Allowed

M/s Durga Granites, v. The Assistant Commissioner of Income Tax, Circle - 1

Telangana HC4 Sept 2023ITTA/30/2023

Case brief

AI extract

What is this about?

The High Court allowed the income tax appeal, setting aside the ITAT's order that added partner capitals under Section 68. The court held that when a firm discloses partner contributions, the burden shifts to the Department to verify with partners, not the firm, and affirmed the CIT(A)'s earlier relief.

What did the court decide?

The appeal was allowed; the order of the ITAT was set aside; the order of the CIT(A) dated 30.06.2017 was affirmed.

M/s Durga Granites, Vs The Assistant Commissioner of Income… — Income Tax | Telangana HC (2023)

¶1

[³³⁸⁶ ]

¶2

IN THE . HIGI{ COURT ATHYDERABADFOR THE STATE OF TELANGANA

¶3

MONDAY, THE FOURTH DAY OF SEPTEMBER TWO THOUSAND AND TWENTY THREE

¶4

PRESENT

¶5

THE HON'BLE SRI JUSTTCE P.SAM KOSHY AND TH E HON'BLE SRI JUSTICE LAXMI NARAYANAALISHETTY

¶6

t.T.T.A 30 ot2023

¶7

lncome Tax Tribunal Appeal Under Section 260,4 of the Income Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ,A,, Hyderabad in lrA No.1706 tHydl2o17, for assessment year zo14-1s dated 31-01_ 2022 preferred against the Order of the Commissioner of Income Tax (Appeals)-2, Hyderabad, lrA No.0346/2016-17 dated 30-06-2017 preferred against the order of the Commissioner of lncome Tax Department, Hyderabad, PAN/GlR No.ACTPN4020C dated 21 - 1 2_20,1 B.

¶8

Between:

¶9

M/s Durga Granites. 2-1O-1-OZgl23, Flat No.406, SRR Enclave, Jyothinagar, Karimnagar - 505 001, Telangana

¶10

..APPELLANT

¶11

AND

¶12

The Assistant Commissioner.of lncome Tax, Circle _ 1, Karrmnagar, Aayakar Bhavan, Karimnasar - sos oO1, ir;ga;;:" -""'"

¶13

.RESPONDENT

¶14

Counset for the Appellant: SRI AV.A. SIVA KARTIKEYA

¶15

counsel for the Respondent: smt. suNoARr R. prsupATr, sR sc FoR cEc

¶16

AND ST

¶17

The Court made the following: ORDER

¶18

¶19

THE HON'BLE SRI JUSTICE P.SAM KOSHY AND

¶20

,fHE HON'BLE SRI JUSTICE LAXMI NARAYANA A,LISHETTY

¶21

I.T.T.A.No.30 of 2o23

¶22

ORDER.'1per Hon'ble Sn Justice P.SAM KOSI-fl)

¶23

The instalt appeal under Section 260-A of the Income Tax Act,^,l96 1 , is prelerred bv the appellant/ast;essee. The appellant in the in stalt appeal has challengeci the^order dated 3l .0 ] .202',1 1;assed bv the FIon'ble Irtcome Tax Appellatc'l'ribur,al Ilvdcrabad Bench'A', IlI'derabad, ln l.T.A.No. \7Obit l,.r.1 i 20i7. lbr the assessrlent 3,'r;ar 201'420i 5.

¶24

Fk'r,uri Sr-r it /,. Srva l(artil<eya, lcarned^{<:ottnsel for} Lhe appcliernt:urcl Srnt. Strndari R.Pisupati, learned counsel for the respon dc'n,. Department

¶25

ll, TLrc bnti lacl s rcqr-rirecl lor adjudication of the present ilppeal air(l to ilns\i^('r thc clutt'sLit;ns lramed^r.l'hile: admitting rhe appcal irrt'ars irirrlcr:

¶26

3.1 'l-[-t t: a 1r t:,' lli t tr t IS partncrship firtn. w'hich lor 'I the asst:ssur(--n I \ r'iir' 20 I -t 20¹ 5 lilcd its return of^incorne

¶27

¶28

on 3O.Og.2Ol4.^{Theappetlanthadadmittedan} income of Rs. 1,84,O8,23O/-.^{The respondent-Department} subsequently subjected^{the return of the appellantfor a} limited scrutiny^{on the ground that there is substantial} increase in the capital^{in the year with mis-matchingthe} sales turnover^{as reportedin the audit reportand ITR'}

¶29

3.2 During the^{year under consideration,the fixed} capital account of^{the partnershipfirm got enhancedby} Rs.3.51 crores on account^{of introduction of new partners'} The Assessing Offrcer^{thereafter, calledfor the detailsfrom} the appetlant to^{which the appetlantfurnished his response} and also gave^{explanation.The AssessingOfficer,} subsequently', did^{not accept the explzrnationprovided b-y} the appellant and^{passed the order of assessment again on} 09. I I .2016. While^{passingthe impugnedorder, the} Assessiug Oflicer^{made an addition of Rs.2,71,O0,OOO/} being the capital introduced^{by the partners' That apart'} the Assessing Officer added^{another additionalamounl ol} Rs.5.+.50,207/- being^{the capital introducedb,Y the} appcllant, rvhich^was subsequently^{said to have beenp:rid} back to the partners in the^{same year under Section 68 ot}

¶30

¶31

¶32

the Act. The Assessing Officer also disallowed^{the interest} paid to the partners on the capital introducecl by them under Section a0^(b) of the^Act.

