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Commissioner Of Income-Tax v. Shiv Shakti Timbers.
Summarized Opinion — Reference under Section 256(1), Income-tax Act, 1961
Factual and Procedural Background
The Revenue, under Section 256(1) of the Income-tax Act, 1961, obtained a reference from the Tribunal posing two questions for the court's determination concerning whether Section 69 rather than Section 68 applied where a firm's books showed cash credits in the names of partners.
The assessee is a firm engaged in dealing in timber, fuel, wood and bhusa and maintained books of account. The Assessing Officer (AO) found entries totalling Rs. 45,000 recorded in the books in the names of several partners and required explanation under Section 68. The AO concluded that the explanations were not satisfactory and made an addition of Rs. 45,000 under Section 68.
On appeal, the Commissioner of Income-tax (Appeals) (CIT(A)) reviewed the material and sustained only Rs. 17,000 as addition, accepting explanations to the extent of Rs. 28,000. The Tribunal allowed the assessee's appeal, set aside the CIT(A)'s order and held that Section 69 applied (i.e., that such sums should be assessed in the hands of partners rather than under Section 68 for the firm). The Tribunal referred to Sundar Lal Jain v. CIT. The Department sought the reference to this court, leading to the present reference of two questions.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that if a firm's books showed a cash credit in the name of a partner, it is Section 69 and not Section 68 which could be attracted in the case of partner only?
- Whether, the Tribunal was correct in law to hold that the provisions of Section 68 did not apply in the case of firm if the cash credit, even though unexplained or not satisfactorily explained, stood recorded in the name of a partner?
Arguments of the Parties
The opinion records that learned counsel for the parties were heard, but it does not set out a detailed account of the parties' specific arguments in the text of the opinion.
The opinion therefore does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sundar Lal Jain v. CIT [1979] 117 ITR 316 (All) | Not specified in the provided opinion. | Mentioned as the case to which the Tribunal referred in reaching its conclusion. |
| Nanak Chandra Laxman Das v. CIT [1983] 140 ITR 151 (All) | Where any sum is credited in the books, the initial onus is on the assessee to explain the nature and source of the cash credit; if explanation is unsatisfactory the AO can treat it as income from undisclosed sources; it is not necessary for AO to locate the exact source. | The court relied on and cited this decision to support the proposition that cash credits recorded in books attract the deeming fiction in Section 68 when explanations are unsatisfactory and that the initial burden is on the assessee. |
| CIT v. Anupam Udyog [1983] 142 ITR 133 (Patna) | Where cash credits in the books of a firm appear in accounts of individual partners and it is found that cash was received by the firm from its partners, in absence of material indicating they are profits of the firm, such amounts cannot be assessed in the hands of the firm but may be assessed in the hands of the partners. | Used by the court to illustrate consistent High Court authority on assessment consequences when cash credits represent partner contributions rather than firm profits; supports analysis distinguishing assessment of firm versus partners depending on factual findings. |
| Banshidher Agarwal Parma v. CIT [1984] 148 ITR 523 (SC) | Distinction between Sections 68 and 69: Section 68 applies when the sum in respect of which the explanation is not accepted is found credited in the books; Section 69 applies to unexplained investments not recorded in the books. | The court cited this authority for the legal distinction between Sections 68 and 69 and to support the conclusion that Section 68 governs cases of book credits. |
| Smt Shanta Devi v. CIT [1988] 171 ITR 532 (P&H) | Where any sum is found credited in the books and explanation is unsatisfactory, the money may be charged as income from undisclosed sources; AO need not locate the exact source; genuineness can be proved by plausible evidence and creditworthiness. | Cited to reinforce the established principle that cash credits in books, if unexplained, can be treated as income under Section 68 and that the assessee bears the onus of proving genuineness. |
| CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj) | Enumerated principles for cash credits in firms: (i) no distinction between entries in firm books whether of partner or third party; (ii) burden to prove identity, capacity and genuineness is on the firm; (iii) if not satisfactorily explained, AO may treat it as income from undisclosed sources; (iv) firm must show amount was actually given by the lender; (v) genuineness and regularity of accounts must be considered; (vi) absent documentary evidence, the deeming fiction of Section 68 can be invoked. | The court relied on this decision to support the proposition that cash credits in firm accounts are governed by Section 68 and to summarize the burdens and considerations that follow when explanations are unsatisfactory. |
Court's Reasoning and Analysis
The court's analysis proceeded from a textual and purposive reading of Sections 68 and 69 of the Income-tax Act, 1961, and from the facts and procedural history supplied by the Revenue and earlier tribunals.
- Statutory distinction: The court identified a fundamental difference between Section 68 and Section 69. Section 68 operates where a sum is found credited in the assessee's books; Section 69 applies to investments not recorded in books. Thus Section 68 presupposes a book entry, whereas Section 69 presupposes an unrecorded investment.
