M/S S.n. Exports v. Commissioner Of Income Tax

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.A. No.362 of 2010 (O&M)Date of decision: 10.8.2010 M/s S.N. Exports. Vs. Commissioner of Income Tax. -----Appellant. -----Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. S.K. Mukhi, Advocatefor the assessee. --- ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the assessee underSection 260-A of the Income Tax Act, 1961 (for short, “the Act”)against the order dated 24.9.2009 in I.T.A. No.603/CHANDI /08for the assessment year 2005-06, passed by the Income TaxAppellate Tribunal, Chandigarh, proposing to raise followingsubstantial questions of law:- A. “Whether the ITAT was justified in reversing theorder of CIT(A) thereby treating the impugnedamount and making addition of the same amountto the income of appellant firm by erroneouslyapplying the provisions of Section 68 of IncomeTax Act, 1961 though having admitted the samein immediately preceding year which is against the well settled law and devoid of correct factswhile relying upon extraneous facts?” B. “Whether the ITAT was justified in reversing theorder of CIT (A) thereby treating the impugnedamount as income of appellant firm byerroneously applying the provisions of Section 68of Income Tax Act, 1961 by treating the amountof gift alleged to be received by one of thepartners of the appellate firm which is against thewell settled law and devoid of correct facts whilerelying upon extraneous facts which amount if atall could have been added in the hands of thealleged partner?”order of CIT (A) thereby treating the impugnedamount as income of appellant firm byerroneously applying the provisions of Section 68of Income Tax Act, 1961 by treating the amountof gift alleged to be received by one of thepartners of the appellate firm which is against thewell settled law and devoid of correct facts whilerelying upon extraneous facts which amount if atall could have been added in the hands of thealleged partner?” C.“Whether the ITAT was justified in reversing theorder of CIT(A) thereby treating the gifts out ofnatural love and affection and that too to thepartner of the appellant firm as colorable deviceand making addition of the gifted amount to theincome of appellant firm by wrongly invoking theprovisions of Section 68 of Income Tax Act, 1961against the well settled law and devoid of correctfacts while relying upon extraneous facts?”order of CIT(A) thereby treating the gifts out ofnatural love and affection and that too to thepartner of the appellant firm as colorable deviceand making addition of the gifted amount to theincome of appellant firm by wrongly invoking theprovisions of Section 68 of Income Tax Act, 1961against the well settled law and devoid of correctfacts while relying upon extraneous facts?” D.“Whether the order of the ITAT in reversing theorder of CIT(A) while relying upon extraneousfacts is bad in law and perverse and thus needs tobe quashed.”order of CIT(A) while relying upon extraneousfacts is bad in law and perverse and thus needs tobe quashed.” 2. The assessee was found to have credited the capital accountof its partner with a sum of Rs.1.45 crore, which was claimed to D.“Whether the order of the ITAT in reversing theorder of CIT(A) while relying upon extraneousfacts is bad in law and perverse and thus needs tobe quashed.”order of CIT(A) while relying upon extraneousfacts is bad in law and perverse and thus needs tobe quashed.” 2. The assessee was found to have credited the capital accountof its partner with a sum of Rs.1.45 crore, which was claimed to be gift from Rajiv Verma, NRI. The Assessing Officer did notaccept the gift to be genuine and treated the amount as undisclosedincome of the assessee. Reason given by the Assessing Officer wasthat the donor had no relation with the partner of the firm and sucha huge amount of gift without any natural love and affection couldnot be accepted to be genuine. Reliance was placed on judgmentv.of the Hon’ble Supreme Court inCommissioner of Income Tax Dr. R.S. Gupta[1987] 165 ITR 36. On appeal, though the CIT(A)upheld the finding on the issue of gift being not genuine, theaddition was deleted only on the ground that the entry being in thecapital account of the partner, addition in the hands of the firm wasnot justified. On appeal by the revenue before the Tribunal, theTribunal reversed the view taken by the CIT(A). It was held thatthere being deposit in the account of the firm, the AssessingOfficer was entitled to make addition to the income of the firm ifthe entry was not genuine and was in fact undisclosed income ofthe firm. The relevant finding is as follows:- “11........The assessee had claimed that the gift wasgiven in view of financial weakness, an averment whichwas made