Jharkhand H.C : Under section 68, Assessing Officer while assessing a Partnership Firm, can ask for source of income of partnership firm, ‘source of source’ cannot be shown by assessee

High Court Of Jharkhand

Prayag Tendu Leaves Processing Co. Vs. CIT

Section 68

Assessment year 2001-02

D.N. Patel, ACTG. CJ. And Amitav K. Gupta J.

C.M.P. No. 492 Of 2010

Tax Appeal No. 38 Of 2008

October 12, 2017

ORDER

D.N. Patel, Actg. C.J – This Civil Miscellaneous Petition has been preferred under Order XLI Rule 21 of the Code of Civil Procedure wherein tax appeal being Tax Appeal No.38 of 2008 was dismissed ex-parte, as submitted by the counsel for the petitioner (original respondent). Counsel appearing for the petitioner has submitted that the aforesaid Order XLI Rule 21 is to be read with Section 260A (7) of the Income Tax Act, 1961.

2. Counsel appearing for the petitioner (original respondent) has relied upon the decision of the Hon’ble High Court of Madhya Pradesh, in the case of Shrinath Buliyan Refinery v. CIT [2002] 125 Taxman 1018/255 ITR 215.

3. Having heard counsel for both the sides, looking to the reasons stated in para – 04 to 09 of the Civil Miscellaneous Petition and in view of the aforesaid decision, as per Order XLI Rule 21 to be read with Section 260A (7) of the Income Tax Act, 1961, ex-parte order passed in appeal can be challenged by the respondent and the said ex-parte order passed in the appeal can be restored as sufficient cause is available.

4. We, therefore, recall the order passed by this Court dated 14.09.2010 in Tax Appeal No.38 of 2008 and Tax Appeal No.38 of 2008 is restored to its original file with the same number.

5. This Civil Miscellaneous Petition is allowed and disposed of.

Tax Appeal No.38 of 2008

1. This Tax Appeal is taken for its final hearing upon the consent of the counsel for both the sides.

2. Counsel appearing for the appellant has submitted that this respondent is the partnership firm. The assessment for the year 2001 – 2002 had already been made and the Commissioner of Income Tax while exercising power under Section 263 of the Income Tax Act (revisional power) opened the assessment mainly on the grounds that huge amount of cash was brought to the partnership firm by two partners namely, Ranjan Jaiswal and Anju Jaiswal. Ranjan Jaiswal brought cash of Rs.9,46,126/- and Anju Jaiswal brought cash at Rs.9,51,563/-. No details have been given as to how the cash has been obtained by Ranjan Jaiswal and Anju Jaiswal. The Assessing Officer has not properly investigated as to how the cash has been brought in the partnership firm. The Assessing Officer had not examined the identity, genuineness of transaction and creditworthiness of the donors. Opportunities were given to the assessee to produce the donors, but, the donors were never produced. The order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act dated 03.06.2005 was challenged by the assessee by way of an appeal being Income Tax Appeal No.48/ PAT/ 06, which the Income Tax Appellate Tribunal, Circuit Bench, Ranchi allowed vide order dated 23.11.2007 mainly on the ground that the assessee is the partnership firm who got amount by cheque/ demand drafts. Details whereof have been given by Ranjan Jaiswal and Anju Jaiswal. These facts are not in dispute. As the appeal was allowed by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi, the present Tax Appeal has been preferred by the department mainly on the aforesaid ground of the identity of the donors, genuineness of the transaction and the creditworthiness of the donors. These aspects of the matter have not been properly investigated by the Assessing Officer, and hence, the order passed by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi dated 23.11.2007 in Income Tax Appeal No.48/ PAT/ 06 for the assessment year 2001-02, deserves to be quashed and set aside.

3. Counsel appearing for the respondent (assessee) has submitted that no error has been committed by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi in allowing the appeal preferred by the assessee mainly for the reasons that the assessee is the partnership firm which has received amount by cheques or demand drafts, details whereof are on record. These cheques or demand drafts have been given by Ranjan Jaiswal and Anju Jaiswal for the amount of Rs.9,46,126/- and for the amount of Rs.9,51,563/- respectively. It is submitted by the counsel for the respondent that this assessee- partnership firm has already explained that without any ambiguity and without any equivocalness of the source of the amount. It is submitted by the counsel for the respondent that the department is in search of “the source of source” which is not permissible. From where Ranjan Jaiswal and Anju Jaiswal obtained the amount, that can be asked to Ranjan Jaiswal and Anju Jaiswal by re-opening their re-assessment, but, the facts remain that the partnership firm has received the amount by cheques or demand drafts. Thus, the source of the amount has already been explained. This aspect of the matter has been properly appreciated by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi while allowing the appeal preferred by the assessee by order dated 23.11.2007.

