Capital contribution received from newly inducted partner via

Capital contribution received from newly inducted partner via demand drafts cannot be taxed under Section 68.

Issue

Whether an addition made under Section 68 of the Income-tax Act, 1961 / Section 102 of the Income-tax Act, 2025 as an unexplained cash credit is sustainable when a partner’s capital contribution is received through demand drafts and duly reflected in audited books of account.

Facts

Capital Contribution Credited: During Assessment Year 1997–98, the assessee-firm credited an amount of Rs. 6.40 lakhs in its books of account representing capital contribution from a newly inducted partner.
Recharacterization by AO: The Assessing Officer treat the amount as an unsecured loan and made an addition under Section 68 as an unexplained cash credit.
Explanation Provided: The assessee tendered a detailed explanation establishing that the amount was received toward capital contribution upon the partner’s induction into the firm.
Banking Channels Used: The capital contribution of Rs. 6.40 lakhs was received through valid demand drafts.
Financial Reflection: The capital contribution was duly reflected in the firm’s balance sheet and supported by the respective partners’ capital accounts.
Consistency in Treatment: Similar capital contributions made by other newly inducted partners during the same period were accepted by the Assessing Officer without dispute.

Decision

Discharge of Onus: The assessee successfully discharged its initial onus of proving the identity, genuineness, and source of the credit entry of Rs. 6.40 lakhs in the partner’s capital account.
Deletion of Addition: Since the explanation offered by the assessee was satisfactory and backed by documentary evidence via banking channels, the addition under Section 68 was legally unsustainable.
Final Ruling: The impugned addition under Section 68 was ordered to be deleted, deciding the issue in favor of the assessee.

Key Takeaways

Onus on Firm in Partner Capital Credits: When a capital contribution by a partner is supported by banking transactions (such as demand drafts) and proper accounting entries, the initial burden placed on the firm under Section 68 stands discharged.
Non-Arbitrary Assessment: The Revenue cannot treat similar capital contributions from different partners selectively without a valid factual basis.
Unsecured Loan vs. Capital Contribution: Capital introduced by partners in accordance with partnership arrangements cannot be arbitrarily reclassified as unexplained unsecured loans when adequate proof of induction and banking realization exists.

HIGH COURT OF GUJARAT

Pestkill Pesticides Industries

Principal Commissioner

BHARGAV D. KARIA and Pranav Trivedi, JJ.

R/TAX APPEAL NO. 123 of 2009^†

JULY 16, 2026

R.C. Jani for the Appellant. Dev D. Patel for the Respondent.

JUDGMENT

Bhargav D. Karia, J.- Heard learned advocate Mr.Vishrut Jani for learned advocate Mr. R.C.Jani for the appellant and learned Senior Standing Counsel Mr. Dev D. Patel for the respondent.

2. This appeal was admitted by order dated 03.02.2009 for consideration of the following substantial question of law:

“Whether in the facts and circumstances of the case, the Tribunal erred in law in confirming the addition of Rs. 6,40,000/- under section 68 of the Income Tax Act, 1961 without taking into consideration the facts and evidence on record resulting into a perverse finding?”

3. The brief facts of the case are that the assessee filed the return of income for the Assessment Year 1997-98 on 31.08.1997, declaring a loss of Rs.15,783/-.

4. The return of income was processed under section 143(1)(a) of the Act on 22.07.1998. Thereafter, a notice under section 143(2) of the Act was issued on 31.08.1998 for a scrutiny assessment. The Assessing Officer noticed that the assessee had revalued its land and building on 15.04.1996 at Rs.52,11,845/-and Rs. 7,04,648/- respectively, and the surplus was credited to the capital accounts of the partners in their respective profit and loss sharing ratios in the month of April 1996 itself.

