AO Cannot Depreciate an Asset & Doubt Its Existence: Partners’ Capital Addition U/s 68 Deleted

Hrishika Logistics Vs ACIT (ITAT Mumbai)

AO Cannot Depreciate an Asset & Doubt Its Existence: Partners’ Capital Addition u/s 68 Deleted

Summary:

Background

Hrishika Logistics was a partnership firm engaged in the business of logistics, clearing services & freight forwarding. It was constituted on 06.05.2011, making AY 2012-13 its first year of business.

During the year, two partners introduced capital into the firm. Mr. Manish Vaswani introduced ₹37,91,744, while Ms. Deepti Vaswani introduced ₹5 lakh.

The AO treated the entire partners’ capital as unexplained cash credits u/s 68. During the first appellate proceedings, the CIT(A) accepted ₹34,93,044 out of the capital introduced by Mr. Manish Vaswani. However, the balance amount of ₹2,98,700 was sustained because adequate supporting evidence was allegedly not furnished during assessment.

The CIT(A) also sustained the addition of ₹5 lakh representing capital introduced by Ms. Deepti Vaswani. Thus, the total addition surviving before the Tribunal was ₹7,98,700.

Furniture Introduced as Capital

The disputed amount of ₹2,98,700 introduced by Mr. Manish Vaswani did not represent an unexplained cash deposit. It represented the value of his personal furniture & fixtures brought into the partnership firm as capital.

The assets were used wholly for the firm’s business, recorded in its books & included in the relevant block of assets. The firm also claimed depreciation upon them.

The assessee relied upon its financial statements, schedules & notes to accounts to demonstrate that the assets had been properly recorded.

Significantly, the AO had accepted the furniture & fixtures as part of the firm’s depreciable block. He had also allowed the corresponding depreciation claimed by the firm.

The ITAT found this treatment fundamentally inconsistent. Once the AO accepted that the furniture & fixtures genuinely existed, belonged to the firm’s business block & qualified for depreciation, he could not simultaneously treat their introduction as an unexplained credit.

The Revenue could not approve the asset for depreciation while rejecting the same asset at the capital-entry stage. Accordingly, the addition of ₹2,98,700 was held unsustainable.

Cash Capital of ₹5 Lakh

The second dispute concerned ₹5 lakh introduced by Ms. Deepti Vaswani.

To establish the source, the assessee furnished her income-tax returns & computations for AYs 2011-12 & 2012-13. It also produced a cash summary reflecting her opening cash balance, salary income, gifts received from her father & brother, drawings, capital introduced into the firm & closing cash balance.

For AY 2011-12, the cash summary disclosed an opening balance of ₹1,06,500, salary income of ₹3,19,585 & gifts of ₹30,000. After drawings of ₹60,600, the closing cash balance stood at ₹3,95,485.

For AY 2012-13, the available funds comprised the opening balance of ₹3,95,485, salary income of ₹1,69,811 & gifts of ₹50,000. Against total availability of ₹6,15,296, she introduced ₹5 lakh into the firm & incurred drawings of ₹76,500, leaving closing cash of ₹38,796.

Even the AO, in the remand report, acknowledged that the cash introduction was supported by her returns for AYs 2011-12 & 2012-13, declaring income of ₹2,70,849 & ₹2,58,879, respectively.

The Tribunal therefore concluded that Ms. Vaswani possessed sufficient financial capacity to introduce the capital.

Three Tests u/s 68 Satisfied

The ITAT held that the assessee had discharged the primary burden imposed by s.68 by establishing the identity of the partners, genuineness of the transactions & creditworthiness of the contributors.

The identity of both partners was undisputed. Their capital contributions were recorded in the firm’s books. The nature of Mr. Vaswani’s contribution was supported by the physical assets recognised by the AO himself. Ms. Vasvani’s contribution was substantiated through her returns, income particulars & cash-flow statement.

Once these essential ingredients were established, the firm was not required, for the year under consideration, to undertake an endless exercise of proving the “source of the source.”

The Tribunal referred to the Bombay High Court’s ruling in Gagandeep Infrastructure (P.) Ltd. v. CIT, besides decisions of the Gujarat, Allahabad, Madhya Pradesh & Telangana High Courts & various Tribunal Benches.

First Year Leaves No Room for Suppressed Profits

The ITAT also considered the fact that AY 2012-13 was the firm’s first year of business.

There could be no reasonable presumption that the newly constituted firm had accumulated undisclosed profits which were subsequently routed back into its books in the guise of partners’ capital. The capital entries represented contributions from identified partners at the commencement of business.

