# M/s Kesharwani Sheetalaya v. Commissioner of Income Tax, Allahabad

- **Citation:** (2020) 6 ILRA 33
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2017-03-15
- **Case number:** Income Tax Appeal No. 17 of 2007
- **Bench:** Biswanath Somadder, Dr. Yogendra Kumar Srivastava
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/m-s-kesharwani-sheetalaya-v-commissioner-of-income-tax-allahabad-45827
- **Pages:** 13

## Headnote

Tax Law - Unexplained Cash Credits -
Income Tax Act, 1961: Section 68,
143(2)/142(1), 143(3) - where the sum
is credited in the book of accounts of a
firm from a partner, the assessee have
to
prove
the
genuineness
of
the
transaction
and
identity
and
credit
worthiness of the creditor. Once the
assessee proves all the three things its
onus is discharged. The assessee only
needs to prove the source of credit
entries and he is not required to prove
the source of source of the creditors'
credit.
(Para
30)
34 INDIAN LAW REPORTS ALLAHABAD SERIES
The requirement under Section 68 is that
the assessing officer must be satisfied
that the explanation offered by the
assessee is genuine, but it is also provided
that in the absence of a satisfactory
explanation, the unexplained cash credit
"may" be charged to income tax -
therefore, the unsatisfactoriness of the
explanation
would
not
automatically
result in deeming the amount credited in
the books as income of the assessee.
(Para 15)

Applicant (partners in the firm) have shown
the agricultural income in their personal
returns of the past years which had been
accepted by the department as such. The
partners are all identifiable and separately
assessed to tax. The source of investment
having been explained, in the event the
Assessing Officer was not satisfied the
addition could have been considered in the
hands of the partners and not in the hands
of the firm. The burden of proving the
source
of
the
credits
having
been
sufficiently explained the addition could not
have been made in the hands of the firm in
the facts of the present case. (para 32)

Writ Petition Allowed. (E-10)

List of cases cited:-

## Text

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6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
33
Court should not be powerless in enabling
the parties to have a better option.

19. In determining the question
whether
provision
is
mandatory
or
directory, language alone is not always
decisive. The Court has to have the regard
to the context, the subject matter and the
object of the provision.

20. The study of numerous cases
on
this
topic
does
not
lead
to
formulation of any universal rule except
this that language alone most often is
not decisive, and regard must be had to
the context, subject-matter and object of
the statutory provision in question, in
determining
whether
the
same
is
mandatory or directory. In an oft-quoted
passage
Lord Campbell
said:
''No
universal rule can be laid down as to
whether mandatory enactments shall be
considered directory only or obligatory
with
an
implied
nullification
for
disobedience. It is the duty of courts of
justice to try to get at the real intention
of the legislature by carefully attending
to the whole scope of the statute to be
considered.'

21. Thus, in view of the ratio laid
down in the case of Smt. Sureshta Devi
(supra), we do not find that the Court
below committed any illegality or legal
infirmity in holding that consent given for
divorce
by
mutual
consent
can
be
withdrawn by one of the parties before a
Court grants a decree of divorce by mutual
consent and when the consent by one of the
parties is withdrawn, the Court cannot pass
a decree of divorce by mutual consent.
Since in this case the respondent has
withdrawn his consent before the passing
of a decree of divorce by mutual consent,
we do not find that the Court below
committed any error in passing the order
dated 15.03.2017 in Case No.392 of 2017
(Smt. Shweta Yadav Vs. Prabhat Singh).

22. This appeal lacks merit and is
accordingly dismissed.
----------
(2020)06ILR A33
APPELLATE JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 24.04.2020

BEFORE

THE HON'BLE BISWANATH SOMADDER, J.
THE HON'BLE DR. YOGENDRA KUMAR
SRIVASTAVA, J.