5. Thereafter, as per the retirement deed dated 08.11.1996, Shri Madhavlal K. Patel, Shri Khemchand K. Patel, and Shri Amrutlal K. Patel retired and their capital accounts were also credited with the proportionate revaluation surplus. Simultaneously, two new partners, Shri S. B. Jariwala and Shri Feroz Ismail Patel were admitted to the Firm on 09.11.1996 contributing Rs.6,40,000/- and Rs.24,00,000/- respectively toward their share capital.

6. The Assessing Officer, therefore, raised a query regarding the revaluation of the assets, which was explained by the assessee that the revaluation of assets had been done on the basis of the possible replacement cost at the prevailing market rates. However, the Assessing Officer was of the view that the assessee had used revaluation as a device to evade tax levied on the profits of the business, as the revaluation surplus was not routed through the profit and loss account before appropriation to the accounts of the partners as their share of profits.

7. The Assessing Officer also observed that there was no material to substantiate the genuineness of the revaluation of the assets ignoring the explanation of the assessee that there was no provision in the Act to tax a revaluation surplus. The Assessing Officer thereafter, relying upon the decision in the case of A.L.A. Firm v. CIT 189 ITR 285 (SC), concluded that the assessee had failed to discharge the onus cast upon it. He further observed that the revaluation of assets was done without any purpose, basis, or necessity and that the three retiring partners having shared the revaluation surplus, the assessee had used the revaluation formula to pass over the suppressed profits of the business into the capital accounts of the existing and retiring partners. The Assessing Officer, therefore, added the amount of Rs.59,16,492/- as the suppressed profit of the business.

8. The Assessing Officer also made an addition of Rs.6,40,000/- contributed by Shri S. B. Jariwala HUF, who had joined the Partnership Firm with effect from 09.11.1996, on the ground that the balance sheet of the Firm as of 31.03.1997 reflected the contribution of Shri S. B. Jariwala HUF by way of an unsecured loan instead of a capital account. The Assessing Officer accordingly addressed a letter to Shri S. B. Jariwala on 17.08.1999, and in reply, by letter dated 23.08.1999, Shri S. B. Jariwala mentioned that the desired information would be submitted after receiving copy of the account in the books of the taxpayer. Since no further information was received, the Assessing Officer issued another letter dated 01.09.1999 and, in response to the said letter, it was replied that an application for allotment of PAN as Karta of HUF was made and that, in view of the pendency of the application for PAN, income tax return in the status of HUF could not be filed due to non-availability of the correct computation of income of the HUF for the period from 09.11.1996 to 31.03.1997. As no confirmation was filed by Shri S. B. Jariwala in respect of the transaction with the assessee, the Assessing Officer issued a show-cause notice dated 07.02.2000, asking the assessee to explain as to why the amount should not be added as an unexplained cash credit to the income of the assessee. By reply dated 14.02.2000, the assessee informed the Assessing Officer that due to a dispute between the partners, Shri S. B. Jariwala was neither cooperating nor furnishing confirmation and that provisions of section 68 of the Act were not applicable to the capital contribution by a partner. The Assessing Officer, however, concluded that since neither capacity of Shri S. B. Jariwala HUF was established in respect of the sum of Rs.6,40,000/- nor genuineness of the transaction, the addition of the amount of Rs.6,40,000/- was made under section 68 of the Act.

9. Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) deleted the addition of Rs.59,16,492/- for suppressed profits but sustained the addition of Rs.6,40,000/- by observing as under:

“10. The contention of the appellant has been carefully examined. It is evident from the fact that the amount of 1.6,40,000/- had been credited in the books of the appellant firm in the name of Shri S.B.Jariwala, HUF. The above HUF was not assessed to tax. This fact is clear from the communication of Shri S.B.Jariwala, I.Tax consultant, Bombay by way of letter dated 23-8-99. It has been mentioned that the request had been filed in the Income-tax Department for allottment of P.A.No. as karta of Shri S.B.Jariwala, HUF and that the above HUF was not able to file the Income-tax return due to non-availability of correct computation of income. Shri S.B.Jariwala, HUF has not confirmed the contribution of Rs. 6,40,000/-that appears in the books of the appellant. Therefore, the source of the above credit is not proved. The A.O. has rightly applied the provision of section 68. The addition of 3.6.40,000/- made in appellant’s total income is not disturbed.”

