Balaji Associates Vs ITO (ITAT Chennai)
Summary: The Chennai Bench of the Income Tax Appellate Tribunal allowed the appeal filed by Balaji Associates against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, dated 11.02.2026 for AY 2016-17, arising from an assessment framed under section 147 read with section 144B of the Income Tax Act, 1961. The assessee was a registered partnership firm consisting of eight partners engaged in real estate development and had filed its return declaring Nil income, which was processed under section 143(1). During scrutiny proceedings in the case of one partner, certain immovable properties were noticed as having been purchased in the name of the firm. Although the Assessing Officer initially treated the investment as unexplained in the partner’s hands, the CIT(A) in the partner’s appeal deleted the addition after holding that the property belonged to the partnership firm. Thereafter, the assessee-firm’s assessment was reopened under section 147.
During reassessment, the Assessing Officer noticed an increase in fixed assets of Rs.3,18,50,000/- and treated it as unexplained investment under section 69. The assessee explained that the investment represented capital contributions made by the partners, duly recorded in the firm’s books and reflected in their respective capital accounts. The books were produced and no defects were pointed out or rejected. The assessee also submitted that the partners were identifiable, their returns of income, balance sheets and capital accounts had been furnished, and that any enquiry concerning the source or financial capacity of individual partners should be undertaken in their assessments.
The Revenue contended that the reopening was based on tangible information from the partner’s assessment and that the assessee had failed to establish the actual source of cash introduced by the partners. It submitted that mere accounting entries and capital accounts did not establish the source of investment and relied upon PCIT vs. NRA Iron & Steel (P.) Ltd [2019] 103 taxmann.com 48 (SC).
The Tribunal found that the addition under section 69 could not be sustained on merits. It held that section 69 applies where investments are not recorded in the books of account maintained by the assessee. In the present case, the immovable properties were undisputedly recorded in the firm’s books, the corresponding source was reflected through the partners’ capital accounts, and the books had neither been rejected nor found defective. The Tribunal therefore held that the basic jurisdictional condition for invoking section 69 was absent.
The Tribunal further found that the partners’ identities were not disputed and their PAN, returns of income, balance sheets and capital accounts had been furnished. It held that once the investment was shown as funded through identifiable partners’ capital and duly recorded in the firm’s regular books, any doubt regarding an individual partner’s financial capacity or source of funds could be examined in the concerned partner’s assessment and could not, by itself, justify treating the firm’s recorded investment as unexplained under section 69. The Tribunal also found force in the assessee’s contention that the Revenue could not accept, in the partner’s appellate proceedings, that the property belonged to the partnership firm and nevertheless invoke section 69 against the firm without first disproving the entries in its books.
The Tribunal distinguished PCIT vs. NRA Iron & Steel (P.) Ltd., observing that the Supreme Court decision concerned section 68 and unexplained cash credits, whereas the present addition was made under section 69 despite the investment being recorded in the assessee’s books. It relied upon PCIT vs. Vaishnodevi Refoils & Solvex and the other decisions cited by the assessee. Accordingly, the Tribunal deleted the addition of Rs.3,18,50,000/- under section 69. Since the addition was deleted on merits, it did not adjudicate the legal grounds challenging the reopening under section 147, which were rendered academic. The appeal of the assessee was allowed.
Cases Discussed:
- PCIT vs. Vaishnodevi Refoils & Solvex [2018] 89 taxmann.com 80 (Gujrat) [SLP dismissed (2018) 96 taxmann.com 469]
- Kesharwani Sheetalaya Sahsaon vs. CIT
- DCIT vs. ANR International Pvt. Ltd [ITA No.5317/Del/2025 dated 05.06.2026]
- PCIT vs. NRA Iron & Steel (P.) Ltd [2019] 103 taxmann.com 48 SC
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal is directed against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) [CIT(A)] dated 11.02.2026 for the Assessment Year (AY) 2016-17 arising out of the assessment framed u/s.147 r.w.s 144B of the Income Tax Act, 1961 (“the Act”).
2. The assessee has filed the following grounds of appeal as mentioned below: –
1. The Ld. CIT(A) erred in confirming the reopening of assessment under section 147.
2. The reopening was based on borrowed satisfaction from the assessment of one of the partners without independent application of mind by the Assessing Officer of the appellant firm.