Income Tax Appeal No. 17 of 2007

M/s Kesharwani Sheetalaya ...Appellant
Versus
Commissioner of Income Tax, Allahabad
 ...Respondent

Counsel for the Appellant:
Sri R.R. Agarwal, Sri Umesh Chandra
Kesarwani, Sri Krishna Agarwal, Sri Pawan
Shree Agarwal, Sri Nikhil Agarwal, Sri
Suyash Agarwal

Counsel for the Respondent:
S.S.C.I.T., Sri Krishna Agarawal, Sri A.N.
Mahajan, Sri B.J. Agarwal, Sri Manu
Ghildyal

Tax Law - Unexplained Cash Credits -
Income Tax Act, 1961: Section 68,
143(2)/142(1), 143(3) - where the sum
is credited in the book of accounts of a
firm from a partner, the assessee have
to
prove
the
genuineness
of
the
transaction
and
identity
and
credit
worthiness of the creditor. Once the
assessee proves all the three things its
onus is discharged. The assessee only
needs to prove the source of credit
entries and he is not required to prove
the source of source of the creditors'
credit.
(Para
30)
34 INDIAN LAW REPORTS ALLAHABAD SERIES
The requirement under Section 68 is that
the assessing officer must be satisfied
that the explanation offered by the
assessee is genuine, but it is also provided
that in the absence of a satisfactory
explanation, the unexplained cash credit
"may" be charged to income tax -
therefore, the unsatisfactoriness of the
explanation
would
not
automatically
result in deeming the amount credited in
the books as income of the assessee.
(Para 15)

Applicant (partners in the firm) have shown
the agricultural income in their personal
returns of the past years which had been
accepted by the department as such. The
partners are all identifiable and separately
assessed to tax. The source of investment
having been explained, in the event the
Assessing Officer was not satisfied the
addition could have been considered in the
hands of the partners and not in the hands
of the firm. The burden of proving the
source
of
the
credits
having
been
sufficiently explained the addition could not
have been made in the hands of the firm in
the facts of the present case. (para 32)

Writ Petition Allowed. (E-10)

List of cases cited:-

1. Commissioner of Income Tax, Lucknow Vs.
Kanpur Brothers (1979) 118 ITR 741 (All)
(distinguished)

2. Deputy Commissioner of Income Tax Vs.
Rohini Builders [2002] 256 ITR 360 (Guj)

3. Commissioner of Income Tax Vs. Smt. P.K.
Noorjahan [1999] 237 ITR 570 (SC)

4. Commissioner of Income Tax Vs. Taj
Borewells [2007] 291 ITR 232 (Mad)

5. Commissioner of Income Tax Vs. Pragati
Cooperative Bank Limited [2005] 278 ITR 170
(Guj)

6.
Commissioner
of
Income
Tax

Vs.
Mohanakala [2007] 291 ITR 278 (SC)

7. Principal Commissioner of Income Tax
(Central)-I Vs. NRA Iron and Steel Private
Limited [2019] 412 ITR 161 (SC)

8. Commissioner of Income Tax, Allahabad Vs.
Jaiswal Motor Finance [1983] 141 ITR 706 (All)

9. India Rice Mills Vs. Commissioner of Income
Tax [1996] 218 ITR 508 (All)

10. Commissioner of Income Tax Vs. Metachem
Industries [2000] 245 ITR 160 (MP)

11. Commissioner of Income Tax VS. Burma
Electro Corporation [2001] 252 ITR 344 (P&H)

12.
Abhyudaya
Pharmaceuticals
Vs.
Commissioner of Income Tax [2013] 350 ITR
358 (All)

13. Commissioner of Income Tax Vs. Kishorilal
Santoshilal [1995] 216 ITR 9 (Raj) (followed)

(Delivered by Hon'ble Dr. Yogendra
Kumar Srivastava, J.)

1. The present appeal has been filed
under Section 260-A of the Income Tax
Act, 1961 (in short 'the Act') against the
order of the Income Tax Appellate
Tribunal, Allahabad Bench, Allahabad (for
short 'the I.T.A.T.') dated 30.10.2006, for
the assessment year 1999-2000, whereby
the Tribunal partly allowed the appeal filed
by the Revenue.

