Vinod Kumar Agarwal Vs ITO (ITAT Agra)
Old PAN in Bank Account Cannot Make New Firm’s Cash the Partner’s Personal Money: ITAT Deletes ₹30 Lakh Demonetisation Addition u/s 69A
Summary: The Agra Bench of the Income Tax Appellate Tribunal has held that cash deposited in the bank account of a partnership firm could not be assessed as unexplained money in the individual partner’s hands merely because the bank had failed to replace the PAN of the erstwhile proprietor with the PAN of the newly constituted firm.
Since the audited accounts, partnership deed, income-tax return and bank particulars established that the proprietorship concern had been converted into a partnership firm with effect from 01.04.2016 and that the cash belonged to the firm, the addition of ₹30 lakh u/s 69A r.w.s. 115BBE in the individual’s hands was deleted.
₹30 Lakh Deposited During Demonetisation
The assessee, Vinod Kumar Agarwal, had carried on business under the name M/s ESS ESS Brassware as a proprietary concern up to 31.03.2016. With effect from 01.04.2016, the proprietary concern was converted into a partnership firm comprising the assessee and Mrs. Kamlesh Agarwal as partners.
The case was selected for limited scrutiny to verify a cash deposit of ₹30 lakh made on 17.11.2016, during the demonetisation period, in Current Account No. 2375201001129 maintained with Canara Bank.
The AO called upon the assessee to explain the nature and source of the cash deposit. The assessee explained that the bank account and the cash deposited therein belonged to the partnership firm, M/s ESS ESS Brassware, and not to him in his individual capacity.
It was submitted that after conversion of the proprietary concern into the partnership firm, the bank had inadvertently continued to mention the assessee’s individual PAN against the same bank account. The failure to update the PAN was only a banking error and could not determine the real ownership of either the account or the money deposited in it.
Cash Represented Amount Lying in Imprest Account
The assessee further explained that cash of ₹36,98,000 was outstanding as on 31.03.2016 under the imprest account in the balance sheet of the erstwhile proprietary concern. Upon conversion, the assets and liabilities of the proprietary business were taken over by the partnership firm.
Out of the amount lying in the imprest account, ₹30 lakh was returned to the partnership firm and deposited in its bank account after demonetisation was announced on 08.11.2016.
In support of the explanation, the assessee furnished the partnership deed, balance sheets of M/s ESS ESS Brassware for the years ended 31.03.2016 and 31.03.2017, trading and profit & loss accounts, capital accounts, tax audit report, imprest ledger account and the income-tax return of the partnership firm.
The assessee’s closing capital in the proprietary concern as on 31.03.2016 was treated as his capital investment in the succeeding partnership firm.
AO Relies on PAN Mentioned in Deposit Slip
The AO was not satisfied with the explanation. On examining the pay-in slip, he noticed that the cash of ₹30 lakh had been deposited by mentioning the assessee’s individual PAN. He therefore concluded that the deposit had been made by the assessee in his individual capacity.
Accordingly, the amount was treated as unexplained money u/s 69A and subjected to tax at the special rate prescribed u/s 115BBE.
At the same time, the AO noticed that the partnership firm had disclosed the same Canara Bank account as well as the impugned cash deposit in its return for AY 2017-18. Considering the firm to be the beneficiary of the account, the AO also made a protective addition in the hands of the partnership firm.
The CIT(A) accepted the AO’s reasoning and confirmed the addition in the assessee’s individual assessment.
Documentary Evidence Established Ownership of Firm
The Tribunal examined the partnership deed and found that the proprietary concern had been converted into a partnership firm with effect from 01.04.2016. The assessee and Mrs. Kamlesh Agarwal became partners, while the assets of the erstwhile concern were taken over by the firm.
The Revenue had not disputed the authenticity of the balance sheets, trading and profit & loss accounts, tax audit report, schedules or imprest ledger account produced by the assessee.
The income-tax return filed by M/s ESS ESS Brassware for AY 2017-18 clearly mentioned the firm’s separate PAN, AAFFE9627E, and its status as a “firm”. More importantly, the partnership firm had disclosed Canara Bank Account No. 2375201001129 and the cash deposit of ₹30 lakh in its own return.
Thus, the contemporaneous statutory and accounting records consistently treated both the bank account and the deposit as belonging to the partnership firm.
Bank’s Failure to Update PAN Is Not Conclusive
The Tribunal accepted the explanation that the assessee’s individual PAN continued to be associated with the account because the bank had not updated its records after conversion of the proprietary concern into a partnership firm.
