Section 68 cash credit test fails where partner's capital contribution is explained by pre-business payments and factual findings support it

Section 68 of the Income-tax Act was held inapplicable where a partner's credit entry represented capital contribution supported by evidence that the amount had been paid before the firm commenced business towards licence fee and security deposit with the Government. On those facts, the Tribunal accepted the partner's explanation from the material on record and treated the entry as not constituting a cash credit in the sense contemplated by section 68. The finding was characterised as a pure finding of fact, and the addition was rightly deleted in favour of the assessee.

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Issues: Whether section 68 of the Income-tax Act, 1961 was attracted to the sum of Rs. 60,000 credited in the partner's account as capital contribution and treated as the firm's undisclosed income.

Analysis: The amount in question had been paid by the partner before the commencement of the firm's business towards licence fee and security deposit with the Government, and the Tribunal accepted the partner's explanation on the basis of the material on record. On those facts, the credit was not treated as a cash credit in the sense contemplated by section 68, and the Tribunal's finding was held to be a pure finding of fact.

Conclusion: Section 68 was not attracted and the addition was rightly deleted; the reference was answered in favour of the assessee.

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