2. The instant appeal was admitted on
the questions of law, as mentioned in the
memo of appeal, which are as follows:-

"(i) Whether, on the facts and in
the circumstances of the case, the Tribunal
was legally justified in upholding the order
of the assessing officer of making addition
U/s 68 of the Income Tax Act at
Rs.4,00,000/- in the hand of the firm?

(ii) Whether, on the facts and in
the circumstances of the case, the Tribunal
6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
35
was correct in holding that the assessee was
not able to prove the source of income of
partners who have made the deposit with
the firm in their capital account therefore
addition u/s 68 is justified?"

3. The records of the case before us
indicate that the assessee has described
itself as a partnership firm having sixteen
partners engaged in the business of cold
storage. For the assessment year 19992000, the assessee filed a return of income
on 01.11.1999 declaring an income of
Rs.36,92,056/-. The case was selected for
scrutiny
and
notices
under
Section
143(2)/142(1) of the Act were issued. The
assessment was thereafter made under
Section 143(3) and in terms of an order
dated 26.03.2002 the Assessing Officer
noted the following credits in the names of
the partners:-

Sr.
No.
Name
Amount/
Date
Nature Evidence
1
Vishwanat Prasad
Kesharwani
(HUF)
50,000/-
01-03-99
Agricu
ltural
Incom
e

Photo
copy of
hand
record
2
Bhairo Nath
(HUF)
50,000/-
01-03-99
---do--
-
---do---
3
Prabhu Nath
(HUF)
50,000/-
01-03-99
---do--
-
---do---
4
Raj Kumar
50,000/-
01-03-99
---do--
-
---do---
5
Subhash Chandra
50,000/-
01-03-99
---do--
-
---do---
6
Satish Chandra
50,000/-
01-03-99
---do--
-
---do---
7
Harish Chandra
Kesharwani
50,000/-
01-03-99
---do--
-
---do---

4. The Assessing Officer held the
credits as unproved and made an addition
of Rs.4,00,000/- under Section 68 of the
Act relying upon a decision of this Court in
Commissioner of Income Tax, Lucknow
v Kapur Borthers1, which was a case
where the assessee had entered deposits in
the books of firm in the names of partners
and upon the explanations for deposits
being rejected the same were treated as
income of the firm and not of the individual
partners.

5. An appeal was filed by the assessee
against
the
aforesaid
order
dated
26.03.2002 before the Commissioner of
Income Tax (Appeals), Allahabad, which
was partly allowed and the addition made
by the Assessing Officer under Section 68
of the Act with regard to the cash credits in
the names of the partners in their capital
accounts was deleted.

6. The deletion of the cash credits was
made on the ground that the partners had
shown agricultural income in their returns.
It was taken note of that the partners were
identifiable and separately assessed to tax
and the firm had explained the source of
investment as agricultural income of the
partners, therefore, if at all additions were
to be made, then the same had to be made
in the hands of the partners and not in the
hands of the firm.

7. Aggrieved against the aforesaid
order, the Revenue filed an appeal before
the
Income
Tax
Appellate
Tribunal,
Allahabad being I.T.A. No.344/(Alld) of
2004 to which the assessee filed crossobjections, being C.O. No.16(Alld) of
2006. The I.T.A.T. by the order impugned
dated 30.10.2006 partly allowed the appeal
filed by the Revenue and dismissed the
cross-objections filed by the assessee. The
Tribunal held that credits in the names of
partners as agricultural income were not
proved within the meaning of Section 68
and therefore the order of the Assessing
36 INDIAN LAW REPORTS ALLAHABAD SERIES
Officer treating the same to be as the firm's
deemed income, was restored and the order
passed by the I.T.A.T., in that regard, was
set aside.

