The Commissioner Of Income-Tax,Nungambakkam High Road,Chennai-34 v. M/S.taj Borewells,Periavallikulam,Aruppukottai Road,Virudhunagar-626 004

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.36 of 2004 The Commissioner of Income-tax,Nungambakkam High Road,Chennai-34. Vs ..Appellant M/s.Taj Borewells,Periavallikulam,Aruppukottai Road,Virudhunagar-626 004. ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai Bench 'B', Chennai inI.T.A. No.891(Mds)/2001 dated 18.07.2003 for the assessment year 1995-96.Against the Order of the Commissioner of Income Tax (Appeals)-XIII Chennaidated 22.3.2001 I.T.A.No.481/99-2000, GI.No./P.A.No.T4307 Assessment year1995-96. JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income Tax Act, 1961by the Revenue, against the order of the Income Tax Appellate Tribunal,Chennai Bench 'B', Chennai in I.T.A. No.891(Mds)/2001 dated 18.07.2003.On 28.01.2004, this Court admitted the appeal and formulated the followingsubstantial questions of law. "1. Whether on the facts and in the circumstances ofthe case, the Income Tax Tribunal is right in law innot considering the balance sheet and profit and lossaccount wherein contribution of the partners have beenshown could be taken to be the books of account and thecredits appearing therein have to be explained?2. Whether on the facts and in the circumstances of the https://hcservices.ecourts.gov.in/hcservices/ case, the Income Tax Tribunal is right in lawespecially when the appellant firm has not been able toexplain the source of the capital invested by thepartners which accordingly has to be treated asunaccounted income under Section 68 of the Income TaxAct?3. Whether on the facts and in the circumstances of thecase, the Income Tax Tribunal is right in law in notfollowing the judgment rendered in 216 ITR page 9?" 2.The facts leading to the above substantial questions of law areas under: The assessee is a firm. It consists of seven partners with equalshare. It claimed the status of Association of Person. The relevantassessment year is 1995-96 and the corresponding accounting year ended on31.03.1995. The main business of the assessee-firm is deriving incomefrom digging borewells at various places in and around Virudhunagar. Theassessee-firm did not maintain any books of account for the reason thatthe total gross receipts were below Rs.5 lakhs. The assessee-firm hadadmitted gross receipts at Rs.34,000/- from which it had claimed expenseslike diesel, salary to staff etc. to the extent of Rs.28,000/- and thebalance net receipt of Rs.6,000/- was returned. From this, the assessee-firm claimed depreciation of Rs.81,500/-. The assessee-firm filed Returnof loss on 31.12.1996. The said Return was processed under Section 143(1)(a) of the Act on 27.03.1997 and the said claim of Rs.81,500/- wasaccepted. Subsequently the case was selected for scrutiny and noticeunder Section 143(2) was issued on 23.07.1997. Later, assessment wascompleted under Section 143(3) of the Act on 31.03.1998, determining thetotal income at Rs.4,84,250/-. While completing the assessment, theAssessing Officer treated the amount of Rs.5,25,000/- which was shown asinvested by the partners, was not accepted and the Assessing Officerconcluded that this amount was to be added under the head "Other Sources"under Section 68 of the Income-tax Act ("Act" in short). Aggrieved by theorder of assessment, the assessee-firm filed an appeal to the Commissionerof Income-tax (Appeals). The C.I.T.(A) confirmed the additions made bythe Assessing Officer under Section 68 of the Act. Aggrieved by the orderof the C.I.T.(A), the assessee-firm filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal deleted theaddition of Rs.5,25,000/- under the head "Other Sources" from the incomeof the firm and allowed the appeal. 3.Learned Standing Counsel appearing for the Revenue submittedthat there had been unexplained credits in the accounts of the firm in theform of partners' contribution towards the capital and hence the AssessingOfficer is right in making addition and the order passed by the AssessingOfficer is in confirmity with law. Further it is submitted that theamount introduced by the partners are not properly explained and hence theAssessing Officer is justified in treating the same as income fromundisclosed sources. It is also further submitted that the AssessingOfficer has brought sufficient evidence and material on record to showthat the amount introduced in the assessee firm had not been properlyexplained. Hence, the Assessing Officer rightly made