TaxTMI 
TaxTMI 
2026 (7) TMI 1646
X X X X Extracts X X X X
X X X X Extracts X X X X
....wer to Government departments, semi-government departments and Institutes. The case was selected for scrutiny under CASS to examine substantial increase in capital during the year. The assessee had disclosed opening capital of Rs. 3,44,48,545/-, introduced capital of Rs. 30,10,48,704/- during the year and reflected closing capital of Rs. 28,81,43,600/- at the end of the year. According to the AO, the source of capital of Rs. 29,75,48,704/- introduced during the year was not explained and, therefore the same was treated as unexplained credit u/s. 68 of the Act and added to income. Further, 20% of the salary paid to relatives of the partners was held as excessive and accordingly disallowance of Rs. 18,60,000/- was made u/s 40A(2)(b) of the Act. The assessment was completed u/s. 143(3) r.w.s 144B of the Act on 28.9.2022 after making these two additions. 3. Aggrieved with the order of the Assessing Officer [hereinafter referred as the "AO"], the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was partly allowed. 4. The Grounds taken by the Assessee and the Revenue are as u....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a picture of the actual standing of the firm for negotiations. Accordingly, the liability as well as the assets were divided in the capital accounts of the partners' in their profit-sharing ratio. This was an internal exercise of the partners for limited purpose of evaluating the proposed reconstitution of the partnership and the notional journal entry was to be deleted at the time of finalization of accounts. According to the assessee, due to mistake of the accountant and the lockdown period, this entry was inadvertently not reversed before the finalization of the accounts and was subsequently rectified by passing a reverse entry on 01.04.2020. The AO had rejected this explanation of the assessee on the ground that no convincing documentary evidence was produced to establish the existence of out-standing salary liability of Rs. 25 crores. According to the AO, the salary payable was Rs. 10,97,27,169/- only in the audited balance-sheet as on 31.03.2020, whereas the assessee had shown total out-standing salary liability of Rs. 16,04,27,135/- at previous year-end. The AO had also rejected the assessee's contention that the impugned notional entry affected only the liability side ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....48,704/- and had accordingly deleted the addition to this extent. According to the assessee, the increase in the capital accounts of the partners to the extent of Rs. 4,75,48,704/- was on account of application of the amount of matured FDRs into the capital account of the partners, which was accepted by the Ld. CIT(A). 8. We have carefully considered the rival submissions, perused the assessment order, the order of Ld. CIT(A) and the materials available on record. According to the assessee, the credit of Rs. 25 crores to the partner's capital account was an year-end notional journal entry transferring the outstanding salary and wages liability to the partner's capital account. The fact that this was a notional entry has not been disputed by the Revenue. There was no actual credit of Rs. 25 crores coming in the bank account of the assessee's firm from the four partners. The partners had also admitted that they did not contribute the capital of Rs. 25 crores but it was only a notional accounting adjustment. The AO had treated this notional entry as unexplained cash credit. The provision of section 68 is attracted when a sum is found credited in the books of accounts of the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2020 and there is nothing on record to indicate that the rectification done in the next year was sham and fabricated. 10. The AO and the Ld. CIT(A) have laid much emphasis on the fact that the salary liability continued to appear in the balance-sheet and, therefore, the explanation of the assessee regarding credit of outstanding salary to partner's capital account cannot be accepted. As per the finding given by the AO the salary payable as on 31st March, 2019 was Rs. 16,04,27,135/- whereas the salary payable as on 31st March, 2020 was Rs. 10,97,27,169/-. Considering this status of the salary payable, the AO had held it was not possible to transfer outstanding salary of Rs. 25 crores to partner's capital account. However, the AO had failed to consider that the assessee had debited a sum of Rs. 62,50,000/- as remuneration to partners in the P&L account for the current year and certain amount being outstanding out of current year's salary to partners, was not ruled out. The assessee had never submitted that the entire outstanding salary was credited to partner's capital account. Only a lump sum outstanding salary of Rs. 25 crores was transferred to partner's capital account....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 12. The contention of the Revenue that the assessee had failed to establish the credit worthiness of the partners, is otiose. The consistent stand of the assessee as well as the partners, was that no money was ever introduced. When the assessee denies the existence of any actual capital contribution, the question of proving the financial capacity of the partners does not arise. The Ld. CIT(A) has placed much emphasis on the fact that this notional entry was not qualified by the tax auditor. In our considered opinion, the absence of qualification in the tax audit report cannot convert an erroneous accounting entry into taxable income. The liability of tax can be determined on the basis of true nature of the transaction and not merely on the basis in which it is represented in the books of accounts. And considering the true nature of the transaction, no addition was called for in the present case. 13. The Ld. CIT(A) has relied upon the principle that every assessment year is an independent unit of assessment and the rectification carried out in the succeeding year cannot alter the position in the current year. There can be no quarrel with this settled proposition. However, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the addition of Rs 18.60 lakhs. 16. We have heard the Ld. AR and the Ld. CIT-DR on this issue. We do not find any reasonable basis to treat the salary paid to the relative of the partners as excessive. The assessee had explained that it was operating from multiple locations of India viz. Bangalore, Delhi, Baroda, Ahmedabad, Rajkot, Junagadh, etc. from where affairs of various sites / locations were coordinated. Each of the specified employees were entrusted with the responsibility of managing the affairs of these offices. They played key role in evaluating and recruiting the manpower and overseeing the entire recruitment process of the firm for specified location. Further, they were also overseeing the administration of the specified office and controlled day-to-day activities at the given location. They were personally supervising the employees on regular basis. Considering the responsibilities given to them, the salary paid to them cannot be held as excessive. The assessee was engaged in the business of supply of manpower to various government agencies, companies and institutions and had rendered uninterrupted services to the hospitals across India during COVID pandemic. The ....