3. The reasons recorded do not demonstrate any tangible material establishing a live link between the information received and alleged escapement of income.
4. The reopening is therefore bad in law and liable to be quashed.
5. The Ld. CIT(A) erred in confirming the addition of Rs.3,18,50,000/- as unexplained investment under section 69.
6. The investment was duly recorded in the books of account of the firm. Therefore, section 69 has no application.
7. The addition was made without rejecting the books of account.
8. The source of investment was partners’ capital contribution, which was duly explained and reflected in capital accounts.
9. Once partners have sufficient capital and the source is explained, no addition can be made in the hands of the firm.
10. The Ld. CIT(A) failed to appreciate that in the partner’s case, the addition was deleted on the ground that the property belonged to the firm.
11.Having accepted that the asset belongs to the firm, the AO cannot treat the same as unexplained without disproving source in firm’s books.
12. The appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.
3. Brief facts of the case: The assessee is a registered partnership firm consisting of eight partners engaged in the business of real estate development. For the AY 2016-17, it filed its return of income declaring Nil income, which was processed u/s.143(1) of the Act. Subsequently, during scrutiny assessment proceedings in the case of one of the partners, it was noticed that certain immovable properties had been purchased in the name of the firm. The Assessing Officer (AO) in the partner’s case treated the investment as unexplained in the hands of the partner. However, the ld.CIT(A), in the partner’s appeal, deleted the addition by holding that the property belonged to the partnership firm and not to the individual partner. Thereafter, based upon the observations made in the assessment proceedings of the partner, the AO reopened the assessment of the assessee-firm u/s.147 of the Act under the erstwhile reassessment provisions. 3.1 During reassessment proceedings, the AO noticed an increase in fixed assets amounting to Rs.3,18,50,000/- and treated the same as unexplained investment u/s.69 of the Act. The assessee explained that the investment represented capital contributions made by the partners, duly recorded in the books of account and reflected in their respective capital accounts. The books of account were produced and no defects were pointed out. The AO, however, held that the partners had returned meagre income and had failed to establish the source of cash introduced into the firm by producing bank statements or other supporting evidence. Accordingly, the addition of Rs.3,18,50,000/- was made u/s. 69 of the Act.
4. On appeal, the ld.CIT(A) upheld both the validity of reopening as well as the addition made u/s.69 of the Act. Aggrieved, the assessee is in appeal before the Tribunal.
5. The ld. Authorised Representative (AR) submitted that the reopening is invalid since it has been initiated solely on the basis of observations made in the assessment proceedings of one of the partners without any independent application of mind by the jurisdictional Assessing Officer. He further submitted that the reasons recorded merely reproduce information received from another assessment and do not establish any live nexus between such information and escapement of income in the hands of the assessee-firm. He submitted that the investment in immovable property is admittedly recorded in the regular books of account maintained by the assessee. The ld.AR vehemently submitted that section 69 applies only where investments are not recorded in the books of account maintained by the assessee. Since the investment is duly reflected in the books, invocation of section 69 itself is legally impermissible. He further pointed out the following:
- the AO has accepted the books of account and has not rejected the same nor pointed out any defect therein;
- the source of investment has been fully explained as partners’ capital contribution duly credited in the respective capital accounts;
- the identity of the partners is not in dispute. They are regular assessees and copies of their returns of income, balance sheets and capital accounts were furnished;
- once the partners own the capital contributions, no addition can be made in the hands of the firm and, if at all, further enquiry regarding the source of funds has to be made in the assessments of the respective partners;
- the law does not require the assessee to establish the “source of source”;
- reliance was placed on the decisions in PCIT vs. Vaishnodevi Refoils & Solvex [2018] 89 taxmann.com 80 (Gujrat) [SLP dismissed (2018) 96 taxmann.com 469], Kesharwani Sheetalaya Sahsaon vs. CIT, and DCIT vs. ANR International Pvt. Ltd [ITA No.5317/Del/2025 dated 05.06.2026].