8. We have heard counsel for the
parties and perused the records.

9. The principal ground sought to be
canvassed by the appellant assessee is that
the partners having shown the agricultural
income in their personal returns of the
previous years, which had been accepted by
the Revenue as such without any addition,
and out of the said agricultural income the
partners having made the deposits with the
firm in their capital accounts, the appellant
assessee had satisfied the conditions
provided under Section 68 of the Act with
regard to the identity and capacity of the
depositors as well as genuineness of the
transactions. It is submitted that the only
point which was required to be considered
on the question of making addition under
Section 68 of the Act in the hands of the
firm was the nature and source of the
transaction and the appellant assessee was
not required to prove the source of the
source.

10. It has been further contended that
the genuineness of the transactions having
been proved and the firm having duly
explained the deposit, the impugned order
passed by the Tribunal was not justifiable,
and deserves to be set aside.

11. Per contra, the learned counsel
appearing for the Revenue has supported
the order passed by the Tribunal by
submitting that the credits having been
found in the hands of the firm the onus was
on the firm to prove the creditworthiness of
the partners as well as genuineness of the
transaction and no evidence having been
given with regard to agricultural operations
of the partners, the transactions in the
books of the firm were rightly held to be
not genuine and proved within the meaning
of Section 68 and there was no infirmity in
the order passed by the Tribunal restoring
the order of the Assessing Officer and
setting aside the order passed by the
C.I.T.(A). Reliance has been placed upon
the decision in the case of Kapur Brothers
(supra) to contend that the cash credits
which are unexplained are to be added in
the hands of the firm.

12. In order to answer the
questions of law upon which the present
appeal has been admitted it would be
necessary to advert to the provisions
contained under Section 68 of the Act.
For ease of reference, Section 68 of the
Act, as it stood prior to the Finance Act,
2012, is being extracted below:-

"68. 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
Assessing Officer, satisfactory, the sum
so credited may be charged to incometax as the income of the Assessee of
that previous year."

13. As per Section 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 of the same or
the explanation offered by the assessee is
not satisfactory, in the opinion of the
Assessing Officer, the sum so credited may
be charged to income tax as the income of
the assessee of that previous year.
6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
37

14.

The
conditions
for
the
applicability of Section 68 would therefore
be as follows--

(i) the existence of books of
accounts made by the assessee itself;

(ii) a credit entry in the books of
account; and

(iii) the absence of a satisfactory
explanation by the assessee about the
nature and source of the amount credited.

15. The requirement under the
Section is that the assessee is to submit
an explanation about the nature and
source of the sum which has been
credited. The explanation furnished by
the assessee is to be satisfactory and the
creditworthiness or financial strength of
the creditor is to be proved by showing
that it had sufficient balance in its
accounts to explain the source and the
credits in the books of accounts of the
assessee. The assessee would be required
to explain the source of credit in the
books of accounts but not the source of
the source i.e. source of the creditor. It is
seen that although the requirement under
Section 68 is that the Assessing Officer
must be satisfied that the explanation
offered by the assessee is genuine, but it
is also provided that in the absence of a
satisfactory explanation, the unexplained
cash credit "may" be charged to income
tax - therefore, the unsatisfactoriness of
the explanation would not automatically
result in deeming the amount credited in
the books as income of the assessee.

16. A similar view was taken in the
case of Deputy Commissioner of Income
Tax v Rohini Builders2, wherein referring
to the judgment of the Supreme Court in
the case of Commissioner of Income Tax
v Smt. P.K. Noorjahan3, rendered in the
context of Section 69 of the Act, it was held
as follows:-

"The phraseology of section 68 is
clear. The Legislature has laid down that in
the absence of a satisfactory explanation,
the unexplained cash credit may be charged
to income-tax as the income of the assessee
of that previous year. In this case the
legislative mandate is not in terms of the
words "shall be charged to income-tax as
the income of the assessee of that previous
year".
The
Supreme
Court
while
interpreting similar phraseology used in
section 69 has held that in creating the legal
fiction the phraseology employs the word
"may"
and
not
"shall".
Thus
the
unsatisfactoriness of the explanation does
not and need not automatically result in
deeming the amount credited in the books
as the income of the assessee as held by the
Supreme Court in the case of CIT v. Smt.
P.K. Noorjahan [1999] 237 ITR 570."

