ORDER
M.A.A. Khan, Judicial Member
1. These cross appeals are directed against the order of the CIT (Appeals)-V, Ahmedabad dated 19-3-1987 and are being disposed of by this common order.
2. The assessee is a registered firm engaged in the business of construction on contract basis. It is constituted by 9 partners. It maintains its accounts on mercantile system. The accounting period, relevant to assessment year 1982-83, which is under consideration, ended on 30-6-1981. For the year under consideration the assessee firm had returned its income at Rs. 1,06,377, revising the same to Rs. 94,040 through revised return filed on 21 -9-1988. During the year under consideration the assessee-firm had done construction work for excavation of exploration tunnel of Geological Survey of India, of Right Bank Power House, Narmada Project No. 1, Kavadia Colony, Gujarat and excavation of power House pit, Mahi Bazar, Sagar Hydel Project, Rajasthan Electricity Board, Banswara, Rajasthan. The ITO assessed the assessee-firm at a total income of Rs. 3,22,601 after making certain additions/disallowances. The learned CIT (Appeals) allowed the assessee’s appeal in part only, thus giving thereby rise to these cross appeals.
3. Assessees appeal (ITA No. 1394/Ahd/87: The assessee has raised the following effective ground in its appeal:
The CIT (Appeals) has erred in not allowing claim under Sections 80HH and 80-1 of Income-tax Act though claim is fully explained. The same may be allowed.
4. At the hearing it had to be agreed between the parties that the point in the above ground was considered by the Tribunal on identical facts in the case of a sister concern Dhorajia Bros, for Assessment Years 1982-83 and 1983-84 [IT Appeal Nos. 2539 (Ahd.) of 1986 and 1064 (And.) of 1987 and was decided in favour of the assessee. On a perusal of the said order, which was produced before us, we find that almost on identical facts, the Tribunal had accepted the assessee’s claim under Sections 80HH and 80J on the basis of the Orissa High Court decision in the case of CITv. N.C. Budharqja&Co. [1980] 121ITR 212 in preference to Bombay High Court decision in the case of CITv. Shah Construction Co. Ltd. [ 1983] 142 ITR 696 insofar as the claim under Sections 80HH was concerned. Similarly relying upon the Bombay High Court decision in the case of CITv. Pressure Piling Co. (India) (P.) Ltd. [ 1980] 126 ITR 333 and a number of Tribunal decisions, the Tribunal had accepted the assessee’s claim under Sections 80J as well. The aforementioned sister concern of the assessee was engaged in the activities of construction such as dams, thermal power stations, tunnels, bridges, buildings etc. We are thus satisfied that the issue in the above ground stands fully covered in favour of the assessee by the decision mentioned hereinabove. The order of the CIT (Appeals) on the issue in the ground raised has, therefore, to be vacated and assessee’s appeal allowed.
5. Revenue’s appeal (ITAppeal No. 1962/Ahd. /1987): Revenue has raised the following grounds in its appeal:
1. The learned CIT (Appeals) has erred in law and on facts in deleting the additions made under Section 68 of Rs. 10,000 and Rs. 20,000 and in directing the ITO to tax these amounts in the hands of the respective partners.
2. He has further erred in law and on facts in deleting the additions of Rs. 1,70,000 made under Section 68 of the IT Act.
3. He has also erred in law and on facts in deleting the addition of Rs. 65,556 made under Section 40A(3) of the Act.
6. The facts relevant for the disposal of ground Nos. 1 & 2 above are interrelated. Both the above grounds are, therefore, discussed together.
7. On going through the account books submitted by the assessee-firm, the ITO noticed that all the 9 partners of the assessee firm had brought new credits amounting to Rs. 3,31,000 during the year under consideration.
The details of such credits are these:
S.No. Name of Partner Amount Date Remarks/Source
1. Shri Harshadbhai D.
Dhorajia 10,000 25-10-1980 ByD.D./Agri.
