COMMR. OF INCOME TAX CHD. vs. M/S METAL & METALS OF INDIA

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ITA/370/2006HC Punjab & HaryanaPHHC01075083200606 November 2006Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE RAJESH BINDAL2 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the view taken by the Tribunal was not erroneous. The Tribunal had noted that the partner admitted to making the investment in the firm and that the partner himself had been duly assessed to tax. The High Court reasoned that even if the gift claimed by the partner was rejected and the amount treated as the partner's undisclosed income, the firm could not be subjected to tax on that ground. The firm had provided an explanation regarding the source of the deposit, which was the partner, Suresh Bhandari. Therefore, the addition to the firm's income was not called for. The High Court found no substantial question of law arising for consideration.

What were the facts?

The Revenue (Commissioner of Income-tax, Chandigarh-II) appealed against an order of the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench. The ITAT had deleted an addition made by the Assessing Officer (AO) to the income of the assessee, M/s Metal & Metals of India, a firm. The AO had doubted an entry of Rs. 6,10,000/- representing an investment by a partner, Suresh Bhandari, into the firm. The partner claimed this amount was received as a gift from NRIs. The AO rejected the gift claim and added the amount to the firm's income. The CIT(A) had accepted the genuineness of the gift, but the ITAT, while setting aside the CIT(A)'s finding on the gift's validity, held that since the partner admitted to the investment and was assessed to tax, addition to the firm's income was not warranted.

What were the issues?

1. Whether, in law and facts, the Tribunal was right in deleting the addition treating the unexplained accretion in the capital account of the partner as his income and not of the firm, when his explanation regarding the source of funds was held to be unsatisfactory? (Question of law and fact, concerning the taxability of funds introduced by a partner into a firm). Assessee's Contention: The judgment does not record specific arguments made by the assessee before the High Court. However, the ITAT's reasoning, which was upheld, implies that if the partner is assessed to tax on the amount, the firm should not be taxed on the same amount as an unexplained accretion. Revenue's Contention: The revenue relied on the judgment in Jagmohan Ram Ram Chandra v. Commissioner of Income-tax (2005) 274 ITR 405, arguing that if a firm fails to provide an explanation regarding the source of a deposit, the firm is liable to be taxed.

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Cause title — parties, addresses and appearances
IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.370 of 2006 Date of decision: 06.11.2006 Commissioner of Income-tax, Chandigarh-II. ---Appellant Vs. M/s Metal & Metals of India, Mohali. ---Respondent. CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON'BLE MR JUSTICE RAJESH BINDAL Present: Mr. S.K. Garg Narwana, Advocate for the revenue. -----

ORDER: This appeal has been preferred by the revenue against the order dated 25.10.2005 of Income Tax Appellate Tribunal, Chandigarh Bench ‘B’, Chandigarh in I.T.A. No.507/Chandi/2003 proposing following substantial questions of law:- “Whether, the Tribunal is right in law and facts of the case, in deleting the addition treating the unexplained accretion in the capital account of the partner as his income and not of the firm, when his explanation with regard to source of funds has been held to be unsatisfactorily?”

During the course of assessment, the Assessing Officer doubted the entry regarding investment of Rs.6,10,000/- by the partner of the firm Suresh Bhandari, who claimed to have made deposit with the firm out of the amount he received as gift from NRIs. The Assessing Officer rejected the claim of gift and made addition to the income on the amount claimed to have been deposited by the partner with the firm.

On appeal, the CIT(A) accepted the genuineness of the claim.

On further appeal by the revenue, the Tribunal set aside the finding of CIT(A) with regard to validity of the gift, but in para 7 of its order, the Tribunal noticed that the partner admitted to have made investment to the firm

I.T.A. No.370 of 2006 and the said partner had been duly assessed to the tax. It was held that in such a situation, addition to the income of the firm was not called for.

Learned counsel for the revenue relies upon the judgment of Allahabad High Court in Jagmohan Ram Ram Chandra v. Commissioner of Income-tax (2005) 274 ITR 405, wherein it was observed that if the firm fails to give explanation regarding source of deposit, the firm was liable to be taxed.

In the present case, the firm has given explanation about the source namely Suresh Bhandari, partner, who himself is an assessee. The said partner has admitted having made deposit with the firm. Thus, as far as the firm is concerned, even if the gift claimed to have been received by Suresh Bhandari is to be rejected, the said Suresh Bhandari may be liable to be taxed by treating the said amount as undisclosed income, but the firm cannot be subjected to tax on that ground.

Thus, the view taken by the Tribunal cannot be held to be erroneous.

In view of above, no substantial question of law arises for consideration.

The appeal is dismissed. ( ADARSH KUMAR GOEL ) JUDGE November 06, 2006 ( RAJESH BINDAL ) ashwani JUDGE Pag e

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