Partner capital introduction cannot be treated as unexplained cash credit absent proof of denial or incapacity.

A partner's capital introduction in a firm's audited books is not to be treated as unexplained cash credit unless the revenue shows that the partner denied the investment or lacked the capacity to make it. Where the record reflects the capital entry and the assessing authority does not examine the partner or disprove his capacity, the addition is not sustainable. Any disallowance of proportionate interest that rests only on that addition also falls away once the underlying capital addition is deleted. The stated principle is that consequential adjustments cannot survive without a valid primary addition.

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Issues: (i) Whether the capital introduction of Rs. 4 crore by the managing partner in the firm's books could be treated as unexplained cash credit in the hands of the firm. (ii) Whether the disallowance of proportionate interest on the said capital introduction could survive.

Issue (i): Whether the capital introduction of Rs. 4 crore by the managing partner in the firm's books could be treated as unexplained cash credit in the hands of the firm.

Analysis: The audited accounts reflected the capital introduction by the managing partner. The Assessing Officer did not examine the partner, did not obtain any denial from him, and did not show that he was incapable of introducing the stated amount. The record also indicated a land transaction between the partner and the firm, and the dispute was only whether the property stood transferred in the firm's name or was held on its behalf. On these facts, the partner's capacity to introduce the capital was accepted.

Conclusion: The addition of Rs. 4 crore as unexplained cash credit in the hands of the firm was not sustainable and was deleted, in favour of the assessee.

Issue (ii): Whether the disallowance of proportionate interest on the said capital introduction could survive.

Analysis: The interest disallowance was consequential to the main addition. Once the addition of the capital introduction was deleted, the foundation for the corresponding interest disallowance also ceased to exist.

Conclusion: The disallowance of proportionate interest was also deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded in full, with the addition on account of capital introduction and the related interest disallowance both set aside.

Ratio Decidendi: A partner's capital introduction cannot be treated as unexplained in the firm's hands unless the revenue shows that the partner denied the investment or lacked the capacity to make it; a consequential interest disallowance falls once the underlying addition is deleted.

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