1999 (9) TMI 21 - HC - Income Tax

s.68: Cash credits as partner capital contributions not taxed once firm identifies investor; s.69 liability shifts to investor.

Commissioner Of Income-Tax Versus Metachem Industries

HC held that under s.68 cash credits shown as capital contributions by a partner are not assessable to the firm once the firm satisfactorily identifies ... Interpretation of u/s 68 - Cash Credits - treatment of credits in the capital account of a partner in a firm - HELD THAT:- Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual and it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under section 69 of the Act, against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner of Income-tax (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries. We are, therefore, of the opinion that the view taken by the Tribunal is correct and the aforesaid question is answered against the Revenue and in favour of the assessee. Issues involved: Interpretation of u/s 68 of the Income-tax Act, 1961 regarding treatment of credits in the capital account of a partner in a firm.Summary:The High Court of Madhya Pradesh addressed a reference u/s 256(1) of the Income-tax Act, 1961, concerning the treatment of credits in the capital account of a partner in a partnership firm. The primary question was whether such credits should be added to the firm's income u/s 68 of the Act or considered in the partner's income. The Assessing Officer initially added certain credits in the partners' accounts to the firm's income, but the Commissioner of Income-tax (Appeals) later deleted these entries, finding the firm had adequately accounted for them. The Tribunal upheld this decision, citing a precedent from the Allahabad High Court.According to u/s 68 of the Act, if an assessee fails to explain a credit entry satisfactorily, it may be charged as income. In this case, the Assessing Officer was not convinced by the firm's explanation, but the Commissioner of Income-tax (Appeals) found it satisfactory, especially regarding the ownership of the business by a specific partner. The Tribunal concurred, stating that once the source of investment is established, the firm's responsibility ends, and it is up to the individual making the investment to account for it. The firm's duty is to explain the investment, not to ensure the individual's tax compliance.The Court concluded that when the firm provides a satisfactory explanation and identifies the person responsible for the investment, its burden is discharged. The Assessing Officer can then pursue further action u/s 69 against the individual if needed. As both the Commissioner of Income-tax (Appeals) and the Tribunal found the firm's explanations satisfactory in this case, the Court upheld their decision, ruling in favor of the assessee and against the Revenue.