4. Counsel appearing for the respondent has relied upon the several decisions which are as under :

(a) Dy. CIT v. Rohini Builders [2003] 127 Taxman 523/[2002] 256 ITR 360 (Guj.);

(b) Addl. CIT v. Hanuman Agarwal [1984] 17 Taxman 19/[1985] 151 ITR 150 (Pat.);

(c) CIT v. Diamond Products Ltd. [2009] 177 Taxman 331 (Delhi);

(d) CIT v. Heena Sharma [2013] 215 Taxman 85 (Mag.)/33 taxmann.com 176 (Guj.);

(e) CIT v. Md. Perwez Ahmed [2004] 268 ITR 381 (Pat.);

(f) CIT v. Rameshwar Dass Suresh Pal Cheeka [2007] 163 Taxman 270 (Punj. & Har.);

(g) CIT v. Taj Borewells [2007] 291 ITR 232 (Mad.);

(h) CIT v. Metachem Industries [2001] 116 Taxman 572/[2000] 245 ITR 160 (M.P.);

(i) Zafa Ahmad & Co. v. CIT [2013] 214 Taxman 440/30 taxmann.com 267 (All.);

(j) CIT v. Anurag Rice Mills [2015] 282 CTR 200 (Patna).

5. On the basis of the aforesaid decisions, it is submitted by the counsel for the respondent that once it is established that the amount has been invested by a particular person, to be a member of a partnership firm, then responsibility of the assessee- partnership firm is over. Evidently, it is for the partners to explain the source of the funds and it is not open for the Assessing Officer to have treated the said amount, brought by the partners, to be income of the firm. This aspect of the matter has been properly appreciated by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi while allowing the appeal preferred by the assessee by order dated 23.11.2007, hence, this appeal may not be entertained by this Court.

Reasons

6. Having heard learned counsel for both the sides and looking to the facts and circumstances of the case, we see no reason to entertain this Tax Appeal mainly for the following facts and reasons :—

I. For the assessment year 2001-02, this respondent filed returns and the assessment order was passed and the assessment was made on 14.11.2003.

II. This respondent is a partnership firm and the partners thereof, Ranjan Jaiswal and Anju Jaiswal, brought the amount to the partnership firm as a capital by cheques and bank drafts. The said amount is at Rs.9,46,126/- and at Rs.9,51,563/- respectively.

III. After the assessment was made by the Assessing Officer, the same was taken up in Revision, by the Commissioner of Income Tax under Section 263 of the Income Tax Act by exercising revisional power and the said order was passed by the Commissioner of Income Tax vide order dated 03.06.2005. The said order is at Annexure – 2 to this memo of this Tax Appeal.

IV. This order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act dated 03.06.2005 was challenged by the respondent – assessee before the Income Tax Appellate Tribunal, Circuit Bench, Ranchi and the Income Tax Appellate Tribunal allowed the appeal by the order dated 23.1.2007, and hence, this Tax Appeal has been preferred by the department.

V. It appears from the facts of the case that the respondent is an assessee which is a partnership firm. The amount received by the assessee is by cheques or bank drafts, the details whereof have already been mentioned in detail, which are as under :—

1. Sri Ranjan Jaiswal

Date Amount Mode of Payment
2.9.00 43,312.50 by A/c payee cheque
16.10.00 8,30,540.36 by A/c payee drafts
4.01.01 25,887.00 by A/c payee cheque
1.2.01 291.00 by bank interest
7.3.01 20,000.00 by A/c payee cheque
22.3.01 25,988.00 by A/c payee cheque
Total = Rs.9,46,126.76

2. Smt. Anju Jaiswal

24.10.00 Rs.6,38,700.00 By A/c payee Bank Draft
28.4.00 4,203.00 By A/c payee cheque
19.6.00 4,203.00 – do –
26.7.00 8,406.00 – do –
6.9.00 4,203.00 – do –
6.11.00 4,203.00 – do –
15.1.01 8,406.00 – do –
14.3.01 4,203.00 – do –
30.3.01 8,406.00 – do –
31.3.01 4,203.00 Decited P/T Dept.
31.3.01 12,000.00 Being Godown rent credited.
1.12.00 427/- Bank Intt.
23.10.00 50,000.00 By Bank drafts
28.11.00 1,00,000.00 – do –
8.3.01 1,00,000.00 – do –
Total = Rs.9,51,563.00

