JUDGMENT Om Prakash, J.
1. Pursuant to a direction of the High Court under Section 256(2) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question for the opinion of this court :
"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 source of the petitioner-firm when the petitioner-firm had not yet even commenced its business ?"
The assessment year herein is 1978-79 for which the accounting year was from April 1, 1977, to March 31, 1978. The assessee-firm was constituted on August 12, 1977, that is, during the accounting year. The assessee-firm became operative from February 12, 1978. The assessing authority noticed that during the period from June, 1977, to February, 1978, ten partners of the firm made capital contributions of the amount aggregating to Rs. 1,43,000. Since the amount stood credited in the books of the assessee-firm, the assessee-firm was called upon to explain the source of the deposits. No return of their income was filed by the partners in the earlier years and all of them filed returns after the close of the accounting years of the assessee-firm. An inference was, therefore, drawn that the deposits aggregating to Rs. 1,43,000 represented the income of the assessee-firm from undisclosed sources and that was, therefore, added in the assessee's hands.
2. The dispute was carried in appeal to the Commissioner of Income-tax (Appeals) (for short, "the C. I. T. (Appeals)"). He held that since the deposits were made in the assessee-firm by the partners before the firm started its production, the deposits aggregating to Rs. 1,43,000 could not be taken to be the income of the firm from undisclosed sources. This is how he deleted the addition.
3. However, the Tribunal relying on CIT v. Kapur Brothers [1979] 118 ITR 741 (All), held that since the amount was credited in the books of the assessee-firm, it is for the assessee to explain the source of the deposits and as the assessee-firm failed to discharge that onus, the deposits were rightly taken to be the income of the assessee-firm from undisclosed source's by the assessing authority.
4. On the facts and the circumstances of this case, we are of the considered view that the Tribunal has fallen into serious error. The Tribunal should have taken note of the fact that all the deposits aggregating to Rs. 1,43,000 represented the capital contribution of the partners in the firm and they were made before the firm started its business. It was for the partners to explain the source of the deposits and if they failed to discharge the onus, then such deposits could be added in the hands of the partners only. The Tribunal erroneously came to the conclusion that the deposits represented the undisclosed income of the assessee-firm. The approach of the Commissioner of Income-tax (Appeals) in this case seems to be correct who clearly held that unexplained deposits in no case, could be the income of the assessee-firm because the firm started its business only after the credits had been made in its books.
5. Reliance on Kapur Brothers' case [1979] 118 ITR 741 (All) is misplaced, inasmuch as in that case deposits were entered in the books of the firm when it was already carrying on its business. The firm was called upon to explain the source of the deposits. The explanation of the firm was that the deposits represented the sale proceeds of certain assets belonging to the partners. When no evidence was adduced to substantiate that explanation, the assessing authority added the amount as income of the partnership-firm. These facts are materially different from the fact of the Infant case. Most striking feature of the case on hand is that all the deposits came to be made during the accounting year in the books of he assessee-firm before it started its business. Therefore, the onus was on the partners to explain the source in the case on hand and if they failed, the amount could have been added in their hands only and not in the hands of the assessee-firm.
6. On these facts, we answer the above question in the negative, that is, in favour of the assessee and against the Revenue. The record of this case be sent down to the Income-tax Appellate Tribunal within fifteen days to enable it to pass an order conformably to our order.