2026 (2) TMI 254 - AT - Income Tax

Write-back of old loan credited to partner's capital account not taxable under section 68; addition reversed for partner.

Assessee challenged addition of an unexplained credit in her capital account on account of write-back of an old partnership loan; ITAT held section 68 ... Addition of cash credit u/s 68 and taxed u/s 115BBE - increase in the capital account of the assessee consequent to write-back of loan in the books of the partnership firm in which the assessee is a partner. - unexplained credit in the form of unaccounted money in the books of partner of the firm - as contended that the assessee failed to discharge the primary onus cast upon her to establish the identity, creditworthiness of the lender and the genuineness of the loan transaction - HELD THAT:- In the present case, the AO has not made any addition in the hands of the partnership firm on account of the loan write-back, but has sought to tax the same in the hands of the assessee-partner by invoking section 68. We find no infirmity in the finding of the CIT(A) that such an approach is legally unsustainable. It is an admitted position on record that the loan was taken in F.Y. 2006–07, remained outstanding in the books of the partnership firm for several years, and was written back in F.Y. 2016–17 on the ground that it had become time-barred. The partnership firm had been subjected to scrutiny assessments u/s 143(3) for multiple assessment years, namely A.Ys. 2006–07, 2008–09, 2012–13 and 2014–15, and the existence of the loan stood accepted in those assessments. Section 68 can be invoked only in respect of a sum credited in the books of the assessee in the relevant previous year. It is well settled that opening balances or credits pertaining to earlier years cannot be brought to tax under section 68 in a subsequent year. CIT(A) has rightly relied on this settled principle and has correctly held that the impugned credit does not represent a fresh credit of the year under consideration. Revenue has not placed any material on record to controvert the factual finding that the credit in the assessee’s capital account represents only the effect of prior period entries in the firm’s books. The transaction under consideration is not the borrowing of the loan during the year, but the write-back of an old, time-barred loan. The loan had existed in the books for more than a decade and had been accepted in earlier assessments of the firm. The assessee cannot be expected to produce complete particulars of a lender relating to a transaction undertaken more than ten years earlier, particularly when the law itself requires maintenance of records only for a limited period. Revenue has not brought any material on record to demonstrate that the conditions of section 41(1) or section 28(iv) are satisfied in the facts of the present case. The Assessing Officer himself has made the addition under section 68, and not under section 41(1). Therefore, the attempt of the Revenue to justify the addition on an alternative footing is misplaced. The credit in the assessee’s capital account is only a consequential book entry arising from adjustments in the books of the partnership firm, the loan pertains to earlier years, and section 68 has no application to such a case. Decided in favour of assessee. Issues: Whether the addition of Rs. 8,38,44,023/- made under section 68 read with section 115BBE in the hands of the assessee-partner, arising from write-back of an old loan in the books of the partnership firm, is sustainable.Analysis: The Tribunal examined the undisputed facts that the loan was taken in FY 2006-07, was reflected in the partnership firm's books for years, and was written back in FY 2016-17 with corresponding consequential entries in the partners' capital accounts. It noted that under the Income-tax Act a firm is a distinct taxable entity and that credits attributable to earlier years or opening balances cannot be taxed as fresh credits under section 68 in a subsequent assessment year. The Tribunal observed that the partnership firm had undergone scrutiny assessments in earlier years where the loan's existence was accepted and that the Revenue produced no tangible material to show the loan was fictitious. The Tribunal further considered that write-back of a time-barred loan is a capital receipt and that mere non-availability of certain lender particulars after a decade, absence of interest payments, or lack of partner remuneration, without corroborative evidence, did not establish sham transactions or warrant invocation of section 68 against the partner.Conclusion: The appeal is dismissed and the deletion of the addition of Rs. 8,38,44,023/- by the CIT(A) is upheld; the addition under section 68 read with section 115BBE in the hands of the assessee-partner is not sustainable (decision in favour of the assessee).