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Issues: Whether capital introduced by the partners was liable to be treated as unexplained cash credit under section 68 of the Income-tax Act, 1961, and whether the related interest expenditure was consequentially disallowable.
Analysis: The assessee produced the partners' returns, bank statements, confirmations, PAN details and ledger accounts before the appellate authority. On examination of the bank statements, no cash deposits were found immediately before the transfers to the firm. The appellate authority held that the primary onus was discharged by the assessee and that, if the revenue had any doubt about the creditworthiness of the partners, inquiry had to be made at the partners' end. The Tribunal agreed, relying on the settled principle that a partnership firm is not required to prove the source of the partners' source once the identity, genuineness and supporting material for the capital contribution are on record.
Conclusion: The addition under section 68 was not sustainable, and the consequential disallowance of interest was also not sustainable. The relief granted by the appellate authority was upheld.
Final Conclusion: The revenue's challenge failed, and the deletion of the additions was sustained.
Ratio Decidendi: Where a partnership firm substantiates partners' capital contributions by returns, bank statements and confirmations, the onus under section 68 stands discharged, and the firm cannot be required to explain the source of the partners' source; any further inquiry lies at the partners' level.
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