the addition under https://hcservices.ecourts.gov.in/hcservices/ Section 68 of the Act and also relied on various judgments to support hiscontention, which are as follows:a)Jagmohan Ram Ram Chandra Vs. Commissioner of Income-tax reportedin 274 ITR 405 (All.)b)Commissioner of Income-tax Vs. Kishorilal Santoshilal reportedin216 ITR 9 (Raj.).c)Rakesh Kalia Vs. Commissioner of Income-tax reported in286ITR 357 (Del.) d) Commissioner of Income-tax Vs. Nivedan Vanijya Niyojan Ltd. reportedin 263 ITR 623 (Cal.)e) C.K.Gopinathan Vs. Commissioner of Income-tax reported in 260 ITR 213(Ker.)f) Ram Lal Agrawal Vs. Commissioner of Income-tax reportedin280 ITR 547 (All.) g) Income-tax Officer, Ward 1, Division I, Ernakulam Vs.Diza Holdings (P.) Ltd. reported in 255 ITR 573 (Ker.) 4.There is no representation on behalf of the respondent inspiteof notice served on them. 5.Heard the counsel. It is an admitted fact that the presentassessment year is the first year of assessment of the assessee. Theassessee did not maintain books of account and the amounts represented arecapital contribution of the partners in the firm. The assessee hadexplained that these amounts were represented only as capital contributionmade by the partners. So, it cannot be said that the assessee had notexplained the source. If the Assessing Officer has any doubt with regardto the genuineness of the source, he should have considered the same inthe hands of the partner and not in the hands of the firm. In the presentcase, the assessee invoked Section 68 of the Act and made an addition ofRs.5,25,000/- under the head "other sources". Section 68 of the Act readsas follows:- "68. Cash credits - Where any sum is found credited inthe books of an assessee maintained for any previousyear, and the assessee offers no explanation about thenature and source thereof or the explanation offeredby him is not, in the opinion of the AssessingOfficer, satisfactory, the sum so credited may becharged to income-tax as the income of the assessee ofthat previous year."Section 68 is a charging section and it is also a deeming provision.Unless the following circumstances exist, the Revenue cannot rely onSection 68 of the Act. a) Credit in the books of an assessee; maintained for the year.b) Assessee offers no explanation or if the assessee offers explanationand if the Assessing Officer is of the opinion that the same is notsatisfactory, the sum so credited is chargeable to tax as "income from other sources". In the present case, there is no dispute that the assessee-firm did notmaintain any books of account during the year. The assessee-firm filedonly the Return of loss and along with the Return, affidavits given by https://hcservices.ecourts.gov.in/hcservices/ a) Credit in the books of an assessee; maintained for the year.b) Assessee offers no explanation or if the assessee offers explanationand if the Assessing Officer is of the opinion that the same is notsatisfactory, the sum so credited is chargeable to tax as "income from other sources". In the present case, there is no dispute that the assessee-firm did notmaintain any books of account during the year. The assessee-firm filedonly the Return of loss and along with the Return, affidavits given by https://hcservices.ecourts.gov.in/hcservices/ each partner for source of capital invested by them were also furnished.There is no written Partnership Deed. The assessee-firm shown thecontributions of the partners in the Profit and Loss Account and theBalance Sheet. The Assessing Officer was of the view that the accounts ofthe assessee-firm are in the form of Profit and Loss Account and BalanceSheet and held that they are the books of account. One of the issues hereis, whether the Profit and Loss Account and Balance Sheet are books ofaccount or not. 6.In the judgment reported in 184 ITR 450 in the case ofS.Rajagopala Vandayar Vs. Commissioner of Income-tax, this Court has takena view that Profit and Loss Account does not form part of the books ofaccount and held as follows:-"We may point out that that is not the situation here,as it had not been disputed by the assessee rightthrough that no account books at all had beenmaintained. The Supreme Court, in CIT v. NationalSyndicate [1961] 41 ITR 225, dealing with section 10(2)(vii) of the Indian Income-tax Act, 1922, laid downthat in order to claim deduction of the loss sustainedunder that provision, one of the essential conditionsto be fulfilled was that the loss should have beenbrought into the books of the assessee and written offas provided