Assessee only needs to Prove the Source of Credit entries and not Source Creditors’ Credit: Allahabad HC [Read Judgment]

The High Court of Allahabad held that assessee only needs to prove the source of credit entries and he is not required to prove the source of the source or the creditors’ credit.

The assessee, M/s Kesharwani Sheetalaya Sahsaon Allahabad is a partnership firm having sixteen partners engaged in the business of cold storage. For the assessment year, the assessee filed a return declaring an income. The case was selected for scrutiny and notices under Section 143(2) and 142(1) of the Income Tax Act were issued. The assessment was thereafter made under Section 143(3) and in terms of an order the Assessing Officer noted various credits in the names of the partners.

Relying upon a decision of the High Court, The Assessing Officer held the credits as unproved and made an addition of Rs.4,00,000/­ under Section 68 of the Act.

An appeal was filed by the assessee against the order before the Commissioner of Income Tax (Appeals), 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 on the grounds that the partners had shown agricultural income in their returns.

Aggrieved against the order of C.I.T.(A), the Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT). 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 Officer treating the same to be as the firm’s deemed income, was restored and the order passed was set aside.

The two-judge bench of Justice Biswanath Somadder and Dr. Y.K. Srivastava held that assessee only needs to prove the source of credit entries and he is not required to prove the source of the source or the creditors’ credit.

“The partners 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 have been sufficiently explained the addition could not have been made in the hands of the firm in the facts of the present case,” the bench observed.