- Purpose of provisions: The court explained that both provisions were introduced to check bogus entries and raise a statutory presumption where explanations for entries or investments are unsatisfactory, aimed at deterring conversion of black money into apparently white investments.
- Application to case facts: In the present case, the entries (Rs. 45,000) were recorded in the firm's books in the names of partners. The AO had treated the entire sum as unexplained under Section 68; the CIT(A) accepted explanations for Rs. 28,000 and added Rs. 17,000; the Tribunal, however, reversed the CIT(A) and invoked Section 69, holding that the sums should be assessed in the hands of partners.
- Legal analysis and rejection of Tribunal's view: The court held that invoking Section 69 was misconceived because the statutory text of Section 69 does not apply where there is a book entry. Given that the amounts were recorded in the firm's books, the matter is governed by Section 68. The CIT(A)'s fact-finding — that Rs. 28,000 had been satisfactorily explained and Rs. 17,000 remained unexplained and was added to the firm's income — is consistent with the operation of Section 68.
- Support from precedents: The court reviewed and relied upon several High Court and Supreme Court authorities (as listed above) that consistently treat cash credits recorded in books as attracting Section 68 where explanations are unsatisfactory, and that the burden of explanation lies on the assessee/firm. Those authorities were used to confirm that where sums are credited in the books and not satisfactorily explained, they may be charged as the assessee's income.
Holding and Implications
Holding: The court answered both referred questions in favour of the Revenue and against the assessee. The court held that the present case is governed by Section 68 and that Section 69 has no application to the facts of this case.
Implications:
- Direct effect on the parties: The Tribunal's conclusion invoking Section 69 was held to be erroneous; the correct legal framework for the recorded cash credits is Section 68, and unexplained credits in the firm's books can be taxed as the firm's income to the extent not satisfactorily explained (as the CIT(A) had done for Rs. 17,000).
- On precedent and wider law: The court's decision applies existing statutory interpretation and aligns with prior High Court and Supreme Court authorities emphasizing the distinction between Sections 68 and 69. The opinion does not purport to lay down a new legal principle beyond applying settled distinctions and authorities to the facts of the case.
Both questions in the reference were therefore resolved in favour of the Revenue; the Tribunal's reliance on Section 69 for recorded cash credits was rejected.
1. This is a reference at the instance of the Revenue under Section 256(1) of the Income-tax Act, 1961, and the following two questions have been referred by the Tribunal for answer by this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that if a firm's books showed a cash credit in the name of a partner, it is Section 69 and not Section 68 which could be attracted in the case of partner only ?
2. Whether, the Tribunal was correct in law to hold that the provisions of section 68 did not apply in the case of firm if the cash credit, even though unexplained or not satisfactorily explained, stood recorded in the name of a partner ?"
2. The brief facts giving rise to this reference are that the assessee is a firm and during the year under consideration, was dealing in timber, fuel, wood and bhusa. Books of account were maintained. The Assessing Officer found Rs. 45,000 recorded in the books in the names of several partners. He required the assessee to explain the genuineness of the credits in terms of the provisions of Section 68 of the Income-tax Act, 1961. The Assessing Officer, after taking into consideration the entire material including the explanation of the assessee, found that the explanations were not satisfactory and he made an addition of Rs. 45,000 as per the provisions of section 68 of the Act. The assessee preferred an appeal against the order of the Income-tax Officer to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) considered the material on record and found that the addition of Rs. 17,000 alone could be sustained since the explanation to the extent of Rs. 28,000 had to be considered as satisfactory. Against the order of the Commissioner of Income-tax (Appeals), the assessee preferred an appeal before the Tribunal which allowed the assessee's appeal and set aside the order of the Commissioner of Income-tax (Appeals) on the ground that cash credits were in the names of partners and Section 69 of the Act was applicable, but not Section 68. In that connection, the Tribunal made a reference to the case of Sundar Lal jain v. CIT [1979] 117 ITR 316 (All). Hence, the Department approached the Tribunal for making a reference to this court and, accordingly, the Tribunal has referred the aforesaid questions for answer by this court.
3. We have heard learned counsel for the parties. Section 68 of the Income-tax Act reads as under :
"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 Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year."
4. Section 69 reads as under :
"69. 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 Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year."
5. A close reading of both these Sections makes it clear that in Section 68, there should be a credit entry in the books of account, whereas in Section 69, there may not be an entry in the books of account. This is a fundamental difference between the two provisions. In the case of Section 69 only where investment has been made but has not been satisfactorily explained, the income should be treated to be the income of the assessee whereas in the case of Section 68, there should be a book entry and if that book entry is not satisfactorily explained, then it should be treated as income of the assessee. It appears that these provisions were introduced in order to check bogus entries which are resorted to by firms in order to raise the corpus of the firm and the money which is being invested may not come from a valid source. Therefore, both these Sections were engrafted so as to raise a statutory presumption in the event of unsatisfactory explanation of those entries. This was with a view to check the evil of illegal bogus entries. For the purpose of avoidance of tax, certain black money of the firm is sought to be invested in the names of bogus persons so as to convert it into white investment. Therefore, law has made such a strong presumption so as to deter this kind of tendency.
