Abhyudaya Pharmaceuticals vs Commissioner of Income Tax

Prakash Krishna, J.—The present appeal has been filed u/s 260A of the income tax Act, 1961, by the assessee relevant to the assessment year 1991-92 against the order dated December 17, 2002, passed by the income tax Appellate Tribunal, New Delhi, in Appeal No. 2618/Del/98 whereby the appeal which was filed by the assessee was dismissed by the Tribunal. The background facts may be noticed in brief.

The appellant is a registered partnership firm constituted, vide partnership deed dated July 5, 1990. The firm was formed to carry on business of distributorship of medicines of M/s. Alembic Chemicals Work Co. Ltd., Baroda.

Master Shishir Kumar Garg (minor) was admitted to the benefits of the partnership firm as partner who contributed his capital account in the shape of two demand drafts of Rs. 1,90,000 and Rs. 72,000. These demand drafts were credited on July 7, 1990, by the bank in the account books of the firm (assessee). In the assessment proceedings, the Assessing Officer required the assessee-firm to explain the source of aforesaid contribution made by Master Shishir Kumar Garg. Explanation was offered which was not found satisfactory and the Assessing Officer has added a sum of Rs. 1,90,000 in the hands of the assessee, after rejecting the explanation furnished by Master Shishir Kumar Garg in respect of the said amount.

The assessment order was unsuccessfully challenged before the Commissioner of income tax (Appeals) as well as before the income tax Appellate Tribunal. Hence, the present appeal.

The appeal has been admitted on the following two substantial questions of law:

Whether, on the facts and in the circumstances of the case, there was any material before the Appellate Tribunal and its order was perverse in upholding Rs. 1,90,000 introduced by the partner, in the assessee-firm at the time of starting of business, as income of the firm?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in not considering the main ground Nos. 2 to 6 of grounds of appeal independently and dismissing the appeal summarily without recording any finding on the said grounds?

Heard Sri R.R. Kapoor, learned counsel for the appellant and Sri Dhanjai Awasthi, learned counsel for the respondents.

Question No. 1

We take up question No. 1 first, the necessary facts regarding which may be noticed in brief.

It may be noted that the appellant is a registered partnership firm and the relevant assessment year 1991-92 was its first year. It filed a return declaring the income of Rs. 3,59,620. The return was filed on October 24, 1991. The partnership firm consisted of eight partners. During the previous year relevant to the assessment year in question/the partners contributed capital of Rs. 25,31,870. One of the partners, namely, Master Shishir Garg, introduced Rs. 2,62,000 as capital. There appears to be no dispute with regard to the other partners who brought their capital in the firm. The dispute is confined to the capital contribution made by Master Shishir Garg (Shishir Kumar Garg). The Assessing Officer asked the assessee to explain the aforesaid deposit in the capital account of the firm. In response, Sri M.L. Garg father and guardian of the minor was produced. He filed cash flow statement of Shishir Garg for the assessment years 1989-90 and 1990-91 and submitted that the minor was an income tax assessee. He stated that out of Rs. 1,90,000 Rs. 1,03,000 was received as cash loan in January, 1989, and the balance was his savings, gifts, etc. The explanation given by the father/guardian of the minor was not found satisfactory by the Assessing Officer nor by any of the appellate authorities.

Shri R.R. Kapoor, learned counsel for the appellant, at this juncture submits that, firstly, the authorities below were not justified in not accepting the explanation. Three ingredients with regard to section 68 were satisfied. The identity of the person was proved. The creditworthiness and the source of money was also proved. In any view of the matter, even if the aforesaid amount is treated as unexplained cash credit, it could not be added in the income of the assessee-firm as it was its first year of business and it could at the most be added at the hands of the minor partner.

In reply, Shri Dhananjai Awasthi, learned counsel for the Department, submits that so far as the first submission is concerned, the findings returned by all the authorities below with regard to it are essentially findings of fact. It cannot be said that the inference drawn by the authorities below is perverse or not plausible. At any rate, he submits that no substantial question of law is involved. So far as the second limb of the argument is concerned, he submits that in view of the Division Bench judgment of this court in the case of Commissioner of Income Tax Vs. Kapur Brothers, , the view taken by the Tribunal is based on correct import of section 68 of the Act.

Considered the respective submissions of the learned counsel for the parties. So far as the first limb of the argument of the appellant is concerned, we will deal with that part of the argument while deciding question No. 2.