10. Being aggrieved by the order of the CIT(Appeals), the Revenue preferred an appeal being ITO v. Pestkill Pesticides Industries [IT Appeal No. 323 (Ahd) of 2001, dated 23-5-2008] for deletion of the addition of Rs.59,16,492/-. On the other hand, the assessee preferred appeal being N. Desai Papers (P.) Ltd. v. ACIT [IT Appeal No. 328 (Ahd.) of 2004, dated 6-6-2008] against the confirmation of the addition of Rs.6,40,000/- made under section 68 of the Act.

11. The Income Tax Appellate Tribunal, Ahmedabad (for short “the Tribunal”), by the impugned order, dismissed the appeal filed by the Revenue and upheld the deletion of addition of Rs.59,16,492/-made by the CIT(Appeals). The Tribunal also dismissed the appeal filed by the assessee and confirmed the addition of Rs.6,40,000/- under section 68 of the Act. The Tribunal confirmed the addition by observing as under:

“6.3 We have heard the rival contentions and gone through the facts of the case Before us, apart from reiterating their submissions the Id. AR on behalf of the taxpayer did nothing to improve upon their case To a query by the Bench, the Id authorised representative on behalf of taxpayer did not reply as to whether the amount was brought in through Demand Draft/cheque As the facts stare the taxpayer in the case under consideration failed to discharge onus laid down upon it for establishing the creditworthiness of Shri S.B.Jariwala, HUF or even genuineness of the transaction. As regards the decision of ITAT in the case of Metal House(supra) relied upon by Id authorised representative, in that case Tribunal had found that the contribution was indeed made by the partner, whereas in the case under consideration as is evident from the facts of the case, the taxpayer had not charged the primary onus laid down upon it. Moreover, Shri S.B.Jariwala did not even confirm that the amount was indeed contributed by him. Similarly in the case of CIT v. Pankaj Dye Stuff Industries(supra), the Hon’ble Gujarat High Court observed that both the DCIT and Tribunal had found that the Taxpayer had discharged the primary onus which was done by offering explanation and which has not been found to be incorrect or false in any manner. The interest of the revenue were also safeguarded as Income-tax Officer had been given opportunity to consider the said credits in the case of the partner if he is not satisfied with the source of investment of cash credit in the account of the partners. Accordingly, Hon’ble High Court upheld the order of the Tribunal in deleting the addition.

6.31 We find from the order of lower authorities that the amount of Rs.6,40,000/ had been credited in the books of the firm in the name of Shri S.B. Jariwala HUF. The said HUF is not assessed to tax as is apparent from the communication dated 23.8 1999 of Shri S.B.Jariwala, tax consultant Since the taxpayer failed to establish the capacity of the creditor to finance money and did not even establish the genuineness of the transaction. apparently the taxpayer has failed to discharge the primary onus Even when AO attempted to ascertain the facts, Shri S B.jariwala, a tax practitioner did not say that amount had indeed been contributed by the HUF Moreover, despite attempts made by the AO, no confirmation has been filed by Shri S.B.Jariwala HUF nor there is any evidence to suggest that the amount had been invested in the firm by Shri S.B. Jariwala, HUF as partner.

6.32 In CIT v Kishorilal Santhoshilal 216 ITR 9(Raj),it was categorically held that the burden of proof in respect of cash credits found in the partners’ accounts in the books of the firm was on the firm itself. Referring to the decisions in 34 ITR 807(SC), 102 ITR 779(Pat), 36 ITR 481(AP) and 29 ITR 942(AP), the Hon’ble High Court held that (a) there was no distinction between the cash credit entries existing in the books of the firm whether it was of a partner or of a third party; (b) the burden of proof regarding the Identity, capacity and genuineness was on the firm (c) if the cash credits were not satisfactorily explained, the Assessing Officer was justified to treat it as income from undisclosed sources; (d) the firm had to establish that the amount was actually given by the lender: (e) the genuineness and regularity in the maintenance of accounts had to be taken into consideration by the Assessing Officer and (f) if the explanation was not supported by any documentary or other evidence, then the deeming fiction created by section 68 of the Act could be invoked.

