ORDER
Keshav Prasad, Accountant Member
1. The appeal has preferred by the assessee against the order of the Commissioner of Income-tax (Appeals) dated 24-7-1992 pertaining to the assessment year 1989-90. The issue has arisen out of orders dated 15-7-1999 in MA No. 124/Del/99 arising out of ITA No. 8014/Delhi/92 pertaining to the assessment year 1989-90.
2. The assessee is engaged in the business of manufacturing copper wire out of non-ferrous metal purchased from MMTC and HCL. In his assessment order the Assessing Officer has inter alia made an addition of Rs. 6,20,000 on account of unexplained credits under section 68 of the Income-tax Act. On appeal the CIT(A) set aside the issue and restored back to the file of the Assessing Officer to pass order afresh. Against setting aside the order by the CIT(A) the assessee filed appeal before the Tribunal. In respect of this issue the assessee has raised two grounds before Income-tax Appellate Tribunal, In ground No. 1 the assessee had objected to the CIT(A)’s order in setting aside the issue and vide ground No. 2 the assessee had prayed that even if certain addition was warranted the same can be considered in the hands of the partners only and not in the hands of the assessee firm. In addition the following additional ground was also admitted by the Tribunal ;–
“That under the facts and circumstances of the case the Ld. Assessing Officer grossly erred in law as well as on facts in charging interest under sections 234A and 234B.”
3. The appeal filed by the assessee was adjudicated by the Tribunal and vide its order dated 29-1-1999 the Tribunal upheld the order of the CIT(A) in setting aside the issue. However, no finding was given regarding ground No. 2. On the issue of charging interest under sections 234A & 234B he directed the Assessing Officer to allow consequential relief. As the assessee felt that there were certain apparent mistakes in the order of the Tribunal, a Miscellaneous Application was moved. Vide this application a request was made that the Tribunal may give its finding on ground No. 2 which involved the interpretation of law. Regarding charge of interest it was stated in the application that the levy was illegal because no speaking order for levy of interest under sections 234A & 234B was passed. The reliance was also placed on the decision of the Hon’ble Patna High Court in the case of Uday Mistanna Bhandar & Complex v. CIT [1996] 222 ITR 44/11997] 90 Taxman 500. The Tribunal vide its order dated 15-7-1999 agreed with the assessee and directed the Registry to refix the
hearing for adjudication of levy of interest under sections 234A and 234B of the Act and on the ground No. 2 mentioned above.
4. The ground No. 2 raised by the assessee before the Tribunal read as under :–
“That without prejudice to ground No. 1 above, firm is not answerable and responsible in respect of addition of Rs. 6,20,000 in the capital account of the partner, Shri M.K. Jain when said partner is assessed separately, having other sources of income and has duly admitted and explained the source of addition to his Capital account”.
Thus only two issuer have to be adjudicated as mentioned above.
5. The learned counsel stated that the assessee was a firm consisting of S/Shri M.K. Jain, Neeraj Jain, Smt. Rajani Jain and Shri Sharad Jain as partners. This was the second year of the business. One of the partners Shri M.K. Jain introduced’ Rs. 6,20,000 as part of his capital during the accounting year. The said capital was brought in the firm by taking loans from 68 parties. As the Assessing Officer had doubt about loans being taken from big number of parties, the enquiries were conducted. 26 persons were produced before the Assessing Officer for cross examination. Remaining 42 persons were not produced. The affidavits in respect of most of the parties were filed. The creditors were close relatives and no interest was paid. Most of the parties were not maintaining bank accounts. It was claimed that the capital amount of Rs. 6,20,000 was brought by the partner Shri M.K. Jain and the firm was not responsible for the amounts brought in by the partner. While relying on the decision of the Hon’ble Allahabad High Court in the case of CIT v. Jaiswal Motor Finance [1983] 141 ITR 706 and in the case of Shamshuddin Mansoor Haqu Taxation 83(4)-51 it was claimed that no addition could be made in the hands of the firm. The learned counsel also relied on the decisions in Addl CIT v. Precision Metal Works [1985] 156 ITR 693/[1984] 19 Taxman 584 (Delhi); India Rice Mills v. CIT [1996] 218 ITR 508/ 85 Taxman 227 (All.); Jivanlal Joitaram Patel v. ITO [1997] 92 Taxman 282 (Ahd. – Trib.); Dettcee Nylons v. Asstt. CIT [1998,] 97 Taxman 110 (Ahd. – Trib.); Vinay Cloth Stores v.ITO [1998] 96 Taxman 20 (Ahd. – Trib.) and Maganbhai Becharbhai Patel & Co. v. ITO [1994] 77 Taxman 355 (Ahd. – Trib.).
