The burden of proof for cash credit transactions under Section 68 lies with the respondent-Department to verify partners' contributions, not the firm.

JUDGMENT (per the Hon’ble Sri Justice P. Sam Koshy)

The instant appeal is one which has been filed aggrieved by the order dated 14.09.2007, in I.T.A.No.257/Hyd/02, passed by the Income Tax Appellate Tribunal, Hyderabad Bench ‘B’, for the assessment year 1998-99 (for short, the ‘ITAT’).

2. Heard Mr. A.V.A. Siva Kartikeya, learned counsel for the appellant and Ms. Bokaro Sapna Reddy, learned Junior Standing Counsel for Income Tax appearing on behalf of the respondent.

3. The appeal has been filed primarily on the following substantial question of law, viz.,

“a) Whether on the facts and circumstances of the case the Hon’ble Tribunal is correct in confirming the additions made under Section 68 on the ground the assessee has not discharged the onus regarding the credit worthiness and genuineness of the cash credit transactions involving the 3 partners K. Lakshman Goud, Durgadas Goud and Ramachander.”

4. It is a case where the Assessing Officer as also the ITAT found that the appellant herein has not been able to show sufficient material to prove the investment made by the partners and therefore the addition made under Section 68 of the Income Tax Act, 1961, could not had been confirmed unless there was an independent enquiry conducted in respect of the investment so made by the respective partners in the said firm.

5. The said question of law raised in the instant appeal came up for consideration before this Hon’ble High Court recently in I.T.T.A.No.30 of 2023, decided on 04.09.2023.In paragraph Nos.12 to 16 of the said judgment, it has been held as under, viz.,

12. Now the only question that needs to be considered at this juncture, is 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 of M.Venkateshwar Rao, supra, the Division Bench of this Court in paragraph No.7 held as under:

“It is a matter of record that the respondent-firm comprises ten partners and each of them made contributions, be it in the form of cash or bank guarantees to be furnished to the Government, at the commencement of business. The returns submitted by the respondent-firm were processed, and the facts and figures furnished by it were accepted. However, the matter was reopened at a later point of time. The Assessing Officer treated the capital raised by the firm in the form of contributions made by the partners as income. This conclusion was arrived at on the ground that source of income for the partners was not explained. Learned counsel for the appellant placed reliance upon the judgment of the Patna High Court in CIT v. AnupamUdyog [1983] 142 ITR 133 (Pat). The Tribunal rested its conclusions upon the judgment of the Bombay High Court in NarayandasKedarnath v. CIT [1952] 22 ITR 18 (Bom) and that of the Allahabad High Court in CIT v. Jaiswal Motor Finance [1983]141 ITR 706(AII).”

13. Recently, again the Division Bench of this Court in somewhat similar case between M/s. Nova Medicare versus The Income Tax Officer, decided on 15.02.2023, relying upon the decision of M.Venkateshwar Rao, supra, in paragraph No.15 held as under:

“Following and applying the aforesaid decision of this Court, Patna High Court in Anurag Rice Mills (supra) held that in such circumstances the unexplained cash credits would have to be assessed at the hands of the partners of the firm and not the firm itself. Such amounts could not have been treated as income of the firm by relying upon Section 68 of the Act.”

14. The Hon’ble Supreme Court of India also in the case of the Commissioner of Income Tax v. Lovely Exports (P) LTD2 in a short judgment at paragraph No.2 held as under:

“Can the amount of share money be regard