The Judgment of the Court was delivered by

V.K Singhal, J.:— The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law arising out of its order dated September 19, 1981, in respect of the assessment year 1977–78 under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the cash credits of Rs. 11,502 in the account of Shri Kishorilal, one of the partners, could not be assessed in the hands of the firm and in deleting the same ?”

2. The brief facts of the case are that during the course of assessment proceedings, the Income-tax Officer recognised the capital account of Kishorilal, one of the partners of the firm, and it was found that a sum of Rs. 11,50,2 was credited in his account in the books of the firm. A notice was issued to the firm and in response to such notice it was stated that the investment has been made by the partner which is out of the recov-eries made from money-lending business carried on by Kishorilal and such income has been declared to the extent of Rs. 5,329 in the accounting year in his individual return and the balance amount of Rs. 6,172 is the sale proceeds of groundnut on the agricultural land of Shri Kishorilal, and such income has also been declared in his individual return. The infor-mation was called for from the circle where the assessment of Kishorilal was made and it was found that he has not filed any return for the assessment year 1977–78 and, therefore, the Income-tax Officer came to the conclusion that the income is of the firm which has been shown as deposit in the hands of the partner. The Income-tax Officer concluded that the sum of Rs. 11,502 is the assessee's income as “income from undis-closed sources”. An appeal was preferred against the order of the Income-tax Officer to the Commissioner of Income-tax (Appeals) and counsel for the assessee was unable to furnish the details showing the name of the person from whom the recovery was alleged to have been made by Shri Kishorilal. No evidence with regard to the sufficient surplus amount from agricultural income to the extent of the net saving of the amount of Rs. 6,172 was furnished. Since the deposits were in the books of the firm, the Commissioner of Income-tax (Appeals) came to the conclusion that the income has rightly been added in the hands of the assessee-firm.

3. In the second appeal before the Income-tax Appellate Tribunal, the matter was not considered on the merits and on the legal point that in a case where any cash credit is found in the account of the partner in the books of a firm and the assessee is unable to give any satisfactory explanation, the income cannot be assessed in the hands of the firm. The submission of learned standing counsel for the Department is that since the entry was in the books of account of the firm and, therefore, the assessment has to be made in accordance with the provisions of section 68 in the hands of the firm.

4. We have considered over the matter. The provisions of section 68 of the Income-tax Act, 1961, are as under:

“Cash credits.— 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.”

5. There is another provision under section 69 which is as under:

“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.”

6. In the present case, the provisions of section 69 were not invoked and it was the provisions under section 68 of the Act by which the Income-tax Officer came to the conclusion that the amount credited in the books of the assessee maintained in the previous year was not properly explained and as such it was held that it should be deemed to be the income of the firm. Under section 69, the question of that investment arises where the investment is not recorded in the books of the assessee. Under section 68, the explanation has to be given by the assessee of the credit entry found in the books of the assessee. In the present case, the assessee is the firm and the credit entry is made through the partner's account. The provisions of section 68 would cover even those credit entries which are made directly or indirectly. In the case of any credit entry which is made directly and it is found that the said creditor is not in existence or is incapable of advancing the money to that extent or the explanation of the amount given is not accepted as satisfactory then the result is that the said amount is considered as income of the firm, as income from “undisclosed sources”. In the case of a partner, if the entry is made by crediting his account in the books maintained by the firm then the additional explanation could be that it was the income of the partner and not of the firm. Simply because an additional argument could be raised that the money belongs to the partner, it cannot be said that in all cases where any credit entry is made through the account of the partner, no addition can be made in the hands of the firm treating it as income from “undisclosed sources”. It is undisputed that the burden is on the assessee to explain the entry and to establish that it is a genuine credit entry which is made in the books of the firm. The burden has to be discharged by the assessee. In the assessment proceedings, the Income-tax Officer is supposed to follow the principles of natural justice and when a notice is given to the assessee to explain such an entry, the explanation which has been given has to be taken into consideration. In the present case, the explanation which was given was that it was the personal income of the partner and has been so declared in his return. Neither the partner was produced nor any evidence in support of the contention was produced either at the stage of assessment or even before the appellate authority. The Income-tax Officer therefore came to the conclusion that it was the income of the firm because, the contention raised by the firm was found absolutely incorrect and no supporting evidence was produced. In any way the burden which was on the assessee was not discharged and, therefore, it was treated as “income from undisclosed sources” of the firm. The same position remained before the Commissioner of Income-tax (Appeals) who also came to the same conclusion. The Income-tax Appellate Tribunal without going into the merits quashed the order on the ground that the “income from undisclosed sources” could not have been assessed in the hands of the firm. In order to examine the legality of such a presumption which the Income-tax Appellate Tribunal has raised in this case, let us see that in a case where an addition is made in respect of a credit entry in the account of the partner in the books of the firm for which the partner has no capacity, can it be said that in all cases the Income-tax Officer is bound to consider such credit entry as income in the hands of the partner and not as income of the firm ? The assessee (firm) in order to introduce the concealed income may take shelter in the partner's account, if the view taken by the Tribunal is accepted as in accordance with law. An entry in the books of the firm in the partner's account or in respect of any credit by a third party stands on the same footing and, if the firm is not in a position to establish the genuineness of the credit entry then it can be added as income from “undisclosed sources” in the hands of the firm. In the case of an entry in the books of the firm in the partner's account, it is open to the firm in its assessment proceedings to produce the partner and also to prove the capacity and genuineness of the deposit. It is only when the identity, capacity and genuineness of the credit entry is proved, the item cannot be added as income from “undisclosed sources”. The identity in the case of a partner is established and, therefore, the other criteria, i.e, the capacity and genuineness have to be established.