6. The ld. Departmental Representative (DR) supported the orders of the lower authorities and submitted that:
- the reopening was validly initiated based upon tangible information received from completed assessment proceedings of one of the partners;
- the assessee failed to establish the actual source of cash introduced by the partners;
- mere accounting entries and capital accounts do not establish the source of investment;
- except income-tax returns and balance sheets, no bank statements or evidence showing availability of cash were furnished;
- the partners had disclosed only meagre income and their financial capacity remained unproved;
- the burden u/s.69 had not been discharged;
- the judgments relied upon by the assessee are distinguishable on facts;
- reliance was placed upon the judgment of the Hon’ble Supreme Court in PCIT vs. NRA Iron & Steel (P.) Ltd [2019] 103 taxmann.com 48 SC].
7. We have carefully considered the rival submissions and perused the material available on record and case law cited. At the outset, we notice that the reassessment has been initiated solely on the basis of observations made during assessment proceedings in the case of one of the partners. The material available on record indicates that in the partner’s own appellate proceedings, the ld.CIT(A) categorically held that the property belonged to the partnership firm and not to the partner. It is only thereafter that the AO proceeded to reopen the assessment of the assessee-firm. 7.1 Even assuming that such information constituted tangible material for initiating reassessment, the addition ultimately made u/s. 69 cannot be sustained on merits. Section 69 of the Act applies only where an assessee has made investments which are not recorded in the books of account, if any, maintained by him. Thus, existence of an investment outside the books is the very foundation for invoking the provision. In the present case, there is no dispute whatsoever that the immovable properties stand recorded in the books of account of the assessee-firm. The corresponding source has been reflected through partners’ capital accounts. The books of account were produced before the Assessing Officer and no defect has been pointed out in the books. The books have never been rejected. Once these undisputed facts exist, the basic jurisdictional condition prescribed u/s.69 itself fails. A recorded investment cannot simultaneously be treated as an investment “not recorded” in the books maintained by the assessee. The AO has proceeded mainly on the premise that the partners had disclosed comparatively low taxable income and therefore lacked the financial capacity to introduce capital. Such reasoning, in our considered opinion, cannot justify an addition u/s. 69 in the hands of the firm. 7.2 The source of investment has consistently been explained as partners’ capital contribution. The identity of the partners has never been disputed. Their PAN, returns of income, balance sheets and capital accounts were furnished before the AO. The capital introduced by them has been duly credited in their respective capital accounts. Once the assessee has demonstrated that the investment has been funded out of capital introduced by identifiable partners and the same stands duly reflected in the regular books of account, the burden shifts to the Revenue. If the Revenue entertains any doubt regarding the financial capacity or source of funds available with any individual partner, the appropriate course is to examine such issue in the assessments of the concerned partners. Such doubt, by itself, cannot justify treating the recorded investment of the firm as unexplained u/s. 69 of the Act. 7.3 We also find considerable force in the contention of the assessee that the Revenue cannot simultaneously accept that the property belongs to the partnership firm, as held in the appellate proceedings of the partner, and yet invoke section 69 in the firm’s case without first disproving the entries appearing in the firm’s books of account. The reliance placed by the Revenue on the decision of the Hon’ble Supreme Court in NRA Iron & Steel (P.) Ltd. is misplaced. That decision was rendered in the context of section 68 involving unexplained cash credits where the assessee was required to establish identity, creditworthiness and genuineness of share applicants. In the present case, the addition has been made u/s. 69, notwithstanding the admitted position that the investment stands duly recorded in the books of account of the assessee. The statutory requirements governing section 69 are materially different and the primary condition for invoking that provision is absent. On the contrary, the principles laid down in PCIT vs. Vaishnodevi Refoils & Solvex support the assessee’s case that once the capital introduced by partners stands reflected in their accounts and the partners are identifiable, no addition can ordinarily be made in the hands of the partnership firm and any further enquiry has to be directed towards the partners. Accordingly, we hold that the addition of Rs.3,18,50,000/- u/s. 69 of the Act is unsustainable both on facts and in law. Hence, the addition of Rs.3,18,50,000/- made u/s.69 of the Act is hereby deleted. 7.4 Since we have deleted the addition on merits by holding that section 69 itself has no application where the investment is admittedly recorded in the books of account, we do not consider it necessary to adjudicate the legal grounds challenging the validity of reopening u/s. 147, the same being rendered academic.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on the 30 day of July 2026 in Chennai.
