Commissioner of Income Tax,
Salem Vs. K.
Chinnathamban  Insc 759 (24 July 2007)
S. H. Kapadia & B. Sudershan Reddy
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.
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 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
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 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
8. Accordingly, the above civil appeals filed by the Department are allowed
with no order as to costs.