If any doubt genuinely survived regarding the partners’ sources, the appropriate enquiry could be made in their respective hands. On the evidence available, however, the capital could not be treated as the unexplained income of the firm.

The ITAT directed deletion of the entire addition of ₹7,98,700, & the assessee’s appeal was allowed.

Author’s Comments

The most striking aspect is the contradictory treatment of the furniture. An asset cannot be genuine enough to earn depreciation but mysterious enough to attract s.68. The AO must adopt a legally consistent position.

The ruling also reinforces the distinction between the firm’s burden & the partner’s burden. The firm must establish the partner’s identity, capacity & genuineness of the contribution. Once that initial burden is discharged, every remote source behind the partner’s funds cannot automatically be demanded from the firm.

The order states that the source-of-source proviso was introduced by the Finance Act, 2022 with effect from 01.04.2013. This observation appears imprecisely worded: the share-capital proviso to s.68 was introduced by the Finance Act, 2012, applicable from AY 2013-14, while the Finance Act, 2022 expanded the source-of-source requirement to specified loans & borrowings from AY 2023-24. Nevertheless, neither amendment affected AY 2012-13, which was the decisive point.

Section 68 can test partners’ capital, but it cannot turn explained assets, documented cash availability & a first-year contribution into the firm’s imaginary income.

Cases Discussed

• Pestkill Pesticides Industries vs. PCIT [2026] 188 taxmann.com 740 (Gujarat); order dated 16.07.2026
• Kesharwani Sheetalaya Sahsaon v. CIT [2020] 116 taxmann.com 382 (Allahabad); order dated 24.04.2020
• PCIT v. Vaishnodevi Refoils & Solvex [2018] 89 taxmann.com 80 (Gujarat); order dated 28.11.2017
• CIT v. Metachem Industries [2001] 116 Taxman 572 (Madhya Pradesh); Order dated 01.09.1999
• Nova Medicare v. ITO [2023] 150 taxmann.com 363 (Telangana); Order dated 15.02.2023
• Galaxy Buildcon v. ITO [2026] 189 taxmann.com 531 (Raipur – Trib.); Order dated 06.08.2026
• Ramesh Industries vs. ITO [ITA No. 3131/Ahd/2008; Order dated 21.01.2011]
• ITO vs. Jaikishan Textile Traders LLP, [ITA. No. 803/PUN/2023; Order dated 15.10.2024
• M/s. Radiant Embroideries vs. ITO [ITA No. 3428/Ahd/2008; order dated 11.09.2009]

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dt. 06.03.2026 passed under section 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre (NFAC) / CIT(A) for the assessment year 2012-13. The assessee has raised the following grounds of appeal: –

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition of Rs. 7,98,700/- being capital introduced by the partners as unexplained income of the Appellant firm, without appreciating the facts and circumstances of the case.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition in the hands of the Firm without appreciating that amount was received from the partners of the firm.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the addition without appreciating that the Appellant had satisfactorily explained the nature and source of the amounts credited in the books of account.”

2. All the grounds raised by the assessee are inter-related and interconnected and relates to challenging the order of ld. CIT(A) upholding the additions of Rs.7,98,700/- made by the Assessing Officer on account of capital reduction by the partners by considering the same as ‘unexplained income’ of the assessee. Therefore, we have decided to adjudicate this ground through the present consolidated order.