6.33 In the case of P. V. Raghava Reddi v. CIT [1956] 29 ITR 942, it was observed by the Hon’ble Andhra Pradesh High Court that the burden of proof is not dependent upon the fact of a credit entry in the name of the assessee or in the name of a third party. In either case, the burden lies upon the assessee to explain the credit entry, though the onus might shift to the Income-tax Officer under certain circumstances. Otherwise a clever assessee can always throw the burden of proof on the income-tax authorities by making a credit entry in the name of a third party either real or pseudonymous. The same High Court in M. M. A. K. Mohindeen Thamby and Co. v. CIT [1959] 36 ITR 481, relying on the said decision came to the conclusion that there is no distinction between the entries in the names of the partners and those in the names of the third parties, and the nature of the entry is not distinguishable In the absence of a satisfactory explanation, it is open to the Department to infer that these monies also belong to the assessee and represent suppressed income.”

12. The learned advocate, Mr. Vishrut Jani appearing for the appellant-assessee submitted that the Tribunal had failed to consider the facts and evidence on record resulting in a perverse order. Learned advocate Mr. Jani invited the attention of the Court to the documents placed on record before the Tribunal in the paperbook to point out that in the reply dated 12.02.2000 filed before the Assessing Officer, the assessee had placed on record the photocopies of the relevant pay-in slips, on the reverse of which details of Demand Draft/Cheque of Rs.6,40,000/-contributed by Shri S. B. Jariwala HUF were mentioned. Reference was also made to the Partnership Deed dated 09.11.1996 to point out that Shri S.B.Jariwala HUF was admitted was partner. Thereafter, a contribution of Rs. 6,40,000/- was made on 11.12.1996. Learned advocate Mr. Jani also referred to the balance sheet of the assessee that to show that as on 31.03.1997, Rs. 6,40,000/- was shown as in the partner’s capital account against the name of Shri S.B.Jariwala. Reference was also made to the account of Shri S.B.Jariwala placed in the details of Partner’s Capital Account wherein the said partner contributed Rs. 5,00,000/- on 11.12.1996, Rs. 1,00,000/- on 21.12.1996 and Rs. 40,000/-on 11.03.1997. It was, therefore, submitted that the Tribunal has failed to consider these documents and the evidence on record which clearly showed that there was a capital contribution by Shri S.B.Jariwala as on behalf of the S.B.Jariwala HUF as a Partner. It was further submitted that merely because the partner failed to provide the confirmation due to a dispute between the partners, the Tribunal was not justified in sustaining the addition made by the Assessing Officer and the CIT(Appeals). It was, therefore, submitted that the impugned order of the Tribunal is resulted into a perverse finding contrary to the facts and evidence on record.

13. In support of his submissions, the learned advocate Mr. Jani for the assessee placed reliance on the decision of this Court in the case of CIT v. Pankaj Dyestuff Industries [IT Reference No. 241 (Guj.) of 1993, dated 6-7-2005], wherein, in the facts of the said case, it was held that both the CIT (Appeals) and the Tribunal had found that the assessee had discharged the primary onus which was on it by offering an explanation which had not been found to be incorrect or false in any manner and the Income Tax Officer was given the liberty to consider said credits in the hands of the partners if he was not satisfied with the source of the cash credit in the accounts of the partners.

14. It was, therefore, submitted by learned advocate Mr. Jani that in the facts of the present case also when the appellant-assessee had discharged the onus by demonstrating that the partner had contributed Rs. 6,40,000/- after having been inducted as a partner in the firm on 09.01.1996, no addition could have been made under section 68 of the Act by the Assessing Officer and could not have been confirmed by the CIT (Appeals) and the Tribunal and addition, if any, could only have been made in the hands of the partner if the partner was not able to explain the source of the investments made in the firm.