So far as the second limb of the argument that at whose hands the addition should be made is concerned, it is apt to have a look to section 68 of the income tax Act. Heading of the said section is "cash credits" and it reads 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 Assessing Officer, satisfactory, the sum so credited may be charged to income tax as income of the assessee of that previous year.

It may be noted that section 68 of the income tax Act, 1961, is a new provision in the sense that there was no such provision under the old Act, i.e., the Indian income tax Act, 1922. Even then the underlying principle of section 68 was given judicial recognition by courts. In other words, the principle has been developed on the basis of judicial decisions which has been given statutory recognition by section 68.

Commissioner of Income Tax Vs. Jaiswal Motor Finance, is a Division Bench authority of this court wherein it has been laid down that if there are cash credit entries in the books of the assessee-firm in which accounts of an individual partner exists, and it is found as a fact that the cash was received by the firm from its partners then in the absence of any material to indicate that they were profits of the firm, it could not be assessed in the hands of the firm. The learned counsel for the appellant submits that the aforesaid decision applies with full force to the facts of the case on hand. Noticeably, this was also a case where it was the first year of assessment of the firm. The observations made therein if read in the context of the facts of the present case, the submission of the appellant''s counsel is well founded. The relevant extract is reproduced below (page 707):

It appears to be well settled that if there are cash credit entries in the books of the firm in which the accounts of the individual partners exist 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 were profits of the firm, it could not be assessed in the hands of the firm. We are, therefore, of the opinion that the Tribunal did not commit any error of law and rightly held that the deposits shown in its accounts were satisfactorily explained.

At this stage, the learned standing counsel for the Department places reliance upon another Division Bench decision of this court in the case of Kapur Brothers [1979] 118 ITR 741 (All). It is apt to examine the facts of the case of Kapur Brothers (supra). The Assessing Officer found a deposit of certain amount while making assessment of M/s. Kapoor Brothers. The amount was deposited in the name of its partners. The deposits were entered as on October 20, 1966, The accounting period for the assessment year 1967-68 ended on November 11, 1968. The explanation offered by the assessee was not found satisfactory. In this factual background, it was noticed that the entries were made about three weeks prior, to the end of the accounting period. In this factual background the High Court held that cash credit entries standing in the name of the partners in the account books of the firm would validly be treated as income of the firm from undisclosed source.

On a first flash, it appears that the ratio of the aforesaid decisions given in the case of Kapur Brothers [1979] 118 ITR 741 (All) and Jaiswal Motor Finance [1983] 141 ITR 706 (All) is conflicting, but on a meaningful reading thereof, would show that they were rendered in different factual matrix. The ratio laid down in the case of Kapur Brothers [1979] 118 ITR 741 (All) will be applicable in a case where a partner brings capital amount at the formation of the firm itself, before the commencement of business by the firm. It would not be applicable in a case where the deposit is reflected in the account books of the firm during the currency of the business of the firm. The underlying idea in the case of Kapur Brothers [1979] 118 ITR 741 (All) is that when the assessee-firm has no business, it cannot possibly have any income. Therefore, in such a case the question of presumption of income of the assessee-firm would not arise generally. But it is not appropriate when the assessee-firm is earning income from its business and in that situation the assessee-firm has to explain the cash credit standing in its account. If the above line of distinction is kept in mind, we find that both the decisions are standing on a different factual background.

It is interesting to note that the aforesaid two decisions one given in the case of Commissioner of Income Tax Vs. Jaiswal Motor Finance, and another in the case of Commissioner of Income Tax Vs. Kapur Brothers, were again came up for consideration before a Division Bench of this court in the case of India Rice Mills Vs. Commissioner of Income Tax, . The relevant extract is reproduced below ( India Rice Mills Vs. Commissioner of Income Tax, ):

However, the Tribunal relying on Commissioner of Income Tax Vs. Kapur Brothers, , held that since the amount was credited in the books of the assessee-firm, it is for the assessee to explain the source of the deposits and as the assessee-firm failed to discharge that onus, the deposits were rightly taken to be the income of the assessee-firm from undisclosed sources by the assessing authority...