15,000 20-11-1980 "
25,000 29-11-1980 "
2. Shri Parvinbhai D.
Dhorajia 20,000 25-10-1980 "
10,000 20-11-1980 "
5,000 19-12-1980 "
15,000 19-12-1980 "
10,000 28-5-1981 "
15,000 28-5-1981 "
3. Shri Hukandbhai D.
Dhorajia 20,000 25-10-1980 ByD.D./Agri.
25,000 29-11-1980 "
5,000 19-11-1980 "
10,000 28-5-1981 "
15,000 28-5-1980 "
4. Shri Manubhai R.
Dhorajia (HUF) 11,000 25-8-1980 By Cheque/Agri.
10.000 30-8-1980 By Cash "
5. Shri Maganbhai R.
Dhorajia (HUF) 15,000 12-8-1980 " "
6. Shri Somabhai R.
Dhorajia (HUF) 10,000 25-8-1980 By D.D.
10,000 30-8-1980 By Cash/Agri.
10,000 8-9-1980 " "
7. Shri C.J. Patel 45,000 From sub-
contract
8. Shri M.J. Patel 10,000 By cash (Rs.
5000 from
Agri.)
9. Shri G.D. Dhorajia 10,000 10-7-1980 By cash/Agri.
(loan from
father)
--------
Total 3,31,000
The ITO found that partners at S1. Nos. 1 to 3 came from one and the same family and they had brought in credits amounting to Rs. 2,00,000. The case of those partners was that the credits in their names represented their agricultural income. The ITO accepted their explanation to the extent of Rs. 30,000 and treated the balance of Rs. 1,70,000 as income of the assessee firm from undisclosed sources.
8. With regard to the credits appearing in the names of partners at S. Nos. 4 to 6 above, who represented their HUFs, the ITO found that Rs. 21,000 out of the total amount of Rs. 66,000 brought by them, had been brought in by cheques or D.Ds. The rest of the amount of Rs. 45,000 was stated to have been brought in by the said partners from their agricultural income. The ITO was of the opinion that the said partners could have brought in Rs. 25,000 only from their agricultural income. He, therefore, treated the balance of Rs. 20,000 as assessee’s income from undisclosed sources.
9. The ITO accepted the credits appearing in the names of C.J. Patel and M. J. Patel at S. Nos. 7 & 8 and they are not the subject of any dispute before us.
10. Insofar as the credit of Rs. 10,000 appearing in the name of G.D. Dhorajia, partner at S1.. No. 9, was concerned, the ITO rejected assessee’s explanation to the effect that the said credit was brought in by the partner Shri G.D. Dhorajia after taking loan from his father who had earned agricultural income. The ITO, therefore, treated that cash credit of Rs. 10,000 also as assessee’s income from undisclosed sources.
11. In appeal, the learned CIT (Appeals) accepted assessee’s intention that the credits amounting to Rs. 2 lakhs appearing in the names of partners at S1.. Nos. 1 to 3 represented their agricultural income and, therefore, no part of such credits should be treated as assessee’s income from undisclosed sources. That part of the order of the CIT (Appeals) makes the subject-matter of ground No. 2 above.
12. With regard to the cash credits in the names of partners at S1.. Nos. 4 to 6 above the CIT (Appeals) agreed with the ITO that those partners could save Rs. 25,000 out of their agricultural income. The CIT (Appeals) was of the opinion that the said partners could not explain the income of the rest of Rs. 20,000 to them from agriculture. Holding thus he took the view that the credits amounting to Rs. 20,000 were required to be considered as income from undisclosed sources of the partners concerned and to be treated as such in their individual assessments. Likewise, with regard to the credit of Rs. 10,000 in the name of G.D. Dhorajia, partner at S1.. No. 9, the CIT (Appeals), though agreed with the ITO that the assessee has failed to explain the source of that credit, yet he took the view that the amount represented by that credit was required to be considered as income from undisclosed sources of the partner himself and not of the assessee-firm. He directed the ITO to do accordingly. That part of the order of the CIT (Appeals) which deals with the credits appearing in the names of partners at S1.. Nos. 4 to 6 and 9 make the subject-matter of ground No. 1 above.