VI. In view of the aforesaid amount received from Ranjan Jaiswal and Anju Jaiswal by account payee cheques or by Bank drafts, by this respondent – assessee firm, the department cannot ask the respondent – partnership firm about the source of income of Ranjan Jaiswal and Anju Jaiswal. The respondent – assessee can show the source of income of the partnership firm, but “the source of source” cannot be shown by this respondent – assessee. This aspect of the matter has been properly appreciated by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi, while allowing the appeal preferred by the respondent.

VII. It appears that department has given a notice to the respondent – assessee giving details as to how Ranjan Jaiswal and Anju Jaiswal got cash and from whom. This is an error apparent on the face of the record. Respondent – assessee cannot explain “the source of”, source of income of the partnership firm. If the department wants to reopen the assessment of Ranjan Jaiswal and Anju Jaiswal, it is always permissible in eye of law subject to the restriction imposed by the Income Tax Act of limitation etc.

VIII. It is an admitted fact that this respondent – partnership firm has received the amount from Ranjan Jaiswal and Anju Jaiswal by account payee cheques or by Bank drafts. Thus, source of income of the respondent – assessee is absolutely a legal one. This aspect of the matter has properly been appreciated by the Income Tax Appellate Tribunal by allowing the appeal preferred by the respondent – assessee.

IX. It has been held by Hon’ble Gujarat High Court in the case of Rohini Builders (supra) in paragraph no. 7 as under :—

“7. We have considered the rival submissions and have also gone through order passed by the Assessing Officer, the relevant portion of which we have also extracted in para 2 above. The Commissioner of Income Tax (Appeals) more or less confirmed the addition on the reasoning given by the Assessing Officer in the assessment order. A perusal of the chart given by us in para 3 above indicates that out of 21 creditors the Assessing Officer has recorded the statements of only six creditors, viz, creditors at serial Nos.1, 2, 3, 4, 6, and 7. However, in respect of all the 21 creditors the assessee has furnished their complete addresses along with GIR numbers/ permanent account numbers as well as confirmations along with the copies of the assessment orders passed in the cases of creditors at serials Nos.1, 2, 4, 5, 6, 7, 9, 10, 11, 12 and 16. In the remaining cases where the assessment orders passed were not readily available, the assessee has furnished the copies of returns filed by the creditors with the Department along with their statement of income. All the loans were received by the assessee by account payee cheques and the repayments of loans have also been made by account payee cheques along with the interest in relation to those loans. It is rather strange that although the Assessing Officer has treated the cash credits as non- genuine, he has not made any addition on account of interest claimed as business expenditure and has been allowed by the Assessing Officers. It is also pertinent to note that in respect of some of the creditors the interest was credited to their accounts/ paid to them after deduction of tam at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the Assessing Officer. Thus it is clear that the assessee had discharged the initial onus which lays on it in terms of section 68 by proving the identity of the creditors by giving their complete addresses GIR numbers/ permanent accounts numbers and the copies of assessment orders wherever readily available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by accounts payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT MANU/MH/0055/1962. The genuineness of the transaction is proved by the fact that the payment to the assessee as well as cheques and the interest is also paid by the assessee to be depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques. Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee – from those creditors as not-genuine in view of the principles laid down by the Supreme Court in the case of Orisa Corporation MANU/SC/0249/1986. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue’s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw an adverse inference against the assessee. In the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessment in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69.”

(Emphasis supplied)