in the course of the examination by theAssessing Officer of Shri Suman Narula, the partner.On this the Assessing Officer records a finding that theweak financial position cannot be accepted in as muchas the other partner of assessee firm Smt. Kajol Vermawife of Shri Suman Narula subscribed for investment inshares of Punjab National Bank for a sum of Rs.2000700/-during the year under consideration. TheAssessing Officer does record a finding that there wasno occasion for making the gift and in the absence ofany cogent material to the contrary led by the assesseeat any stage, we are inclined to sustain such finding ofthe Assessing Officer. On this aspect, another reasonfor us to sustain the stand of the Assessing Officer isthat in the Memorandum of Gift Deed, the donor makesout that the gift is made out of natural love andaffection and occasion has been brought out. However,the explanation furnished by the donor, Shri SumanNarula was that the gift was made because of his firm'sweak financial position. Therefore, considering theoverall facts, the observation of the Assessing Officerthat there was no occasion for making the gift, is liableto be sustained. Further, the Assessing Officer noticedthat the assessee had failed to provide any answer as towhy the unsecured loan and advance for the purchasereceived in the earlier years, were converted as gift andthat too by a person who was the not related. Merelybecause there was a capacity to make the gift, wouldnot automatically make the gift as genuine. In theultimate analysis, we are inclined to uphold theinference of the Assessing Officer that firstly, the gift inquestion is invalid and further that the assessee havingfailed to establish the genuineness of the gift, theamount is assessable in the hands of the assessee. Muchhas been argued by the respondent and the same hasalso been upheld by the Commissioner of Income-Tax(A) that no addition is permissible in this case in theyear under consideration by invoking the provision ofSection 68 of the Act because no fresh cash has been introduced and the credit is made in the personalaccount of Shri Suman Narula by way of a transferentry only. In our view, the interpretation placed onSection 68 coupled with the circumstances of the case,cannot be upheld. In fact, in this, we are supported bythe judgment of the Hon'ble Madhya Pradesh HighCourt in the case of V.I.S.P.(P) Ltd. Vs. CIT & Another265 ITR 202 wherein a similar restricted interpretationof Section 68 has been negated. Account is found to bebogus and in the absence of any reasonable explanation,it can certainly be added towards the income of theassessee and Section 68 of the Act would not fallmerely because the books of account did not show thecash entry. 12. In the present case, a starkly evident position whichemerges is that the Assessing Officer has brought onrecord sufficient material to show that the credit builtup in the capital account of the partner by way of atransfer entry from the account books of the assesseefirm was a device or an arrangement to contrivance. Forthe above reasons, we are inclined to uphold the pleaset up by the Assessing officer that the issue is to bedecided by considering the import of all thesurrounding circumstances and by applying the tests ofhuman probabilities as laid down by the Hon'bleSupreme Court in the case of Sumati Dayal (supra). TheHon'ble Delhi High Court in the case of BhahatConstruction Co. (P) Ltd. 251 ITR 291, wherein afterreferring to the decisions of the Hon'ble Supreme Courtin the case of CIT Vs. Sree Mennakshi Mill Ltd. (1996)63 ITR 609 (SCP and Juggilal Kamlapat Vs. CIT (1969) 73 ITR 702 (SC), it has been held that “Whileone factor may not be sufficient to prove the colourabledevice, the cumulative effect of all factors can be takeninto account to conclude about the real purposeintended behind the corporate veil”. Therefore, in ourconsidered view, the Assessing Officer was justified inbringing to tax the impugned amount while determiningthe total income of the assessee for the assessment yearunder consideration. The order of the Commissioner ofIncome Tax (A) is set aside and the addition made bythe Assessing Officer is hereby restored, as above. “ 3. We have heard learned counsel for the assessee. 4. Learned counsel for the assessee submits that theamount of gift having been received by the partner of the firm,addition in the hands of the assessee could not be justified. He placed reliance on following judgments:- i)CITv. Usha Studd Agricultural Farms Ltd. [2008} 5DTR 335 (Del); DTR 335 (Del); ii)CITv. Burma Electro Corporation252 ITR 344 (P&H); iii)CITv. Mrs. Sunita Vachani[1990] 184 ITR 121 (Del); iv)Addl. Commissioner of Income Taxv. HanumanAgarwal[1985] 151 ITR 150 (Pat); Agarwal[1985] 151 ITR 150 (Pat); v)Roopchand Manoj Kumar v. CIT[1999] 235 ITR 461(Gau); (Gau); vi)CITv. Dr. R.S. Gupta[1987] 165 ITR 36 (SC). 