13. Mr. V.S. Shah, the learned Sr. D.R., vehemently urged that once the learned CIT (Appeals) had come to the conclusion that the credits appearing in the names of partners at S. Nos. 4 to 6 and of partner at S. No. 9 had not been satisfactorily explained by the assessee, the CIT (Appeals) should have treated those credits amounting to Rs. 30,000 (Rs. 20,000 + Rs. 10,000 as mentioned in ground No.l) as the income of the assessee firm from undisclosed sources and should not have directed the ITO to treat the same as the income of the concerned partners from their undisclosed sources. In this behalf Mr. Shah heavily relied upon the Allahabad High Court decision in the case of CIT v. KapurBros. [1979] 118 ITR 741. He further contended that it had not been satisfactorily proved by the assessee that its partners at S1.. Nos. 1 to 3 above had brought in Rs. 2,00,000 out of their agricultural income. In the opinion of the D.R., the amount of Rs. 1,70,000 represented assessee’s own income from undisclosed sources and should have been held so by the CIT (Appeals) and credits appearing in the names of those partners should not have been treated as having been satisfactorily explained.
14. On the other hand, Mr. H.M. Talati, Advocate for the assessee-firm, supported the order under appeal and further submitted that the issue in the two grounds stood clearly covered in favour of the assessee by a binding decision of the Bombay High Court in the case of Narayandas Kcdarnathv. CIT [1952] 22 ITR 18 wherein it has been held that where a credit appearing in the name of the partner of a firm has not been satisfactorily explained the same may be treated as income of the partner but not as income of the firm itself. Mr. Talati further supported his reliance en the said decision with another decision of Allahabad High Court in the case of CITv. Jaiswal Motor Finance [1983] 141 ITR 706.
15. With regard to the deletion of Rs. 1,70,000 which makes the subject-matter of ground No. 2, Mr. Talati supported the order under appeal and further submitted that it was fully established on record that the concerned partners were having 75 acres of land which gave them sufficient agricultural income to bring the credits into the assessee-firm. Mr. Talati took us through the extract from revenue records as also other documents on the paper book in order to satisfy us that the concerned partners had brought in all the amounts of credits out of their agricultural income and that the credits were brought into the firm through the mode of demand drafts. It was further submitted that the finding recorded upon the subject-matter of ground No. 2 by the CIT (Appeals) was most appropriate in the facts and circumstances of the case.
16. Before we proceed to appreciate the submissions of the learned representatives for the parties in the light of the cases relied upon by them, we would like to mention that the findings of the learned CIT (Appeals) over the credits appearing in the names of partners at S1.. Nos. 4 to 6 and 9 above as having not been satisfactorily explained by the assessee firm, have not been challenged by the assessee by way of cross appeal or cross objection. The limited issue for our consideration in respect of those credits, which make the subject-matter of ground No.l above would be whether the CIT (Appeals) , alter having agreed with the ITO that the said credits had not been satisfactorily explained by the assessee firm, though appearing in its books in the names of its partners, was justified in coming to the conclusion that the said credits did not represent assessee’s income or profits and that they were required to be added as income of the concerned partners from their undisclosed sources.