17. The question of addition under
Section 68 in a case of capital introduced
by
the
partners
was
considered
in
Commissioner of Income Tax v Taj
Borewells4, and taking note of the fact that
Section 68 is a charging section and also a
deeming provision it was held that once the
firm
had
offered
explanation
and
established that the capital was contributed
by the partners, the same could not be
assessable in the hands of the firm. The
relevant observations made in the judgment
are as follows:-

"7. Section 68 is a charging
section and it is also a deeming provision.
Unless the following circumstances exist,
the Revenue cannot rely on section 68 of
the Act.

(a) Credit in the books of an
assessee
maintained
for
the
year.
38 INDIAN LAW REPORTS ALLAHABAD SERIES

(b)
the
assessee
offers
no
explanation or if the assessee offers
explanation the Assessing Officer is of the
opinion that the same is not satisfactory, the
sum so credited is chargeable to tax as
"income from other sources".

x x x x x

13. ...Once the firm had offered
an explanation and established that the
capital was contributed by the partners, the
same could not be assessable in the hands
of the firm. Unless there are contradictions
and inconsistencies in the statement of the
partners, the credit cannot be treated as
unexplained and cannot be added under
section 68 of the Act in the hands of the
assessee-firm..."

18. The issue relating to addition
under Section 68 also came up in
Commissioner of Income Tax v Pragati
Co-operative Bank Limited5, and taking
note of the language of Section 68 it was
held that the word "may" indicates that the
intention of the legislature is to confer a
discretion on the Assessing Officer in the
matter of treating the source of investment
or credit which had not been satisfactorily
explained as income of an assessee, but it is
not obligatory to treat such source as
income in every case where the explanation
offered was found to be not satisfactory. It
was held thus:-

"14. Section 68 of the Act
requires that there has to be a credit in the
books maintained by an assessee; such
credit has to be of a sum during the
previous year; and the assessee offers no
explanation about the nature and source of
such credit; or the explanation offered by
the assessee is not, in the opinion of the
assessing authority, satisfactory, then the
sum so credited may be charged to tax as
income of the assessee of that previous
year. The apex court in the case of CIT v.
Smt. P.K. Noorjahan [1999] 237 ITR 570
has laid down that the word "may"
indicated the intention of the Legislature
that a discretion was conferred on the
Assessing Officer in the matter of treating
the source of investment/credit which had
not been satisfactorily explained as income
of an assessee, but it was not obligatory to
treat such source as income in every case
where the explanation offered was found to
be not satisfactory."

19. The nature and scope of Section
68 of the Act fell for consideration before
the Supreme Court in Commissioner of
Income Tax v P. Mohanakala6, and it was
held as follows:-

"16. The question is what is the
true nature and scope of section 68 of the
Act? When and in what circumstances
section 68 of the Act come into play? A
bare reading of section 68 suggests that
there has to be credit of amounts in the
books maintained by an assessees; such
credit has to be of a sum during the
previous year; and the assessees offer no
explanation about the nature and source of
such credit found in the books; or the
explanation offered by the assessees in the
opinion of the Assessing Officer is not
satisfactory, it is only then the sum so
credited may be charged to income-tax as
the income of the assessees of that previous
year. The expression "the assessees offer no
explanation" means where the assessees
offer no proper, reasonable and acceptable
explanation as regards the sums found
credited in the books maintained by the
assessees. It is true the opinion of the
Assessing Officer for not accepting the
explanation offered by the assessees as not
satisfactory is required to be based on
proper appreciation of material and other
6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
39
attending
circumstances
available
on
record. The opinion of the Assessing
Officer is required to be formed objectively
with reference to the material available on
record. Application of mind is the sine qua
non for forming the opinion."

