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Sundar Lal Jain v. Commissioner Of Income-Tax, Lucknow

Allahabad High Court

Aug 22, 1978

Judgment

Subsequent
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Summary of Legal Opinion

Factual and Procedural Background

The assessee is an individual who became a partner in the firm Messrs. Saraswati Udyog at Diwali 1968 with a 27% share. On 7 November 1968 he contributed 11 engines and spare parts to the firm valued at Rs. 40,000 as capital. He also made a cash deposit of Rs. 6,000 to the firm on 4 June 1969. While computing the income for the assessment year 1970–71, the Income-tax Officer (ITO) required the assessee to explain the source of these investments, disbelieved the explanation and included both items in the assessable income.

On appeal (first appellate authority) it was held that any inclusion was justifiable only under section 69; on merits the explanation was disbelieved and the appeal was dismissed. The Tribunal, however, held that section 68 applied because the books of the firm were, in the Tribunal's view, also the books of the assessee and the credit entry in those books could be considered under section 68; it rejected the applicability of section 69 and dismissed the appeal. The Tribunal referred the following question of law to this Court.

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that section 68 of the Income‑tax Act and not section 69 was applicable and on that basis in upholding the addition in assessment year 1970–71?”

Legal Issues Presented

Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that section 68 of the Income‑tax Act, and not section 69, was applicable, and whether that finding justified upholding the addition in assessment year 1970–71.

Arguments of the Parties

Assessee's Arguments

The assessee (individual partner) explained the nature and source of the investments, but the ITO disbelieved that explanation.
The assessee argued before the Tribunal that if section 69 applied, the correct assessment year for inclusion would be 1969–70 (the year in which the investments were made), not 1970–71.

Revenue / Tribunal's Position

The ITO included the amounts in the assessee's income for assessment year 1970–71 after finding the explanation unsatisfactory.
The Tribunal held that section 68 applied on the basis that the books of the firm are "as much books of the assessee" and that the credit entry in the firm's books could be treated under section 68; the Tribunal rejected the applicability of section 69 and sustained the addition for 1970–71.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court examined the text and scope of sections 68 and 69 of the Income‑tax Act as they apply to the facts.

On section 68:

The Court quoted section 68, which applies "where any sum is found credited in the books of an assessee maintained for any previous year" and the assessee offers no satisfactory explanation.
The Court noted that "assessee" is defined in the Act and that the Act distinguishes between an individual assessee and a firm as separate entities each liable to assessment independently.
The Court reasoned that when section 68 refers to the "books of an assessee" it means the books of the particular assessee whose assessment is under consideration. Thus, for section 68 to apply to an individual partner, the relevant cash credit entry must appear in the books of that individual partner (the assessee), not merely in the firm's books, because the firm's books belong to a different assessee (the firm).
Accordingly, the existence of an entry in the firm's books was held immaterial to the individual partner's assessment under section 68.

On section 69:

The Court quoted section 69, which deems unexplained investments (not recorded in the books of account, if any, maintained by the assessee) to be income where the assessee offers no satisfactory explanation.
The Court found that the assessee had made investments which were not recorded in his own books because he maintained no books of account at all, and that the assessee's explanation was held unsatisfactory by the authorities below.
All statutory ingredients of section 69 were thus satisfied in the present case, making section 69 the applicable provision; section 68 was therefore inapplicable on the facts.

The Court further observed that the Tribunal did not address a separate point raised by the assessee: that if section 69 applied the value would be includible in the assessment year 1969–70 rather than 1970–71. The Tribunal gave no finding on that timing question, and because that issue was not part of the referred question, the Court left it open.

Holding and Implications

Holding: The Court answered the referred question by holding that section 69 of the Income‑tax Act, and not section 68, was applicable to the facts of the case. The Tribunal was not justified in upholding the addition for assessment year 1970–71 on the basis that section 68 applied.

Implications:

The immediate legal consequence is that the addition sustained by the Tribunal for assessment year 1970–71 cannot be justified on the basis of section 68.
The Court did not decide whether inclusion under section 69 should be for assessment year 1969–70 or 1970–71; that question was left open because it was not referred to the Court for decision.
The Court made no order as to costs.
The opinion does not purport to set or discuss any broader precedent beyond the statutory interpretation applied to the facts; the decision is limited to the conclusions stated above.

Show all summary ...

Satish Chandra, C.J:— The assessee is an individual. He became a partner of the firm, Messrs. Saraswati Udyog, which was constituted in Diwali, 1968. His share in the firm was 27%. On November 7, 1968, he gave 11 engines and some other spare parts to the firm of the total value of Rs. 40,000. This was his capital contribution to the firm. He also gave a cash deposit of Rs. 6,000 to the firm on June 4, 1969. The ITO, while computing the income for the assessment year 1970–71, required the assessee to explain the source of these investments. He disbelieved the explanation offered by the assessee and included these two items in the assessable income.

2. On appeal, it was held that the inclusion was justifiable only under s. 69. On merits, the explanation offered by the assessee was disbelieved and the inclusion was held justified. In the result, the appeal was dismissed. The assessee then went up to the Tribunal. The Tribunal held that s. 68 was applicable because the books of the firm are as much books of the assessee and the credit entry therein can be considered under s. 68.

3. They held that s. 69 was not applicable. On the merits, they agreed with the findings of the authorities below. In the result, the appeal was dismissed.

4. At the instance of the assessee, the Tribunal has referred the following question of law for our opinion.

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that section 68 of the Income-tax Act and not section 69 was applica-ble and on that basis in upholding the addition in assessment year 1970–71?”

5. Section 68 reads:

“68. 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 thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”

6. Section 68 applies where the books of the assessee show a cash credit entry. The term “assessee” has been defined by cl. (7) of s. 2 to mean a person by whom any tax or any other sum of money is payable under this Act. Section 2(31) defines the expression “persons” to include an individual, a Hindu undivided family, a company, a firm or association, etc. The I.T Act makes a distinction between an individual as a person who is liable as an assessee on the one hand and a firm on the other being as much an entity liable to assessment independently of the individuals who may constitute its partners. When s. 68 uses the term “books of an assessee”, it refers to the assessee whose books show the cash credit entry. In the case of the firm, the books maintained by the firm should show a cash credit entry and the firm's explanation should be found unsatisfactory, then only s. 68 will entitle the ITO to include the amount of the entry as the income of the assessee-firm. Here, the entries were found in the books of the firm but the assessment that we are concerned with is that of an individual, namely, a person who was one of the partners of the firm. For s. 68 to apply to such a case, a cash credit entry has to be found in the books of the individual partner who is the assessee. The existence of the entry in the books of the firm is immaterial because those are the books of a different assessee.

7. Section 69 reads as follows:

“69. Unexplained investments.— Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”

8. In the present case, the assessee had made investments. Those investments were not in fact found recorded in his books of account because he had not maintained any books of account at all. The explanation offered by the assessee, namely, the individual partner, was not found satisfactory. All the ingredients and conditions of s. 69 were satisfied in the present case. It was s. 69 which alone could apply. Section 68 was entirely inapplicable.

9. In our opinion, s. 69 was applicable to the facts of the case. The Tribunal was in error in holding that s. 68 was applicable. The Tribunal did not answer the defect pointed out by the assessee in the course of arguments before it that if s. 69 were to apply then on the merits there will be some difficulty in including it in the income for the year 1970–71. The assessee's argument was that the income could be includible under s. 69 only for the assessment year 1969–70. The Tribunal has, however, not given any finding on this aspect. This finding is also not the subject-matter of the question referred to us. We, therefore, leave the question open.

10. In the result, we answer the question referred to us by holding that s. 69 was applicable to the facts of the case and the Tribunal was not justified in upholding the addition for the assessment year 1970–71 on the basis that s. 68 applied. In the circumstances, we make no order as to costs.