15. On the other hand, learned advocate Mr. Dev D. Patel appearing for the respondent-Revenue submitted that there are concurrent findings of fact recorded by the CIT (Appeals) and the Tribunal. The learned advocate Mr. Patel referred to and relied upon the findings of fact recorded by the Tribunal and pointed out that in response to a query made by the Tribunal, the authorized representative of the assessee could not clarify as to whether the amount was brought in through a demand draft or a cheque. It was further submitted that the Tribunal in the case under consideration had held that the assessee had failed to discharge the onus cast upon it for establishing the creditworthiness of Shri S. B. Jariwala HUF or even the genuineness of the transaction. It was further submitted that the CIT (Appeals) and the Tribunal had rightly distinguished the decision rendered in case of Pankaj Dyestuffs Industries (supra) in absence of any confirmation. It was further submitted that the CIT (Appeals) and the Tribunal have rightly distinguished the decision of this Court in case of Pankaj Dyestuffs Industries, (supra) because in the facts of the present case, the assessee did not discharge the primary onus by submitting the confirmation of the partner S. B. Jariwala HUF, whereas, in the facts of the case in case of Pankaj Dyestuff Industries (supra), the assessee had discharged the primary onus by offering explanation which was not found to be incorrect or false in any manner.

16. It was, therefore, submitted that since the assessee had failed to establish the capacity of Shri S. B. Jariwala to finance the money and did not establish the genuineness of the transaction, the assessee had failed to discharge the primary onus which is upheld by the Tribunal and therefore, no interference may be made in the impugned order of the Tribunal.

17. Having heard the learned advocates for the parties and having considered the facts and documentary evidence placed on record in the paper book filed before the Tribunal, it emerges from the record that on 09.11.1996, Shri S. B. Jariwala was inducted as a partner of the appellant-assessee firm. This fact is not in dispute. Moreover, as per the explanation given by the assessee in a letter dated 12.2.2000 (placed on record at Pages 76 and 79), the assessee has explained as under:

“3. In Para 3 of your letter under reference it is mentioned that there is credit of Rs. 6.40 lacs in the name of Shri S. B. Zariwala (H.U.F.). Karta of Shri Suresh B. Zariwala which you propose to add as unexplained cash-credit. It may be clarified here that this is not a deposit/loan account. This amount is actually the capital contribution of a partner. The amount is received through bank instruments. We are enclosing herewith xerox copies of relevant Pay-in Slips on the reverse of which details of the DD/Cheque are fully recorded. We have also furnished copy of the partners’ account from our books. It would thus be noticed that this is not actually a cash-credit but capital contribution by a partner through cheque/draft.”

18. However, the Assessing Officer, CIT (Appeals) and the Tribunal ignored this explanation and harped solely upon the fact that there was no confirmation by Shri S. B. Jariwala HUF regarding the investment of Rs.6,40,000/- made as a capital contribution to the assessee-Firm.

19. Moreover, on perusal of the balance sheet placed on record at Page No. 99 of the paper-book, Rs.6,40,000/- is reflected as a partner’s capital account against the name of Shri S. B. Jariwala. The account of the partner Shri S. B. Jariwala, placed on record at Page 91 of the paper-book, reflects that the amounts of Rs. 5,00,000/-, Rs. 1,00,000/-, and Rs. 40,000/- were received by Demand Drafts on 11.12.1996, 21.12.1996, and 11.03.1997 respectively. These facts are not controverted by the Revenue.