6. In the present case, the Income-tax Officer found that all the entries with regard to investment of Rs. 45,000 were not satisfactorily explained, but the Commissioner of Income-tax (Appeals) found that the explanation to the extent of Rs. 28,000 was satisfactory and he has only made an addition of Rs. 17,000 to the income of the assessee-firm. But strangely enough, the Tribunal, without going into the matter, has gone to the extent of invoking Section 69 of the Act and held that all the income should be assessed in the hands of the partners. With great respect, the view taken by the Tribunal does not appear to be well founded. As a matter of fact, Section 69 of the Act has no application to the facts of the present case. The present case is governed by Section 68, because Section 68 talks about entries in the books of account. In the present case, the names of parties from whom certain amount was received by the firm had been mentioned and the Commissioner of Income-tax (Appeals) has considered all the investments made by the partners and after examining their assets and capacity to make investments, has found that a sum of Rs. 28,000 had been properly explained and rest of the amount of Rs. 17,000 was not properly accounted for and added this amount to the credit of the firm. Therefore, the view taken by the Tribunal with reference to Section 69 of the Act is totally misconceived.
7. In this connection, reference may be made to the decision of the Allahabad High Court in the case of Nanak Chandra Laxman Das v. CIT [1983] 140 ITR 151. The Allahabad High Court has taken the same view. It has been hold as under (headnote) :
"Where any sum is found credited in the books of the assessee, the initial onus is on the assessee to offer an explanation of the nature and source of a cash credit. If the explanation is not found satisfactory or reasonable, the Income-tax Officer can treat such money as the asses-see's income from undisclosed sources. It is not necessary for the Income-tax Officer to locate the exact source of the credits. The assessee can prove the genuineness of the credits by establishing from some plausible evidence the identity of the creditor and his creditworthiness."
8. A similar view has been taken by the Patna High Court in the case of CIT v. Anupam Udyog [1983] 142 ITR 133, that if there are cash credits in the books of a firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partners, then in the absence of any material to indicate that they are the profits of the firm, they cannot be assessed in the hands of the firm, though they may be assessed in the hands of the individual partners. It has been held as under (headnote) :
Held, that though the Tribunal was not satisfied with regard to the explanation given by the partners that they had invested the so-called capital from out of their agricultural income, yet the Tribunal held that since the partners had owned that the sums had been advanced by them as capital outlay for the formation of the firm, they entered them as cash credits in the relevant previous year. The Tribunal arrived at its finding on the basis of surmises that the explanation of the assessee might be true. It was for the partners of the firm to explain to the satisfaction of the Income-tax Officer with regard to the nature and source of the cash credit entries in the books of the firm of the previous year and, on the Tribunal's own finding, the onus had not been discharged. Therefore, the Tribunal was not right in deleting the addition of Rs. 16,700 from the assessment of the firm.
9. A similar view was taken by this court also in the case of Banshidher Agarwal Parma v. CIT [1984] 148 ITR 523, as under (headnote) :
" A perusal of Sections 68 and 69 of the Income-tax Act, 1961, shows that Section 68 applies when the sum in respect of which the explanation of the assessee is not accepted is found credited in the books of account. In such a situation, the sum so credited is charged to income-tax as the income of the assessee of that previous year in which it is found credited in the books of account. Section 69 applies to unexplained investments which are not recorded in the books of account."
10. The same view was taken by the Punjab and Haryana High Court also in the case of Smt Shanta Devi v. CIT [1988] 171 ITR 532, as under that where any sum is found credited in the books of account of an assessee who offers no explanation of the nature and source of the cash credit and if the explanation is not found satisfactory or reasonable, the money may be charged to income-tax as the assessee's income from undisclosed sources. It is not necessary for the Income-tax Officer to locate the exact source of the credits. The assessee can prove the genuineness of the credits from some plausible evidence and his creditworthiness.
11. The same view was taken in the case of CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj) as under (headnote) :
In the case of cash credits in the accounts of a firm (i) there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party; (ii) the burden to prove the identity, capacity and genuineness is on the firm ; (iii) if the cash credit is not satisfactorily explained, the Income-tax Officer is justified to treat it as income from undisclosed sources ; (iv) the firm has to establish that the amount was actually given by the lender ; (v) the genuineness and regularity in the maintenance of accounts has to be taken into consideration by the taxing authorities, and (vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by Section 68 of the Income-tax Act, 1961, can be invoked.
12. Therefore, from the series of decisions of various High Courts, it is well established that in such a situation where there is a credit entry in the books of account of the assessee and there is no satisfactory explanation, then it will be deemed to be the income of the firm and will be added to the income of the firm and can be accordingly taxed. The view taken by the Tribunal appears to be erroneous on the face of it.
13. Hence, we answer both the questions in favour of the Revenue and against the assessee.
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