Kesharwani Sheetalaya Sahsaon Allahabad Vs CIT (Allahabad High Court)
Conclusion: Addition under section 68 for not proving the source of income of partners who have made the deposit with the firm in their capital account could not be made as partners had shown the agricultural income in their personal returns of the past years which had been accepted by the department as such and the partners were all identifiable and separately assessed to tax thus, the source of investment having been explained and therefore, the addition could not have to be considered in the hands of the partners and not in the hands of the firm.
Held: Assessee-partnership firm having sixteen partners engaged in the business of cold storage. AO noted certain credits in the names of the partners. AO held the credits as unproved and made an addition under Section 68 relying upon a decision of this Court in Commissioner of Income Tax, Lucknow v Kapur Borthers1, which was a case where assessee had entered deposits in the books of firm in the names of partners and upon the explanations for deposits being rejected the same were treated as income of the firm and not of the individual partners. It was held that where a sum was credited in the books of account of a firm from a partner, assessee firm could discharge its onus by proving three things: (i) identity of the creditor; (ii) creditworthiness of the creditor; and (iii) genuineness of transaction in question. Once assessee proves all the three things its onus is discharged. It had also been consistently held that assessee only needed to prove the source of credit entries and he was not required to prove the source of the source or the creditors’ credit. In a case where the integrity of the creditors was established and the entries were shown to be not fictitious, the burden would shift on the Revenue. In the case at hand, the partners have shown the agricultural income in their personal returns of the past years which had been accepted by the department as such. The partners were all identifiable and separately assessed to tax. The source of investment having been explained, in the event AO was not satisfied the addition could have been considered in the hands of the partners and not in the hands of the firm. The burden of proving the source of the credits having been sufficiently explained the addition could not have been made in the hands of the firm in the facts of the present case.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. The present appeal has been filed under Section 260A of the Income Tax Act, 1961 (in short ‘the Act’) against the order of the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad (for short ‘the I.T.A.T.’) dated 30.10.2006, for the assessment year 19992000, whereby the Tribunal partly allowed the appeal filed by the Revenue.
2. The instant appeal was admitted on the questions of law, as mentioned in the memo of appeal, which are as follows:
“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in upholding the order of the assessing officer of making addition U/s 68 of the Income Tax Act at Rs.4,00,000/ in the hand of the firm?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was not able to prove the source of income of partners who have made the deposit with the firm in their capital account therefore addition u/s 68 is justified?”
3. The records of the case before us indicate that the assessee has described itself as a partnership firm having sixteen partners engaged in the business of cold storage. For the assessment year 19992000, the assessee filed a return of income on 01.11.1999 declaring an income of Rs.36,92,056/. The case was selected for scrutiny and notices under Section 143(2)/142(1) of the Act were issued. The assessment was thereafter made under Section 143(3) and in terms of an order dated 26.03.2002 the Assessing Officer noted the following credits in the names of the partners:
