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CASE NO.: Appeal (civil)  3230 of 2007

PETITIONER: Commissioner of Income Tax, Salem

RESPONDENT: K. Chinnathamban

DATE OF JUDGMENT: 24/07/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL No.  3230           OF 2007 (arising out of S.L.P. (C) No. 11596/2006) with Civil Appeal No.    3231       of 2007 @ SLP(C) No. 14262/06 Civil Appeal No.    3232       of 2007 @ SLP(C) No. 14263/06 Civil Appeal No.    3233       of 2007 @ SLP(C) No. 15538/06 Civil Appeal No.    3234       of 2007 @ SLP(C) No. 17035/06 Civil Appeal No.    3235       of 2007 @ SLP(C) No. 18654/06

KAPADIA, J.

       Leave granted.

2.      The short question which arises for determination in this group of  civil appeals is: Whether in the facts and circumstances of the case the  Tribunal was right in holding that income on the unexplained investments  should be considered in the hands of the firm, M/s V.V. Enterprises.

3.      For the sake of convenience, we mention hereinbelow the facts of the  civil appeal arising out of Special Leave Petition (C) No. 11596/2006.

4.      K. Chinnathamban, the respondent-assessee, was connected with the  firm by the name V.V. Enterprises, having its premises at No. 2 & 3A, East  Perumanoor Road, Salem. There was a search in the premises by police  officers on 19.8.1991 when Rs. 1.18 crores (approx.) was seized. This  seizure was followed by a survey under Section 133A and investigations  under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as  the "said Act"). The firm was managed by one K. Palanisamy who had filed  his Return and who appeared on summons and gave statements. In the  course of assessment proceedings, it was detected that the books of accounts  were incomplete. K. Palanisamy was not in a position to explain the source  of the deposit amount of Rs. 1.18 crores (approx.). Therefore, the Assessing  Officer ("A.O.") treated the said amount as undisclosed income of persons in  whose names the deposit appeared. The assessment made in respect of K.  Chinnathamban was Rs. 5.16 lacs consisting of Rs. 16,148 as salary and Rs.  5 lacs as undisclosed income under Section 69. This order of assessment was  upheld by the CIT(A). The assessee, K. Chinnathamban, carried the matter  in appeal with the Tribunal. By the impugned judgment, the Tribunal held  that since the claim was made by members of the public, it was not proper to  treat the amount as income from undisclosed source of various assessees  and, therefore, according to the Tribunal, it was necessary to link up all these  amounts with the books of the firm. It is this part of the reasoning given by  the Tribunal which is the subject matter of these civil appeals.

5.      At the outset, we may state that none appeared for the assessees  though served.  M/s V.V. Enterprises ostensibly was a firm floated for  carrying on the business of prize tickets and for collecting deposits from the

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public. K. Palanisamy was the man behind the said activity. His statement  was recorded on various dates. He has admitted that the partners were  fictitious. They were not eligible to any shares in the profits of the firm. K.  Palanisamy has further stated that monies were lying in various banks in  FDRs. in the names of these so-called partners. He further claimed that part  of this amount belonged to the members of the public. This part of the  statement was not accepted by the Department. In view of the aforestated  position the A.O. proceeded to frame the assessment in the hands of  Palanisamy on protective basis and in the hands of deposit holders for  unexplained deposits. The most important aspect of the case is that although  M/s V.V. Enterprises was stated to be a registered firm, there were no bank  accounts in the name of such a firm. There were no accounts in the name of  any of the partners of the alleged firm. There were no deposits in the name  of the alleged firm. There were no deposits in the name of any of the  partners of the alleged firm. None of the assessees have been able to explain  the source of the deposits in the names of the relatives. When asked, they  have pointed their fingers to K. Palanisamy. In the circumstances, the  Department was right in coming to the conclusion that the alleged firm of  M/s V.V. Enterprises was not genuine. The assessee could not establish the  source of deposits. The Department was right in coming to the conclusion  that there was no evidence in support of the claim of the assessee that the  aforestated amount was collected from the members of the public. The  assessee had failed to show that the collections did not represent his income.  In order to find out whether the assessee is the owner of any money in terms  of Section 69A of the said Act, the principle of Common Law Jurisprudence  in Section 110 of the Evidence Act, 1872 can be applied. In the case of  Chuharmal  v.  C.I.T. reported in (1988) 3 SCC 588 it has been held by this  Court that the word ’income’ in Section 69A of the Income Tax Act has   wide meaning which meant anything which came in as gain. In the present  case, the assessee did not adduce any evidence to show that the aforestated  amount did not belong to him. In the facts of this case, therefore, the  Department was right in drawing inference that the assessee had the  aforestated amount as his income which was subject to tax under Section  69A. In our view, the Tribunal should not have interfered with these findings  of fact rightly recorded by the A.O. and the C.I.T.(A).

6.      In the present case, the Tribunal has further held that the partners were  employees of public sector undertakings; that they had acted as partners; that  the firm was floated and, therefore, though the firm was illegally constituted,  however, the very existence of the firm was never in doubt. The Tribunal  held that members of the public have placed their deposits with the said firm  through the relatives and friends. The Tribunal has further held that though  the aforestated amount ought to have been deposited in the name of the firm,  it was not so done and, therefore, it was necessary to link up the said  amounts with the books of the firm and to the extent possible should be  shown as amounts received by the said firm as deposits from various  persons. We do not see any basis for recording the aforestated findings.  There is no evidence to show that members of the public have been placing  their deposits with the said firm through their relatives and friends, therefore,  there was no question of linking up all these amounts with the books of the  firm as ordered by the Tribunal. In the above facts, the Department was right  in holding that income on unexplained investments cannot be considered in  the hands of the firm found to be fictitious. Therefore, the Tribunal had erred  in directing linking up of the deposits with the accounts of the alleged firm.

7.      Where a deposit stands in the name of a third person and where that  person is related to the assessee then in such a case the proper course would  be to call upon the person in whose books the deposit appears or the person  in whose name the deposit stands should be called upon to explain such  deposit. In the present case, there is no evidence recording registration of the  firm. In the present case, books of accounts are not properly maintained. In  the present case, there is no explanation regarding the source of investment.  In the present case, the evidence of K. Palanisamy, indicates that even the  partners of the firm were fictitious. In the above circumstances, the Tribunal  had erred in directing linking up of the deposits with the accounts of M/s

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V.V. Enterprises. In fact, the directions given by the Tribunal to the A.O. for  such linking up was not even capable of compliance. The onus of proving  the source of deposit primarily rested on the persons in whose names the  deposit appeared in various banks. In the circumstances, the Department was  right in making individual assessments in the hands of respondent-assessee,  K. Chinnathamban. Similarly, the Department was right in making the  individual assessments in the names of other respondent-assessees, who are  parties to connected civil appeals herein.  

8.      Accordingly, the above civil appeals filed by the Department are  allowed with no order as to costs.