20. The aforementioned principle of
law has been reiterated and followed in a
recent
judgment
in
Principal
Commissioner of Income Tax (Central)-I
v NRA Iron and Steel Private Limited7.

21. The judgment in the case of
Kapur Brothers, which forms the basis of
the order passed by the Assessing Officer
and also that of the Tribunal, and upon
which strong reliance has been placed by
the Revenue, was a case where the entries
had been made in the books of account of
the assessee firm about three weeks prior to
the end of the accounting period and the
different explanations furnished by the
assessee
at
different
stages
of
the
proceedings were disbelieved for the reason
that the assesee had failed to establish that
the partners had actually deposited the
money and that the entries were not
fictitious, and it was in view of the said
facts that the court proceeded to answer the
question referred to it by holding that the
cash credit entries standing in the names of
the partners in the account books of the
firm could validly be treated as income of
the firm from the undisclosed sources. The
operative portion of the judgment in the
case of Kapur Brothers is being extracted
below:-

"In that case, the entries were
alleged to have been made a week before
the end of the accounting period. In the
present case, the entries were made about
three weeks prior to the end of the
accounting period. Identical amounts were
entered as deposited in the name of each
partner. Different explanations were given
by the assessee at different stages of the
proceedings. They were disbelieved. In this
view of the matter, the Tribunal was not
justified in treating the amount as the
income of the individual partner in view of
the finding that the assessee had failed to
establish that the partners have actually
deposited the money and that the entries
were not fictitious.

Accordingly,
we
answer
the
question referred to us by holding that the
cash credit entries standing in the names of
the partners in the account books of the
firm could validly be treated as the income
of the firm from undisclosed sources. As no
one appeared on behalf of the assessee,
there will be no order as to costs."

22. The question as to whether in a
case where there are cash credit entries in
the books of the assessee firm in which
accounts of individual partners exist 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
there were profits of the firm, the sum so
credited could be assessed in the hands of
the firm was considered in the decision in
Commissioner of Income Tax, Allahabad
v Jaiswal Motor Finance8, and it was
stated thus:-

"...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, 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
40 INDIAN LAW REPORTS ALLAHABAD SERIES
deposits shown in its accounts were
satisfactorily explained."

23. The questions with regard to
burden of proof in respect of an addition
under Section 68 came up for consideration
in India Rice Mills v Commissioner of
Income Tax9, and it was held that where
capital contributions are made by the
partners prior to the commencement of the
business by the assessee firm, it is for the
partners to explain the source of such
capital contribution and if they failed to
discharge such onus then such capital
contributions, although entered in the
books of accounts of the assessee firm,
cannot be regarded as income of the
assessee firm but the same were to be
added
in
hands
of
the
partners.
Distinguishing the judgment in the case of
Kapur Brothers, it was held as follows:-

"Reliance on Kapur Brothers'
case [1979] 118 ITR 741 (All) 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
Infant 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 he 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."

24. The question as to whether in a
case where there was credit in the capital
account of partners in books of the firm,
addition thereof could be made in the hands
of the firm or the same had to be
considered in the hands of the partners,
came up in a reference under Section
256(1) of the Act in Commissioner of
Income Tax v Metachem Industries10,
and it was held that according to Section 68
the burden was on the assessee to
satisfactorily explain the credit entry in the
books of account of the previous year and
in a case where satisfactory explanation
had been given by establishing that the
amount had been invested by a particular
person, be he a partner or any individual
then the burden of the assessee firm is
discharged and the credit entry could not be
treated to be income of the firm for the
purposes of income tax. The relevant
observations made in the judgment are as
follows:-

"...Section 68 of the Act of 1961
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 Income-tax
Officer, satisfactory, the sum so credited
may be charged 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 satisfactory or
the source offered by the assessee-firm is
not satisfactory, then in that case, the
6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
41
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.

...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 the 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 to the Assessing
Officer to undertake further investigation
with regard to that individual who has
deposited this amount.

So far as the responsibility of the
assessee is concerned, it is satisfactorily
discharged. Whether that person is an
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 a 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 the income of the
firm for the purposes of income-tax. It is
open to 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..."