X. It has been held by Hon’ble Patna High Court in the case of Hanuman Agarwal (supra) in paragraph no.3 as under :—

“3. It is by now well-settled that Sec.131(1)(b) empowers but does not oblige the revenue authorities concerned to administer oath. Therefore, the statements of witnesses taken without administration of oath are equally admissible in evidence. When the evidence of such witness is being taken in the course of the assessment proceeding, the witness has no right, but the assessee has, to be represented by a lawyer or other authorised representative. The assessee is not supposed to know the capacity of the money-lender or the cash creditor. It is within the exclusive domain or the dark trusses of the minds of the creditors to know as to whether and how their sources of income are arrived. It is for that specific purpose that Sec.131 of the Act has been introduced so that in case of any suspicion, the ITO or the authorities concerned may exercise the powers of a civil court under Sec.131 and call upon the creditor concerned to prove his capacity to pay and the genuineness of his transaction. Once the ITO or the authority concerned is satisfied that the creditor is not telling the truth, it has been left open to the assessee to discharge his subsequent onus of proving the genuineness of the transaction and the capacity of the creditor to pay by cross-examining him. Where, therefore, an assessee gives the correct name, address and the G.I.R. number of the creditor, as my learned brother has observed, he has discharged his onus and unless a notice in due form under Sec.131 of the Act is issued by the revenue authority concerned to test the veracity or the genuineness of the transaction or the capacity of the creditor to pay, the assessee has to succeed.”

(Emphasis supplied)

XI. It has been held by Hon’ble Delhi High Court in the case of Diamond Products Ltd., (supra) in paragraph no.5 as under :—

“5. We have heard the learned counsel for the appellant and have examined the findings returned by the Tribunal as well as those returned by the Commissioner of Income-tax (Appeals) and find ourselves to be in agreement with the conclusions arrived at by the Tribunal. The Assessing Officer is not permitted to examine the source of the source once the assessee has been able to establish that the transaction with his creditors is genuine and that the creditors’ identities and creditworthiness have been established. In this case, this had been done, therefore, it was not open to the Assessing Officer to make the addition of Rs.23,00,000 after entering upon an examination of the source of the source. Consequently, we feel that no interference is called for on this conclusion in the impugned order passed by the Tribunal. The Tribunal has correctly applied the law on the facts determined by it. No substantial question of law arises on the aspect of the matter.”

(Emphasis supplied)

XII. It has been held by Hon’ble Gujarat High Court in the case of Heena Sharma (supra), reported in (2013) 215 TAXMAN 85 (Gujarat) (MAG.) in paragraph no.11 as under :—

“11. In the instant case, as can be noted from the findings of the Tribunal, Assessing Officer had not summoned any of the donors. However, it had issued the letters under section 133(6) of the Act. Assessing Officer had also called for confirmation letters which were received by it. The assessee also had furnished all other requisite documents like copies of DD, gift deed, copy of PAN cards, copy of acknowledgement of returns of the donors along with computation and balance sheet. It also found that all the donors were assessed to tax except one who was based at USA. On thus having found identity of the donors so also creditworthiness and genuineness of the transaction having been established, Tribunal did not accept the say of the Revenue that the gifts were bogus.”

(Emphasis supplied)

XIII. It has been held by Hon’ble Patna High Court in the case of Md. Perwez Ahmed (supra) in paragraph no.2 as under :—

“2. The Tribunal after having considered the materials on record has found that section 68 of the Income-tax Act, 1961 is not attracted in the case for the reason that in this case credit in the books if account of the assessee-firm is on account of introduction of capital by the partners and the firm has failed to prove the amount credited in the books of account and as such it would be assessed in the hands of the partners as unexplained investment.”

(Emphasis supplied )

XIV. It has been held by Hon’ble Punjab & Haryana High Court in the case of Rameshwar Dass Suresh Pal Cheeka (supra) in paragraph no.5 as under :—

‘5. We are also in agreement with the view taken by the Tribunal that no case was made out for addition to the income of the firm even if deposits made with the firm by the partners were unexplained income of the partners. These view has been taken by us in our recent order passed on 6-11-2006 in CIT v. Metal & Metals of India [IT Appeal No.370 of 2006], wherein it was observed as under :

“In the present case, the firm has given explanation about the source namely Suresh Bhandari, partner, who himself is an assessee. The said partner has admitted having made deposit with the firm. Thus, as far as the firm is concerned, even if the gift claimed to have been received by Suresh Bhandari is to be rejected, the said Suresh Bhandari may be liable to be taxed by treating the said amount as undisclosed income, but the firm cannot be subjected to tax on that ground.’

