Case Law Details
Pr. CIT Vs. Vaishnodevi Re foils & Solvex (Gujarat High Court)
Gujarat High Court: Firm Not Liable for Partner’s Capital Creditworthiness Under Section 68
Ahmedabad: In a ruling by the Gujarat High Court, it has been held that a partnership firm cannot be held liable under Section 68 of the Income-tax Act, 1961, for the creditworthiness of capital introduced by a partner, provided the firm has furnished details of the source and the partner has confirmed the contribution. The court reiterated its earlier stance, affirming that the onus to prove creditworthiness in such a scenario shifts to the partner, not the firm.
The case involved an appeal filed by the Principal Commissioner of Income Tax against an order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad, which had deleted an addition of Rs. 1,05,46,160 made by the Assessing Officer (AO) in the hands of the assessee firm, Vaishnodevi Re foils & Solvex, for the assessment year 2010-11.
The facts of the case were that during the financial year 2009-10, a partner of the firm, Mr. Kantilal Jayramdas Thakkar, had introduced capital amounting to Rs. 1,05,46,160. The AO, during the assessment proceedings, asked the firm to prove the source of this capital and show cause why it should not be treated as a cash credit under Section 68 of the Act.
In response, the firm provided a confirmation from the partner regarding the capital contribution. It also furnished a copy of the partner’s income tax return acknowledgment and audit report for the relevant year to show that the partner was a regular taxpayer and the investment in the firm was reflected in his books of accounts.
The AO, however, was not satisfied with the creditworthiness of the partner and proceeded to make the addition under Section 68 in the hands of the partnership firm.
The assessee firm challenged this addition before the Commissioner (Appeals), who noted that the partner’s audited balance sheet reflected the investment and his sources included capital, secured and unsecured loans, and other liabilities. The Commissioner (Appeals) observed that the AO had not found any adverse material regarding these sources and held that if the AO doubted the partner’s creditworthiness, the inquiry should have been conducted at the partner’s level, not the firm’s.
The Revenue then appealed to the ITAT, which upheld the decision of the Commissioner (Appeals). The ITAT relied on a previous judgment of the Gujarat High Court in the case of CIT v. Pankaj Dyestuff Industries (Income Tax Reference No. 241 of 1993).
Before the High Court, the Revenue contended that the Tribunal erred in deleting the addition. However, the High Court found that the controversy was squarely covered by its own decision in CIT v. Pankaj Dyestuff Industries. The court reiterated the principle from that case: once the assessee firm has provided details of the capital source and the concerned partner has confirmed the contribution, the initial onus on the firm is discharged. Any further doubts about the creditworthiness of the partner must be investigated at the partner’s end by their AO, not by making an addition in the firm’s assessment under Section 68.
The High Court concluded that since the Tribunal had merely applied the binding precedent of the jurisdictional High Court to the facts of the case, its order did not suffer from any legal infirmity that would raise a substantial question of law warranting interference. Accordingly, the High Court dismissed the Revenue’s appeal.
The ruling reinforces the legal position that a partnership firm’s responsibility under Section 68 for partners’ capital contributions is limited to providing identity and confirmation of the source from the partner; the burden of proving the partner’s creditworthiness lies with the partner himself.
FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-
By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), the appellant-revenue has called in question the order dated 13-2-2017 made by the Income Tax Appellate Tribunal, Ahmedabad “A” Bench, (hereinafter referred to as the “Tribunal”) in ITA No. 2778/Ahd/2013 by proposing the following question, stated to be a substantial question of law :–
“Whether the Tribunal erred in law and on facts in deleting the addition of 1,05,46,160 on account of capital introduction by one of the partner of the firm was made under section 68 of the Income Tax Act?”
2. The assessment year is 2010-11 and the relevant accounting period is the previous year 2009-10. The assessee filed its return of income for assessment year 2010-11 on 23-9-2010 declaring total income of Rs. 10,48,630. Vide order dated 27-2-2013, the assessing officer framed the assessment under section 143(3) of the Act making an addition of Rs. 1,05,46,160 on account of capital introduction by one partner of the firm under section 68 of the Act.
3. The assessee carried the matter in appeal before the Commissioner (Appeals) and succeeded. The revenue carried the matter in appeal before the Tribunal, which dismissed the appeal.
4. Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, reiterated the grounds set out in the memorandum of appeal.
5. From the facts as emerging from the record, it appears that during the financial year 2009-10, Mr. Kantilal Jayramdas Thakkar, one of the partners of the assessee firm had introduced net capital of Rs. 1,05,46,160 in the firm. The assessing officer called upon the assessee to prove the source of capital introduced by Mr. Kantilal Jayramdas Thakkar and show cause as to why such sum should not be treated as cash credit under section 68 of the Act. Before the assessing officer, the assessee furnished the contra confirmation of the said partner who was assessed to tax at Ward-2 of Palanpur B.K. Range and was filing the return of income regularly. Copy of acknowledgement receipt of ITR filed by Mr. Kantilal Jayramdas Thakkar was also furnished along with the audit report of the said financial year to prove that the assessee firm had received the fund from its partner Shri Kantilal Jayramdas Thakkar, who had also shown in his books of accounts that such amount had been invested by him. The assessing officer, however, was of the view that the credit worthiness of the partner who introduced the capital had not been proved by the assessee and made the addition by invoking the provisions of section 68 of the Act.
6. The assessee carried the matter in appeal before the Commissioner (Appeals), who noted that from the audited balance-sheet of the partner in his books of accounts, the investments in the partnership firm were duly reflected. Insofar as the source of capital contribution is concerned, the partner had his own capital, secured and unsecured loans besides liability. The assessing officer had not given any adverse finding about the said sources and their genuineness. According to the Commissioner (Appeals), in case the assessing officer had any doubts about the credit worthiness of the partner, he could have referred the matter to the assessing officer of the partner for making necessary verifications at his end. But no adverse inference could be drawn in the case of the assessee being the partnership firm, for the capital introduced by the partner when the partner had confirmed the capital contribution.
7. In revenue’s appeal, the Tribunal placed reliance upon the decision of this High Court in Pankaj Dyestuff Industries rendered in Income Tax Reference No. 241 of 1993 for the proposition that no addition can be made with regard to the partner’s capital introduction in the hands of the partnership firm and dismissed the appeal.
7. In revenue’s appeal, the Tribunal placed reliance upon the decision of this High Court in Pankaj Dyestuff Industries rendered in Income Tax Reference No. 241 of 1993 for the proposition that no addition can be made with regard to the partner’s capital introduction in the hands of the partnership firm and dismissed the appeal.
8. In the facts of the present case, when the assessee has furnished the details with regard to the source of the capital introduced in the firm and the concerned partner had confirmed such contribution, the assessee had duly discharged the onus cast upon it. Thereafter, if the assessing officer was not convinced about the creditworthiness of the partner who had made the capital contribution, the inquiry had to be made at the end of the partner and not against the firm. The controversy involved in the present case, therefore, stands squarely covered by the decision of this court in the case of CIT v. Pankaj Dyestuff Industries in Income Tax Reference No. 241 of 1993.
9. In the above view of the matter, when the Tribunal has merely applied the decision of the jurisdictional High Court to the facts of the case, it cannot be said that the impugned order suffers from any legal infirmity so as to give rise to any question of law, much less, a substantial question of law warranting interference. The appeal, therefore, fails and is, accordingly, summarily dismissed.
