Creditworthiness proved when agricultural income though not accepted, treated other income

Creditworthiness proved when agricultural income not accepted by the Department in toto but the portion not accepted treated income from other sources

In a recent judgment, ITAT has held that when agricultural income returned by partners was accepted albeit under different head of income, there can be no case of the Revenue to hold later that creditworthiness of the partners is not proved on account of their agricultural income not being accepted.

ABCAUS Case Law Citation:
ABCAUS 3881 (2024) (02) ITAT

Important Case Laws relied upon by parties:
NRA Iron & Steel P. Ltd.
Commissioner of Income Tax vs. Jaiswal Motor Finance
CIT Vs. Pankaj Dyestuff Industries ITR 241 of 1993

In the instant case, the assessee had challenged the order passed by the CIT(A), National Faceless Appeal Centre (NFAC) in confirming addition on account of treating the capital introduced by the partners of the appellant firm as unexplained cash credit in terms of section 68 of the Income Tax Act, 1961 (the Act).

The Tribunal observed that the AO found that the assessee was unable to discharge its onus of proving the genuineness of the amount so received. The CIT(A) also found that the assessee had failed to prove the genuineness and credit worthiness of the transactions, and finding so, he confirmed the addition made by the AO.

As per the order of the CIT(A) the identity of the partners was not in doubt. What was doubtful and not established by the assessee was the credit-worthiness and genuineness of the transactions.

The Tribunal noted that during assessment proceedings the assessee had submitted returns of income along with computation of incomes of the partners to prove their credit-worthiness. The assessee had explained the source of partners, as being out of their agriculture income. During the first appellate proceedings, the assessee filed additional evidence including proof of land holdings to prove the agriculture income earned by the partners.

The CIT(A) agreed with the AO that the agriculture income shown by the partners in their returns was highly inflated and actually there was not enough income to justify the capital introduction. He rejected the assessee’s contention of the agriculture income having been returned by the partners and accepted by the Department in preceding and succeeding assessment years including the impugned assessment year finding that the AO had not accepted the quantum of agricultural income returned by them.

Before the Tribunal, the assessee contended that the identity of the partners were not doubted and partners have confirmed to have introduced capital in the firm, and that the addition, if any, on account of credit-worthiness of the partners not being proven, could have been made only in the hands of the partners and not the assessee firm.

It was pointed out that the Hon’ble High Court on similar facts has held that mere not acceptance of the explanation given on behalf of the assessee in respect of the new deposits or cash credits in the accounts of the partners does not, however, provide material for finding that the said sum represented income of the assessee firm. As held by the Allahabad High Court in the absence of any material to indicate that there were profits of the firm, the amount credited to the partners’ accounts could not be assessed in the hands of the

firm. Once the partners have owned that the monies deposited in their accounts are their own, the Income Tax Officer is entitled to and may proceed against the partners and assess the same in their hands, if their explanation is not found satisfactory.

It was further argued that credit-worthiness of the partners could not be stated to be in doubt, and the assessee could be held to have not discharged its onus of proving so. It was contended that the partners had returned identical agriculture income in the preceding and succeeding years, and though it was not accepted completely, but the balance was treated as income of the partners from other sources. Therefore, as far as the credit-worthiness of the partners were concerned, whether from agriculture income or from other sources, the same stood accepted by the Department in the assessment of the partners. Therefore, the onus on the assessee to prove credit-worthiness stood completely discharged.

The Tribunal observed that the addition of the capital introduced by partners in the partnership firm has been made solely for the reason that their credit-worthiness was not proved. It opined that where the identity of the partners was not doubted and partners had confirmed introduction of capital in the assessee-firm during the year, the issue stands covered by the decision of the Hon’ble jurisdictional High Court wherein in the backdrop of identical facts and circumstances, the Hon’ble High Court held that addition, if any, in such circumstances ought to have been made in the hands of the partners alone who had owned up the money introduced as capital as belonging to them but failed to prove their creditworthiness.

Even otherwise the Tribunal observed that the returns filed by these partners prove their creditworthiness since the income though returned as agricultural income was not accepted by the department in toto but the portion not accepted was treated as income from other sources of these partners. Thus, the quantum of income returned by these partners was accepted by the Revenue albeit under different head of income. Thus, there can be no case of the Revenue now to hold that creditworthiness of the partners is not proved on account of

their agricultural income not being accepted by the Revenue.

Accordingly, the ITAT held that income of the assessee as unexplained capital of partners, was not sustainable and the same is therefore directed to be deleted.

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