M/S Rup Chand Filling Station vs ITO Ward-2(4)

“1.

That the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi has erred both in law and, on facts in upholding the determination of income made by the learned Income Tax Officer, Ward-2(4), Faridabad of the appellant at Rs.1,30,16,600/- as against declared income at Rs.30,500/- in an order of assessment dated 4.12.2019 u/s 143(3) of the Act.

2.

That the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) has erred both in law and on facts in upholding an addition of Rs. 84,70,500/- representing alleged unexplained capital contribution by the partners and erroneously held as unexplained cash credit under section 68 of the Act read with section 115BBE of the Act.

2.1

That while upholding the above addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the factual substratum of the case, statutory provisions of law and as such, addition so upheld is highly misconceived, totally arbitrary, wholly unjustified and therefore, unsustainable.

2.2

That, the learned Commissioner of Income Tax (Appeals) has also failed to appreciate that it is well settled law that credit in the capital account of a partner cannot be brought to tax as income of an appellant u/s 68 of the Act.

2.3

That, the learned Commissioner of Income Tax (Appeals) has further failed to appreciate that in the instant case appellant firm has not only discharged burden lies on it u/s 68 of the Act goes much beyond by establishing source of cash in the hands of partners too.

2.4

That finding of the learned Commissioner of Income Tax (Appeals) that "mere production of PAN, ITRs or affidavits does not automatically establish creditworthiness, especially when large sums of cash are introduced into books just prior to or during the demonetization period." is not in accordance with law.

2.5

That further finding of the learned Commissioner of Income Tax (Appeals) that "the internal movement of funds between relatives without a clear commercial rational or substantiated cash rail fails the test of genuineness" is legally misconceived and wholly untenable.

2.6

That the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in upholding the finding of the learned Assessing Officer that "assessee failed to furnish satisfactory evidence regarding the specific source of funds at the time of assessment" is factually incorrect and not based on correct appreciation of facts on record.

3.

That the learned the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in upholding an addition of Rs.45,15,599/- on account of alleged suppression of sales/purchases made by the appellant and suppressed profit earned by the appellant during the instant assessment year and erroneously held as unexplained cash credit u/s 68 of the Act read with section 115BBE of the Act.

3.1

That while upholding the above addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the factual substratum of the case, statutory provisions of law and as such, addition so upheld is highly misconceived, totally arbitrary, wholly unjustified and therefore, unsustainable.

3.2

That the addition made and sustained is based on pure surmises, conjectures and suspicion and, as such is otherwise erroneous untenable and unwarranted.

4.

That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in recording various adverse inferences which are contrary to the facts on record, material placed on record and, are otherwise unsustainable in law and therefore, addition so sustained is absolutely unwarranted.

5.

That without prejudice to the above and in the alternative, even otherwise, the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in holding that amount deposited in the bank by the appellant is taxable as income under section 68 of the Act and thereafter computed the demand in accordance with the rates specified in section 115BBE of the Act as amended by Taxation Laws (Second Amendment) Act, 2016.

6.

That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding the impugned order of assessment dated 4.12.2019 without granting the appellant fair, proper and reasonable opportunity, thereby violating the principles of natural justice.

7.

That the learned Commissioner of Income Tax (Appeals) has also erred both in law and on facts in upholding the levy of interest of Rs.33,10,791/- u/s 234B of the Act which is not leviable on the facts of the appellant.”

“2.

Brief facts necessary for disposal of this reference are that the assessee is a partnership firm. During the accounting year relevant to the assessment year under consideration, it was found that there was a credit of Rs.11,000 in the account of Shri S.K. Gupta. Certain credits in the accounts of the partners were found as under :

1.

Smt. Shakun Gupta 70,000

2.

Shri Vrindavanlal Gupta 80,000 3.Shri A.K. Mukherji1, 68,000 The Assessing Officer did not accept the credits and made the addition in the account of the firm. On appeal before the Commissioner (Appeals) by the assessee, the Commissioner (Appeals) deleted these three entries and held that the firm has satisfactorily accounted for the aforesaid three entries. The matter was taken up in appeal by the revenue before the Tribunal (it may be clarified that we are not concerned with ShriS.K Gupta, because the question has not been referred qua Shri S.K. Gupta).The Tribunal also affirmed the finding of the Commissioner (Appeals) relying on the decision of the Allahabad High Court in the case of Sundar Lal Jain v. CIT [1979] 117 ITR 316. It was held in the aforesaid case that credit in the account of a partner is not loan to the firm and it is not assessable in the hands of the firm. The Tribunal further observed that the Assessing Officer is free to take any action in the hands of the partners.Aggrieved by this order passed by the Tribunal, the revenue made an application before the Tribunal for referring the aforesaid question of law for answer by this Court and, accordingly, the aforesaid question has been referred by the Tribunal for answer by this Court.