by the first proviso to section 10(2)(vii)of the Indian Income-tax Act, 1922. At page 234, theSupreme Court has catalogued the four conditionsrequired to be fulfilled and the fourth condition,according to the Supreme court, to be fulfilled isthat in the books of account of the assessee, the lossshould have been brought in and written off. Itfollows, therefore, that if this requirement is notfulfilled, the assessee is not entitled to the reliefof allowance of the loss. We may now refer to thedecision of this court in P.Appavu Pillai v. CIT[1965] 58 ITR 622. In that case, the Tribunal tookthe view that relief under section 10(2)(vii) of theIndian Income-tax Act, 1922, could be given only incases where the assessee maintains regular books ofaccounts and the loss had been written off in thebooks and that as the assessee did not keep anyaccounts, the allowance was rightly refused. Thecourt found that though there is no indication insection 10(2)(vii) of the Indian Income-tax Act, 1922,as to the particular type of account book which shouldbe maintained by the assessee, if accounts areproduced, in which the relevant entry with regard tothe allowance appeared, that would be sufficientcompliance with the first proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. In thatcase, the assessee produced before the assessingauthority the daily collection and expenditure accountand notwithstanding the absence of a day-book and a ledger, the Income-tax Officer was satisfied that theobsolescence allowance claimed could be granted. Buta contrary view was taken by the Appellate AssistantCommissioner and the Tribunal that the loss could beallowed only if such amount is actually written off inthe books of the assessee and that books in thatcontext would mean the books of account maintained bythe assessee in the course of the business. However,the court took the view that though the accountsmaintained by the assessee may be defective in thatthe entries therein do not lead to a correctassessment of trhe income profit and gains of thebusiness, that has nothing whatever to do with theallowance that can be granted under section 10(2)(vii)of the Indian Income-tax Act, 1922, if such accountsare available in which the relevant entry with regardto the allowance appears, that would be sufficientcompliance with the requirement of the proviso and inthat view, it was held that the details in theaccounts produced in that case would be sufficient tocomply with the requirements of the first proviso tosection 10(2)(vii) of the Indian Income-tax Act, 1922.We may, in this connection, point out that theargument of the Revenue in that case that the profitand loss account is the account which can be said tobe a book of account was rejected and it wascharacterised as a statement representing the state ofbusiness as at the end of the accounting year withdetails culled from other books of account, which maybe characterised as the primary books which abusinessman generally maintains. In other words,according to that decision, a profit and loss accountis not a book of account. We are, therefore, of theview that merely by relying upon the profit and lossaccount, the assessee in this case cannot claim thebenefit of allowance of loss sustained on the sale ofthe cars."The word "books of account" is not defined during the relevant assessmentyear. Later, Section 2 (12A) was introduced in the Act defining "books orbooks of account" by the Finance Act, 2001 with effect from 01.06.2001 andthe same reads as follows: "(12A) "books or books of account" includes ledgers,day-books, cash books, account-books and other books,whether kept in the written form or as print-outs ofdata stored in a floppy, disc, tape or any other formof electro-magnetic data storage device;"The above definition is inclusive definition and it includes not onlyledgers, day-books, cash books, account-books and other books, but alsothe print-outs of data stored in a floppy disc, tape or any other form ofelectro-magnetic data storage device. P.Ramanatha Aiyar's Advanced LawLexicon, 3[rd] Edition 2005, also defines "Books of account" as follows:- "Books in which merchants, businessmen, and traders "(12A) "books or books of account" includes ledgers,day-books, cash books, account-books and other books,whether kept in the written form or as print-outs ofdata stored in a floppy, disc, tape or any other formof electro-magnetic data storage device;"The above definition is inclusive definition and it includes not onlyledgers, day-books, cash books, account-books