¶33

3.3 The aforesaid order of the Assessing Officer^was subjected to challenge b-'^{u'ay of} an^{appeal by tht: etppellant} before the Commissioner of lncome^{Tax (AppeaJ s]-2 (for} short 'CIT (Appeals)'), Hvderabad,^{vide ITA No.0l)46/2016-} 17. The CIT (Appeals) bv its order dated 30.06.2017^allowed the appeal of the appellant holding that^{the partnership} f,rrm is not required to explain the sources^{of inc,lme of the} partners in respect of the arnount contributt:d^{by the} partners towards the capital of the firm.

¶34

3.4 The said order ol the CIT^{(Appeals)was further} subjected to challenge bv^tl.rc respondent-Department^by way of an appeal before tlrt' Hon'ble^{lncome Tax Appellate} Tribunal, Hyderabad Bcnch^{'A',Hyderaba<1,vide} I.T.A.No. 1706/Hydl2O17. The Hon'ble^{ITAT vide its order} dated 31.01 .2022 reversed thc lindings of^{the CIl' (Appeals)} and in the process,^{aftlrrnecl the order of the Assessing} Officer dated 09 I l.2O ltr^{l'trc [{on'bleITAT also reversed}

¶35

¶36

C',

¶37

the findings of the CIT (Appeals) so far as deletion of interest payabte to the partners of the assessee firm holding that the assessees could not establish very cojent documents so far as the interest paid to the partners of the assessees firm being debited in the profit and loss account of the assessee hrm. It is this order of the Honble Tribunal which is under challenge in the present appeal.

¶38

The appeal was admitted for hearing on 13.03.2023

¶39

on the follou,ing substantial questions of law:

¶40

1 . Whether on tLE facts and in. the ciranmstances of the case, Tibunal is ight in setting aside the uell-considered order of the Commissioryer of lncome Tax (Appeals) and in sustaining the addition made by the Assessing Officer under Section 68 of the Act?

¶41

Whether on tl'Le facts and in the circurtrstonces of the case, Tibunal is i!1ht in taxing the credits in the hands of the firm, speciallg when the arnounts are alreadg taxed in tle hands of tle indiuidual pafiners, therebg resulting in double taratiort?

¶42

Whetler otr the facts and in tLE ciranrnstances of the case, Tibunal is corect in holdinq thot interest poament made bg the firm is in uiolatiott of Sectiort 40(b) of the Act?

¶43

Though r'''hile admitting the appeal there were three

¶44

substantial questions of law framed. However, while

¶45

arguing the matter, the learned counsel for the appellant

¶46

¶47

¶48

only stressed upon substantia-l question Nos.1 atrd 2^and did not make his submissions so far as :;ubstantial question No.3 is concerned. Hence, we tzd<e into consideration the contents of substantial question Nos.l and 2, which would clearly reflect that they are ir-rtrinsically connected to each other and thus the 1"' substantial question of law would be required to be ansrvered together. Hence, we take up both the questions to be considered analogously

¶49

It would be relevalt at this^juncture to t€ke note of the wordings of Section 68 ol the lncome Tax Act, I96 1, for adjudication of the two substantial questions of [aw, which for ready reference is being reproduced herein undr:r

¶50

'Sec.'^{568. Wtere any surn is} foturd^{creditetT in the} books of an assessee maintained for orttl preuiots^gear, and the assessee offers no explartatiort ctbottt the^nature and source thereof or tLrc expLanatior,- offered bu hi,n is not, in the opinion of the Assessing Offic<zr, satisfacrc.try, the sum so credited may be charged to incorne-las. os the income o.f the assessee of that preurolls^qear:

¶51

Provided that uthere the asse.s.see is <t cornp,ttty^(not being a companA in uhich the^pttfi!1p rtre substantially interested), and the sum so credited consists of share application moneA, share capitttl, shore S;rerniurr, or^anA such amotLnt by whateuer rrcurre cctllecl.^{atrg explanation} offered bg such assessee-co;rl pany^{slutllbe deerrtedto be} not satisfactory, unle ss

¶52

¶53

¶54

(o) The person, being a^{resident in uthose name such} credit is recorded in the^{books of suchcompang also offers} an explanation about the^{nature and source of such sum} so credited; and

¶55

(b) Such explanation in the opinion of^{the Assessing} Officer aforesaid has been found^{to be satisfactory.}

¶56

Provided further that nothing^{containedin th.e} first proui,so shall applg if the person, in u-those name^{th.e sum} referred to therein is recorded, is a^{uenture capital} fund^or a uenhre capital companA as^{refened to in clause (23F8)} of Section 10."