Reliance on Commissioner of Income Tax Vs. Kapur Brothers, is misplaced, inasmuch as in that case deposits were entered in the books of the firm when it was already carrying on its business. The firm was called upon to explain the source of the deposits. The explanation of the firm was that the deposits represented the sale proceeds of certain assets belonging to the partners. When no evidence was adduced to substantiate that explanation, the assessing authority added the amount as income of the partnership firm. These facts are materially different from the fact of the instant case. Most striking feature of the case on hand is that all the deposits came to be made during the accounting year in the books of the assessee-firm before it started its business. Therefore, the onus was on the partners to explain the source in the case on hand and if they failed, the amount could have been added in their hands only and not in the hands of the assessee-firm.

On the facts and circumstances of this case, we are of the considered opinion that the authorities below have committed error as they have failed to take into account that this was the first year of the business of the assessee-firm. The partnership firm was formed on July 5, 1990, and on July 7, 1990, Master Shishir Garg deposited Rs. 1,90,000 and Rs. 72,000 as capital money with the firm through bank clearance of two bank drafts. The accounting period being financial year, i.e., ending on March 31, 1991, the firm could not have any income at the time of its formation. The identity of the depositor, i.e., Master Shishir Garg Was not in issue at any point of time before the income tax authorities. They treated the said deposit by Master Shishir Garg. This being so, if for one reason or the other, they were not satisfied with the financial capability of Master Shishir Garg, the amounts could have been added at the hands of Master Shishir Garg and not at the hands of firm.

The decision relied upon by the learned counsel for the Department is clearly distinguishable on facts as it was not in respect of first year of the business and has no application whatsoever. The argument put by him that the income was liable to be added in the hands of firm as Master Shishir Garg being minor could not be prosecuted, has no substance.

It may be noted that the decision given in the case of Jaiswal Motor (supra) is being constantly followed by this court in the subsequent decisions. Reference can be made to Surendra Mahan Seth Vs. Commissioner of Income Tax, .

The Rajasthan High Court in Commissioner of Income Tax Vs. Kewal Krishan and Partners has also taken similar view.

In view of the above, we are of the considered opinion that on the facts of the present case, the Tribunal was not justified in holding that the unexplained cash credit recorded in the assessee''s books be added in the hands of the assessee. We, therefore, hold that there was no material before the Tribunal in holding that Rs. 1,90,000 introduced by Master Shishir Garg at the time of starting of the business, as income of the asses-see-firm. The Tribunal erroneously came to the conclusion that the deposits represented undisclosed income of the assessee-firm. All the three authorities below committed the same mistake and in this regard their orders cannot be allowed to stand.

Question No. 2

Now, we take up question No. 2. It is an acknowledged legal position that the income tax Appellate Tribunal is the highest fact finding authority. The findings returned by the Tribunal unless perverse or against the material on record are binding. A bare look to the order of the Tribunal under appeal would show that it contains 11 paragraphs. Up to paragraph 9, it has noticed the history of the case, the findings recorded by the authorities below to it as also the respective arguments of the counsel for the parties. Then, in para. 10 it has reproduced a portion from the order of the Commissioner of income tax (Appeals) and in the last paragraph that is paragraph 11, it has dismissed the appeal with the following observation:

We find no infirmity in the order and have no hesitation in dismissing the appeal filed by the assessee.

There is absolutely no discussion about the respective arguments of the counsel for the parties therein. It does not contain the points for determination and its findings thereon. Even an order of affirmation by a higher authority requires that the authority should give its own reason, may be, in brief for its concurrence with the order appealed. An order without reason is no order in the eyes of law. The income tax Appellate Tribunal is under an legal obligation to record its own finding on the submissions of the learned counsel for the parties, may be in brief, depending upon the facts and circumstances of the case. But if it does not contain any reason such an order is no order in the eyes of law and cannot be allowed to stand.

Remarkably, in the opening portion of the order, the Tribunal noticed the grounds raised by the assessee in the memo of appeal. It has taken trouble to reproduce them but left them undecided. Definitely, the case merited a different treatment at the hands of the Tribunal.

In view of the answer given by us of question No. 1, no useful purpose is going to be served by restoring the matter back to the Tribunal to decide ground. Nos. 2 to 6 raised in the memo of appeal before it.

We, therefore, hold that the Tribunal was not justified in not considering ground Nos. 2 to 6 of grounds of appeal independently and it committed illegality in dismissing the appeal without recording any finding thereon.

Viewed as above, therefore, we decide both the aforesaid substantial questions of law in favour of the assessee-appellant and against the Department. The appeal is allowed accordingly with costs assessed at Rs. 500 (Rs. five hundred only).