and other books, but alsothe print-outs of data stored in a floppy disc, tape or any other form ofelectro-magnetic data storage device. P.Ramanatha Aiyar's Advanced LawLexicon, 3[rd] Edition 2005, also defines "Books of account" as follows:- "Books in which merchants, businessmen, and traders generally keep their accounts. "Books of Accounts"mean such books of account as are usual in thebusiness, and do not extend to "letters, cheques, andvouchers from which books of account can be madeup"(Per CAVE, J., Re Winslow, 55 LJQB 238)""If the word 'account' is to be given wider meaning toinclude a record of financial transactions reckoned, abook containing a statement of monetary transactionwould attract the definition of 'book of account' underSection 34 of the Act. CBI v. V.C.Shukla, (1998) 3 SCC410, para 23. [Indian Evidence Act (1 of 1872), S.34]""Company's books in which business transactions arerecorded, often consisting of journals, ledgers andvarious other records of accounts. They are normallyheld to be legal documents and should indicate thefinancial position of the business at any time.(International Accounting; Business Term)"So, the books of account is defined as any book which forms an integralpart of system of book keeping employed in any particular business andconsequently includes both the ledger and the books of original entry.The Profit and Loss Account of a trade is the statement wherein thevarious items of profit and revenue on the one hand and the losses andexpenditure on the other hand, are collected and offset, the one classagainst the other, that is, in compiling such an account being - debit allthe losses, credit all the gains. The resulting balance of this accountrepresents the Net Profits or the Net Losses for the period under review.The object of a Profit and Loss Account is to ascertain the income of abusiness and by offsetting the expenses of earning that income, toascertain the net increase (profit) or decrease (loss) in the traders'"net worth" for the period. Balance Sheet lists the assets and liabilitiesand equity accounts of the company. It is prepared 'as on' a particularday and the accounts reflect the balances that existed at the close ofbusiness on that day. By following the judgment of the Madras High Courtcited supra and taking note of the definition of the books or books ofaccount in the Income-tax Act as well as in P.Ramanatha Aiyar's AdvancedLaw Lexicon, 3[rd] Edition 2005, and also the meaning of the Profit and LossAccount and Balance Sheet, we can safely conclude that the Profit and LossAccount and the Balance Sheet are not the books of account as contemplatedunder the provisions of the Act. The learned Standing Counsel for theRevenue has not placed any authority or any case law or any other materialor evidence to show that the books of account includes Profit and LossAccount and Balance Sheet. 7.In the present case, the assessee-firm had explained the sourceof capital. So, there was an explanation offered by the assessee-firm.The said explanation has not been rejected by the Assessing Officer.Later, the Assessing Officer examined the partners and the partners hadalso made explanation in respect of the source for the contribution of thecapital to the assessee-firm. The Assessing Officer had also partiallyaccepted the explanation offered by the partners. The Assessing Officerhad not rejected the explanation offered by the firm. Unless and untilthe explanation offered by the firm is rejected and the same is not https://hcservices.ecourts.gov.in/hcservices/ 7.In the present case, the assessee-firm had explained the sourceof capital. So, there was an explanation offered by the assessee-firm.The said explanation has not been rejected by the Assessing Officer.Later, the Assessing Officer examined the partners and the partners hadalso made explanation in respect of the source for the contribution of thecapital to the assessee-firm. The Assessing Officer had also partiallyaccepted the explanation offered by the partners. The Assessing Officerhad not rejected the explanation offered by the firm. Unless and untilthe explanation offered by the firm is rejected and the same is not https://hcservices.ecourts.gov.in/hcservices/ genuine, the Assessing Officer cannot invoke the provision of Section 68of the Act. In the present case, the explanation offered by the firm wasaccepted and later, the Assessing Officer examined the partners and notaccepted the explanation. The Assessing Officer cannot ask the assessee-firm to prove source