TaxTMI 
TaxTMI 
2026 (6) TMI 281
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....arge the primary onus cast upon it under section 68 of the Act to establish the source, creditworthiness, and genuineness of the capital contributions credited in the partners' accounts. 2. That the CIT(A) erred in holding that notional book entries or capital contributions are outside the scope of section 68, contrary to binding judicial precedents. 3. That the CIT(A) erred in deleting the disallowance of business loss of Rs. 20,70,899/- ignoring the admitted fact that no business operations were carried out during the relevant year. 4. That the CIT(A) wrongly concluded that there was violation of principles of natural justice, despite repeated opportunities granted u/s. 142(1), draft assessment order, which the assessee has miserably failed to explain. 4. Brief facts of the case are that assessee has e-filed its return of income for AY 2018-19 on 1.10.2018 declaring total income of Rs. NIL thereby claiming current year loss of Rs. 20,70,899/-. The return has been processed u/s. 143(1) of the Act on 1.10.2019 raising demand of Rs. 1000/-. The case of the assessee was selected for Complete Scrutiny as per norms under the CASS to verify the issues. Acco....
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....ideration. However, in reply to the above statutory requirements the assessee has merely stated that "not applicable". It is stated that "as we already filed balance sheet with you, there is clearly shown in other current assets that Capital is till receivable from Partner and we already submitted bank statement with you there is no entry of capital." The contention of the assessee-LLP is not acceptable. In light of the provisions of section 68 of the Act, AO noted that it is the legal demand that in support of the sum credited in the books of accounts during the previous year; the assessee is statutorily required to explain the sources of those funds, creditworthiness of the partners / creditors and genuineness of the transaction. The burden has to be discharged by the assessee cumulatively. In this backdrop it is established that the credits to the extent of Rs. 5,00,00,000/- remained unexplained despite, the sufficient opportunities offered to assessee from time to time since 22.9.2019 onwards. Considering the facts and legal aspect of the case said sum of Rs. 5,00,00,000/- is proposed to add back to the total income of the assessee invoking the provisions of section 68 r.w.s. 1....
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....ons 143(3A) & 143(3B) of the Income-tax Act, 1961, for the Assessment Year 2018-19. The Assessing Officer (AO) assessed total income at Rs. 5,00,00,000 as against the returned loss of Rs. 20,70,899. The key issues raised in this appeal pertain to the addition of Rs. 5 crore on account of unexplained partners' capital contribution under section 68, the disallowance of administrative expenditure amounting to Rs. 20,70,899, and the consequential tax, interest, and penalty arising from these additions. After careful consideration of the appellant's submissions, perusal of records, and examination of legal principles, the following detailed analysis and findings on each ground of appeal are set out. 6.1 Addition of Rs. 5 crore under section 68 (Partners' Capital Contribution) Facts The appellant LLP was constituted on 20 September 2017 with two partners: Mr. Pramod Bhasin (Rs. 2.55 crore, 51%) and Mr. Anil Chawla (Rs. 2.45 crore, 49%), contributing to a total agreed capital of Rs. 5 crore as per clause 6.1 of the LLP agreement. No actual cash or cheque was received from the partners during the year. The capital was credited in th....
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.... credited may be charged to tax as the income of the assessee. A plain reading of the section makes it clear that it applies to cases involving actual receipt of money, which is credited in the books, thereby triggering an obligation on the part of the assessee to explain the nature and source, establish the identity of the creditor, the creditworthiness of the creditor, and the genuineness of the transaction. In the present case, it is a settled position that section 68 does not apply to mere notional or contra journal entries which do not involve real cash inflows. This principle has been upheld in various judicial pronouncements. The Hon'ble Supreme Court in CIT v. H.H. Shri Rama Varma (1991) 187 ITR 308 (SC) held that the expression "sum" refers to a definite amount of money and implies actual receipt. Similarly, the Hon'ble Calcutta High Court in Jatia Investment Co. v. CIT (1994) 206 ITR 718 held that when there is no real credit of cash but merely a notional or book entry without actual inflow, section 68 cannot be invoked. In the appellant's case, the audited balance sheet clearly discloses the partners' capital contributions as receivable, and there is no....
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.... The Assessing Officer disallowed the expenses on the grounds that no business activity had been carried out during the year, as evidenced by the absence of any revenue. According to the AO, since no income had been earned, the expenses could not be considered business expenditure and, therefore, were not allowable as deductions. Observation and Conclusion On careful examination of the facts and materials on record, it is clear that the business was indeed set up during the year under consideration. The execution of the LLP agreement, opening of the bank account, engagement of professional firms, and completion of various regulatory formalities, including the SEBI application, clearly demonstrate the readiness of the business to commence its intended activities. It is well settled through various judicial pronouncements, including the decisions of the Hon'ble Supreme Court in Indian Molasses Co. (P) Ltd. v. CIT, Sarabhai Management Corporation Ltd. v. CIT, and of the Hon'ble Delhi High Court in Carefour WC & C India (P) Ltd. v. DCIT, that expenses incurred after the business is set up are allowable even if no revenue has been earned during the year. Fur....
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.... the instant case the Assessing Officer assessed total income at Rs. 5,00,00,000 as against the returned loss of Rs. 20,70,899. The sole issue is relating to addition of Rs. 5 crore on account of unexplained partners' capital contribution under section 68 and the disallowance of administrative expenditure amounting to Rs. 20,70,899. As regards addition of Rs. 5,00,00,000/- u/s. 68 is concerned, the AO concluded that since the amount of Rs. 5 crore was credited in the books, it attracted the provisions of section 68. According to the AO, the assessee failed to furnish adequate documentary evidence regarding the source of capital, such as bank statements or proof of the partners' financial capacity to contribute the declared amounts. The AO further held that mere mention of "receivable from partners" did not absolve the assessee from the statutory onus under section 68 to establish source and creditworthiness. We note that in the present case, the audited balance sheet clearly discloses the partners' capital contributions as receivable, and there is no evidence on record to suggest that any actual money was received during the year. The capital contribution entries were purely in....