LLP Cleared of Section 68 Additions Due to Proven Partner Funds

CIT Vs Gurkirat BPO Services LLP (ITAT Delhi)

Delhi ITAT Upholds Deletion of ₹13.16 Cr u/s 68: Capital & Loans from Partner / Relative Cannot Be Taxed in Firm’s Hands

Partner’s Capital & Relative’s Loan: Add in Their Hands, Not LLP’s- Once Partner Owns Up, Firm Walks Free: Delhi ITAT Reiterates Metachem Rule-  Source of Source Explained—Section 68 Can’t Be Invoked in Firm’s Hands-

Delhi ITAT ‘C’ Bench in ACIT Vs. Gurkirat BPO Services LLP [ITA No. 697/Del/2025, AY 2017-18, order dated 31.12.2025] dismissed Revenue’s appeal and upheld deletion of additions aggregating to ₹13,16,97,653 made u/s 68 towards introduction of capital of ₹11,15,35,773 and unsecured loans of ₹2,01,61,880. Assessee-LLP had no business activity during the year and earned only interest on FDRs. AO treated capital introduced by major partner, an NRI holding 95% profit share, and unsecured loans received from his close relative as unexplained cash credits alleging failure to prove identity, creditworthiness & genuineness. Tribunal noted that before CIT(A) detailed affidavits, bank statements, balance sheets and complete source-of-source were furnished showing that funds flowed from maturity of FCNR/FDR deposits of partner and relative. Relying on settled law that once partner/creditor admits the transaction and explains source, firm’s burden ends, Tribunal held that any doubt on source must be examined in hands of partner or creditor and not in hands of firm. Tribunal further observed that firm having no business activity could not logically generate undisclosed income. Accordingly, deletion of additions u/s 68 was affirmed and Revenue appeal was dismissed.

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal filed by the Revenue Department is against the order dated 05.12.2024 of the ld. Commissioner of Income-tax (Appeals), NFAC, Delhi [hereinafter referred to as the Ld. CIT(A)] u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the assessment order dated 27.12.2019 of the ld. AO/Income-tax Officer, Ward 36(8), Delhi (hereinafter referred to as ‘the ld. AO’) u/s 143(3) of the Act for Assessment Year 2017-18.

2. The brief facts of the case are that the assessee e-filed ITR on 30.12.2017 at an income at Rs.20,84,880/-. The case was selected for scrutiny under CASS. Notice u/s 143(1) of the Act dated 10.08.2019 was served. Notice u/s 142(1) of the Act dated 18.10.2019 along with a questionnaire was issued. The assessee e-filed necessary details on various dates. The assessee firm had undertaken no business activity and had only income of interest from FDRs. The Profit & Loss sharing ratio of the assessee firm is as under:-

2.1 Show cause notice dated 21.12.2019 was issued. The assessee filed letter dated 23.12.2019. On completion of assessment proceedings, the ld. AO, vide order dated 27.12.2019, made additions of Rs.11,15,35,793/- and Rs.2,01,61,880/-. Against the order dated 27.12.2019 of the ld. AO, the appellant-assessee preferred appeal before the ld.CIT(A) which was allowed, vide order dated 05.12.2024.

3. Being aggrieved, the appellant-Department preferred the appeal with the following grounds:-

“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.11,15,35,000/- made on account of introduction of capital in partner’s capital account as unexplained cash credit under the provisions of section 68 and addition of Rs.2,01,61,880/- on account of addition in unsecured loans u/s 68 as unexplained cash credit during the A. Y. 2017-18 and additions were made after making necessary enquiries during the course of assessment.

2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the above mentioned addition of Rs. 13,16,97,653/- by not considering the remand report of AO on the additional evidence from which during the appellate proceeding.

3. The appellant reserves the right to add, amend or alter the grounds of appeal on or before the date the appeal is finally heard for disposal.”

4. The ld. Departmental Representative submitted that the ld.CIT(A) erred in deleting the additions made by the ld. AO by not considering the remand report of the AO on additional evidence during the appellate proceedings.

5. The ld. AR for the respondent assessee submitted that the source of source was explained in the appellate proceedings.

6. From examination of the record, in the light of the aforesaid rival contentions, the ld.CIT(A) in paras No.6.1 to 7.6 has observed as under:-