6. It was claimed that the issue was covered in favour of the assessee by the decision of the jurisdictional High Court in Precision Metal Work’s case (supra) and therefore, no addition could be made in the hands of the assessee firm in respect of capital credited to the accounts of the partners.
7. On the other hand, the learned DR stated that the decisions relied on by the learned counsel are distinguishable on facts. It was argued that in the ease of Precision Metal Works (supra), the Hon’ble Delhi High Court had observed that the income could be either the income of the firm or the income of the individual partner. It could not be income of both. The
Hon’ble Court held that the assessment of the partners had resulted in the sum being charged to tax in their hands as the same was surrendered by them as their income, the same could not be brought to tax in the hands of the firm. The learned DR stated that in the instant case the amount has not been offered/charged to tax in the hands of the partners and therefore, the decision of the Hon’ble Delhi High Court was not applicable. The learned DR. also relied on the decisions in CIT v. Kapur Bros. [1979] 118 ITR 741/1 Taxman 25 (All.); CIT v. Kishorilal Santoshilal [1995] 216 ITR 9(Raj) Hardwarnal Onkarmal v. CIT [1976] 102 ITR 779 (Pat.); CIT v. Shiv Shakti Timbers [1997] 90 Taxman 349/[1998] 229 ITR 505 (MP). Regarding the decision of Hon’ble Allahabad High Court in the case of Jaiswal Motor Finance (supra), the learned D.R. stated that in the instant case it was I he first year of the -assessee. Similarly in the case of India R ice Mill’s case (supra) the capital contribution was made by the partner before the firm has commenced ifs business. It was under these circumstances that the Hon’ble Allahabad High Court had held that once the business of the firm has not commenced the unexplained investment in the capital account of the partner cannol be assessed in the hands of the firm. The learned DR further observed that in the cases mentioned above ratio is clearly laid down that even if the capital account of the partner is credited and the explanation furnished by the firm was not satisfactory, the addition under section 68 of the Act in the hands of the firm was valid. In his counter reply the learned counsel reiterated his arguments.
8. We have considered the rival submissions. In a case where the capital account of the partner is credited in the books of account of the firm and no satisfactory explanation is furnished by the firm, whether the addition could be made in the hands of the firm or not, was considered by various High Courts. The Hon’ble Patna High Court in the case of Hardwamal Onkarmal (supra) and Hon’ble Allahabad High Court in the case of Kapur Bros, (supra) has held that the cash credits standing in the names of the partners in the books of the firm should be treated as the income of the firm from undisclosed sources. Hon’ble Rajasthan High Court in the case of Kishorilal Santoshilal (supra) (at page 14) has held as under :–
“In these circumstances we are of the view that simply because the amount is credited in the books of the firm in the partner’s capital account it cannot be said that it is not the undisclosed income of the firm and in all cases it has to he assessed as an undisclosed income of the partner alone.”
Hon’ble Madhya Pradesh High Court in the case of Shiv Shakti Timbers (supra) has considered a similar issue. The issue referred for the consideration of the Hon’ble Court was as under:–
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that if a firm’s books showed a cash credit in the name of a partner, it is section 69 and not section 68 which could be attracted in the case of partner only ?
2. Whether, the Tribunal was correct in law to hold that the provisions of section 68 did not apply in the case of firm if the cash credit, even though unexplained or not satisfactorily explained, stood recorded in the name of a partner ?”
After analysing various case laws on the issue the Hon’ble Court held as under :–
“Therefore, from the series of decisions of various High Courts, it is well established that in such a situation where there is a credit entry in the books of account of the assessee and there is no satisfactory explanation, then it will be deemed to be the income of the Firm and will be added to the income of the firm and can be accordingly taxed.”
9. We have also perused the decision of the Hon’ble Delhi High Court in the case of Precision Metal Work’s (supra) relied on by the learned counsel. In this case the Hon’ble High Court has held as under :–
“Held that the income could either be the income of the firm or it could be the income of the individual partners, it could not be income of both. Once having accepted the amount as the income of the partners themselves it could not be added to the income of the firm.”
In this case the income was offered to tax by the partners in their hands and under these circumstances the Hon’ble Delhi High Court had held that once the same income has been taxed in the hands of the partners, the same cannot be taxed in the hands of the firm. But in the case before us only the enquiry was made regarding cash credits in the names of the partners when the assessment of the firm was in progress. No addition is made nor income is offered for taxation by the partner. Thus the ratio laid down in the case of Precision Metal Works (supra) was not applicable to the assessee’s case who cannot take benefit of such a ratio.
10. We have also perused the decision of Hon’ble Allahabad High Court in the case of India Rica Mills (supra). In this case the following question was referred to the Hon’ble High Court for adjudication :–
“Whether the Tribunal was correct in law in invoking section 68/69 of the Income-tax Act, 1961 and treating a sum of Rs. 1,43,000 as income from undisclosed sources of the petitioner firm when the petitioner firm had not yet even commenced its business.”
