>>CASH CREDIT, UNEXPLAINED
INVESTMENTS, ETC.
CASH CREDIT, PARTNERSHIP FIRMS AND DISCLOSURE SCHEMES
Subramanian M.
Advocate
The present article deals with the subject of cash
credits in two specific circumstances.
The author deals with issue of credit in capital account
of a partner in books of partnership firm – what is the onus on the firm in such
circumstances and in whose assessment the credit can be assessed as income.
The article also explains and discusses the effect of declaration by
creditor of amount lent under Voluntary Disclosure Scheme.
1. Introduction
In the earlier article, what exactly are cash credits and various other
aspects including the effects of the same on assessment etc. have been explained. Here an
attempt has been made to bring out the relationship between cash credits and Partnership
firms’ assessment as well as the effects of disclosure schemes on cash credits.
It is now established from the statute as well as case laws that the
onus and burden of proof of explaining a cash credit entry is on the assessee.
The general proposition of law is that whenever any sum is found
credited in the books of account of the assessee and the assessee is unable to explain the
nature and the source of such a credit or the explanation offered is not satisfactory, the
sum credited would be charged to tax as the income of the assessee of that previous year.
2. Firms assessment and credits in partners account
Whenever cash credits are found in the books of account of the assessee
firm, there is no difficulty in applying the above proposition of law. However, some
difficulty arises, when it comes to the question of assessing partnership firm and the
credits are in the capital accounts of the partners in the books of the firm. To know more
about this aspect one must read and analyse the words in Section 68. From the wording of
the section, it is clear that the emphasis is on the words ‘assessee’ and
‘books of the assessee’ and therefore, for invoking provisions of Section 68,
the credits must be in the books of the same assessee. The firm and partners, are
different assessees undoubtedly. Thus, applying the bare provisions of law the position
that would emerge would be that if the credits, although in the name of partners, are
found in the books of the assessee firm, no addition could be made in the firms hand so
long as the transactions are genuine in the hands of the firm. That is to say that once it
is proved that the cash credit entries represent the amount brought by the partners, the
same cannot be treated as bogus credits representing the profits/income of the assessee
firm and the firm need not further establish the source from where the partners have
brought the amount represented by cash credits. Of course, there is a scope for making
such an enquiry for the purposes of assessing the income of the partners concerned.
However, the books of account of the partnership cannot be considered as that of the
individual partners and therefore, Section 68 would not be attracted while assessing the
partners in respect of credits found in the partners’ accounts
3. Case laws
The above proposition has emanated from various case laws.
(i) Smt. Shanfa Devi vs. CIT (1988) 171 ITR 532 (P
& H)
Partnership firm is distinct from that of individual partners and
therefore, the books of the firm cannot be treated as that of individual partners for the
purpose of Section 68.
(ii) CIT vs. Jaiswal Motor Finance (1983) 141 ITR
706 (All)
Cash credit entries in the books of the firm in which the accounts of
the individual partners exist and if 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.
(iii) Narayandas Kedamath vs. CIT (1952) 22 ITP 18
(Born)
If credit appearing in the name of the partners of a firm has not been
satisfactorily explained, the same may be treated as income of the partners but not as
income of the firm itself. Here it may be worthwhile mentioning that there are decisions
where it has been held that unexplained credit in the name of a partner on the first day
of the accounting year could be treated as income of the firm. Hardwarmal Onkarmal vs. CIT
102 ITR 779 (Pat.), CIT vs. Kapur Bros. 118 ITR 741 (ALL) and CIT vs. Anupam Udyog, 142
ITR 133 (Pat.)
Apart from the above, there are many other decisions. Most of them have
been succinctly analysed by the ITAT and therefore, it is essential to have a knowledge of
the following two decisions.
(i) Dhorajia Construction Co. vs. ITO (1992) 42 ITD
450
In this case, it has been held as under:–
On going through the provisions of Section 68 and further from a
consideration of various decisions of the High Courts and the Supreme Court it appears
that where certain cash credits appear in the books of the firm in the name of its
partners, the onus to prove that the partners had brought in the amounts represented by
those cash credits rests on the firm. It may be observed that a firm is constituted by its
partners and, therefore, the explanation to be offered ‘in the cases pertaining to
the cash credits appearing in its books in the name of its partners must fit in the facts
and circumstances of the case and should be acceptable to a prudent mind. Once it is
proved that the partners had in fact brought in the amounts represented by the cash
credits and that the entries made in respect thereto were not fictitious, the cash credits
cannot be treated as representing the profits or income of the assessee firm. The nature
and source of the cash credits having been so established, it should not be the scope of
enquiry in the case of the firm to know as to from where the partners had brought in the
amounts represented by the cash credits. For, that would be the subject matter of enquiry
in the case of the partner concerned. In other words, until and unless there exist
circumstances in a given case of material on record to show that the cash credits
appearing in the name of the partners represents the profit of the firm itself, no
addition to the total income of the firm in that behalf can be made, treating the cash
credits as undisclosed income of the firm.