17. It may be recalled that there was no provision in the 1922 Act corresponding to Section 68 of the 1961 Act. It appears that the dispute whether a cash credit appearing in the books of account of the assessee should be regarded as assessee’s income of the year of account and if so can it be so regarded where such cash credit was made in the books in the beginning of the accounting year, had led to the enactment of Section 68. Section 68 set at rest such disputes as it unequivocably provides that where any sum is found credited in the books of an assessee, maintained for any previous year, and the assessee, offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the ITO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Now, credit may be made either in the name of the assessee or his relatives or a third party. Where the credit appears in the name of the assessee or his relative rather a heavy burden is cast upon the assessee to explain that the said credit did not represent his income from undisclosed sources. However, where the cash credits appear in the name of a third party it would ordinarily suffice if the assessee proves the identity of the third party and source available to that party to make the deposit with the assessee. Now, so far as the effect of the explanation contemplated by Section 68 is concerned it may be approached like this. Where the assessee offers no explanation there would arise no difficulty in treating the credit appearing in his name or in the name of his relative as assessee’s income for year of account. However, where the assessee offers an explanation but the explanation was not found satisfactory by the ITO then the ITO may treat the amount represented by the cash credit as assessee’s own income from undisclosed sources. Where, however, an explanation is found satisfactory then certainly the amount represented by the cash credit cannot be treated to be the income of the assessee himself but the same shall have to be treated as the income of the person in whose name it appears in the books of the assessee.
17A. The effect of the explanation offered by the assessee but not found satisfactory by the ITO appears to have been considered by the Bombay High Court in the case of Narayandas Kedarnath (supra). In that case certain amounts standing to the credit of some of the partners of the assessee-firm were found to be amounts actually brought in by them from their native place by means of bank drafts. The partners had stated that they had brought the moneys to meet losses but they were unable to explain how those moneys were available to them in their native place. The income-tax authorities and the Appellate Tribunal had treated the credits as undisclosed profits of the firm. On a reference the Bombay High Court held that there were no material on which the Tribunal could come to the conclusion that the credits represented undisclosed profits of the firm. In that case Chagla, C.J. observed that if the department was not satisfied with the explanation given by the partners then it was legitimate for the department to draw an inference that the amounts represented undisclosed profits of the partners and to assess them in their own individual assessments.
18. A similar case appears to have fallen for the consideration of the Allahabad High Court in the case of Balbhadra Chand Munnalal v. CIT [1958] 33 ITR 781 wherein it was held that where once the Appellate Tribunal accepts that the money represented by cash credits in the account books of a partnership was brought into the firm by the financing partner no part of that amount can be held to be the revenue income of the partnership and in the assessment proceedings of the partnership the incorrectness of the explanation offered as regards the source from which the partner obtained the money is of no effect.
19. The Supreme Court also appears to have considered a similar question in the case of A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807. In that case the assessee was a partner in a firm and the books of the firm disclosed credits amounting to Rs. 54,600 and Rs. 27,500 appearing in the name of the assessee for assessment years 1945-46 and 1946-47. When the assessee was called upon to give explanation as to how he had come to possess those amounts his explanation was in two parts. He firstly stated that his father had made a profit of about Rs. 80,000 in the business conducted by him, that he had this amount with him when he died in 1936, that prior to his death he had entrusted that amount to the assessee’s aunt who had died in 1944 and before her death she had handed over that amount to the assessee. As regards balance of Rs. 42,000 the explanation of the assessee was that the same represented the profits earned in a partnership concern which carried on business in arrack during the years 1938-39 to 1944-45. The partners of that firm were two persons viz. Ediga Thayappa and M. Govindaswamy Mudaliar. The case of the assessee was that Ediga Thayappa was only a Benamidar for him and that the profits earned by the business during those years were the profits in which the assessee had a share and that came to Rs. 42,000. This story of the assessee was rejected by the IT authorities as well as by the Appellate Tribunal. It was on these facts that the Supreme Court held that whether a receipt is to be treated as income or not must depend very largely on the facts and circumstances of each case. Where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the year the ITO is entitled to draw the inference that the receipts are of an assessable nature. The Supreme Court further observed that where the explanation of the assessee as regards the amounts shown in the books of account of a firm, of which he was a partner, as credits from him, were rejected as untrue, it was open to the ITO and the Appellate Tribunal to hold that they represented the concealed income of the assessee.
