2012 (5) TMI 819 - AT - Income Tax

Tribunal upholds CIT(A) decision on unexplained cash credit, emphasizing partner's capital contribution proof

The Tribunal upheld the decision of the ld. CIT(A) to delete the addition of Rs. 17,75,000 made by the AO regarding unexplained cash credit u/s. 68 of the ... - Issues Involved: The judgment involves the issue of deletion of addition of Rs. 17,75,000 made by the Assessing Officer (AO) on account of unexplained cash credit u/s. 68 of the Income Tax Act for the assessment year 2007-08.Details of the Judgment:Issue 1: Unexplained Cash Credit u/s 68 of the IT ActThe assessee, a firm with three partners, had one partner, Shri Naresh Agarwal, introduce fresh capital of Rs. 45,45,000 during the relevant year, out of which Rs. 17,75,000 was deposited in cash on various dates. The AO treated this cash deposit as unexplained. Shri Naresh Agarwal, in his statement u/s. 131 of the IT Act, explained that the capital was introduced from past capital, hundi borrowings, and cash withdrawals from his bank account. The ld. CIT(A) considered the explanations and additional evidence, including a cash flow statement and bank statements, and deleted the addition of Rs. 17,75,000. The ld. CIT(A) held that the firm had satisfactorily explained the source of the capital introduced by Shri Naresh Agarwal, except for Rs. 1,25,000 deposited on 06.12.2006. The ld. CIT(A) relied on precedents to conclude that if the firm can prove the source of the amount invested by a partner, the burden is discharged, and the credit entry cannot be treated as income of the firm for income tax purposes. The AO was directed to take action against Shri Naresh Agarwal under section 69 of the IT Act if needed.Issue 2: Applicability of Section 68 of the IT ActThe ld. DR relied on the AO's order and a decision of the M.P. High Court to argue that section 68 applied in this case due to cash credits in the firm's books in the name of a partner without a satisfactory explanation. However, the Tribunal found that the firm had adequately explained the capital contribution by Shri Naresh Agarwal, and the burden was on the AO to take action against the partner individually if creditworthiness was in question. The Tribunal distinguished the cited case law as it pertained to cash credits u/s. 68, whereas in this case, the capital was contributed by the partner for the firm's business operations. The Tribunal dismissed the Revenue's appeal, upholding the ld. CIT(A)'s decision to delete the addition of Rs. 17,75,000.In conclusion, the Tribunal dismissed the appeal of the Revenue, affirming the deletion of the addition of Rs. 17,75,000 made by the AO on account of unexplained cash credit u/s. 68 of the IT Act for the assessment year 2007-08.