2012 (9) TMI 223 - AT - Income Tax

Tribunal directs deletion of addition for capital contribution, upholds unexplained credit, reduces expenditure disallowance

The Tribunal partially allowed the appeal by directing the deletion of the addition under Section 68 for one partner's capital contribution, while ... Addition on capital introduced by the partners u/s. 68 - Held that:- partner had invested an amount of Rs. Rs. 17,53,653 towards capital contribution in the partnership firm by way of demand drafts having a capital of Rs. 19,05,96.58 as on 31.3.2005, thus it can be concluded having sufficient source of funds towards contribution made in the capital of the firm and could not be treated as unexplained at the hands of the assessee firm - no addition. Investment made by the other partner - Held that:- As the assessee has furnished the names and addresses of the parties from whom partner has collected advances of an amount necessary enquiry could have been made to find out the genuine findeness of the claim of the assessee but no such enquiry has been made either by the AO or by the CIT (A) - matter remanded back. Addition made towards unexplained credit - Held that:- The onus is on the assessee to prove the creditworthiness of the persons who have given the loan on credit which was not proved excepting the confirmation letter, the assessee has failed to produce any other document to prove the creditworthiness of Shri Tatiparti Venkata Rami Reddy - against assessee. Disallowance of 25% of an expenditure - Held that:- Considering the nature of expenditure claimed and proportion of such expenditure with regard to the total turnover of the assessee firm it is reasonable to restrict the disallowance to 10% of the total expenditure claimed - partly in favour of assessee. Issues Involved:1. Addition of capital introduced by partners under Section 68 of the Income-tax Act.2. Addition towards unexplained credit.3. Disallowance of certain expenditures.Detailed Analysis:1. Addition of Capital Introduced by Partners under Section 68 of the Income-tax Act:The assessee, a partnership firm, challenged the addition of Rs. 17,53,653 and Rs. 7,01,516, introduced by partners Shri P. Sankar Narayana Rao and Shri A. Venkata Subba Rao, respectively. The Assessing Officer (AO) treated these amounts as unexplained credits under Section 68 due to insufficient evidence of the source of funds. The CIT(A) upheld this decision, finding the explanations improbable and lacking credibility.The Tribunal found that Shri P. Sankar Narayana Rao had sufficient funds, as evidenced by his balance sheet showing a capital of Rs. 19,05,965.58 as of 31.3.2005. Therefore, the Tribunal directed the deletion of the Rs. 17,53,653 addition, as the capital was introduced before the business commenced.For Shri A. Venkata Subba Rao, the Tribunal noted that his return was filed late, and the sources of his capital introduction were not adequately substantiated. The Tribunal restored this issue to the AO for further inquiry to verify the genuineness of the sources.2. Addition Towards Unexplained Credit:The AO added Rs. 4,00,600 as unexplained credit, questioning the creditworthiness of Shri Tatiparti Venkata Rami Reddy, who advanced the amount. Despite the assessee's contention that the amount was from agricultural income, the Tribunal upheld the AO's decision due to a lack of sufficient evidence proving the lender's creditworthiness.3. Disallowance of Certain Expenditures:The AO disallowed Rs. 2,03,171 out of total expenditures claimed on salary, advertisement, commission, etc., supported by self-made vouchers, and an additional Rs. 22,269 in interest payments. The CIT(A) reduced this disallowance to 25% of the total expenditure, amounting to Rs. 85,775. The Tribunal further reduced the disallowance to 10% of the total expenditure claimed, considering the nature and proportion of the expenses relative to the firm's turnover.Conclusion:The Tribunal partly allowed the appeal, directing the deletion of Rs. 17,53,653 added under Section 68 for Shri P. Sankar Narayana Rao's capital contribution, while remanding the issue of Shri A. Venkata Subba Rao's capital contribution back to the AO for further verification. The addition of Rs. 4,00,600 towards unexplained credit was upheld, and the disallowance of expenditures was reduced to 10% of the total claimed amount.