The Hon’ble High Court answered the question in the following words :–
“Most striking features of the ease on hand is that all the deposits came to be made during the accounting year in the books of the assessee firm before it started its business. Therefore, the onus was on the partners to explain the source in the case on hand, it they failed the amount could have been added in their hands only and not in the hands of the firm,”
The above ratio is not applicable to the assessee’s case as it was the second year of the business. Needless to say that unless the business had started,
the question of generating any income which could be brought back in the shape of partner’s capital did not arise.
11. Considering the legal position as a whole we are of the view that the addition under section 68 of the Act can be made in the hands of the firm, if the capital account of the partners in the books of account of the firm are credited. As we have been asked upon to adjudicate only the legal issue raised by the assessee, we are not going into the question of onus and sufficiency of the explanation. Accordingly, this ground of appeal raised by the assessee is dismissed.
12. Regarding levy of interest under sections 234A & 234B of the Act, the learned counsel stated that such levy was illegal unless the specific section under which it has been charged has been mentioned by the Assessing Officer. It was also stated that no interest under these seclions could be levied by making the mention “charge interest as per rules” or “charge interest if any”. For this purpose the learned counsel relied on the decision of the Hon’ble Patna High Court in the case of Uday Mistanna Bhandar’s case (supra). It was stated that as this was the only decision on the issue, the same has to be followed. On the other hand, the learned DR stated that by not mentioning the specific section the Assessing Officer has committed the procedural irregularity which is curable under section 292B of the Act. While relying on the decisions in Joseph Kuruvila v. CIT [1989] 179 ITR 139/44 Taxman 318 (Ker.); Bal Erectors v. CIT [1989] 180 ITR 625/ [1990] 49 Taxman 196 (Punj. & Har.) and Mishri Lal Gordhan Lal v. CIT [1996] 217 ITR 42 (Raj.), the learned DR stated that procedural irregularity will not invalidate the order and accordingly the interest has been charged correctly.
13. We have considered the rival submissions. We have also perused the decisions relied on by the learned DR. As regards the reliance of the DR on the cases mentioned above we found that all the cases related to the directions under sect ion 144A/144B of the Act wherein the Courts have held that non-reference of draft assessment order to then lACs under section 144A/144B was the procedural error which could be cured and the whole order will not be invalid. We are also aware that the Courts have held that no speaking order has to be passed while charging interest under sections 234A and 234B of the Act. This view was taken by the Hon’ble Allahabad High Court in the cases P.C. Dwadesh Shreni&Co. Ltd- v. ITO [1962] 46 ITR 586 and Santamal Pitambar Prasad v. ITO [1963] 47ITR 562 respectively. However, the decision of the Hon’ble Patna High Court in the case of Uday Mistanna Bhandar & Comp. (supra) cannot be brushed aside. While deciding this issue the Hon’ble Patna High Court has held as under :–
“From a bare reading of section 156 of the Income-tax Act, 1961, it is clear that the notice of demand claiming interest can be issued only when there is a specific order in the assessment order, levying interest. To use the expression “charge interest, if any” or “charge interest as per
the rules” cannot be read to mean that the Assessing Officer has passed orders to “charge interest under all the aforesaid sections”. The order to charge interest has to be specific and clear, as for that matter, any order to charge any lax, penalty or fine. The assessee must be made to know that the Assessing Officer after applying his mind has ordered charging of interest and under which section of the Act. A notice of demand is somewhat like a decree in a civil suit which must follow the order. When a judgment does not specify any amount to be charged under any particular section, the decree cannot contain any such amount. Similarly, when the assessment order is silent on whether any interest is leviable, the notice of demand under section 156 of the Act cannot go beyond the assessment order and the assessee cannot be served with any such notice demanding interest.”
14. There is no dispute that direction for charge of interest under a specific section has to be given by the Assessing Officer. If he fails to do so, no interest could be charged. Thus one thing is clear that direction for charging interest has to be mentioned in the assessment order. Whether the direction for charging interest has to be specific has been considered by the Patna High Court in the case mentioned above. Considering ratio laid down by Hon’ble Patna High Court we have perused the assessment order also. In his order the Assessing Officer has mentioned as under :–
“Charge interest as per rules.”
As held by Hon’ble Patna High Court that such direction was not valid for charging interest under section 234A/234B of the Act because the same was not specifically mentioned in the assessment order. This is the only decision available on this issue. Respectfully following the same, we hold that the Assessing Officer was not justified in charging interest under section 234A/234B of the Act in absence of specific directions of charging interest under the above sections. Accordingly the interest charged by the Assessing Officer is deleted. This ground of appeal raised by the assessee is allowed.
15. In the result, the appeal is partly allowed.