(ii) Sapna Traders vs. Asstt. CIT (1991) 41 TTJ 77
In this case, it has been held that —
The firm was a new one and it could not be run unless certain
contributions were made by the partners. Under the deed of agreement the funds were to be
made available by the partners and thus the amounts standing at the credit of the partners
was nothing but contributions made by the partners. The partners had filed confirmations
regarding the said deposits made by them in the firm. Now it is for the individual
partners to explain away the said amounts and it is not for the firm to explain the said
cash credits. Admittedly, the firm, being new, the alleged contributions made by the
partners could not be income of the firm, it having no past business at its credit. These
cash credits have been explained by the assessee as they stood in the name of the partners
and filing their confirmations have further substantiated the claim of the assessee that
these amounts were not of the firm but belonged to the individual partners. Under these
circumstances the additions of the said amounts, although in part, was not
justified.’ Thus, once the partners admit bringing in capital or money s in the firm
and that fact is established from the books of the firm, the onus is discharged and the
cash credits cannot be assessed in the hands of firm.
4. Cash credits and disclosure schemes
To understand the effects of disclosure schemes on cash credits one
must know what the disclosure schemes are. These are schemes where an assessee could
disclose/declare voluntarily all such income/money hitherto not disclosed to the
Income-tax Department with immunity. In other words, the 1.T. Department would not make
any enquiry regarding the source and the nature of disclosed income. Thus once the
disclosure/declaration of the assessee is accepted by the Department, assessment was being
completed, wherever necessary, without conducting any enquiry, whatsoever in respect of
such income and immunity was being granted in respect of imposition of penalty, charging
of interest etc.
5. To know more about the above aspect, we
may have to go through some of the important case laws on the subject and they are as
under:
1. Jamuna Prasad Kanhaiyalal vs. CIT (1981) 130 ITR
244 (SC)
Department not precluded from enquiring into genuineness of the credits
while completing the assessment proceedings of the firm and adding the same in the hands
of the person to whom it really belongs.
2. ITO vs. Ratan Lal (1984) 145 ITR 183 (SC)
There is nothing in the section which prevents the ITO from enquiring
into the genuineness of the amounts credited in the books in spite of these having been
made subject matter of declaration by depositor/creditor in a case of this description.
There is no question of double taxation.
3. Radheshyam Tibrewal vs. CIT (1984) 145 ITR 186
(SC)
In the absence of satisfactory proof that the transactions of deposits
represented by cash credits in the books of the assessee were genuine; i.e., the deposits
had really been made by depositors mentioned, the taxing authorities are justified in
holding that the amount of cash credits represented the assessee’s own income from
undisclosed sources notwithstanding that declaration had been made under voluntary
disclosure scheme.
4. Radio Instruments Associates (P) Ltd. vs. CIT
(1987) 166 ITR 718 (AP)
Explanation regarding cash credits cannot be automatically accepted
because of voluntary disclosure. Assessee must establish the nexus between the cash
credits and the disclosure. An SLP filed in this case has been dismissed by the Supreme
Court [169 ITR (St) 85 (SC)]
5. Anisa Bano vs. ITO (1989) 171 ITR 368 (MP)
Amount disclosed under the Amnesty Scheme was deposited in bank account
in respective names and were separately identifiable. Attachment made under Section 132(3)
against the bank accounts during the course of 132 action squashed as the amounts were
declared by the petitioners.
Thus, the principle that emerges from the above case laws is that the
nexus between the disclosure and cash credit must be proved to get the benefit of immunity
available under various disclosure schemes. The assessee with whom the disclosed money is
deposited cannot escape the liability of explaining the genuineness of the credit/deposit.
However, when the declarants are ladies or minors and if the deposits
are made by them, then the Department normally relies on their Circular No. 451 dated
17-2-1986 (Reported in 158 ITR (St) 135). The relevant extract is as under:–
"Whether ladies and minors can avail of the immunity given by the
Circulars?
Yes, in respect of their own income or wealth certainly. But tax-payers
who try to introduce black money and benami investment in the names of ladies or minors
will be doing so at their own risk."
It is therefore, essential that the assessee should be able to prove
beyond doubt the identity, capacity and genuineness of the credits. In addition, it should
also be proved that the declarant has a source of income and the amount credited is in
fact the income of the declarant and not of the assessee.
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