25. A similar question was considered
in Commissioner of Income Tax v Burma
Electro
Corporation11
wherein
the
deletion of the addition made by the
Tribunal, on the ground that though there
was no evidence on record to show
availability of funds with partners at the
time of investment with the assessee firm
the concerned partners having admitted to
have made those investments and there
being no material to indicate that those
investments were profits of the assessee
firm, the sum so credited could not be
assessed as income of the firm in terms of
Section 68 but could be assessed in the
hands of the individual partners, was
upheld.

26. We may also refer to the decision
in
the
case
of
Abhyudaya
Pharmaceuticals v Commissioner of
Income Tax12, wherein the earlier decision
in the case of Jaiswal Motor Finance was
followed on the point 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 the same were profits of the
firm, it could not be assessed in the hands
of the firm. The judgment in the case of
Kapur Brothers was also considered and
distinguished
on
facts.
The
relevant
observations made in the judgment are as
follows:-

"13. 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,
42 INDIAN LAW REPORTS ALLAHABAD SERIES
satisfactory, the sum so credited may be
charged to income-tax as income of the
assessee of that previous year.

14. 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.

15. CIT v. Jaiswal Motor Finance
[1983] 141 ITR 706 (All) 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."

16. 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
partners in the account books of the Firm would
validly be treated as income of Firm from
undisclosed source.

17. 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
6 All. M/s Kesharwani Sheetalaya Vs. Commissioner of Income Tax, Allahabad
43
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.

18. It is interesting to note that
the aforesaid two decisions one given in the
case of Jaiswal Motor Finance [1983] 141
ITR 706 (All) and another in the case of
Kapur Brothers [1979] 118 ITR 741 (All)
were again up for consideration before a
Division Bench of this court in the case of
India Rice Mill v. CIT (1996) 218 ITR 508.
The relevant extract is reproduced below
(page 510 of 218 ITR):

"However, the Tribunal relying on
CIT v. Kapur Brothers [1979] 118 ITR 741
(All), 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 Kapur Brothers' case
[1979] 118 ITR 741 (All) 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."

19.
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.

20. 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.

21. 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 Mohan
Seth v. CIT [1996] 221 ITR 239 (All).
44 INDIAN LAW REPORTS ALLAHABAD SERIES

22. The Rajasthan High Court in
CIT Vs. Kewal Krishna and Partners
[2009] 18 DTR 121 (Raj) has also taken
similar view."

27. Section 68 requires the Assessing
Officer to satisfy itself of the source of the
credit and if during the course of enquiry
undertaken, the entries are found to be not
genuine then the sum represented by such
credit entry is to be added as income of the
assessee. The satisfaction of the Assessing
Officer thus forms the basis for invocation
of the provisions of Section 68. The
satisfaction in this regard, however, must
not be illusory or imaginary but is required
to be based on the facts and the evidence
and on the basis of a proper enquiry of the
material before the Assessing Officer. The
enquiry envisaged under the provision is to
be reasonable and just.

28. Under Section 68, the onus is on the
assessee to offer explanation where any sum is
found credited in the books of account and
where the assessee fails to prove to the
satisfaction of the Assessing Officer, the source
and nature of the amount of cash credits an
inference may be drawn that the credit entries
represent income taxable in the hands of the
assessee. This does not however absolve the
responsibility of the Assessing Officer to prove
that the cash credits constitute the income of the
assessee. The onus on the assessee has to be
understood with reference to the facts of each
case and if the prima facie inference on the
basis of facts is that the assessee's explanation is
probable, the onus shifts to the Revenue. It has
been consistently held that once the assessee
has proved the identity of its creditors, the
genuineness of the transactions and the
creditworthiness of the creditors vis-a-vis the
transactions which it had with the creditors, the
burden stands discharged and the burden then
shifts to the Revenue to show that the amount in
question actually belong to, or was owned by
the assessee himself.

29.