20. Moreover, in the statement of income of the assessee-Firm, the account of Shri S.B. Jariwala is also reflected at Page 87, which clearly shows that the amount of Rs.6,40,000/- was received through demand drafts. Thus, the Tribunal committed a grave error by not considering such documentary evidence on record, erred in law and thereafter arrived at a perverse finding by reiterating the order passed by the Assessing Officer and the CIT (Appeal) and relying upon the decisions mentioned in Paragraph Nos 6.3.2 to 6.3.4 which pertain to the onus on the assessee to explain a credit entry. However, in the facts of the case, the Tribunal has, in Paragraph 6.3.5, has arrived at a finding contrary to the facts and evidence on record by holding that the assessee had failed to discharge its onus before the lower authorities, nor could even reply to a specific query as to whether or not the amount was brought in by cheque or by demand draft. Such findings of the Tribunal is contrary to the fact that the amount of Rs.6,40,000/- was received by demand drafts, the details of which were placed on record by the assessee along with the reply dated 12.02.2000. Thus, the Tribunal has considered the factors that are not relevant regarding the confirmation to be provided by the partner Shri S. B. Jariwala HUF when the assessee has tendered the explanation with regard to the receipt of the amount of Rs.6,40,000 towards capital contribution upon the induction of the aforesaid partner w.e.f. 09.11.1996. This Court in the case of Pankaj Dyestuffs Industries (supra), after considering the decision in the similar facts, has held as under:

“9. As can be seen from the order of the Tribunal, the Tribunal has confirmed the findings of the Deputy Commissioner of Appeals, hence it would be necessary to advert to the findings recorded by the Deputy CIT (Appeals). Before the Deputy CIT (Appeals), it had been contended on behalf of the assessee that the source of monies in the hands of the partners had been explained by producing necessary supporting evidences by way of extract from panipatrak in Form 7/12 and record of rights in Form 8-A etc. That the Income Tax Officer had not disputed that the credits in the accounts of the partners were not deposits from the partners. It was pointed out that the credits in the accounts of partners are not in proportion to the profit sharing ratio. It was submitted that the partners had satisfactorily explained the credits in their accounts by necessary supporting evidence. Alternatively, it was contended that, in any view of the matter, the credits in the accounts of the partners are to be explained by the partners and not by the firm. Reliance was also placed upon the decision of the Allahabad High Court in case of Commissioner of Income Tax v. Jaiswal Motor Finance (1983) 141 ITR 706, wherein it has been held as follows:

“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.”

10. The Deputy CIT (Appeals), upon consideration of the submissions of the appellant, found that the partners had produced sufficient evidence to show the source for deposit in their accounts. Accordingly, he deleted the addition. However, he left it open for the Income Tax Officer to consider the cash credits in the hands of the partners, if he was not satisfied with the source of investment of cash credits in the hands of the partners.

11. This Court in a recent decision dated 29th June 2005 rendered in case of C.I.T. v. Pragati Cooperative Bank Ltd., Income Tax Reference No. 215 of 1993 has, while construing the provisions of section 68 of the Act, observed as follows :

“11. 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 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 Commissioner of Income Tax v. Smt.P.K.Noorjahan, (1999) 237 ITR 571 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.

12. Applying the aforesaid principle to the facts found, it is not possible to state that the Tribunal committed any error when it confirmed the findings of CIT (Appeals) deleting the addition. The assessee offered an explanation. The said explanation is not found to be false. The Assessing Officer merely does not accept the explanation because he finds it not satisfactory. From that, legally there is no obligation, on the Assessing Officer, to treat the fixed deposits as income of the assessee.”

