NEW SURROAD GINNING AND PRESSING FACTORY,SABARKANTHA vs. THE ITO, WARD-2, HIMATNAGAR

3. The brief facts of the case are that the assessee is a partnership-firm engaged in the business of purchase of raw-cotton from local market/farmers and then processing the same to separate cotton seeds from raw-cotton and, thereafter, processed cotton is sold in Bales to different parties and cotton- seeds are further processed to extract cotton oil and cotton cake which is further sold to the farmers. The Assessing Officer (AO) noticed that the assessee-firm had made cash deposits amounting to Rs.1,34,20,228/- during demonetization period in its bank account, regarding the source of which, the assessee could not furnish any satisfactory explanation. He, therefore, made an addition of Rs.1,34,20,228/- as income of the assessee from unexplained sources.

4. Before the Ld. CIT(A), the assessee explained that the assessee used to sell its by-products, such as, cotton oil and cotton cake to farmers on cash sale basis. That the total turnover of the assessee-firm was of Rs.4,45,79,409/- and the cash deposited amounted to Rs.1,30,03,728/- only. The assessee submitted that the aforesaid cash deposit was out of the cashsales made by the assessee. The Ld. CIT(A), however, observed that the AO has noted that if the cash sales were normal in the course of business of the assessee, then why there were no such cash deposits during the same period in the immediately preceding financial year.

4.1. The Ld. CIT(A), however, noted that by the doctrine of human probabilities, it cannot be assumed that at the time of introduction of demonetization, the assessee would not have any cash in hand given the nature and scale of its business. He, therefore, observed that the submissions of the assessee cannot be disregarded in entirety. He, therefore, held that it

4 would be fair and reasonable to hold that 20% of the cash deposits in the bank account of the assessee constituted its business receipts. He, however, confirmed the balance addition amounting to Rs.1,04,02,985/-.

5 on cash sales. However, due to announcement of demonetization scheme, the assessee deposited the cash, lying with it out of cash sales, in the bank account and, therefore, the cash deposits during the year out of cash sales were more as compared to earlier year. The Ld. CIT(A) has duly taken note of the turnover of the assessee at Rs.4,45,79,409/-. Hence, considering the aforesaid facts and circumstances of the case, the assessee has duly explained the source of the cash deposited in the bank account. Therefore, we do not find justification on the part of the lower authorities in making/confirming the impugned addition of Rs.1,34,20,0228/- and the same is, accordingly, ordered to be deleted.

“5.4. I have gone through the facts of the case, submissions made by the appellant and also the findings of the AO. It emerges from the facts of the case that the AO have made the addition of addition of Rs. 4,16,98,589/- on account of accretion to capital account of the partners of appellant firm u/s 68 of the IT Act 1961. These additions have been made by the AO primarily due to the fact that during the course of assessment proceedings the appellant could not offer any cogent or concrete explanation pertaining to the cause and source of the same to the satisfaction of the AO. The AO was not justified on the facts and circumstances of the case to make the impugned addition on the ground that it is now well settled jurisprudentially that when any partner invests or contributes in capital to the partnership firm, it is the partner who has to explain the source of such contribution and addition, if any, can be made in the hands of the partner only u/s 68 or 69 of the Income Tax Act, 1961 (the Act) and no addition can be made in the hands of the firm. The reliance is placed on the following judgements which are squarely applicable to the facts and circumstances of the instant case:-

(i) According to Section 68 of Income Tax Act 1961, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source of the same or the explanation offered by him is not satisfactory in the opinion of A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year. In Smt Shanta Devi v. CIT [1998] 171 ITR 532 (P&H), it was held that a perusal of section 68 would shows that the expression books has been used with reference to the word assessee. In other words, such books of account have to be books of the assessee himself and not of any other assessee. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner.

(ii) 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 appellant firm is over. The appellant firm cannot ask the person who makes investment, whether the money invested is properly taxed or not. If that person owns the entry then the burden of the appellant firm is discharged. It is open to the A.O to undertake further investigation with regard to that individual who has deposited the amount. In the instant case when it was clear to the AO that the capital has increased in partner's capital account, it was incumbent upon the AO conduct further investigation if the concerned (By Revenue) New Surroad Ginning and Pressing Factory vs. ITO Asst. Year : 2017-18 partners were assessed with him or should have passed the information to the concerned AO to take remedial action as per law. In Khandelwal Constructions v. CIT 227 ITR 900, it has been held that section 68 of Income Tax Act, 1961, empowers the Assessing officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the appellant's explanation A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained. In the instant case, prima- facie no enquiry had been conducted by the AO.

(iii) In ITO Vs Nithyasudha Combines (ITAT Chennai), it was held that whether the partners' capital is assessable in the hands of the assessee firm has been adjudicated by various Benches of the Tribunal as well as various courts and held that there cannot be any addition in the hands of the assessee firm on account of capital contribution by its partners. The tribunal further held that:-

"Similarly, by following the decision in the case of CIT v. M. Venkateswara Rao and others [2015] 370 ITR 212 (T&AP), In the case of ITO v. Gowthami Builders in & 392/Viz/2017 & ors dated 14.03.2018, the Visakhapatnam Bench of ITAT has decided the issue against the Revenue. The relevant portion of the order of the Hon'ble Telangana & Andhra Pradesh High Court is reproduced as under:-

"Held, dismissing the appeal, (i) that the amount that was sought to be treated as income of the firm was the contribution made by the partners to the capital. In a way, the amount so contributed constitutes the very substratum for the business of the firm. The pooling of such capital as credit. It was only when the entries were made during the course of business tliat they could be subjected to scrutiny under section 68 of the Income-tax Act, 1961. Even otherwise, it was evident that the assessee explained the amount of Rs. 76,57,263 as the contribution from its partners. In such a situation, section 68 could no longer be pressed into service. Inquiry into the source for the respective partners to make that contribution could, at the most, be conducted against the individual partners. If the partner was an assessee, the concerned Assessing Officer can require him to explain the source of the money contributed by him to the firm. If, on the other hand, the partner was not an assessee, he can be required to file a return and explain the source. Undertaking such an exercise, vis-a-vis the firm itself, was impermissible in law. Therefore, the view taken by the Assessing Officer that the firm must explain the source of income for the partners regarding the amount contributed by them towards capital of the firm could not be sustained in law."

8 In view of the above, the additions made by the AO on account of unexplained accretion to the partners' capital account amounting to Rs. 4,16,98,589/- u/s 68 of the IT Act 1961 was not justified to be assessed in firm's hand. It should be assessed in partners hand as observed above. The AO is at liberty to initiate action against the partners if they are assessed with him or in the alternative, he should pass on information to the concerned AO to take appropriate action in accordance with the law. In view of the above, this ground of appeal taken by the appellant is allowed.”