ITA No.362 of 2010 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.362 of 2010 (O&M) Date of decision: 10.8.2010 M/s S.N. Exports. -----Appellant. Vs. Commissioner of Income Tax. -----Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. S.K. Mukhi, Advocate for the assessee. --- ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the assessee under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order dated 24.9.2009 in I.T.A. No.603/CHANDI /08 for the assessment year 2005-06, passed by the Income Tax Appellate Tribunal, Chandigarh, proposing to raise following substantial questions of law:- A. “Whether the ITAT was justified in reversing the order of CIT(A) thereby treating the impugned amount and making addition of the same amount to the income of appellant firm by erroneously applying the provisions of Section 68 of Income Tax Act, 1961 though having admitted the same in immediately preceding year which is against 1 ITA No.362 of 2010 the well settled law and devoid of correct facts while relying upon extraneous facts?” B. “Whether the ITAT was justified in reversing the order of CIT (A) thereby treating the impugned amount as income of appellant firm by erroneously applying the provisions of Section 68 of Income Tax Act, 1961 by treating the amount of gift alleged to be received by one of the partners of the appellate firm which is against the well settled law and devoid of correct facts while relying upon extraneous facts which amount if at all could have been added in the hands of the alleged partner?” C. “Whether the ITAT was justified in reversing the order of CIT(A) thereby treating the gifts out of natural love and affection and that too to the partner of the appellant firm as colorable device and making addition of the gifted amount to the income of appellant firm by wrongly invoking the provisions of Section 68 of Income Tax Act, 1961 against the well settled law and devoid of correct facts while relying upon extraneous facts?” D. “Whether the order of the ITAT in reversing the order of CIT(A) while relying upon extraneous facts is bad in law and perverse and thus needs to be quashed.” 2. The assessee was found to have credited the capital account of its partner with a sum of Rs.1.45 crore, which was claimed to 2 ITA No.362 of 2010 be gift from Rajiv Verma, NRI. The Assessing Officer did not accept the gift to be genuine and treated the amount as undisclosed income of the assessee. Reason given by the Assessing Officer was that the donor had no relation with the partner of the firm and such a huge amount of gift without any natural love and affection could not be accepted to be genuine. Reliance was placed on judgment of the Hon’ble Supreme Court in Commissioner of Income Tax v. Dr. R.S. Gupta [1987] 165 ITR 36. On appeal, though the CIT(A) upheld the finding on the issue of gift being not genuine, the addition was deleted only on the ground that the entry being in the capital account of the partner, addition in the hands of the firm was not justified. On appeal by the revenue before the Tribunal, the Tribunal reversed the view taken by the CIT(A). It was held that there being deposit in the account of the firm, the Assessing Officer was entitled to make addition to the income of the firm if the entry was not genuine and was in fact undisclosed income of the firm. The relevant finding is as follows:- “11........The assessee had claimed that the gift was given in view of financial weakness, an averment which was made in the course of the examination by the Assessing Officer of Shri Suman Narula, the partner. On this the Assessing Officer records a finding that the weak financial position cannot be accepted in as much as the other partner of assessee firm Smt. Kajol Verma wife of Shri Suman Narula subscribed for investment in shares of Punjab National Bank for a sum of 3 ITA No.362 of 2010 Rs.2000700/-during the year under consideration. The Assessing Officer does record a finding that there was no occasion for making the gift and in the absence of any cogent material to the contrary led by the assessee at any stage, we are inclined to sustain such finding of the Assessing Officer. On this aspect, another reason for us to sustain the stand of the Assessing Officer is that in the Memorandum of Gift Deed, the donor makes out that the gift is made out of natural love and affection and occasion has been brought out. However, the explanation furnished by the donor, Shri Suman Narula was that the gift was made because of his firm's weak financial position. Therefore, considering the overall facts, the observation of the Assessing Officer that there was no occasion for making the gift, is liable to be sustained. Further, the Assessing Officer noticed that the assessee had failed to provide any answer as to why the unsecured loan and advance for the purchase received in the earlier years, were converted as gift and that too by a person who was the not related. Merely because there was a capacity to make the gift, would not automatically make the gift as genuine. In the ultimate analysis, we are inclined to uphold the inference of the Assessing Officer that firstly, the gift in question is invalid and further that the assessee having failed to establish the genuineness of the gift, the amount is assessable in the hands of the assessee. Much has been argued by the respondent and the same has also been upheld by the Commissioner of Income-Tax (A) that no addition is permissible in this case in the year under consideration by invoking the provision of Section 68 of the Act because no fresh cash has been 4 ITA No.362 of 2010 introduced and the credit is made in the personal account of Shri Suman Narula by way of a transfer entry only. In our view, the interpretation placed on Section 68 coupled with the circumstances of the case, cannot be upheld. In fact, in this, we are supported by the judgment of the Hon'ble Madhya Pradesh High Court in the case of V.I.S.P.(P) Ltd. Vs. CIT & Another 265 ITR 202 wherein a similar restricted interpretation of Section 68 has been negated. Account is found to be bogus and in the absence of any reasonable explanation, it can certainly be added towards the income of the assessee and Section 68 of the Act would not fall merely because the books of account did not show the cash entry. 