12. The Bombay High Court in case of Narayandas Kedarnath v. Commissioner of Income Tax, Central, [1952] 22 ITR 18 has, while dealing with the question as to whether certain amounts standing to the credit of some of the partners of the assessee firm could be treated as undisclosed profits of the firm itself, observed thus :

“If the department was satisfied that moneys, although paid in the names of the partners or strangers, were really undisclosed profits of the firm and were not individual contributions made by partners or strangers, then it would be legitimate for the department to draw an inference that those moneys represented the undisclosed profits of the firm. But here the only finding we have from the Tribunal is that these moneys were brought in by the partners from their native place and that no adequate explanation is forthcoming from the persons themselves as to where these moneys came from. Now it seems to me that the assessee firm has discharged the burden which was upon it to explain these credit entries and it has discharged the burden by satisfying the department that these entries represent genuine remittances received from Jaipur which have gone into the coffers of the firm. When that burden is discharged, it would be for the department to find that notwithstanding the fact that these moneys were actually brought in they do not represent the moneys of the partners but they represent the undisclosed profits of the firm which left the firm earlier and returned through the intermediary of the partners. If the department was not satisfied with the explanation given by the partners then it is legitimate for the department to draw an inference that these amounts represent undisclosed profits of the partners and to assess them in their own individual assessment.”

The aforesaid decision in the case of Narayandas Kedarnath (supra) rendered by Bombay High Court on 28th March 1952 has precedential value equivalent to a decision of this Court and hence, is equally binding on this Court. The said decision though rendered under the Indian Income Tax Act, 1922, would not make any difference. Section 68 of the Act was introduced for the first time in the Act and there was no corresponding provision in the 1922 Act. However, as per settled legal position, Section 68 of the Act only gives a statutory recognition to the principle that cash credits which are not satisfactorily explained might be assessed as income. (See CIT v. Orissa Corporation Pvt. Ltd. [1986] 159 ITR 78).

13. Applying the aforesaid principles to the facts of the present case, it is apparent that the assessee had furnished the details which would discharge the onus which lay on the assessee. It is not the case of the revenue that the partners of the assessee firm are fictitious. The Income Tax Officer has not disputed that the credits in the accounts of the partners were not deposits from the partners. Moreover, it is an admitted position that this was the second year of the firm, and that it was running in loss. It is true that the Income Tax Officer did not accept the explanation given on behalf of the assessee in respect of the new deposits or cash credits in the accounts of the partners. The mere non-acceptance of that explanation 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 case of Commissioner of Income Tax, Allahabad v. Jaiswal Motor Finance (supra), 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.

14. In the facts and circumstances of the present case, both the Deputy CIT (Appeals) and the Tribunal have found that the assessee had discharged the primary onus which was on it by offering explanation, which has not been found to be incorrect or false in any manner. The interest of the revenue is also safeguarded as the Income Tax Officer has been given the liberty to consider the said credits in the hands of the partners if he is not satisfied with the sources of investment of cash credits in the accounts of the partners.

15. In these circumstances, it is not possible to find that the order of the Tribunal suffers from any infirmity which would require interference at the hands of this Court. Accordingly, it is held that the Tribunal was right in law and on facts in deleting the addition of Rs.87,250/- being deposits in the accounts of the partners. The question referred to this Court is, accordingly, answered in the affirmative i.e. in favour of the assessee and against the revenue.”

21. In the facts of the case, applying the above decision, we are of the opinion that the assessee has offered an explanation which was not accepted by the authorities solely on the ground that there was no confirmation from Shri S. B. Jariwala for the amount received by the assessee. It also appears from the record that the fact of contribution made by the assessee towards the capital is duly reflected in the balance-sheet supported by the accounts of the partners, as similar contribution was also made by the newly inducted partners, Shri Feroz Ismail Patel of Rs.24,000, which is not disputed by the Assessing officer. Thus, we are of the opinion that the assessee has discharged the onus of providing an explanation of the credit entry of Rs.6,40,000/- made in the partner’s capital account by Shri S. B. Jariwala HUF upon being inducted as a partner of the assessee-firm with effect from 09.11.1996.

22. We therefore, answer the question in favor of the assessee and against the Revenue by holding that the tribunal has committed an error in confirming the addition of Rs.6,40,000/- under section 68 of the Act, resulting in a perverse finding. We, therefore, hold that the addition of Rs.6,40,000/- made under section 68 of the Act is accordingly ordered to be deleted. The Tax Appeal is accordingly allowed. There shall be no order as to cost.