COMMISSIONER OF INCOME TAX-2 VIZAG V. M/S. M. VENKATESWARA RAO AND OTHERS

ITTA/29/2003

AI Insights

The case involves the Commissioner of Income Tax-2 as the appellant and M/s. M.Venkateswara Rao & Others as the respondents. The primary legal issue was whether the contributions made by the partners to the capital of the firm and certain credit entries in the firm's accounts constituted unexplained income under Section 68 of the Income Tax Act, 1961. The Tribunal had earlier partly allowed the respondent's appeal, leading to the Revenue's further appeal under Section 260-A of the Act. The High Court dismissed the Revenue's appeal, agreeing with the Tribunal's decision that the contributions and deposits were not unexplained income.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 678368 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 27-08-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Anupam Udyog, Narayandas Kedarnath vs. Commissioner of Income Tax, Commissioner of Income Tax vs. Jaiswal Motor Finance
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: S R ASHOK
• Keywords: Capital Contribution; Credit entries; Income Tax; Partnership firm; Unexplained income
• Section: 68; 143(1)(a)

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +I.T.T.A.No.29 of 2003 % Dated 27.08.2014 # Commissioner of Income Tax-2. ….Appellant $ M/s. M.Venkateswara Rao & Others. ….Respondent ! Counsel for the appellant : Sri S.R.Ashok ^ Counsel for respondent : ---- < GIST: > HEAD NOTE: ? Cases referred: 1. (1983) 142 ITR 133 2. 22 ITR 18 3. 141 ITR 706 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.29 of 2003 JUDGMENT: (Per LNR,J) The respondent is a partnership firm, which undertook the business of purchase and sale of Arrack in Visakhapatnam District from the year 1982 onwards. It has been submitting returns year after year. The returns submitted by the respondent for the year 1993-94 was picked up for verification and it was processed under Section 143(1)(a) of the Income Tax Act, 1961 (for short ‘the Act’) through order, dated 31.03.1995. Later on, steps were taken for necessary rectification and notices under the relevant provisions of the Act were issued. Though several aspects were dealt with, the principal controversy was about the contributions made by as many as 10 partners aggregating to Rs.76,57,263/-; and the alleged undisclosed credit entries amounting to Rs.31,06,000/-. The explanation of the respondent that the partners have paid various amounts towards contribution of their share in the capital was not accepted. Similarly, the explanation offered in respect of the undisclosed credit entries was rejected. In the appeal preferred by the respondent before the Commissioner (Appeals), the amounts paid by four partners were deducted. As regards the money paid by the remaining six partners as well as the undisclosed credit of Rs.31,06,000/-, the matter was remanded to the appointing authority, for fresh consideration. While the appellant filed two appeals, being I.T.A.Nos.1853 and 2072/Hyd/1996, the respondent filed I.T.A.No.1860/Hyd/1996 before the Visakhapatnam Bench of the Income Tax Appellate Tribunal. Through a common order dated 09.07.2001, the Tribunal partly allowed I.T.A.No.1860/Hyd/1996 and dismissed I.T.A.Nos.1853 and 2072/Hyd/1996. Hence, this further appeal under Section 260-A of the Act by the Revenue, against the order in I.T.A.No.1853/Hyd/1996. Heard Sri S.R.Ashok, learned Senior Standing Counsel for the Department. None appears for the respondent. There is a procedural defect in the present appeal. The Tribunal dealt with as many as 3 appeals and passed a common order. It is not as if the subject matter of all the three appeals was similar or identical. While two appeals were preferred by the assessee, one was preferred by the Department covering different aspects. Therefore, the appellant ought to have filed three separate appeals before this Court also. Be that as it may, the appellant urges two points before this Court. The first is about the unexplained income in the form of contributions made by the partners and the second is about the unexplained credit entries. It is a matter of record that the respondent-firm comprises of ten partners and each of them made contributions, be it in the form of cash or bank guarantees to be furnished to the Government, at the commencement of business. The returns submitted by the respondent-firm were processed, and the facts and figures furnished by it were accepted. However, the matter was reopened at a later point of time. The Assessing Officer treated the capital raised by the firm in the form of contributions made by the partners as income. This conclusion was arrived at on the ground that source of income for the partners was not explained. Learned counsel for the appellant placed reliance upon the judgment of the Patna High Court in Commissioner of Income Tax vs. Anupam Udyog[1]. The Tribunal rested its conclusions upon the judgment of the Bombay High Court in Narayandas Kedarnath vs. Commissioner of Income Tax[2] and that of Allahabad High Court in Commissioner of Income Tax vs. Jaiswal Motor Finance.[3] Section 68 of the Act no doubt directs that if an assessee fails to explain the nature and source of credit entered in the books of account of any previous year, the same can be treated as income. In this case, the amount, that is sought to be treated as income of the firm, is the contribution made by the partners, to the capital. In a way, the amount so contributed constitutes the very substratum for the business of the firm. It is difficult to treat the pooling of such capital, as credit. It is only when the entries are made during the course of business that can be subjected to scrutiny under Section 68 of the Act. Even otherwise, it is evident that the respondent explained the amount of Rs.76,57,263/- as the contribution from its partners. That must result in a situation, where Section 68 of the Act can no longer be pressed into service. However, in the name of causing verification under Section 68 of the Act, the Assessing Officer has proceeded to identify the source for the respective partners, to make that contribution. Such an enquiry can, at the most be conducted against the individual partners. If the partner is an assessee, the concerned Assessing Officer can require him to explain the source of the money contributed by him to the firm. If on the other hand, the partner is not an assessee, he can be required to file a return and explain the source. Undertaking of such an exercise, vis-a-vis the partnership firm itself, is impermissible in law. In the judgment relied upon by the appellant itself, the Patna High court held as under: “If there are cash credits in the books of a firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partners, then in the absence of any material to indicate that they are the profits of the firm, they cannot be assessed in the hands of the firm, though they may be assessed in the hands of the individual partners. Cash credits in the individual accounts of members of a joint family with third party cannot be assessed as the income of the family unless the Department discharges the burden of proof to the contrary.” Therefore, the view taken by the Assessing Officer that the partnership firm must explain the source of income for the partners regarding the amount contributed by them towards capital of the firm, cannot be sustained in law. As regards the other amount i.e., unexplained credit entries, the Tribunal took the view that the amount represented the security deposits made by the retail dealers, and the source thereof was properly explained. Nowhere in the order of assessment, the Assessing Officer recorded any finding to the effect that he verified the matter from the respective retail dealers and that such dealers have denied of making deposits. In the field of Arrack business, it is not uncommon that the retail dealers are required to keep security deposits with the supplier. At any rate, it is a pure question of fact. Therefore, the appeal is dismissed. The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs. ______________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J 27.08.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.29 of 2003 Date: 27.08.2014 JSU [1] (1983) 142 ITR 133 [2] 22 ITR 18 [3] 141 ITR 706 "