7. In V. Govindarajuly Mudaliar v. Commissioner Of Income Tax, Hyderabad, [1958] 34 ITR 807, it was observed by the Supreme Court that there is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipts are of an assessable nature.

8. In P.V Raghava Reddi v. CIT, [1956] 29 ITR 942, it was observed by the Andhra Pradesh High Court that the burden of proof is not dependent upon the fact of a credit entry in the name of the assessee or in the name of a third party. In either case, the burden lies upon the assessee to explain the credit entry, though the onus might shift to the Income-tax Officer under certain circumstances. Otherwise a clever assessee can always throw the burden of proof on the income-tax authorities by making a credit entry in the name of a third party either real or pseudonymous. The same High Court in M.M.A.K Mohindeen Thamby and Co. v. CIT, [1959] 36 ITR 481, relying on the said decision came to the conclusion that there is no distinction between the entries in the names of the partners and those in the names of the third parties, and the nature of the entry is not distinguishable. In the absence of a satisfactory explanation, it is open to the Department to infer that these monies also belong to the assessee and represent suppressed income.

9. In Hardwarmal Onkarmal v. Commissioner Of Income-Tax., [1976] 102 ITR 779, it was observed by the Patna High Court that if cash credits are found in the account books of a partnership firm in the names of the partners, the credits are surely in the names of persons who constitute the firm itself. In such a case, the onus was on the assessee to establish that the partners had actually deposited the money and that the entries were not fictitious.

10. On the basis of the language used under section 68 and the various decisions of different High Courts and the apex court, the only conclusion which could be arrived at is:

(i) that 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) that the burden to prove the identity, capacity and genuineness has to be on the assessee,.

(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 the account has to be taken into consideration by the taxing authorities,

(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction credited by section 68 can be invoked.

11. In these circumstances, we are of the view that simply because the amount is credited in the books of the firm in the partner's capital account it cannot be said that it is not the undisclosed income of the firm and in all cases it has to be assessed as an undisclosed income of the partner alone. In these circumstances, we are of the view that the Tribunal was not justified in holding that the cash credits of Rs. 11,502 in the account of Shri Kishorilal, one of the partners, could not be assessed in the hands of the firm and in deleting the same. Since the matter was not considered by the Tribunal on the merits, the Tribunal would be free to hear the arguments of both the parties and decide afresh in view of the observations made above.

12. Accordingly, the reference is answered in favour of the Revenue and against the assessee. No order as to costs.