of a source. Once the firm had offered anexplanation and established that the capital was contributed by thepartners, the same could not be assessible in the hands of the firm.Unless there are contradictions and inconsistencies in the statement ofthe partners, the credit cannot be treated as unexplained and cannot beadded under Section 68 of the Act in the hands of the assessee-firm.Also, it is clear from the language employed under Section 68 of the Actthat only the assessee alone has to offer explanation. If the assesseemakes explanation, it is for the Assessing Officer to accept or reject thesame. Finding given by the Tribunal is that the assessee-firm hadexplained the source of the capital and hence the same cannot be assessedas undisclosed income in the hands of the assessee firm. The order of theTribunal reads as follows:- "When the assessee has explained the amounts as capitalcontributions by the partners, the Revenue authoritiesare not justified in holding that the assessee has notexplained the source and the same is to be added underthe head 'Other Sources' in the hands of the firm. Incase the Assessing Officer doubted the genuineness ofthe source, he should have considered the same in thehands of the partners only and not in the case of thefirm. This view of ours is supported by the decisionsof the Allahabad High Court in the cases reported in141 ITR 706 and 221 ITR 239, cited supra. Under thesecircumstances, we delete the addition of Rs.5,25,000/-under the head 'Other Sources' from the income of theassessee-firm." From a reading of the above, it is clear that the Tribunal had given afinding that the assessee had offered explanation and hence the RevenueAuthorities are wrong in holding that the assessee had not explained thesource. If the Assessing Officer doubted the genuineness of the source ofthe partners, he should have considered the same in the hands of thepartners only and not in the hands of the firm. We feel that the reasonsgiven by the Tribunal are based on valid materials and evidence and hencethe view taken by the Tribunal is in accordance with law. 8.In the case of India Rice Mills Vs. Commissioner of Income-tax(218 ITR 508), the Allahabad High Court considered the scope of Section 68of the Act. In that case, the assessee is a partnership firm. There wereten partners in the firm and they made capital contribution totalling toRs.1,43,000/-. Since this was credited in the books of the firm, the firmwas called upon by the Assessing Authority to explain the source of thedeposit. All the partners had filed their Returns after the close of theaccounting year of the firm and they had not filed any Return in theearlier years. Therefore, the Assessing Officer held that the amountrepresented the income of the assessee-firm from undisclosed sources andon appeal, the Commissioner of Income-tax (Appeals) held that as thedeposits were made by the partners before the firm started its business, https://hcservices.ecourts.gov.in/hcservices/ the same could not be taken to be the income of the firm from undisclosedsources. The Tribunal held that as the amount was credited in the booksof the firm, it was for the assessee-firm to explain the source ofdeposit. On a reference, the Court held that all the deposits came to bemade during the accounting year in the books of the firm before it startedits business and the deposits represented the capital contribution of thepartners, and it was for the partners to explain the source of depositsand if they failed to discharge the onus, then such deposits could in nocase be the income of the assessee-firm because the firm started itsbusiness only after the credits had been made in its books. Hence theAllahabad High Court held that the same cannot be assessed in the hands ofthe assessee-firm. We also agree with the view expressed by the by theAllahabad High Court. The said Allahabad High Court judgment was followedby the subsequent judgment of the Allahabad High Court in the case ofSurendra Mahan Seth Vs. Commissioner of Income-tax reported in 221 ITR239. The facts in both the judgments of the Allahabad High Court aresimilar to the facts involved in the present case. The Tribunal alsocorrectly followed the judgment of the Allahabad High Court, reported in221 ITR 239, wherein it was held that the onus was on the partners toexplain the source of the deposits made on the very first day when thepartnership firm came into existence and if they failed to explain thesource of the deposits, the amount would be added in the hands