“6.1 Ground No 1 and 2 are directed against the Assessing Officer (hereinafter referred to as ‘the AO’)making an addition of Rs. 11,15,35,773 u/s 68 of the Act. During the course of assessment proceedings, the AO found that the huge capital and unsecured loanhad been introduced in business during the year under consideration. The AO found that the appellant had not furnished copies of ITR or Bank Statements of any of the parties from whom suchfunds were received during the year under consideration. The AO found that the appellant furnished an undertaking on plain paperwith thump impression affixed with name of Sh. Malkit Singh written, the correctness of which couldnot be examined.In addition to above, letters of confirmations from Mrs. Harjinder Kaur and Sh.Mandeep Kaur were also provided stating to give unsecured loan of Rs 2,00,83,000/-and Rs 78,800/-respectively to the appellant. Also, copy of passport of Sh. Malkit Singh was provided. The AO found from a perusal of letter dated 23.12.2019 filed by the appellant, that the appellant has claimed that Unsecured Loan was received from Partners of the assessee Firm. However, the AO that Partners of the assessee firm are Mr. Gurdial Singh, Mrs. KulwinderKaur and Mr. Malkit Singh, whereas Unsecured Loan has been received from Mrs Harjinder Kaur andMrs Mandeep Kaur, who are not partners of the assessee firm. The AO found that an aggregate capital of Rs 11,15,35,000/- (Rs 5,00,000 +Rs 11,10,35,000/-) has been introduced as fresh capital during the year under consideration. The AO held that the appellant could not satisfy the three limbs of Section 68 i.e. identity,creditworthiness and genuineness of transaction. Therefore, an aggregate of Rs 11,15,35,000 was treated as unexplained Cash Credits referred in Section 68 of the Act and accordingly added tothe returned income for the year under consideration.

6.2 The appellant during the course of appeal proceedings has submitted written submission whish has been quoted in earlier paras.I have carefully considered the facts of the case, the submission of the appellant and evidences on record. Sh. Malkit Singh is partner in the above said LLP firm having major share of 95% and is NRI presently residing in Glasgow, Scotland. He maintains his personal books of accounts and had given loan to the appellant separately as deposit (unsecured loan) in addition to his capital account. Mr. Malkit Singh has filed an affidavit dated 01.12.2021 confirming that he has advanced loan to appellant LLP Firm and closing balance of the loan account is Rs. 11,15,10,000 respectively. It is seen that the amount advanced to appellant from the Bank accounts namely Canara Bank A/C no. 2133101004889 and 2133101008753 which are savings bank accounts. The details of amounts advanced to appellant from the saving bank accounts of Malkit Singh, date and narrations wise are mentioned below where in the explanation has been given to each and every loan advanced by Malkit Singh to the appellant along with the source as under:

6.3 The following documents were submitted in support of the unsecured loan raised by the appellant from the partner Malkit Singh:

a. Affidavit of Malkit Singh

b. Copy of Bank accounts namely Canara Bank A/C no. 2133101004889 and 2133101008753 from where amount Rs. 11,15,10,000 has been transferred to the Gurkirat BPO services LLP Canara bank A/C no. 2133214000006.

c. Copy of Balance Sheet of Malkit Singh where the debit balance outstanding in the name of Gurkirat BPO Services LLP of Rs. 11,15,10,000 along with copy of Account of Gurkirat BPO in the books of Malkit Singh.

6.4 As per the provisions of section 68 where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO satisfactory, the sum so credited may be charged to the income tax as the income of the assessee that previous year. There is nothing to suggest the aforesaid unsecured loan given by the partner was actually income of the firm. The AO in the assessment order has also acknowledged that during the year under consideration the appellant has undertaken no business activities and it has only income from Interest on FDR. Therefore, it is difficult to imagine that the appellant firm will have undisclosed and unexplained cash credits/income.The partner Sh. Malkit Singh who has not only confirmed the deposits but also has explained his source by way of documentary evidence. In case the AO doubted the genuineness of the sources he should have considered the same in the hands of the partner not in the hands of the firm.

6.5 The Hon’ble ITAT Cuttackin the case of Panda Fuels Vs ITO(ITA 07/CTK/2018) that a firm cannot be assessed for the unexplained cash credit w’s 68 of LT. Act, 1961 in respect of capital introduced by the partner “

6.6 In the case of CIT vs Metachem Industries Ltd. (2000) 245 ITR 160 (MP) Hon’ble MP High Court held that,“so for as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of the income tax. In this case capital was introduced by the partner in the firm. Hon’ble Tribunal as well as CIT(A) held that once it is established that a amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over.”

6.7 The Hon’ble ITAT Delhi in the case of ACIT Vs Ambika Enterprises in ITA No. 31/Del/2020 Date of Judgement/Order : 21/07/2023 has held as under:-

“6. We have carefully considered on both sides and perused the materials available on record. We find that in this case there is no ambiguity about the identity of the partner and capital introduced from him. In such circumstances if he AO was of the opinion that the amount is not proved in the hands of the partner, he should have considered it in his individual hands and not in the hands of the firm. This view is duly supported by Hon’ble Madhya Pradesh High court in the case of CIT vs. Metachem Industries 245 ITR 160. Hence, following the aforesaid precedents, we do not see any infirmity in the well reasoned order of the Ld. CIT(A), same is thereby upheld.”

6.8 The AO in the remand report noted that during the course of assessment, the appellant vide letter dated 05.12.2019 stated that ITR has not been filed by the partners as their income was not above the taxable limit. The AO submitted that as per bank statement of account no. 2133101004889 maintained with Canara Bank, Sh Malkit Singh had earned interest of Rs.6,37,995 during the financial year 2016-17 relevant to the assessment year under consideration. Therefore, AO submitted that the claim of the appellant that income was below taxable limit is factually incorrect. The fact that Sh Malkit Singh had earned interest of Rs.6,37,995 and has not filed return cannot be held against the appellant. The AO is at liberty to proceed against Shri Malkit Singhand not consider in the hands of the firm.

