2024 (5) TMI 90 - AT - Income Tax

Addition under Section 68 for partner capital introduction from loan advances legally unsustainable against firm

ITAT Pune held that addition u/s 68 regarding capital introduced by five partners from loan advances was not sustainable. Following precedents from ... Addition u/s 68 - capital introduced by five partners, which in turn was out of the loan advanced - Proprietor of loan advancing concern is a non filer of income tax return and does not have the creditworthiness HELD THAT:- We find in the case of Prayag Tendu Leaves Processing Co. [2017 (12) TMI 932 - JHARKHAND HIGH COURT] while deciding an identical issue has held that u/s 68 of the Act, the AO, while assessing a partnership firm, can go behind the source of income of the partnership firm, but he cannot go to the ‘source of source’. We find in the case of PCIT vs. Vaishnodevi Refoils & Solves [2018 (1) TMI 861 - GUJARAT HIGH COURT] under identical circumstances has held that if the AO is not convinced about the creditworthiness of the partners who had made the capital contribution, the inquiry had to be made at the end of the partners and not against the firm. While holding so, the Hon’ble Gujarat High Court followed its earlier decision in CIT vs. Pankaj Dyestuff Industries [2005 (7) TMI 601 - GUJARAT HIGH COURT]. Similar view has been taken in various other decisions relied on by the assessee, wherein it has been held that the addition, if any, can be made in the hands of partners on account of introduction of capital, but no addition can be made in the hands of firm. Thus we hold that the addition made by the AO u/s 68 of the Act in the hands of assessee firm on account of introduction of capital by the partners is not sustainable in the eyes of law. We, therefore, set aside the order of CIT(A) / NFAC and direct the AO to delete the addition - Decided in favour of assessee. Issues Involved:1. Addition u/s 68 of the Income-tax Act, 1961.2. Creditworthiness and genuineness of the transaction.3. Onus of proving the source of capital introduced by partners.Summary:Issue 1: Addition u/s 68 of the Income-tax Act, 1961The Assessing Officer (AO) made an addition of Rs. 1,10,00,000/- u/s 68 of the Act, being the capital introduced by five partners. The AO noted that the firm received a loan from M/s. M.M. Traders, whose proprietor, Shri Harish Kantilal Shah, was a non-filer and could not explain the source of the loan. The AO inferred that M.M. Traders was a route to channelize the firm's own money. The Ld. CIT(A)/NFAC sustained the addition, stating that the identity, creditworthiness, and genuineness of the transactions were not satisfactorily explained.Issue 2: Creditworthiness and Genuineness of the TransactionThe AO observed that the bank account of M.M. Traders showed cash deposits before transferring money to the partners, indicating that the entity was used to route the firm's own money. The Ld. CIT(A)/NFAC agreed, noting that the transactions seemed circular and involved unaccounted money.Issue 3: Onus of Proving the Source of Capital Introduced by PartnersThe assessee argued that the partners introduced the capital through banking channels, supported by documentary evidence such as ledger extracts, bank statements, and confirmations. The Tribunal found merit in the assessee's argument, citing various judicial precedents which held that the addition, if any, should be made in the hands of the partners and not the firm. The Tribunal referred to the decision in CIT v. Metachem Industries, which stated that once the firm proves the investment by a partner, the onus shifts to the individual partner to explain the source of the investment.Conclusion:The Tribunal held that the addition made by the AO u/s 68 in the hands of the assessee firm was not sustainable. The Tribunal set aside the order of the CIT(A)/NFAC and directed the AO to delete the addition. The appeal filed by the assessee was allowed.Order pronounced in the open Court on this 29th day of April, 2024.