of thepartners only and not in the hands of the assessee-firm. 9.The Standing Counsel for the Revenue relied on later AllahabadHigh Court judgment reported in 274 ITR 405 in the case of Jagmohan RamRam Chandra Vs. Commissioner of Income-tax to support his contention. Inthat case the assessee is a firm consisting of six partners. TheAssessing Officer required the firm to explain the nature of source of twocash credits standing in the names of two partners. The explanationoffered by the firm was that these two partners had surrendered theamounts in question in their individual Returns and they had been assessedthereon. The Assessing Officer rejected the explanation treating thecredit as income of the assessee-firm by invoking the provision of Section68 of the Act. Also, in the individual assessment of the partner, theIncome-tax Officer assessed the surrendered income which was the amountdeposited and standing in his name in the firm by way of protectivemeasure. The Tribunal also upheld the additions. The assessee-firm filedan appeal to the High Court and the High Court held that with regard toentry of cash credits found in the books of account of the firm, it is forthe firm to give explanation regarding the identity and source of suchdeposits and if the explanation is disbelieved, then it has to be added asincome under Section 68 of the Act in the hands of the firm. Similarly,if the assessee who is a partner in the firm has made investment which isnot recorded in the books of account maintained by him for any source ofincome, and the explanation given by the partner regarding the source ofdeposits is disbelieved, then such deposits which are an investment, canbe brought to tax as income from undisclosed sources under Section 69 ofthe Act. It was also further held that there was no question of doubletaxation and the full effect of deeming provision provided under Sections68 and 69 of the Act are to be given. Finally the Allahabad High Courtheld that the firm and the partners, being treated as separate assessees https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ under the Act, the assessment of the income in the hands of differentassessees under different provisions of the Act is permissible and on thefacts and in the circumstances of the case, the Tribunal was justified inupholding the addition in the total income of the assessee even though thesaid amount was also assessed in the hands of two partners. In the abovejudgment, the explanation offered by the assessee-firm was not acceptedand hence there was an addition. These facts are materially differentfrom the facts involved in the present case. The most striking feature ofthe present case is that all the partners made contribution during theaccounting year and the assessee-firm also explained the source and thesame was not rejected and only the partners' explanations were rejected.Hence the Tribunal, in the present case, had rightly taken a view that ifat all, the Assessing Officer can assess the same in the hands of thepartners. 10.The Standing Counsel for the Revenue relied on number of otherHigh Court judgments, cited supra. The facts in these judgments arematerially different from the facts involved in the present case. Hencethey have no relevance and do not also help the case of the Revenue. 11.The most striking features involved in the present case are asfollows:- a) Since there are no books of account, there can be nosuch books. creditsin b) It is the first year of assessment of the assessee.c) Explanation offered by the assessee-firm not rejectedexplanation offered by the partners wererejected. and only therejected. Hence, it is not a fit case for making addition under Section 68 of theAct. 12.Under these circumstances, we are of the view that the order ofthe Tribunal is in confirmity with law. The reasons given by the Tribunalare based on valid materials and evidence and we find no error or legalinfirmity in the order of the Tribunal so as to warrant interference.Hence we answer all the questions in favour of the assessee and againstthe Revenue. No costs. km Sd/- Asst.Registrar /true copy/ Sub Asst.Registrar To, 1. The Asst.Registrar Income Tax Appellate Tribunal Besant Nagar, Madras-90. (5 Copies) Appellate Tribunal Besant Nagar, Madras-90. (5 Copies) 2. The Secretary Central Board of Revenue New Delhi (3 Copies) New Delhi (3 Copies) 3. The Commissioner of Income Tax (Appeals) - XIII Chennai. Chennai. +1 cc to Mr.Pushyasitaraman, Advocate Sr.No.20945. AKR(CO)dcp/24.4.07 T.C.(A) No.36 of 2004