A PAN appearing in the bank’s records or on a deposit slip is an important identifying detail, but it cannot override the true legal and beneficial ownership established by the surrounding evidence.
The Tribunal held that the assessee had proved that his proprietary concern existed only until 31.03.2016 and that its assets were taken over by the partnership firm from 01.04.2016. The cash deposit made during the demonetisation period was supported by the audited books of the firm.
Consequently, the omission to substitute the firm’s PAN in place of the assessee’s pre-existing PAN was insufficient to infer that the cash had been deposited by or belonged to the assessee in his individual capacity.
The addition of ₹30 lakh u/s 69A r.w.s. 115BBE was therefore deleted, and the assessee’s appeal was allowed.
Author’s Comments
The decision rightly recognises that a bank account number may continue after the constitution of the business changes, but the ownership of money must be determined from the complete documentary trail and not from one outdated PAN field.
For invoking Section 69A against an individual, the Revenue must establish that the individual was the owner of the unexplained money. Mere appearance of his PAN in the bank’s legacy records cannot discharge that burden when the firm’s audited accounts, return of income and bank disclosure recognise the deposit as belonging to the firm.
The decision should, however, not be understood as overlooking the source of demonetisation cash. The assessee succeeded because the ₹30 lakh deposit was supported by the imprest account, audited books and succession of the proprietary assets into the partnership firm. A bare plea of “bank error” without such corroborative records may not be sufficient.
Practically, on conversion of a proprietorship into a partnership firm, taxpayers should immediately update the account holder’s constitution, PAN, KYC records and authorised signatories with the bank. Continuation of the proprietor’s PAN can expose the same transaction to proceedings in both hands, as happened here.
The principle is clear: tax follows the real owner of the money, not an obsolete PAN mechanically carried forward in the bank’s records.
FULL TEXT OF THE ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 05.03.2026 passed in appeal No CIT(A) Aligarh/10329/2019-20 by the ld. Commissioner of Income Tax, NFAC(Delhi) [(hereinafter referred to as the “CIT(A)] u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2017-18, wherein ld CIT(A) has dismissed assessee’s appeal, confirming the addition of Rs. 30,00,000/- as unexplained cash u/s 69A r.w.s. 115BBE of the Act, made vide assessment order dated 20.11.2019 passed u/s 143(3) of the Act.
2. Aggrieved, assessee preferred an appeal before ld CIT(A), who dismissed assessee’s appeal, confirming the additions made in the assessment order.
3. Aggrieved, assessee has preferred this second appeal on the following grounds:
“1. Because the Ld. CIT (A), NFAC, Delhi has wrongly, illegally and arbitrarily confirmed the order passed u/s 143(3) by the JAO, Aligarh.
2. Because the Ld. CIT (A) has wrongly, illegally and arbitrarily confirmed the addition of Rs.30,00,000/-u/s 69A of IT Act cash deposited during the demonetization period.
3. Because the Ld. CIT (A) has erred both on facts and in law in ignoring that the cash deposited in the bank account of M/S Ess Ess Brassware a partnership firm and not in the bank account of appellant.
4. Because the Ld. CIT (A) has erred both on facts and in law in ignoring that the assesse has produced documentary evidences during the course of assessment proceedings before the JAO and he wrongly rejected the legitimate claim of the assesse.
5. Because the Ld. CIT (A) has erred both on facts and in law in ignoring that cash of Rs.36,98,000/- was outstanding as on 31-03-2016 in the balance sheet of M/S Ess Ess Brassware under the head of imprest account out of which Rs.30,00,000/- was deposited in bank account during the demonetization period.
6. Because the Ld. CIT (A), has wrongly, illegally and arbitrarily rejected the submission of the appellant that M/S Ess Ess Brassware was proprietary concern till 31-03-2016 and hence PAN of the appellant was mentioned in bank account and later on, w.e.f. 01-04-2016, the proprietary concern was converted in to the partnership firm but bank has not changed the PAN of the appellant, while PAN of partnership firm ought to be inserted in the bank account of the partnership firm. The appellant is a partner in the said partnership firm.
7. Because considering the facts of the case and the legal position the additions made by the Assessing Officer should have been deleted. The Ld. CIT (A) has arbitrarily erred in confirming the same.
…….”
