2025 (8) TMI 1685 - AT - Income Tax

Section 68: Firm's capital receipts accepted when books and partners confirm contribution; AO must question partners, not firm

Shakti Developers Versus Income Tax Officer Ward-2 (3) (4), Surat

ITAT, Surat (AT) held that where a firm's books reflect receipt of capital and partners confirm capital introduction, additions under s.68 cannot be made ... Unexplained investment in land out of partners’ capital as unexplained investment - HELD THAT:- When amount received by assessee firm has been duly reflected in the books of account and the partners have confirmed the introduction of capital, addition of partner’s capital u/s 68 of the Act cannot be made in the case of firm. If the AO is not convinced about creditworthiness of the partner who made the capital introduction, inquiry has to be made in case of the partner and not against the firm - See Vaishnodevi Refoils and Solvex [2018 (7) TMI 651 - SC ORDER] and Pankaj Dyestuff Industries [2005 (7) TMI 601 - GUJARAT HIGH COURT] Hence, addition made by the AO by treating the source of investment in land out of partners’ capital as unexplained investment is not tenable. The order of the CIT(A) is accordingly set aside and the grounds are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether capital introduced into a partnership firm by partners, duly reflected in the firm's books and supported by partners' confirmations, bank statements and partners' returns, can be treated as unexplained investment in the hands of the firm and added under section 69 (and/or treated as undisclosed in the firm under section 68) when the Assessing Officer doubts the creditworthiness of the partners but has not made inquiry into the partners themselves. 2. Whether additional evidence and particulars furnished before the appellate authority (CIT(A)) - including partnership deed, partners' ITRs, bank statements and partners' confirmations - can preclude an addition originally made by the Assessing Officer under section 69/68 where those particulars were not placed before the AO during assessment but were accepted and remanded for comment by the AO at appellate stage. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatability of partners' capital as unexplained investment in the hands of the firm (section 69/section 68) Legal framework: Sections 68 and 69 of the Income-tax Act empower the Revenue to treat unexplained cash credits and unexplained investments as income of the assessee where the source is not satisfactorily explained; partnership firms receive capital contributions from partners which are reflected in the firm's books. Precedent treatment: The Tribunal followed and applied the jurisprudence of the jurisdictional High Court which holds that where a firm's books reflect partners' capital and partners have confirmed the contributions supported by documentary evidence, the addition cannot be made in the hands of the firm; if the Revenue doubts the creditworthiness of a partner, inquiry must be directed at the partner and not against the firm (decision in Pankaj Dyestuff Industries and subsequent High Court authority relied upon; Supreme Court dismissal of Special Leave Petition against the High Court decision relied on). Interpretation and reasoning: The Court examined the material filed before the CIT(A) - tabulated details of partners' capital introductions, partnership deed, partners' ITRs, computations, bank statements and ledger entries - and found that the firm's books and partners' confirmations established that funds were introduced by the partners and used for business purpose (purchase of land). The Assessing Officer's objection was that these particulars were not submitted at assessment and that the partners' declared incomes were not commensurate with the amounts introduced. The Tribunal accepted the principle that when the firm furnishes documentary evidence and partners affirm the capital contribution, the onus is discharged in respect of the firm and any further inquiry about a partner's creditworthiness should be pursued against the partner personally rather than by making an addition against the firm. Ratio vs. Obiter: Ratio - Where partners' capital is recorded in the firm's books and corroborated by partners' confirmations and supporting documents (ITRs, bank statements), the firm cannot be charged with unexplained investment under section 69 (and analogous treatment under section 68) merely because the AO remained unconvinced about the partners' creditworthiness; the appropriate course is inquiry into the partner. Obiter - observations on the AO's procedural conduct in not receiving earlier documents and the CIT(A)'s practice of admitting evidence on appeal are ancillary to the principal ratio. Conclusion: The addition of Rs. 2,52,24,075 as unexplained investment in the hands of the firm is not tenable and is to be deleted; the AO should, if necessary, pursue any suspicion regarding individual partners' creditworthiness against those partners and not by making an addition against the firm. Issue 2 - Admissibility and effect of additional evidence filed before the appellate authority Legal framework: The appellate authority has power to admit additional evidence in the interest of justice and to call for a remand report from the AO; assessment additions based on alleged non-filing before the AO can be revisited if material is produced at appellate stage and is reliable. Precedent treatment: The Tribunal relied on the approach in relevant High Court decisions that where documentary evidence and partners' confirmations are produced before the appellate forum, these can discharge the onus for the firm and preclude additions against the firm. Interpretation and reasoning: The appellate authority admitted additional evidence, forwarded it to the AO for remand comments, and the AO's remand report maintained non-satisfaction regarding creditworthiness. The Tribunal, however, evaluated the totality of documentary evidence produced at the appellate stage (ITRs, bank statements, ledger entries, partnership deed, confirmations) and concluded that the firm had discharged its onus. The Tribunal treated the AO's reliance on non-submission at assessment as insufficient to sustain the addition once the evidence was before the record and the established principle requires inquiry into partners rather than treating the firm's receipts as unexplained. Ratio vs. Obiter: Ratio - Admission of cogent documentary evidence at appellate stage that establishes the nature of funds as partners' capital negates the basis for an addition under sections 68/69 against the firm; remand to the AO for comment does not cure the legal defect in making an addition against the firm when partners' capital is adequately evidenced. Obiter - comments concerning the timing of evidence submission and procedural propriety of the AO's conduct. Conclusion: The additional evidence admitted before the CIT(A) was sufficient to establish the nature and source of the capital introduced; consequently, the appellate forum was justified in allowing the appeal and setting aside the addition made under section 69/68 against the firm. Cross-reference and ancillary observations 1. The Tribunal expressly applied the High Court precedent that where a firm's books reflect partner contributions and partners confirm the same, the addition cannot be sustained in the firm's hands; any disbelief about a partner's creditworthiness requires action against that partner. 2. The Tribunal noted the Supreme Court's dismissal of the Revenue's SLP against the High Court decisions relied upon, thereby reinforcing the binding effect of those precedents for the issue decided. 3. Though the appellant raised grounds regarding the Assessing Officer's exercise under section 144 and applicability of section 115BBE and surcharge, the Tribunal's order resolves the appeal on the substantive question of the correctness of the addition under sections 69/68 by setting it aside in view of the evidentiary position and applicable precedents.