The division bench of the Allahabad High Court, in the case Banaras Chemical Factory v. CIT, held that the burden of explaining the source of gift received by the minor children of the Assessee-Firm lies on the partners.
Dismissing the appeal filed by the Firm against the order of penalty imposed on them under section 271(1)(a) of the Income Tax Act, the bench said that the lower authorities had rightly upheld the order in the absence of any material evidence to prove the genuineness of the Gift.
During the course of assessment proceedings against the assessee-Firm, the AO noted certain cash credit entries in the name of the minor children of the partners. After enquiry, the AO found that these were bogus gifts from complete strangers to the children and no one was able to substantiate the source of the same. It is in this circumstance, AO concluded the proceedings by making addition on account of the same. The addition was later confirmed by both the Tribunal and the High Court. Consequently, penalty proceedings were initiated against the assessee.
Before the CIT(A), one of the partners admitted that the donors were not related and that such donors were friends of relatives and that the details of such friends of relatives who had made the gifts as an organized activity of the parents of the minors, who are the partners of the firm. The CIT (Appeals), hence, noted that the receipt of gifts from total strangers was a device to introduce unaccounted money in the names of minor children as well as in their own personal names.
The bench noted that the burden was on the assessee to furnish such explanation and to lead evidence to establish the truthfullness and correctness of the same.“The nature of transaction being such that assessee alone could have had knowledge of the special facts claimed by him to have existed.”
Confirming the levy of penalty, the bench added that “we cannot loose sight of the fact that the minors in question were children of the partners in the firm and therefore, it had to be the partners who would have both arranged the gifts and also made the decisions to introduce money into the firm in name of the minors. It was therefore for them to have established the genuineness of the transaction as otherwise, in such circumstances, it would be to allow assessee’s to place the minors in between themselves and the firm to escape the consequences in law by citing the rule – revenue cannot look into the source of the source.”
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