Holding

Income on unexplained investments cannot be considered in the hands of a fictitious firm; the individual assessee is liable to tax under Section 69A.

Summary

The case involved a firm, M/s V.V. Enterprises, purportedly engaged in prize ticket business and collecting public deposits. Police seized about Rs. 1.18 crore from its premises, and the Assessing Officer found the firm’s books incomplete and could not explain the source of the deposits, treating the amount as undisclosed income under Section 69 of the Income Tax Act. The Tribunal, relying on the claim that the deposits were made by members of the public, directed that the amounts be linked to the firm’s books rather than taxed in the hands of individual assessees. The Supreme Court held that there was no evidence of the firm’s registration, proper accounts, or genuine partners, and therefore the firm was fictitious; the onus to explain the deposits rested on the persons in whose names the deposits appeared. Consequently, the income from the unexplained investments was taxable in the hands of the individual assessee under Section 69A, and the Tribunal’s direction to link the deposits to the firm was erroneous. The appeals filed by the Income Tax Department were allowed.

Issues considered

Whether income from unexplained investments should be attributed to a fictitious firm or taxed in the hands of the individual assessee under Section 69A of the Income Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 132, s. 133A, s. 69, s. 69A
Indian Evidence Act, 1872s. 110

Subjects

Income TaxUndisclosed incomeSection 69Section 69AFictitious firmTax assessmentPublic depositsEvidentiary burden

Judgment

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A COMMISSIONER OF INCOME TAX, SALEM
v.
K. CHINN ATHAMBAN

JULY 24, 2007

B [S.H. KAPADIA AND B. SUbERSHAN REDDY, JJ.]

Income Tax Act, 1961-Sections 69 and 69A-Firmfloatedfor collecting
deposits from pub/ic-Assessee, connected with the firm~ln assessment
C proceedings, amount shown as undisclosed income subject to tax uls 69-
0rder of tribunal that since claim made by members of public. income on
unexplained investments to be considered in the hands of the firm-
Correctness of-Held: Not correct since no evidence recording registration
offirm, books ofaccount not properly maintained-No explanation by assessee
about source of investment-No evidence that members of public placed their
D · deposits with the firm through their relatives and friends-A/so the firm as
·well as its partners found to be fictitious.

Firm VV was floated for carrying on the business of prize tickets and
for collecting deposits from the public. The firm was managed by KP. Police
Officer carried out search in the premises of the firm and seized Rs. 1.18
E crores. KP filed his return. In the assessment proceedings, the books of
accounts were found incomplete and KP could not explain source of deposit
amount of Rs. 1.18 crores. Assessing Officer treated the amount as
undisclosed income of persons in whose names the deposit appeared.
Respondent-assessee was also connected with the firm and with regard to his
F assessment, Rs. 5 .lakhs was shown as undisclosed income under s. 69 of the
Income Tax Act, 1961. CIT upheld ·the Assessment Order. However, 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 it was necessary to link up all these amounts with books of the
firm. High Court upheld the order. Hence the present appeals.
G
Allowing the appeals, the Court

HELD: 1.1 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
H 4%
COMMNR. OF INCOME TAX, SALEM,., K. CHINNATHAMBAN (KA!'ADIA, J.) 497
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or the person in whose name the deposit stands should be called upon to A
explain such deposit. !Para 711500-BI

1.2. In the instant case, there was no evidence recording registration
of the firm, the books of accounts were not properly maintained; there was no
explanation regarding the source of investment and the evidence of KP
indicated that even the partners of the firm were fictitious. There was no ,B
evidence to show that members of the public have been placing their deposits
with the firm through their relatives and friends, therefore, there was no
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question of linking up all these amounts with the books of the firm. The
Department was right in holding that the income on unexplained investments
cannot be considered in the hands of the firm found to be fictitious and that
the assessee had the amount as his income which was subject to tax under
c
section 69A of the Income Tax Act, 1961. Therefore, the Tribunal erred in
directing linking up of the deposits with the accounts of the alleged firm. In ·
fact, the directions given by the Tribunal to the A.O. for such linking up was ,
t not even capable of compliance. The onus of proving the source of deposit
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primarily rested on the persons in whose names the deposit appeared in D
>-- ''arious banks. Thus, the Department was right in making individual
assessments in the hands of respondent-assessee and in the names of other
respondent-assessees in the other civil appeals. The tribunal should not have
interfered with these findings of fact rightly recorded by A.O. and C.l.T. (A).
(Paras 5, 6, and 71 (499-G, H; E; 500-A; C; D, El
E
Chuharmal v. C.l.T., (198813 SCC 588, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3230 of 2007.

From the Judgment & Order dated 24.01.2006 of the High Court of
~ Judicature at Madras in Tax Case Appeal No. 680 of 2004. F

WITH

C.A. Nos. 3231-3235 of2007.

Arijit Prasad, Chinmay Sharma and 8. V. Balaram Oas for the Appellan~. G
The Judgment of the Court was delivered by
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KAPADIA, J. I. Leave granted.
2. The short question which arises for determination in this group of H
498 SUPREME COURT REPORTS [2007) 8 S.C.R.

A civil appeals is: Whether in the facts and circumstances of the case the __1.. 1 1

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.
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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 I 33A and investigations under
C 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 ' ..
D 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
E 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
F the Tribunal which 's the subject matter of these civil appeals.

5. At the outset, we may state that none appeared for the assessees
though served. Mis 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
G 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
H accepted by the Department. In view of the aforestated position the A.O.
COMMNR. OF INCOME TAX, SALEM v. K. CHINN ATHAMBAN [KAPADIA, J.] 499
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proceeded to frame the assessment in the hands of Palanisamy on protective A
basis and in the hands of deposit holders for unexplained deposits. The most
important aspect of the case is that although Mts 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
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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 c
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
.... D
y-
Common Law Jurisprudence in Section 110 of the Evidence Act, 1872 can be
' applied. In the case ofChuharmal v. C.l.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 iv 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, E
therefore, the Departmer.t 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.l.T.(A).

·"-' 6. In the present case, the Tribunal has further held that the partners F
were employees of public sector undertakings; that they had acted as partners;
that the firm was floated and, therefore, though the finn 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 afore stated amount ought to have been deposited in the name of the firm,
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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 H
500 SUPREME COURT REPORTS (2007) 8 S.C.R.
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A with the said finn through their relatives and friends, therefore, there was no
question of linking up all these amounts with the books of the finn 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
finn found to be fictitious. Therefore, the Tribunal had erred in directing
linking up of the deposits with the accounts of the alleged finn.
B
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
c deposit. In the present case, there is no evidence recording registration .of the
finn. In the present case, books of accounts are not properly maintained. In
the present case, there is no explanation regarding the source of investlttent.
In the present case, the evidence of K. Palanisamy, indicates that even the
partners of the finn were fictitious. In the above circumstances, the Tril.iunal
had erred in directing linking up of the deposits with the accounts of Mis v.v. ..
D 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 4
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 hand.s of respondent-aSsessee, K.
Chinnathamban. Similarly, the Department was right in making the individual
E assessments in the names of other respondent-assess~es, 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.
f'. ~-
NJ. Appeals allowed.

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