12. In the present case, a starkly evident position which emerges is that the Assessing Officer has brought on record sufficient material to show that the credit built up in the capital account of the partner by way of a transfer entry from the account books of the assessee firm was a device or an arrangement to contrivance. For the above reasons, we are inclined to uphold the plea set up by the Assessing officer that the issue is to be decided by considering the import of all the surrounding circumstances and by applying the tests of human probabilities as laid down by the Hon'ble Supreme Court in the case of Sumati Dayal (supra). The Hon'ble Delhi High Court in the case of Bhahat Construction Co. (P) Ltd. 251 ITR 291, wherein after referring to the decisions of the Hon'ble Supreme Court in the case of CIT Vs. Sree Mennakshi Mill Ltd. (1996) 63 ITR 609 (SCP and Juggilal Kamlapat Vs. CIT 5 ITA No.362 of 2010 (1969) 73 ITR 702 (SC), it has been held that “While one factor may not be sufficient to prove the colourable device, the cumulative effect of all factors can be taken into account to conclude about the real purpose intended behind the corporate veil”. Therefore, in our considered view, the Assessing Officer was justified in bringing to tax the impugned amount while determining the total income of the assessee for the assessment year under consideration. The order of the Commissioner of Income Tax (A) is set aside and the addition made by the Assessing Officer is hereby restored, as above. “ 3. We have heard learned counsel for the assessee. 4. Learned counsel for the assessee submits that the amount of gift having been received by the partner of the firm, addition in the hands of the assessee could not be justified. He placed reliance on following judgments:- i) CIT v. Usha Studd Agricultural Farms Ltd. [2008} 5 DTR 335 (Del); ii) CIT v. Burma Electro Corporation 252 ITR 344 (P&H); iii) CIT v. Mrs. Sunita Vachani [1990] 184 ITR 121 (Del); iv) Addl. Commissioner of Income Tax v. Hanuman Agarwal [1985] 151 ITR 150 (Pat); v) Roopchand Manoj Kumar v. CIT [1999] 235 ITR 461 (Gau); vi) CIT v. Dr. R.S. Gupta [1987] 165 ITR 36 (SC). 6 ITA No.362 of 2010 5. We have considered the submissions and perused the judgments relied upon on behalf of the assessee. The question whether addition on account of unexplained credit entry in the books of accounts of the assessee could be made to the income of the firm or the partner, depends on facts and circumstances of each case. There is no rigid rule that whenever credit entry is in the capital account of a partner, addition could not be made in the hands of the firm even when credit entry is, on the face of it, bogus or a device to evade tax. A single factor may not be sufficient to record whether the assessee had employed a colourable device or whether the partner had unexplained income which was credited in the books of account of the assessee. It cannot always be held that merely because the entry in the capital account of the partner was identified as source of undisclosed income, the firm was immune from being taxed, even where colourable device was used by the firm by introducing its undisclosed income by way of deposit by a partner. 6. Section 68 of the Act provides that any sum found credited in the accounts of the assessee in respect of which no valid explanation is furnished by the assessee may be treated as income of the assessee. In the present case, the explanation by the firm that the credit entry represented amount received as gift by partner has been found to be unacceptable. It has been held that the same was device to avoid tax. Additions in the hands of the firm were fully 7 ITA No.362 of 2010 justified in these circumstances. Burden is on the assessee to prove satisfactorily nature and source of the entry. Where the entry is held to be fictitious, the same can be held to be undisclosed income of the firm. 7. In CIT v. P.Mohanakala, (2007) 6 SCC 21 = 291 ITR 278, scope of section 68 was considered and it was held that where there are unexplained credits in the books of the assessee, the same can be added as undisclosed income of the assessee. Burden of proof in such cases was on the assessee. Reference was also made to earlier Supreme Court judgment in Sumati Dayal v. CIT, 1995 Supp (2) SCC 453 and CIT v. P.K.Noorjahan, (1997) 11 SCC 198 = (1999) 237 ITR 570. No doubt whether or not the amount is to be treated as undisclosed income even after explanation of the assessee is rejected, depends on facts and circumstances of each case. In absence of perversity, finding recorded by the Tribunal will be a finding of fact not liable to be interfered with under section 260-A. 8. In Jagmohan Ram Ram Chandra v. CIT, (2005) 274 ITR 405, it was observed:- “Thus, from the aforesaid decisions, it is settled that if an entry of cash credit is found in the books of account of a firm, it is for the firm to give explanation regarding the identity and source of each deposits and if the explanation is disbelieved then it is to be added as an income under section 68 of the Act in the hands of the firm.” 8 ITA No.362 of 2010 9. The object of the provision is to check introduction of undisclosed income in the books of the firm and mere fact that the amount is shown to have been deposited by partner does not create any immunity against the amount being treated as undisclosed income of the firm. 10. In the facts and circumstances of the present case, the judgments relied upon on behalf of the assessee are distinguishable. In Usha Studd, appeal of the revenue was dismissed on the ground that finding of fact had been recorded in facts of that case about deletion of addition made. Again in Burma Electro, appeal was dismissed on the ground that finding of fact was involved. The observations that partners having made investments in the firm, the addition was required to be made in the hands of the partners and not in the firm was also on facts and not as inflexible rule. In Sunita Vachani, there was a finding of fact against addition being allowed which was upheld. In Hanuman Agarwal, it was held that where assessee gave correct name, address and particulars of the creditor without testing genuineness of the transaction, the amount could not be assessed in the hands of the assessee. Similar is the position in Roopchand. Addition to the income of the assessee was held to be justified in absence of valid explanation. In R.S.Gupta, in absence of gift being genuine, addition to the net wealth was held to be valid. None of the 9 ITA No.362 of 2010 judgments relied upon by the counsel for the appellant holds that addition could never be made in the hands of the firm. 11. The finding recorded by the Tribunal being pure finding of fact, which is not shown to be perverse, no substantial question of law arises. 12. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE August 10, 2010 ( AJAY KUMAR MITTAL ) Ashwani/gs JUDGE 10