5. We have considered the submissions and perused thejudgments relied upon on behalf of the assessee. The questionwhether addition on account of unexplained credit entry in thebooks of accounts of the assessee could be made to the income ofthe firm or the partner, depends on facts and circumstances of eachcase. There is no rigid rule that whenever credit entry is in thecapital account of a partner, addition could not be made in thehands of the firm even when credit entry is, on the face of it, bogusor a device to evade tax. A single factor may not be sufficient torecord whether the assessee had employed a colourable device orwhether the partner had unexplained income which was creditedin the books of account of the assessee. It cannot always be heldthat merely because the entry in the capital account of the partnerwas identified as source of undisclosed income, the firm wasimmune from being taxed, even where colourable device was usedby the firm by introducing its undisclosed income by way ofdeposit by a partner. 6. Section 68 of the Act provides that any sum foundcredited in the accounts of the assessee in respect of which no validexplanation is furnished by the assessee may be treated as incomeof the assessee. In the present case, the explanation by the firm thatthe credit entry represented amount received as gift by partner hasbeen found to be unacceptable. It has been held that the same wasdevice to avoid tax. Additions in the hands of the firm were fully justified in these circumstances. Burden is on the assessee to provesatisfactorily nature and source of the entry. Where the entry isheld to be fictitious, the same can be held to be undisclosed incomeof the firm. 7. In CIT v. P.Mohanakala, (2007) 6 SCC 21 = 291 ITR278, scope of section 68 was considered and it was held that wherethere are unexplained credits in the books of the assessee, the samecan be added as undisclosed income of the assessee. Burden ofproof in such cases was on the assessee. Reference was also madeto earlier Supreme Court judgment in Sumati Dayal v. CIT, 1995Supp (2) SCC 453 and CIT v. P.K.Noorjahan, (1997) 11 SCC 198= (1999) 237 ITR 570. No doubt whether or not the amount is tobe treated as undisclosed income even after explanation of theassessee is rejected, depends on facts and circumstances of eachcase. In absence of perversity, finding recorded by the Tribunalwill be a finding of fact not liable to be interfered with undersection 260-A. 8. In Jagmohan Ram Ram Chandra v. CIT, (2005) 274 ITR 405, it was observed:- “Thus, from the aforesaid decisions, it is settledthat if an entry of cash credit is found in the booksof account of a firm, it is for the firm to giveexplanation regarding the identity and source ofeach deposits and if the explanation is disbelievedthen it is to be added as an income under section68 of the Act in the hands of the firm.” 9. The object of the provision is to check introduction ofundisclosed income in the books of the firm and mere fact that theamount is shown to have been deposited by partner does not createany immunity against the amount being treated as undisclosedincome of the firm. 10. In the facts and circumstances of the present case, thejudgments relied upon on behalf of the assessee aredistinguishable. In Usha Studd, appeal of the revenue wasdismissed on the ground that finding of fact had been recorded infacts of that case about deletion of addition made. Again inBurma Electro, appeal was dismissed on the ground that findingof fact was involved. The observations that partners having madeinvestments in the firm, the addition was required to be made in thehands of the partners and not in the firm was also on facts and notas inflexible rule. In Sunita Vachani, there was a finding of factagainst addition being allowed which was upheld. In HanumanAgarwal, it was held that where assessee gave correct name,address and particulars of the creditor without testing genuinenessof the transaction, the amount could not be assessed in the hands ofthe assessee. Similar is the position in Roopchand. Addition to theincome of the assessee was held to be justified in absence of validexplanation. In R.S.Gupta, in absence of gift being genuine,addition to the net wealth was held to be valid. None of the judgments relied upon by the counsel for the appellant holds that addition could never be made in the hands of the firm. 11. The finding recorded by the Tribunal being purefinding of fact, which is not shown to be perverse, no substantialquestion of law arises. 12.The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE August 10, 2010Ashwani/gs ( AJAY KUMAR MITTAL ) JUDGE