The Commissioner Of Income Tax , Patiala v. M/S Deepak Iron & Steel Rolling Mills Mandi Gobindgarh

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. ITA No. 86 of 2003 Date of decision: 2.8.2010 The Commissioner of Income Tax , Patiala -----Appellant Vs. M/s Deepak Iron & Steel Rolling Mills Mandi Gobindgarh ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Ms. Urvashi Dhugga, Advocate for the revenue. Mr. S.K.Mukhi, Advocate for the assessee. Adarsh Kumar Goel,J. 1.This appeal has been preferred by the revenue undersection 260A of the Income Tax Act, 1961 (for short, ‘the Act’) againstorder dated 28.11.2002 passed by the Income Tax Appellate Tribunal,Chandigarh Bench ‘A’, in ITA No.213/Chandi/97 for assessment year1993-94, proposing to raise following substantial question of law:- “Whether on the facts and in the circumstances ofthe case, the Hon’ble ITAT was right in law inupholding the order of learned CIT(A) deleting theaddition of Rs.22,01,000/- made by the AO onaccount of unexplained NRI gifts allegedly receivedby the partners and brought into the books ofaccount of the firm through capital accounts ofpartners?” 2. The assessee is a manufacturer having eight partners.During assessment, it was noticed that there were deposits in the capital accounts of the partners out of gifts received from NRIs. The said giftswere treated to be unexplained income of the assessee, rejecting theplea that the gifts were genuine and were received through bankingtransactions. On appeal, the CIT(A) held that irrespective ofgenuineness or otherwise of the gifts, the partners being separateassessees, deposits in their capital account were liable to be treated astheir income and not the income of the firm. Accordingly, addition tothe income of the firm was deleted. This view was upheld by theTribunal. 3.We have heard learned counsel for the parties and perusedthe record. 4.Contention raised on behalf of the revenue is that theamounts covered by the entries, though shown to be gifts, representedunexplained income of the assessee. The transaction could be gift ifthere was genuine love and affection, which was not established.Learned counsel for the revenue referred to the finding recorded by theCIT(A) noticing the proceedings before the Assessing officer that theamounts were received by the assessee firm from NRIs. The NRIs whopurportedly made the gifts were not produced. The partners in whoseaccount the amount was credited were also not produced except three.The donors were strangers and had no relationship with the saidpartners. The partners were also not familiar to the NRIs who allegedlymade the gifts. There was corresponding deposit in the accounts of theNRIs even before the gifts were made. The said gifts were merely anarrangement and not genuine and amount represented unaccountedincome. This was a device to bring back undisclosed profit of the firm from the accounts. It was submitted that after recording this finding, theCIT(A) was not justified in holding that the gifts were received bypartners and then brought into accounts in the books of the firm and insuch a situation, the amount represented income of the partners only.5.On the other hand, learned counsel for the assesseesubmitted that the question before the Court was not whether the giftswere genuine but only question was whether the gifts representedunexplained income of the partners or of the firm and a finding hasbeen rightly recorded that the amount represented unexplained incomeof the partners which was taxable in the hands of the partners only andnot in the hands of the firm. Reliance has been placed on followingjudgments:- i)CIT v. Burma Electro Corporation, (2001) 252 ITR344 (P&H)344 (P&H) ii)CIT v. Metachem Industries, (2000) 245 ITR 160(MP);(MP); iii)DCIT v. Rohini Builders, (2002) 256 ITR 360(Guj.);(Guj.); iv)CIT v. Daulat Ram Rawat Mull, (1973) 87 ITR 349(SC);(SC);v)CIT v. Diamond Products Limited, (2009) 21 DTR9 (Del.) 9 (Del.) 6. i)CIT v. Burma Electro Corporation, (2001) 252 ITR344 (P&H)344 (P&H) ii)CIT v. Metachem Industries, (2000) 245 ITR 160(MP);(MP); iii)DCIT v. Rohini Builders, (2002) 256 ITR 360(Guj.);(Guj.); iv)CIT v. Daulat Ram Rawat Mull, (1973) 87 ITR 349(SC);(SC);v)CIT v. Diamond Products Limited, (2009) 21 DTR9 (Del.) 9 (Del.) 6. We have thoughtfully considered the arguments of the learned counsel for the parties. 7.The assessee had claimed that the partners of the firm hadreceived gifts from NRIs as per details given below:- 8. The Assessing Officer, after appreciating the evidence, hadconcluded that the gifts from NRIs were not genuine. The relevantobservations read thus:- “In the present case the assessee has received gifts fromstrangers who are not at all related to the assessee in anymanner. The statements of the three donees clearly showthat the donors are complete strangers to them. Thus thereis no reason why donors should gift a sum ofRs.22,01,000/- to the donees. As regards the means of thedonors the assessee has failed to produce the donors andhas failed to discharge his onus. For the reasons that thedonors have not been examined it cannot be concludedwhether the donors are men of means. However, from thestatements of the three partners it appears that the donorsare persons carrying out petty jobs and have gone toforeign countries mainly for earning their livelihood.Thus, they