3. We have heard the learned Counsels for both the parties and perused the material placed on record. It was submitted before us, and the same is also borne out from the orders of the Revenue authorities, from the records we noticed that the assessee is a partnership firm engaged in the business of logistics, clearing services and freight forwarding. The said firm was incorporated on 06/05/2011, and the year under consideration was the first year of business of the assessee. However, during the year under consideration, partners Mr. Manish Vaswani and Ms. Deepti Vaswani introduced capital into the firms are Rs.37,91,744 and Rs.5,00,000/- respectively. During the course of assessment proceedings, the Assessing Officer made an addition under section 68 of the Act in respect of the entire amount of capital introduced by the partners. However, during the appellate proceedings, the learned CIT(A), being satisfied with the explanation furnished by the assessee, accepted the capital introduced by Mr. Manish Vaswani to the extent of Rs.34,93,044/- as explained. Accordingly, the learned CIT(A) sustained the addition only to the extent of the balance amount of Rs.2,98,700/-, holding that the assessee had failed to furnish supporting documents and evidence in respect thereof during the course of assessment proceedings. Moreover, other addition of Rs.5,00,000/- on account of capital introduced by the second partner i.e. Smt. Deepti Vaswani and before us both while rebutting the same arguments as raised by the assessee before the Revenue had submitted that the capital introduced in the form of personal furniture and fixtures amounting to Rs.2,98,700/- was introduced by Mr. Manish Vaswani and the same was used solely for the purpose of business of the assessee. It was further submitted that the said furniture and fixtures brought in by the Partner was duly recorded in the books of the assessee firm. It had also claimed depreciation of such assets. In order to support its contention, the assessee has relied upon copy of Financial Statement along with all schedules and notes forming part of accounts. We after having considered the said documents and the submissions of the parties, we noticed that Assessing Officer has duly accepted such furniture and fixtures as part of block of asset of the assessee and also allowed the depreciation claimed on such asset, therefore, once the Assessing Officer had himself accepted the assets introduced as genuine and allowed the claim of depreciation, the same cannot be regarded as ‘unexplained’ for the purpose of addition u/s.68 of the Income Tax Act.

4. Now coming to the capital introduced by the second partner Mrs. Deepti Vaswani to Rs.5,00,000/- is concerned in this regard, we noticed that assessee has duly established the source of such credit in its books, moreover, assessee has submitted copy of ITR and computation of income for A.Y.2011-12 and 2012-13. Cash summary reflecting the inflow and outflow of cash for A.Y.2011-12 and 2012-13 were also placed on record which is reproduced as under:-

5. We further noticed that ld. AO had acknowledged in remand report that cash introduced by the partner is duly substantiated by ITR filed for A.Y.2011-12 and A.Y.2012-13 thereby declaring total income of Rs.2,70,849/- and Rs. 2,58,879/- respectively which consequently establishes that Mrs. Deepti Vasvani had sufficient financial capacity to introduce capital of Rs.5,00,000/- in the assessee firm. Even otherwise, we noticed that since the source of such credit in its books being capital introduced by its partners and once the assessee had explained and established the three essential test of section 68 of the Act namely genuineness of the transaction, identity and creditworthiness of the Partners, the assessee was not required to prove the source of capital introduced by the Partners. The Proviso to section 68 to prove source of source was introduced by Finance Act 2022 with effect from 01.04.2013. Thus, it would be effective only from AY 2013-14 onwards and not for the subject Assessment Year 2012-13. In this regard, reliance was being placed on the decision of Hon’ble Bombay High Court in case of Gagandeep Infrastructure (P.) Ltd vs. CIT [2017] 80taxmann.com 272 (Bombay); order dated 20.03.2017. We also noticed that the year under consideration i.e. 2012-13 is the first year of business of the year of the assessee therefore, there could be no presumption that there were profits of the firm which were routed through capital introduced by partners. Accordingly, capital introduced by the partners cannot be added in the hands of the assessee. In this regard reliance has also been placed on the decision in the following cases: –

• Pestkill Pesticides Industries vs. PCIT [2026] 188 taxmann.com 740 (Gujarat); order dated 16.07.2026
• Kesharwani Sheetalaya Sahsaon v. CIT [2020] 116 taxmann.com 382 (Allahabad); order dated 24.04.2020
• PCIT v. Vaishnodevi Refoils & Solvex [2018] 89 taxmann.com 80 (Gujarat); order dated 28.11.2017
• CIT v. Metachem Industries [2001] 116 Taxman 572 (Madhya Pradesh); Order dated 01.09.1999
• Nova Medicare v. ITO [2023] 150 taxmann.com 363 (Telangana); Order dated 15.02.2023
• Galaxy Buildcon v. ITO [2026] 189 taxmann.com 531 (Raipur – Trib.); Order dated 06.08.2026
• Ramesh Industries vs. ITO [ITA No. 3131/Ahd/2008; Order dated 21.01.2011]
• ITO vs. Jaikishan Textile Traders LLP, [ITA. No. 803/PUN/2023; Order dated 15.10.2024
• M/s. Radiant Embroideries vs. ITO [ITA No. 3428/Ahd/2008; order dated 11.09.2009]

6. Therefore, considering the totality of facts and circumstances and also keeping in view the decision of ITAT and also following the orders of Hon’ble High Court, we are of the view that the additions made by the Assessing Officer and upheld by the ld. CIT(A) are not sustainable in the eyes of law. Accordingly, we direct Assessing Officer to delete the addition.

7. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on this 02/09/2026