Allahabad High Court: Cash Credit Entries in Books of a Firm, in Absence of Material to indicate that they were its Profits, could not be assessed in the hands of the Firm

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In the case of M/s Kesharwani Sheetalaya Sahsaon Allahabad V Commissioner of Income Tax Allahabad, the assessee is a partnership firm having sixteen partners engaged in the business of cold storage.

For the AY 1999-2000, the assessee filed an ITR on 01.11.1999 declaring an income of Rs.36,92,056/-. The assessee had entered deposits in the books of the firm in the names of partners and upon the explanations for deposits being rejected, the same was treated as income of the firm and not of the individual partners. An appeal was filed by the assessee against the order before the Commissioner of Income Tax (Appeals), Allahabad.

Appellant’s Arguments

The counsel canvassed for the assessee by stating that the partners having shown the agricultural income in their returns of the previous years had been accepted by the Revenue as such without any addition, and out of the agricultural income.

The partners have made the deposits with the firm in their capital accounts, the appellant assessee had satisfied the conditions provided under Section 68 of the Act concerning the identity and capacity of the depositors.

The only point which was required to be considered on the question of making addition under Section 68 of the Act that was in the hands of the firm was the nature and source of the transaction and the appellant assessee was not required to prove the source of the source.

The genuineness of the transactions having been proved and the firm having duly explained the deposit, the order passed by the Tribunal was not justifiable and deserves to be set aside.

Respondent’s Arguments

The counsel supported the order passed by the Tribunal by submitting that the credits have been found in the hands of the firm.

The onus was on the firm to prove the creditworthiness of the partners as well as genuineness of the transaction.

No evidence has been given concerning agricultural operations of the partners, the transactions in the books of the firm, however, were rightly held not to be genuine and proved within the meaning of Section 68.

There was no infirmity in the order passed by the Tribunal restoring the order of the Assessing Officer and setting aside the order passed by the C.I.T.(A).

Court’s Decision

The appeal filed by the assessee against the order which was partly allowed and the addition made by the Assessing Officer under Section 68 of the Act concerning the cash credits in the names of the partners in their capital accounts was deleted.

It was noted that the partners were identifiable and separately assessed to tax and the firm had explained the source of investment as agricultural income of the partners, therefore, if at all additions were to be made, then the same had to be made in the hands of the partners and not in the hands of the firm.

Given the aforementioned facts and circumstances, the questions of law are answered in favour of the assessee and against the Revenue. The burden of proving the source of the credits could not have been made in the hands of the firm.

In a case where the integrity of the creditors is established and the entries are shown to be not fictitious, the burden would shift on the Revenue. In a case where a sum is credited in the books of account of a firm from a partner, the assessee firm could discharge its onus by proving three things:

  • identity of the creditor;
  • the creditworthiness of the creditor; and
  • genuineness of the transaction in question.

Once the assessee proves all the three things its onus is discharged. The assessee only needs to prove the source of credit entries and he is not required to prove the source of the source or the creditors’ credit.


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