3.

We have heard the learned counsels for the parties. Section 68 of the Act says that 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 ITO, satisfactory, the sum so credited may becharged to income-tax as the income of the assessee of that previous year.Therefore, according to section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. in case the explanation offered by the assessee is not satistactory or the source offered by the assessee-firm is not satisfactory, then in that case the amount should be taken to be the income of the assessee. In the present case, the Assessing Officer did not feel satisfied with the explanation given by the assessee and, accordingly, assessed all the three credit entries to the account of the assessee as the income.

4.

On appeal, the Commissioner (Appeals) examined the matter in detail and found that ShriS.K. Gupta was the real owner of the business. The explanation given by the assessee was found to be satisfactory and he deleted the aforesaid three entries. The same finding of fact has been affirmed by the Tribunal. 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 assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by the particular individual and it is responsibility of that individual to account for the investment made by him. If that person owns that entry, then the burden of the assessee-firm is discharged. It is open for the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount.

5.

So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be income of the firm for the purposes of income-tax. It is open for the Assessing Officer to take appropriate action under section 69 of the Act against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries.

6.

We are, therefore, of the opinion that the view taken by the Tribunal is correct and the aforesaid question is answered against the revenue and in favour of the assessee."

"6.

The above reply of the assessee with regard to addition of Rs. 45 Lacs has been found to be general in nature and not tenable due to fact that

1.

The assessee has shown huge cash in hand as on 01.04.2016 amounting to Rs. 12,80,000/-whereas the business was started in the month of August 2016. Moreover, the assessee also has bank account and has not deposited the same in his bank account.

2.

The assessee has not shown sale of diesel and petrol during August and September, whereas purchase had been made during August and September amounting to Rs. 23,83,415.67/- and Rs. 21,32,183.02/- respectively. It gives an indication that sale had also taken place in month of August and September but had not been shown by assessee.

7.

Keeping in view of above, an addition of Rs. 45,15,599/- is made to the return income of assessee on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961 for the F.Y. 2016-17 relevant to A.Y. 2017-18 and the tax will be charged on the assessed income as per provision of section 115BBE of the Income Tax Act, 1961."

"4.5.

Addition of Rs. 45,15,599/- (Suppressed Sales/Purchases): The AO noted purchases worth Rs. 45.15 Lakhs in August/September 2016 from Essar Oil Ltd but NIL sales. Conversely, sales in November 2016 (demonetization period) spiked to Rs. 85.82 Lakhs. The AO inferred that sales from Aug/Sept were suppressed and booked in November to launder cash using the demonetization immunity. The Appellant argued that the "purchases" were actually payments for machinery or accounting adjustments (clearing entries), and that 23-10-2016. The operations only commenced on submission of the Appellant regarding the nature of ledger entries is found to be an afterthought. The ledger of Essar Oil Ltd reflects substantial financial transactions in August and September. The explanation that entries like "Rs. 15,40,040/-" were merely "clearing documents" does not negate the fact that there was active financial movement indicative of business activity. Furthermore, the Appellant admits to holding a massive opening cash balance of Rs. 12,80,000/- on 01.04.2016 but claims it was not deposited in the bank until September because the bank account was not open. This explanation is highly unconvincing. No prudent business holds such a large cash inventory for five months without banking it. especially when claiming the business was yet to commence. The most damning evidence is the sales pattern. The jump in sales to Rs. 85 Lakhs in November 2016-nearly 7 times the sales of other months-cannot be coincidental. It strongly corroborates the AO's finding that the assessee utilized the demonetization window to deposit unaccounted cash generated from prior months (August/September). The explanation of "testing" fuel is insufficient to justify the purchase volume of over 12,000 litres. The AO's estimation that the purchase value of Aug/Sept represents suppressed sales is logical and consistent with the preponderance of probabilities. The Appellant has failed to rebut the strong circumstantial evidence of profit shifting. The addition of Rs. 45,15,599/- is confirmed. Penalties and interest are consequential in nature. Since the quantum additions are confirmed, the initiation of penalty proceedings and charging of interest are also upheld."