may not be men of means even. In the presentcase also there was no occasion for making such hugegifts. Thus, all the conditions in the cited case aresatisfied in the present case. Though the assessee hasreceived all the gifts through bank drafts but this is only aself serving evidence in possession of the assessee. In thecited case also the assessee had received the gifts throughbank drafts which were rejected by the Hon’ble HighCourt. In the light of these facts and the decision of theHon’ble Punjab and Haryana High Court referred to above, it is held that the alleged gifts are not genuine. It isheld that the alleged gifts amounting to Rs.22,01,000/-received by the assessee are nothing but the income of theassessee from undisclosed sources. It may be mentionedhere that this year the assessee has declared gross profitrate of 2.90% as against 4.39% last year. The gross profitdeclared is Rs.41.26 lakhs as against Rs.57.17 lakhsdeclared last year. If the gross profit rate of 4.39% isadopted, the gross profit of the assessee this year shouldhave been Rs.62.57 lakhs as against the declared grossprofit of Rs.41.26 lakhs. Thus the assessee has declaredless gross profit by Rs.21.31 lakhs. The reasons advancedby the assessee for lower gross profit rate are notconvincing. The assessee’s partners have received allegedgifts amounting to Rs.22,01,000/- which amount is almostequal to the lesser gross profit declared by the assessee.The assessee therefore has understated his gross profitrate with a view to show the receipt of alleged gifts onwhich no tax was payable by the assessee. The tradingresults of the assessee are therefore rejected. Addition ofRs.22,01,000/- is therefore made to the returned incomeof the assessee as income from undisclosed sources.” 9. The CIT(A) and the Tribunal, however, held that even ifthe gifts to the partners were not genuine, no addition in the hands ofthe firm could be made. We are of the opinion that the orders passed byCIT(A) and the Tribunal cannot be sustained. 10. The question whether addition on account of unexplainedcredit entry in the books of accounts of the assessee could be made tothe income of the firm or the partner, depends on facts andcircumstances of each case. No doubt, partner under the Act is a 9. The CIT(A) and the Tribunal, however, held that even ifthe gifts to the partners were not genuine, no addition in the hands ofthe firm could be made. We are of the opinion that the orders passed byCIT(A) and the Tribunal cannot be sustained. 10. The question whether addition on account of unexplainedcredit entry in the books of accounts of the assessee could be made tothe income of the firm or the partner, depends on facts andcircumstances of each case. No doubt, partner under the Act is a separate entity and where there is separate income, the same may not beliable to be taxed in the hands of the firm merely because credit entry ismade in the accounts of the firm.There is no rigid rule that whenevercredit entry is in the capital account of a partner, addition could not bemade in the hands of the firm even when credit entry is, on the face ofit, bogus or a device to evade tax. A single factor may not be sufficientto record whether the assessee had employed a colourable device orwhether the partner had unexplained income which was credited in thebooks of account of the assessee. It cannot always be held that merelybecause the entry in the capital account of the partner was identified assource of undisclosed income, the firm was immune from being taxed,even where colourable device was used by the firm by introducing itsundisclosed income by way of deposit by a partner. 11. Now adverting to the facts of the present case, a findinghad been recorded by the Assessing officer that in the previous year,the gross profit declared by the assessee was 4.39% i.e. Rs.57.17 lacswhereas it was 2.9% i.e. Rs.41.26 lacs in the current year. Applying theprevious year gross profit rate of 4.39% to the current year, it wasnoticed that the gross profit of the assessee would have been Rs.62.57lacs as against declared gross profit of Rs.41.26 lacs giving adifference of Rs.21.31 lacs. No plausible explanation had beenfurnished by the assessee for lower gross profit in the current year andthe amount of alleged gifts amounting to Rs.22,01,000/- was almostequal to lesser gross profit declared. The trading results of the assesseewere, thus, rejected and addition of Rs.22,01,000/- was treated as undisclosed income of the assessee. The said finding has not been setaside by the CIT(A) or the Tribunal. In view thereof, we are of theopinion that the alleged gifts received from NRIs by the partners werethe undisclosed income of the assessee firm in the facts andcircumstances of the present case. Finding to the contrary by the CIT(A) and the Tribunal is legally unsustainable and is accordingly setaside. 12.Suffice it to notice, the judgments relied upon by learnedcounsel for the assessee are not helpful to it and do not advance itscase as those were the cases which were decided on the individual factsituation and are, thus, distinguishable. Consequently, substantialquestion of law is answered in favour of the revenue and orders of theCIT(A) and the Tribunal are hereby set aside. 13.The appeal is disposed of. (Adarsh Kumar Goel) Judge August 2, 2010‘gs’ (Ajay Kumar Mittal) Judge