2019 (5) TMI 1438 - AT - Income Tax

Tribunal directs Assessing Officer to consider ITSC's additional income, investigate duplication in investments

The Asst. Commissioner of Income-tax, Central Circle 2, Ernakulam Versus M/s. Thomson Agencies

The Tribunal allowed the Revenue's appeals for statistical purposes and remanded the matter to the Assessing Officer. The Assessing Officer was directed ... Addition u/s 68 - unexplained cash credits brought into the assessee firm by partners - additional income was disclosed by the partners before the Income Tax Settlement Commission - additional income offered by the partners would be sufficient to cover the introduction of capital / credits in the partners account - HELD THAT:- When an assessee records credit in the name of third party in its books of account, it must prove not only the identity of the creditors, the capacity of the creditors to advance money, but also the genuineness of the transaction. The onus of proving the source of a sum of money found to have been received by the assessee is on the assessee itself. When the nature and source of the receipt cannot be satisfactorily explained by the assessee, it is open for the Revenue to hold that it is the income of the assessee - burden lies with the assessee to show that the income is from a particular source. In the instant case, for all the assessment years, the A.O. has examined the creditworthiness of all the partners and has categorically found that the partners did not have sufficient withdrawals on matching dates of introduction of capital / current account credits. We also notice that the A.O. had given due credits for source when there was matching withdrawal / explanation by partners CIT(A) was of the view that the partners of the assessee-firm had disclosed substantial additional income before the Income Tax Settlement Commission and that would be sufficient to cover the introduction of capital / credit in their current account. We have perused the order of the Settlement Commission dated 23.06.2014. There are variations in the additional income computed by the Income Tax Settlement Commission and the details of the additional income that was furnished by the learned AR before the Tribunal. AO also did not have the benefit of Income Tax Settlement Commission’s order (The assessment order was completed on 28.03.2014, whereas the Income Tax Settlement Commissioner’s order was dated 23.06.2014). Since the A.O. did not have the benefit of Income Tax Settlement Commissioner’s order and for a proper examination of availability of funds with the partners of the assessee-firm for making investments in assessee-firm, necessary the matter needs to be remanded to the A.O. for fresh consideration. The assessee is directed to furnish the orders of the Income Tax Settlement Commission and also cash flow statement to prove that there the disclosure made before the Income Tax Settlement Commission towards unexplained income was directly invested in these funds as their respective capital and there should be direct nexus between the disclosure made by the assessee before the Settlement Commission and the investment in these firms. - Appeals filed by the Revenue are allowed for statistical purposes. Issues Involved:1. Justification of the CIT(A) in deleting the addition made under section 68 of the Income Tax Act.2. Whether the unexplained credits brought into the books of the firm by the partners should be considered in the hands of the partners or the firm.3. Evaluation of the additional income declared by the partners before the Income Tax Settlement Commission (ITSC).Issue-wise Detailed Analysis:1. Justification of the CIT(A) in deleting the addition made under section 68 of the Income Tax Act:The primary issue in these appeals is whether the CIT(A) was justified in deleting the additions made under section 68 of the Income Tax Act. The Revenue contends that the CIT(A) erred in deleting these additions on account of unexplained cash credits brought into the assessee firm by its partners. According to the Revenue, the CIT(A) wrongly held that if the partners fail to explain the sources for the cash brought in, the addition should be considered in the hands of the partners and not the firm. The Revenue argues that this position is contrary to the scheme of section 68, which states that if any sum is found credited in the books of an assessee and the assessee offers no satisfactory explanation, the sum so credited may be charged to income tax as the income of the assessee.2. Whether the unexplained credits brought into the books of the firm by the partners should be considered in the hands of the partners or the firm:The CIT(A) decided that the unexplained credits brought into the books of the firm by the partners should be considered in the hands of the partners and not the firm. The CIT(A) observed that the partners of the firm had introduced cash in the books of account on various dates and that the partners had disclosed additional income before the Income Tax Settlement Commission (ITSC). The CIT(A) concluded that the identity and creditworthiness of the partners could not be doubted and that even if the partners could not prove the source of these capital introductions, the addition should be made in the hands of the individual partners and not the firm. However, the Tribunal found that this reasoning goes against the provisions of section 68, which requires the assessee to prove the identity, capacity, and genuineness of the transaction. The onus of proving the source of the sum received lies with the assessee, and if the nature and source of the receipt cannot be satisfactorily explained, it is open for the Revenue to hold that it is the income of the assessee.3. Evaluation of the additional income declared by the partners before the Income Tax Settlement Commission (ITSC):The CIT(A) further held that the additional income declared by the partners before the ITSC was sufficient to explain their credits in the books of the firm. However, the Tribunal noted variations in the additional income computed by the ITSC and the details furnished by the learned AR before the Tribunal. For instance, in the case of one partner, the additional income computed by the ITSC was significantly lower than what was claimed by the AR. Moreover, the additional income offered before the ITSC was also sought to be explained for investments in another company, Thomson Granites Private Limited, where the partners were shareholders/directors. The Tribunal found no clarity on the availability of additional income with the partners for the introduction of capital/credits in the assessee-firm. Since the Assessing Officer did not have the benefit of the ITSC’s order at the time of completing the assessment, the Tribunal deemed it necessary to remand the matter to the Assessing Officer for a fresh examination of the availability of funds with the partners for making investments in the assessee-firm. The assessee was directed to furnish the ITSC’s orders and a cash flow statement to prove the direct nexus between the disclosure made before the ITSC and the investment in the firm.Conclusion:The Tribunal concluded that the appeals filed by the Revenue are allowed for statistical purposes, and the matter is remanded to the Assessing Officer for fresh consideration. The Assessing Officer is directed to take into account the additional income computed by the ITSC and consider whether there was any duplication in the source of investments by the partners in other group companies/concerns out of the additional income computed by the ITSC. The Tribunal ordered that due credits be given in the partners' accounts for the introduction of capital in the assessee-firm.