Capital introduced by partners cannot be taxed in the hands of firm

ITO Vs Nithyasudha Combines (ITAT Chennai)

The next point for consideration is whether the unexplained partners’ capital is assessable in the hands of the assessee or not in terms of section 68 of the Act.

Section 68 of the Act can be invoked only when there is a credit in the books of account maintained by the assessee. However, in the present case, no credit was recorded in the books of accounts of the assessee firm.

During the course of appellate proceedings, the ld. CIT(A) has called for assessment records and observed that during the course of scrutiny assessment proceedings, the Assessing Officer noted from the return of income filed by the assessee firm that the assessee has reported a sum of ₹.9,70,00,000/- against the column “partners’ capital”. On this basis, the Assessing Officer has come to a conclusion that the assessee firm has introduced a capital of ₹.9,70,00,000/- during the impugned assessment year. On examining the assessment records, the ld. CIT(A) has noted that the conclusion of the Assessing Officer is neither based on bank accounts nor books of accounts of the assessee firm. Moreover, it is not the case of the Assessing Officer that ₹.9,70,00,000/- was found credited in the books of accounts of the assessee firm before reaching the conclusion that there was a substantial increase in the capital of the assessee firm during the previous year relevant to the impugned assessment year. The Assessing Officer failed to appreciate that addition under section 68 of the Act can be made only when there is a credit in the books of account maintained by the assessee. In the instant case, the assessee firm has not carried out any transactions during the year under consideration warranting recording the same in its books of account.

The return of income filed by the assessee is not its books of accounts. Under the above facts and circumstances no addition could be made under section 68 of the Act and thus, the addition of ₹.2,40,00,000/-made by the Assessing Officer is liable to deleted.

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