1955 (8) TMI 39 - HC - Income Tax

Assessee firm denied registration due to late partnership deed. Cash credits upheld as undisclosed income.

D.C. AUDDY AND BROTHERS Versus COMMISSIONER OF INCOME-TAX, WEST BENGAL

The court held that an assessee firm could not be registered under Section 26A of the Indian Income-tax Act based on a partnership deed executed after the ... - Issues Involved:1. Registration of the firm under Section 26A of the Indian Income-tax Act.2. Addition of unexplained cash credits as income from undisclosed sources.Issue-wise Detailed Analysis:1. Registration of the firm under Section 26A of the Indian Income-tax Act:The primary issue was whether an assessee firm, constituted orally in June 1944, could validly be registered for the assessment years 1945-46 and 1946-47 under Section 26A of the Indian Income-tax Act on the basis of a Memorandum of Partnership executed in June 1948. The firm's application for registration was refused by all authorities. The court referred to its previous judgment in the case of R.C. Mitter and Sons v. Commissioner of Income-tax, West Bengal, Calcutta [1955] 28 I.T.R. 698, and held that no registration can be claimed under Section 26A unless there was an instrument of partnership creating the firm at or prior to the commencement of the relevant accounting year. Since the deed of partnership was executed long after the expiry of the relevant assessment years, the answer to the question was in the negative.2. Addition of unexplained cash credits as income from undisclosed sources:For the assessment year 1946-47, the books of the assessee firm disclosed a gross profit of only 4%. The Income-tax Officer considered this too low and added Rs. 50,000 as concealed profits, raising the gross profit to 12.5%. Additionally, cash credit entries amounting to Rs. 32,563 were found in the suspense account, shown as put in by the partners. The explanation for these deposits was not accepted, and the entire amount was added as the firm's profits from undisclosed sources. On appeal, the Appellate Assistant Commissioner satisfactorily explained Rs. 9,000 of the credits but found no justification for adding the remaining Rs. 23,563 as undisclosed profits, as the only known source of the firm's income was its business.The Commissioner of Income-tax appealed to the Appellate Tribunal, which reduced the gross profit percentage to 8% but restored the addition of Rs. 23,563 as income from undisclosed sources. The Tribunal reasoned that if the explanation regarding the sources of the credits was not forthcoming, it did not necessarily follow that such credits represented suppressed business receipts. The Tribunal confirmed the addition of Rs. 23,563 as income from undisclosed sources, apart from the gross profits estimated at 8% of the turnover.The assessee's counsel argued that the unexplained cash credits should not have been added as undisclosed profits from other sources after estimating the undisclosed profits of the business. The court found this argument fallacious, distinguishing the present case from the Patna High Court decision in Ramcharitar Ram Harihar Prasad v. Commissioner of Income-tax, Bihar and Orissa [1953] 23 I.T.R. 301. In the present case, the Income-tax Officer added the sum under an independent head as profits from undisclosed sources, not as undisclosed profits of the same business.The court explained that income from undisclosed sources means income from some source unconnected with any known sources or lines of profit-earning activity. If the Income-tax Officer finds that the cash credits cannot be properly related to the known source, he is entitled to treat them as undisclosed profits from some independent and unknown source. The Tribunal, as the final court of fact, examined the accounts afresh and decided to treat the cash credits as income from an independent undisclosed source.The court concluded that there was no error of law in treating the cash credits as undisclosed profits from other sources. The question referred was whether the addition of Rs. 23,563 as income from undisclosed sources was legally justified when an estimate of gross profit on the turnover was already made and Rs. 50,000 was added as suppressed income from business. The answer was in the affirmative.The Commissioner of Income-tax was awarded half of his costs from the assessee due to the complexity of one of the questions. The reference was answered in the affirmative.