¶57

A plain reading of the aforesaid^{provision of law would} clearly reflect that the said^provision of^{law would be} applicable in a situation^where, in the^{course of} assessment, the Assessing Officer^{seeks an explanation} from the assessee in respect of certain^{amounts wtrich are} found credited in the books of the^assessee hrm.^{And to the} said sum, the explanation^provided by the^{assessee was not} satisfactory

¶58

According to the learned counsel for the^appellant, the Hon'ble ITAT has erroneously^{mis-interpretedthe} provisions of Section 68 of the Act and have also held taxing the credits b1 the partners in the hands of^the assessee firm. It is further contended that the requirement under Section 68 of the Act. so far as the explanation to^be

¶59

¶60

¶61

provided as^{regardsthe sources of income of tht: partners'} the sarne should^{not had been enquired from the} appellant's firm.^{Rather, the sarne should had been} enquired from^{the respectivepartners u'ho had investedin} the firm by^{way of capital and loan' And that tht' Assessing} Officer and the Hon'ble^{ITAT have 't\rrongl-y adderl the same} in the hands of^{the appeltant as unexplainedcreditunder} Section 68 of the^{Income Tax Act, 196 1'}

¶62

Learned^{counselfor the respondent-Departrlent on the} other hand,^{opposingthe appeal,submits that tht: order of} the Assessing Officer^{which was affirmed bv the Hon'ble} ITAT reversing^{the frnding of the CIT (Appeals;) does not} warrant interference^{as the Hon'ble ITAThacl e'xtensively} deatt with the^{issue and have ansu'ered[lle s:'me in a} reasoned martner^{by way of a speaking order' As such'} there is no substantial^{question of lau' nttrclc out by the} appellant. It is^{further contendedthat stltc't: St'clion 68 of} the Act requires^{plausible explanationiri respt'ct' of the} arnount put by the^{partners tou'ardscerpil ai sources of} income of the Partners.

¶63

¶64

¶65

According to the learned counsel for the respondentDepartment, since the appellant had not established before the Assessing Offrcer so far as the cash introduced by the partners in their respective books, but merely reflected in ttre books of the assessee firm, the Assessing Oflicer and the Hon'ble ITAT both were^justihed tn dis-allowing the claim of the appellant.

¶66

Having heard the content-ions put lorth on either side and on perusal of records, admittedly the appellant herein is a partnership hrm. The return rvas filed by the appellant for the assessment year 2014-15. On 3O.O9.2O14, upon limited scrutiny of the said return filed by the appellant, some discrepancy and mis-match rvas detected. The Assessing Officer in the course ol the assessment, made an addition under Section 68 of the Act to the extent of Rs.2,71,00,000/- being the capital introduced by the partners. The Assessing Officer further made an addition an amount of Rs.54,50,207/ being the capital introduced by the partners which was paid bacl< to the partners in the said year itself. The Assessing Officer subsequently disallowed the interest paicl to the p.rrtners on the capital

¶67

¶68

¶69

introduced by them. The appellant herein had oifered^his explanation, which the Assessing Officer did not accept the explanation and passed the assessment order.

¶70

The said assessment was subjected to challenge^by the appellant before the CIT (Appeals). The sai,l^Appellate Authority i.e. the CIT (Appeals) vide order dated^30.06.2017 partly allorved the appeal of the appellant and rejected the assessment made by the appellant so far as the^czrpital invested by the partners into the partnership flrm. The CIT (Appeals) relied upon the judgement of this High Cor-rrt in the case of the Commissioner of Income TcLr^u M.Venkateshwar Roo and ottrerst. In the said irrdgement, the Divrsion Bench of this Court had helc that^the parlnership firm is not required to explain the sources of income of partners so far as the amount contributed bv the partners to$'ards the capital of the partnership firnr

¶71

Aggrieved by the aforesaid order of the CII^(r\ppeals) datcd 30.06.2017, the respondent-Departrnt:nt^l.rad prcfe rred the appea-l before the Honble ITAT.^u.hert: the

¶72

'[201s]^{tio IIR 212 (T&AP)}

¶73

¶74

¶75

case was registered as ITA No.1706lHyd/2017. The^Hon'ble ITAT had reversed the order of the CIT^(Appeals) holding that the appellant has not been able to^provide sufficient material to establish the source of income of the partners who had invested in the appellant's partnership firm. Undoubtedly, from the pleadings it^reflects that the stand^of the appellant all along was that the investment to^the partnership lirm was contributed by the partners.