20. The Supreme Court again considered a related question in the case of Lalchand Bhagat Ambica Ram v. CIT [ 1959] 37 ITR 288. In that case the Tribunal had apparently accepted the explanation of the assessee in respect of the encashment of high denomination notes and had rejected a part of the explanation. It was observed by the Supreme Court that the books of the assessee having not been challenged in any other manner except in regard to the interpolations relating to the number of high denomination notes and the Tribunal having accepted the books of account as genuine, and having worked up its theory on the basis of the entries, obtained in the books of account, it was not open to the Tribunal to have accepted the genuineness of the books of accounts and at the same time to have accepted the explanation of the assessee in part only and rejected the same in one part.
21. A similar question arose before the Patna High Court In the case of Hardwarmal Onkarmal v. CIT [1976] 102 ITR 779. In that case credit entries in the names of partners, proportionate to the shares of each of the partners, were found in the books of the firm and the explanation offered was also found unsatisfactory. The Patna High Court opined that the credit entries represented undisclosed income of the firm and were required to be added as such in firm’s total income.
22. The above decision of the Patna High Court was relied upon by the Allahabad High Court in the case of Kapur Bros, (supra) where deposits in the books of the firm were found existing in the names of the partners and the explanation offered for those deposits had been disbelieved by the authorities concerned. The Allahabad High Court held that the deposits should be treated as income of the firm and not of individual partners.
23. In a subsequent decision in the case of Jaiswal Motor Finance (supra] the Allahabad High Court held that if there are cash credit entries in the books of a 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 the profits of the firm it cannot be assessed in the hands of the firm. It may be pointed out that in this case the earlier decision of the Allahabad High Court in the case of Kapur Bros, (supra) was not considered.
24. A study of the above cases brings us to hold 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 or 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.
25. Another principle which also emerges from the study of the above cases and particularly the case decided by the Supreme Court is that the explanation offered by an assessee should, ordinarily be read and accepted as a whole, particularly in those cases where his explanation relates to one and the same item of addition. If the explanation offered on a particular item of addition is inseparable then it should be accepted for or against the assessee as a whole.
26. Now coming to the facts of the instant case, we find that the cash credit of Rs. 10,000 as existing in the name of partner at S. No. 9 above and cash credits amounting to Rs. 20,000 in the names of partners at S1.. Nos. 4 to 6 above, have not been appreciated in right perspective. Insofar as the credit of Rs. 10,000 appearing in the name of partner at S1.. No. 9 is concerned the case of the assessee was that the said partner had brought in the amount represented by the cash credit from loan obtained from his father. That case was neither accepted by the ITO nor by the CIT (Appeals). We find that the income-tax authorities have rejected the case of the assessee in that behalf on sound grounds. No confirmation from the father was ever filed. No promissory note was alleged to have been executed by the son in favour of the father, the loan was not admittedly returned to the father. No interest on the loan advanced was stated to have been paid by the partner to the father. All these factors could have reasonably led the income-tax authorities to reject the explanation of the assessee in that behalf. But after rejecting the explanation in respect of this cash credit of Rs. 10,000 the CIT (Appeals) held that the same was required to be added as partner’s income from undisclosed source in his individual assessment. We would have accepted this approach of the CIT (Appeals) had we not kept the totality of the circumstances of this case in mind. It has not been the case of assessee that it had stood in need of funds. It is also an obvious fact that huge amounts appear in the account books representing credits in the names of the partners. Undoubtedly in a majority of the cash credits the nature and source of such cash credits had been established on record but the totality of circumstances speak that the cash credit of Rs. 10,000 standing in the name of partner at S1.. No. 9 above was assessee’s income. In our opinion, therefore, after having rejected the assessee’s explanation in this behalf the learned CIT (Appeals) should have directed the inclusion of that cash credit in the total income of the assessee firm from undisclosed sources. We now hold and direct the ITO accordingly.
