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of <h1>Unexplained pre-business capital deposits taxable in partners' hands, not firm's undisclosed income u/ss 68 and 69</h1> HC held that unexplained deposits made in the books of a partnership firm prior to commencement of its business cannot be assessed as undisclosed income ... Undisclosed Sources - Scope and ambit of u/s 68/69 - failed to discharge the onus - Whether the Tribunal was correct in law in invoking section 68/69 and treating a sum as income from undisclosed source of the petitioner-firm when the petitioner-firm had not yet even commenced its business ? - HELD THAT:- The firm was called upon to explain the source of the deposits. The explanation of the firm was that the deposits represented the sale proceeds of certain assets belonging to the partners. When no evidence was adduced to substantiate that explanation, the assessing authority added the amount as income of the partnership-firm. These facts are materially different from the fact of the instant case. Most striking feature of the case on hand is that all the deposits came to be made during the accounting year in the books of the assessee-firm before it started its business. Therefore, the onus was on the partners to explain the source in the case on hand and if they failed, the amount could have been added in their hands only and not in the hands of the assessee-firm. On these facts, we answer the above question in the negative, that is, in favour of the assessee and against the Revenue. Issues involved: Interpretation of u/s 68/69 of the Income-tax Act, 1961 regarding treatment of a sum of Rs. 1,43,000 as income from undisclosed source of the petitioner-firm before commencement of business.Summary:The High Court of ALLAHABAD was directed u/s 256(2) of the Income-tax Act, 1961 to consider whether the Tribunal was correct in invoking section 68/69 of the Act and treating Rs. 1,43,000 as income from undisclosed source of the petitioner-firm which had not yet commenced its business. The assessee-firm was formed during the accounting year 1978-79, with capital contributions of Rs. 1,43,000 made by partners before the firm started operations. The assessing authority added this amount to the firm's income as undisclosed, as partners had not filed income returns prior to these deposits. The Commissioner of Income-tax (Appeals) disagreed, stating that pre-business deposits could not be treated as undisclosed income. However, the Tribunal upheld the addition, emphasizing the need for the firm to explain the source of deposits credited in its books.In its judgment, the High Court found the Tribunal's decision erroneous, highlighting that the deposits were capital contributions made by partners before the firm commenced business. The Court noted that the onus was on the partners to explain the source of these deposits, and if they failed to do so, the amount should have been added to the partners' income, not the firm's. The Court disagreed with the Tribunal's reliance on a previous case, distinguishing the current scenario where all deposits were made before business operations began. Consequently, the Court ruled in favor of the assessee, stating that the deposits were not income from undisclosed sources for the firm. The case record was to be sent back to the Income-tax Appellate Tribunal for further action in line with the High Court's decision.
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