4. Perused the records. Heard ld representative for the parties.
5. A very small issue that has arisen under appeal is, assessee’s challenge to the addition of Rs. 30,00,000/- deposited in cash during the demonetization period and added u/s 69A r.w.s. 115BBE of the Act, vide assessment order dated 20.11.2019 passed u/s 143(3) of the Act, by the assessing officer.
6. On perusal of the assessment order, it is noticed that while examining and verifying the cash deposit in the present case selected for limited scrutiny, the assessing officer noticed that assessee has deposited Rs. 30,00,000/- in the current A/C No. 2375201001129 maintained with Canara Bank, thus issued statutory notices to the assessee, seeking the details of bank account maintained with him along with the explanation with respect to the nature and source of cash deposit during demonetization period with documentary evidences. Assessee furnished his reply submitting that the aforesaid cash was deposited on 17.11.2016 by the partnership firm M/s ESS ESS Brassware in which assessee is a partner. The proprietorship concern of assessee in the name of ESS ESS Brassware was converted to the partnership firm on 01.04.2016 (A.Y. 2017-18). The assessee contended that the said cash belonged to the partnership firm and not to assessee. The relevant statement of bank account of assessee and the partnership firm were reflected in the balance sheet of the firm. The copies of balance sheet of ESS ESS Brassware for the year ending 31.03.2016 and 31.03.2017 were furnished, copies of P&L account of assessee and the partnership firm M/s ESS ESS Brassware for A.Y. 2017-18 were also furnished. Assessee further submitted that the said cash was deposited out of imprest account. The copy of imprest account of assessee with partnership firm ESS ESS Brassware was also submitted during assessment proceedings. Assessee returned this money to the firm when the Govt. declared demonetization on 08.11.2016. The details of the partnership firm was also furnished.
7. Assessee further furnished the trading and P&L account, balance sheet and capital account of the proprietorship concern (ABTPA1682Q) as on 31.03.2016. After analyzing assessee’s submissions, the assessing officer was not satisfied and observed that a verification of pay in slip of cash deposit, he found that the said cash of Rs. 30,00,000/- was deposited in the aforesaid bank account in his individual capacity by quoting his own PAN (ABTPA1682Q) as depositor. Further the assessing officer after noticing that the partnership firm disclosed aforesaid bank A/C No. 2375201001129 as well as the impugned cash deposit during the demonetization in its ITR for A.Y. 2017-18, thus, treated the partnership firm as beneficiary of the bank account and made the protective addition in the hands of the partnership firm M/s ESS ESS Brassware. Ld CIT(A) accepted the reasoning of the assessing officer and confirmed the impugned addition.
8. We notice that according to the partnership deed, which is part of assessee’s paper book at page 4 to 14. Assessee’s proprietorship firm M/s ESS ESS Brassware was converted into the partnership firm to which assessee Vinod Kumar Agarwal became partner along with Mrs. Kamlesh Agarwal to the said firm w.e.f. 01.04.2016. The capital account of assessee as on 31.03.2016 was treated as capital investment in the partnership firm.
9. Revenue has not raised any finger in respect of the balance sheet, trading and profit and loss account, tax audit report, audited balance sheet, P&L accounts with scheduled and imprest ledger account etc. Ld AR explained that due to the mistake of the bank, the PAN of the assessee continued to remain there in the partnership firm’s A/C No. 2375201001129. According to the ITR, filed by the partnership firm M/s ESS ESS Brassware for A.Y. 2017-18, which is part of assessee’s paper book at page 58 to 59, it is clear that for A.Y. 2017-18, the partnership firm has shown the firm’s PAN no. AAFFE9627E and the status as ‘firm’. It is further noticed that the partnership firm has shown its Canara Bank A/C No. 2375201001129 and the deposit of said cash of Rs. 30,00,000/- in the said ITR. The assessing officer has raised doubt on the huge amount deposited in assessee’s imprest account.
10. The assessee has been able to prove from aforesaid documentary evidence that his proprietorship firm existed only till 31.03.2016 and all assets of proprietorship concern were taken over by the partnership firm w.e.f. 01.04.2016. The deposit of said cash during demonetization period gets support from the assessee’s audited books of accounts. The omission to substitute the PAN of partnership firm as against pre-existing PAN of assessee against the same bank account is not sufficient to infer the said deposit on behalf of assessee in his individual capacity. The impugned order is thus not sustainable under the law. The aforesaid issue is accordingly determined in favour of the appellant assessee and against the respondent revenue. The appeal is liable to be allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on – 17 .09.2026
