2017 (8) TMI 1133 - AT - Income Tax

Tribunal rules capital source not to be proven by firm in appeal, verification by CIT(A) required.

The Tribunal allowed the assessee's appeal, stating that the firm was not required to prove the source of the source of capital introduced by the ... Addition u/s 68 - Unexplained capital contribution by the partners in the partnership firm - partners received the gifts - proving source of source - additions, if any, to be made in the hands of the respective partners or in the hands of the assessee firm - Held that:- The gifts are received by the partners who are separate income tax entities as distinct from the assessee firm and therefore, the addition for unaccounted / unexplained money, if any, which was to be made, could be made in the hands of the respective partners only and not in the hands of the assessee firm, since the assessee firm, at the relevant time, was not required to do so in view of the statutory provisions as contained in Section 68. - Decision in the case of Zafa Ahmad & Co. Vs. CIT [2013 (3) TMI 48 - ALLAHABAD HIGH COURT] followed. Revenue is unable to establish the fact that the capital contribution received by the assessee firm was unaccounted money of the assessee firm. Secondly, the assessee could not be expected to prove the source of source and addition which could be made on this account, could be made in the hands of the respective partners only. - additions shall stand deleted - Decided in favor of assessee. Issues Involved:1. Addition of Rs. 7.20 Lacs as unaccounted capital introduced by the partners.2. Requirement for the assessee firm to prove the source of the capital introduced by the partners.Issue-wise Detailed Analysis:1. Addition of Rs. 7.20 Lacs as Unaccounted Capital Introduced by the Partners:The primary issue in the appeal was the confirmation of an addition of Rs. 7.20 Lacs by the Ld. Commissioner of Income Tax (Appeals) [CIT(A)], which was alleged to be unaccounted capital introduced by the partners of the assessee firm. The assessee firm, assessed under Section 143(3) for the Assessment Year (AY) 2004-05, had its income determined at Rs. 15,37,450/- after certain additions and disallowances against the returned income of Rs. 6,17,450/-. During the assessment proceedings, it was observed that the partners introduced capital aggregating Rs. 12.20 Lacs, purportedly from gifts received from four individuals. However, the Assessing Officer (AO) concluded that Rs. 7.20 Lacs remained unexplained and added this amount as unexplained capital. This addition was confirmed by the CIT(A) and was contested before the Tribunal in the second round of appeal.2. Requirement for the Assessee Firm to Prove the Source of the Capital Introduced by the Partners:The assessee firm argued that it had discharged its primary onus by producing the donors with their bank statements before the AO. It was contended that the source of funds was the capital contribution by the partners and not the gifts, and hence, the firm was not required to prove the source of the source. The firm relied on judgments from the Hon'ble Allahabad High Court, which held that any addition for unexplained money should be made in the hands of the respective partners and not in the hands of the firm.Tribunal's Findings:The Tribunal observed that the assessee firm received capital contributions from its partners, which was not disputed by the revenue. The firm had substantiated the source by producing the donors with their bank statements. The Tribunal noted that the gifts were received by the partners, who are separate income tax entities, and therefore, any addition for unexplained money should be made in the hands of the partners, not the firm. This view was supported by the cited judgments of the Hon'ble Allahabad High Court in Zafa Ahmad & Co. Vs. CIT and Abhyudaya Pharmaceuticals v. Commissioner of Income-tax, which emphasized that the firm should not be required to prove the source of the source.Relevant Case Laws:- Zafa Ahmad & Co. Vs. CIT: The court held that the firm cannot be asked to prove the source of the source or the origin of the origin, and any unexplained money should be added in the hands of the partners.- Abhyudaya Pharmaceuticals v. Commissioner of Income-tax: The court reiterated that if a firm receives capital from its partners, the unexplained money should be added in the hands of the partners, not the firm.Conclusion:The Tribunal concluded that the revenue failed to establish that the capital contribution was unaccounted money of the firm. It was also noted that the firm should not be expected to prove the source of the source. Therefore, the Tribunal allowed the assessee's appeal in principle and restored the matter to the CIT(A) for verification of whether the capital contribution was received from the partners' bank accounts. If verified, the addition would be deleted; otherwise, the CIT(A) would decide as per the law. The appeal was allowed for statistical purposes.Order Pronouncement:The order was pronounced in the open court on 23rd August 2017.