¶76

L2. Now the only question that needs to be considered at this juncture, ls that, in the event of the appellant's partnership firm disclosing that it was the partners who had contributed in the capital, the source of income of the partners was to be explained by the partners themselves and not by the firm. In the case ol M.Venkateshwar Rao, supra, the Division Bench of this Court in paragraph No.7 held as under:

¶77

'It is a matter of record that the^responde:ri Jinn^cornprises ten partners and eoch of tlem made contributi<lts, be it in the form^{of ca.sh or bonkguaranteeslo be} funislrcrl^{to the} Gouentment, at the commencement of^busitte-s-s. Thr:^returns submitted bg tLte respondent-firm Luere^processed, and the facts^and figares furnished^{bg it Ltereacceptr:rl . Hou.)euer,the} mqtter u)a.s reopened at a later^{pointoJ' tirne. I'ltcAs-scs-sin4} Officer treated the capital raised bg^tlrc ilnn^{ut tLte} fonn of contibution^s made bg the^partnersas irtgrne.^?hi-s conclusion u-tas arriued at on^{the ground} tltttl source^ctf ,income for^{the partnersu)as tTot e-xpLained.Lr:anu:clcounsel}

¶78

¶79

¶80

for^{the appellantplaced relianceuponthe judgment of the} Patna High Court in CIT u. Anupam Udgog [1983] 142 ITR 133 (Pat). The Tribunal rested its conclusions upon the pdgment of the BombaA High Court in Nan.ayondas Kedarnath u. CIT [1952] 22 ITR 18 (Bom) and th,tt of the Allahabad High Court in CIT u. Jaisutal Motor Finance |^{1 98311 4 1 rrR 706(Arr)."}

¶81

Recentlv, again the Division Bench of tl-^,is Court in somewha[ similar case between M/ s. Noua Medicare uersus The Inconrc Tax Officer, decided on 75.O2.2C2.3, relying upon the decision of M.Venkateshwar Rao, supra, in

¶82

paragraph No.I5 held as under:

¶83

"Follotuttq and applying the aforesaid decbiort of thts Court, Potna Htgh Court in Anurag Rlce Mllls (supra) held that in such circumstances the unexplained caslt credits tuould haue to be assessed at the lnnd.s of the portrters of the Jinn and nol the firm ttself. Such amounts could not haue been treeted as income of the firm bg relging upon &tclion 68 of tLLe Act..^"

¶84

The Hon'ble Supreme Court of India also in the case of the Comnussioner of Income Tax u. Louelg Export:; (P) LTD- it-r

¶85

a short judemcnt at paragraph No.2 held as und,3r:

¶86

''('rrrr rlr<, amount of share moneg be regord,etd as urttlrscloserJ rLcome under s. 68 of IT Act, 1961 ? We f.nd no nlenl Ln tlri-s .S)rccial Leaue Petitin for the simple reason that il the shurc ttpplication money b receiued bg the c'ssesser: conlpenr.l Jion'L allegedbogus shareholders, utlase names are qtL'en lo titr, ,,(), then the Department is free to proceed k) reopen ll,er rrrdluiclual cssessments in accordance with lau,. Ilcrrce. tL,e'.lirr<l tto inftnnity with the impugned judgmcnt."

¶87

[2008]^{216 CrP.l9s rSC)}

fl!

The ratio laid down in the aforesaid^{three decisions} clearly indicate that if in a^proceeding under^{Section 68 of} the Act, the assesse has been^able to explain^{the sources of} income, which in the instant case, the appellant^{had been} stating that the capital investment^{made by the partnersof} the said firm is sufficient to meet^{the requirement under} Section 68 of the Act. Thereafter, if at all,^{if the respondent-} Department was not satisfied with the^{explanation,it was} for them to have got it verihed from the^{partncrs.Ratirer} tha-lr still pursing the matter before the^appellant's partnership firm, which is otherwise impermissible in^the light of the^judgement referred to in the^preceding paragraphs.

¶93

In the instant case also the appellant^{havingsaid that} the capital investment is that made^{b1' the partners.} Applying the aforesaid^{judicial precedet.rts, tl.re burdennor'r'} shifts upon the respondent-Department^{to gct it counter} verified from the partners from their^{books of accounts} ascertaining whether such^{investmenls havc ht:cn made or} not. In the absence of such^{an enquiry/ r'erificaAofi from the} p:rrtners by the respondent-Departmcnt, the ordt:r ol^the

¶94

¶95

Assessing Olficer, as also the stand taken by the Hon'ble ITAT would not be sustainable and the same dese.:ves to be and is accordingly' set aside/quashed. The order passed by the CIT (Appeals) dated 30.06.20 17 stands affirmed

¶96