. 11.The appeal stands allowed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Asheesh Kr. Yadav/96