(Emphasis supplied)

XV. It has been held by Hon’ble Madras High Court in the case of Taj Borewells (supra), in paragraph no.13 as under :—

’13. In the present case, the assessee-firm had explained the source of 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 had also made explanation in respect of the source for the contribution of the capital to the assessee-firm. The Assessing Officer had also partially accepted the explanation offered by the partners. The Assessing Officer had not rejected the explanation offered by the firm. Unless and until the explanation offered by the firm is rejected and the same is not genuine, the Assessing Officer cannot invoke the provision of Section 68 of the Act. In the present case, the explanation offered by the firm was accepted and later, the Assessing Officer examined the partners and not accepted the explanation. The Assessing Officer cannot ask the assessee-firm to prove source of a source. Once the firm had offered an explanation and established that the capital was contributed by the partners, the same could not be assessible in the hands of the firm. Unless there are contradictions and inconsistencies in the statement of the partners, the credit cannot be treated as unexplained and cannot be added 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 Act that only the assessee alone has to offer explanation. If the assessee makes explanation, it is for the Assessing Officer to accept or reject the same. The finding given by the Tribunal is that the assessee- firm had explained the source of the capital and hence the same cannot be assessed as undisclosed income in the hands of the assessee firm. The order of the Tribunal reads as follows:—

“When the assessee has explained the amounts as capital contributions by the partners, the Revenue authorities are not justified in holding that the assessee has not explained the source and the same is to be added under the head Other Sources in the hands of the firm. In case the Assessing Officer doubted the genuineness of the source, he should have considered the same in the hands of the partners only and not in the case of the firm. This view of ours is supported by the decisions of the Allahabad High Court in the cases reported in 141 ITR 706 and 221 ITR 239, cited supra. Under these circumstances, we delete the addition of Rs.5,25,000/-under the head Other Sources from the income of the assessee-firm.’

(Emphasis supplied)

XVI. It has been held by Hon’ble Madhya Pradesh High Court in the case of Matachem Industries (supra) in paragraph no.3 as under :—

“3. We have heard learned counsel for the parties. Section 68 of the Act of 1961 says that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Therefore, according to Section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. In case the explanation offered by the assessee is not satisfactory or the source offered by the assessee-firm is not satisfactory, then in that case, the amount should be taken to be the income of the assessee. In the present case, the Assessing Officer did not feel satisfied with the explanation given by the assessee and accordingly assessed all the three credit entries to the account of the assessee as the income.”

(Emphasis supplied)

XVII. It has been held by Hon’ble Allahabad High Court in the case of Zafa Ahmad & Co. (supra) in paragraph no.9, which reads as under :—

“9. Taking the various facts enumerated above, we are of the considered opinion that the Tribunal had erred in holding that the amount deposited by the two partners is liable to be added under section 68 of the Act on the ground that the gifts received by the respective partners from the various persons could not be explained as creditworthiness of the donors had not been established. The Tribunal had wrongly drawn an adverse inference upon the fact that the donors had filed their Income Tax Return for the Assessment Years 1988-89 to 1991-92 on a single day and further the return for the Gift Tax was filed on 25.08.1992, which was well within the due date.”

(Emphasis supplied)

XVIII. It has been held by Hon’ble Patna High Court in the case of Anurag Rice Mills (supra) in the last page of the order, which reads as under :—

“….. In the present matter, the partners were also assessees and had been summarily assessed under Section 143 (1) of the Act for several years prior to the assessment year 1991-92. They have brought in the said amount to be included as a capital to the firm. Evidently, it is for the partner to explain the source of the said funds and it was not open to the Assessing Officer to have treated the said amount as income of the firm as there was no business of the firm to carry forward such income, and it was not in dispute that the amounts had been brought in by the partners into the firm.

In the said circumstances, the Tribunal has rightly held that if at all the assessments had to be made, they may be of the partners of the firm and not the firm itself and such amounts could not have been treated as income of the firm by relying upon Section 68 of the Act.”

(Emphasis supplied)

7. In view of the aforesaid decisions where assessee has given support of the gift or the amount received from the particular person with necessary documents, such as, copies of demand drafts and cheques etc., no addition could have been made by this appellant in respect of the amount received by the assessee. Under Section 68 of the Income Tax Act, the Assessing Officer while assessing a Partnership Firm, can go behind the source of income of the partnership firm, but he cannot go to “source of source”. The aforesaid aspect of the matter has been properly appreciated by the Income Tax Appellate Tribunal by allowing the appeal preferred by the respondent – assessee and no error has been committed by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi.

8. In view of the aforesaid facts, reasons and judicial pronouncement so far as the question raised by the appellant is concerned, no error has been committed by the Income Tax Appellate Tribunal in quashing and setting aside the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act dated 03.06.2005. This Tax appeal is, therefore dismissed as no substantial question of law is involved.

[Citation : 400 ITR 120]