6.9 In view of the documents above, I am of the considered view that the appellant has discharged its onus of cash credit received from the partner Sh. Malkit Singh who has not only confirmed the deposits but also has explained his source by way of documentary evidence. The responsibility of the firm ends once it provides satisfactory evidence regarding the unsecured loan from the partner. Once, it is established that the partner has admitted to given the unsecured loan, the burden shifts to the individual to explain the source of his investment and that may be examined in the individual’s personal capacity and not of the appellant firm. Therefore, the addition of Rs 11,15,35, 000is not sustainable u/s 68 of the Act and is directed to be deleted. The appeal on Ground Nos 1 and 2 are thus treated as allowed.

7.1 Ground No 3 and 4 are both directed against the AO making an addition of Rs.2,01,61,880 u/s 68 of the Act on unsecured loans obtained by the appellant. The AO durng the course of assessment proceedings found that an aggregate of Rs 2,01,61,880has been claimed to be received as Unsecured Loan during the year under consideration and that the appellant could not satisfy the three limbs of Section 68 i.e. Identity of Party, Creditworthiness of Party and genuineness of transaction. Accordingly, an aggregate of Rs 2,01,61,880 was treated as unexplained cash credits as referred in Section 68 of the Act and accordingly the same was added to the returned income of the appellant.

7.2 The appellant during the course of appeal proceedings has submitted written submission which has been quoted in earlier paras. I have carefully considered the facts of the case, the submission of the appellant and evidences on record. Smti. Harjinder Kaur is daughter-in-law of partner Sh. Malkit Singh in the appellant firm and is NRI presently residing in Glasgow, Scotland. She gave loan to the appellant as deposit (unsecured loan). Smt Harjinder Kaur has filed an affidavit dated 18-11-2021 confirming that she has advanced loan to appellant Firm and closing balance of the loan account is Rs. 2,00,83,000 respectively. Further she has stated that the amount advanced to assessee LLP Firm is from the Bank accounts namely Canara Bank A/C no. 2133104010049 and State Bank of India account no. 36132503565 which are saving bank accounts. The details of amounts advanced to LLP firm from the saving bank accounts of Harjinder Kaur date and narrations wise where in the explanation has been given to each & every loan advanced by Harjinder Kaur to the LLP firm along with the source as under:

7.3 The appellant has submitted the following documents in support of the unsecured loan raised by the appellant from Harjinder Kaur:

1. Affidavit of Harjinder Kaur.

2. Copy of Bank accounts namely State Bank of India 10992771810 and State Bank of India NRI branch 36132503565 from where amount Rs. 2,00,83,0000 has been transferred to the Gurkirat BPO services LLP Canara bank A/C no. 2133214000006, Bank of India A/C no 639120110000398 and Capital Small Finance Bank A/C no. 024100000021.

3. Copy of Balance Sheet of Harjinder Kaur where the debit balance outstanding in the name of Gurkirat BPO Services LLP of Rs. 2,00,83,0000 along with copy of Account of Gurkirat BPO in the books of Harjinder Kaur.

7.4 In view of the documents above, I am of the considered view that the appellant has discharged its onus of cash credit received from depositor Smt Harjinder Kaur. There is nothing to suggest the aforesaid unsecured loan given by Smt Harjinder Kaurwas actually unaccounted income of the firm. The AO in the assessment order has also acknowledged that during the year under consideration the appellant has undertaken no business activities and it has only income from Interest on FDR. Therefore, it is difficult to imagine that the appellant firm will have undisclosed and unexplained cash credits/income.Smt Harjinder Kaurhas not only confirmed the deposits but also has explained the source by way of documentary evidence. In case the AO doubted the genuineness of the sources he should have considered the same in the hands of Smt Harjinder Kaur not in the hands of the firm.

7.5 Therefore, I am of the considered view that the appellant has discharged its onus of cash credit received from Smt Harjinder Kaurwho has not only confirmed the loans but also has explained the source by way of documentary evidence. The responsibility of the firm ends once it provides satisfactory evidence regarding the unsecured loan from Smt Harjinder Kaur. Once, it is established that Smt Harjinder Kaurhas admitted to given the unsecured loan, the burden shifts to Smt Harjinder Kaurto explain the source of her investment and that may be examined in the individual’s personal capacity and not in the hands of the appellant firm. Therefore, the addition of Rs 2,01,61,880 is not sustainable u/s 68 of the Act and is directed to be deleted. The appeal on Ground Nos 3 and 4 are thus treated as allowed.”

7. From the above discussion and observations, it is evident on record that the ld.CIT(A), on the basis of documents held that the assessee discharged the onus of cash credit received. Therefore, the additions were rightly deleted. The grounds of appeal being devoid of merit are rejected.

8. In the result, the appeal of the Revenue Department is dismissed.

Order pronounced in the open court on 31.12.2025.