27. The cash credits amounting to Rs. 20,000 appearing in the names of partners at S1.. Nos. 4 to 6, however, stand on different footings. The explanation of the assessee in that behalf was that the concerned partners had brought in Rs. 45,000 out of their agricultural income. The ITO had accepted that the concerned partners had agricultural income but he was of the opinion that the said partners could have brought Rs. 25,000 only out of their agricultural income. He had, therefore, added the balance of Rs. 20,000 to the income of the assessee, treating the same as income from undisclosed sources. We would like to point out that in giving that treatment to a part of the amounts brought in by the partners at S1.. Nos.4 to 6, the ITO had in reality and in principle accepted the position that the cash credits were genuine transactions and that all the amounts had been brought in by the concerned partners. Once the nature of the credits and the source therefor had been established on record and it had been found as a matter of fact by the ITO that the moneys represented by those cash credits had in fact been brought in by the concerned partners he should not have rejected the explanation of the assessee in respect of the cash credits amounting to Rs. 20,000. In this behalf we rely upon the Supreme Court decision in the case of Lalchand Bhagat Ambika Prasad (supra). That being so the order of the learned CIT (Appeals) in that behalf is sustained. Consequently ground No. 1 is partly accepted.
28. On the subject-matter of ground No. 2, the ITO had himself accepted the position that the partners at S1. Nos. 1 to 3 had agricultural income. The controversy was whether they could have earned Rs. 2 lakhs from agriculture or not. In the opinion of the ITO those partners could have brought in only Rs. 30,000 out of their agricultural income. That means that the ITO had accepted (1) that amounts had been brought in by the partners to the assessee firm and (2) that the partners had agricultural income. Once the nature of the cash credits and the sources had been accepted by the ITO he should not have entered upon the task of examining as to what could be the income to the concerned partners from agriculture. That question should have been left to be considered in detail in their individual assessments. Therefore, the principle laid down by the Supreme Court in the case of Laichand Bhagat Ambika Prasad (supra) squarely applies to the facts obtaining in the instant case. We, therefore, agree with the CIT (Appeals) that the amount of Rs. 1.17,000, represented by the cash credits standing in the names of partners at S1.. Nos. 1 to 3 above, could not have been treated as the income of the assessee firm. The question whether the amounts represented by the cash credits to that extent or to any other extent represented partners’ income from undisclosed sources or from agriculture would be an open question to be considered at length by the assessing authority in the individual cases of the partners. That being so ground No. 2 is dismissed.
29. Now coming to ground No. 3, the relevant facts are that the assessee firm had got some of its work executed through three sub-contractors to whom the firm had Shri made the following payments:
1. Shri C.L. Vasoya Rs. 61,076 2. " S.V. Patel Rs. 36,540 3. " P.V. Patel Rs. 19,441 ---------- Rs. 65,556
The assessee explained that since the work was being carried out at a place 13 Kms. away from the place where the bank was situated and the sub-contractors had insisted upon making payments to them in cash so that they may pay amounts in cash to the labourers on site, the assessee had to make the payments in cash exceeding Rs. 2,500 at several occasions. In this behalf reliance on Rule 6DD(J) of the IT Rules, 1962 was also placed. The ITO rejected the above contention but the learned CIT (Appeals) accepted the same.
30. The learned Sr. D.R. has no doubt vehemently urged that there existed no exceptional circumstances or emergency so as to apply the provisions of Rule 6DD(j) to the payments in question, but after hearing the parties, we are satisfied that the order of the CIT (Appeals) is just and proper in the facts and circumstances of the case. In the paper book we find that the three sub-contractors appears to have agreed to take up the work from the assessee-firm on the clear understanding that payments to them, as and when needed, shall have to be made in cash as they would be requiring cash for payment to the labourers who were executing the work on site. The site of the work was admittedly at about 12 Kms. away from the place where bank facilities were available to the parties. Looking to the nature of the business of the assessee-firm, the insistence of the sub-contractors who received payments in cash in order to enable them to pay cash to the labourers on site, the provisions of Section 6DDQ) read with the Circular of the Board applies for the benefit of the assessee-firm. We, therefore, confirm the order of the CIT (Appeals) on this ground.
31. In the result, the assessee’s appeal is allowed in full but revenue’s appeal is allowed in part to the extent mentioned above.