Case Law Details
ITO Vs Samvatt Properties LLP (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT) Ahmedabad dismissed the appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), which had deleted the addition of ₹2.62 crore in the case of Samvatt Properties LLP. The case revolved around the applicability of Section 68 of the Income Tax Act, 1961, regarding the unexplained credit of capital introduced by partners into the firm. The Assessing Officer had initially added the amount as unexplained cash credit under Section 68. However, the CIT(A) overturned this, ruling that the firm fulfilled its obligation under the law by explaining the source of funds through the banking channels used by the partners.
The ITAT, relying on precedents from both the Gujarat High Court and the Supreme Court, affirmed that any issues regarding the creditworthiness of the partners should be examined in the hands of the partners and not the firm. The tribunal upheld the CIT(A)’s view that the responsibility of the firm is limited to explaining the source of the funds introduced as capital by the partners. Once this is done, any further inquiry should be directed at the partners individually, not the partnership firm. The ITAT dismissed the Revenue’s appeal, confirming the position that no addition can be made under Section 68 for capital introduced by the partners in a firm.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Revenue as against the appellate order dated 27.12.2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2016-17.
2. The solitary ground raised by the Revenue is whether the Ld. CIT(A) was justified in deleting the addition of Rs.2,62,50,000/- as against cash credit in the books of the assessee firm u/s. 68 r.w.s. 115BBE of the Act without taking into consideration facts of the case.
3. The brief facts of the case is that the assesse is a Limited Liability Partnership Firm filed its Return of Income for the Asst. Year 2016-17 on 29.07.2016 showing Nil total income. The case was selected for scrutiny assessment and the A.O. made addition of Rs.2,62,50,000/-, being the capital introduced by the Partners. Since the assessee failed to prove the genuineness and source of funds, therefore the Assessing Officer added the amount of Rs.2,62,50,000/- as unexplained cash credit u/s. 68 r.w.s. 115BBE of the Act and demanded tax thereon.
4. Aggrieved against the same, the assessee filed an appeal before Ld. CIT(A) who considered the submissions of the assessee and Judgment of the Hon’ble High Court on similar issue, which was later confirmed by Hon’ble Supreme Court thereby deleted the addition by observing as follows:
“7.2 There is no doubt about the fact that the appellant firm received capital contribution from its partners. It is also an admitted fact that the partners got their funds by taking loan from either partners or external sources. Through banking channel, the partners introduced capital to the appellant firm. Thus, the appellant fulfilled it’s obligation as required under section 68 of the Act and was not required to explain the sources of the funds in the hands of the partners. While it is true that one of the partners of the appellant firm obtained loan through shady transactions as noted above in this order, the appellant firm was not responsible for the actions of the partners. Any actions that need to be taken should be taken in the case of partners.
7.3 The views expressed above are supported by the decisions of the Hon’ble High Court and Tribunals as listed below:. The Hon’ble Gujrat High Court in the case of PCIT vs Vaishnodevi Refoils & Solvex [2018] 89 tax man.com 80(Gujrat) held as under:
“In the fact of the present case, when the assessee has furnished the details with regard to the sources of the capital introduced in the firm and the concemed partner had confirmed such contribution, the assessed 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 capital contribution, the enquiry had to be made at the end of the partner and nol 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 vs Pankaj Dyestuff Industries in Income Tax Reference No.241 of 1993”
7.4 The above view was also subsequently affirmed by the Hon’ble Supreme Court in SLP filed before it reported in 96 tax man.com 469. In the said case SLP was dismissed by the Hon’ble Supreme Court. The Hon’ble MP High Court in the case of Metachem Industries Ltd held that in so far as the responsibility of the assessee is concerned it is satisfactorily discharged, whether the person is an income tax assessee or not or from where he has brought this money is not responsibility of the firm. The moment the gives a satisfactory explanation and produces person who had deposited the amount, then burden of the firm discharged and in that case that credit entry cannot be the income of the firm for the purpose of income tax. Hon’ble Tribunal as well as CIT(A) held that once it is established that the amount has been invested by a particular person, be it partner or individual, then the responsibility of the firm is over.
7.5 The Hon’ble Cuttack ITAT in the case Panda Fuels vs ITO(ITA 07/CTK/2018 held that a firm can’t be assessed under section 68 of the Income Tax Act, 1961 in respect of capital introduced by the partners. In the case of Shiri Gem vs ITO it is held by Hon’ble Delhi Tribunal In the case amount in question was deposited by the partners as the capital, therefore even if the Assessing Officer was not satisfied with the explanation, it can’t be added in the assessee firm. At the most it can be considered in the hands of the individual partner of the assessee firm”.
8.1 Taking into account the discussion above, and relying upon the decisions of the Hon’ble High Court and Tribunals cited above, I am of the view that no addition can be made in the hands of the firm in case capital introduction by the partners. Accordingly, the AO is directed to delete the addition of Rs.2,62,50,000/- made under section 68 of the Act. However, in the case of partners the AO is free to take appropriate action according to the law. The ground thus, allowed.”
5. Ld. Counsel Shri D.K. Parikh appearing for the assessee submitted before us a Paper Book wherein submissions made before the Lower Authorities as well as a compilation of Case Laws and submitted that it is well settled as far as credit in the capital account of the Partners in the case of firm is concerned. No addition is permissible u/s. 68 in the hands of the Partnership Firm, but can be examined only in the hands of the individual Partners which was held by Hon’ble High Court of Gujarat in the case of PCIT vs Vaishnodevi Refoils & Solvex reported in [2018] 89 taxmann.com 80 (Gujarat) which was confirmed by Hon’ble Supreme Court by dismissing the SLP filed by the Department reported in 96 taxmann.com 469. Thus Ld. CIT(A) followed the Jurisdictional High Court confirmed by Hon’ble Supreme Court. Therefore the decision made by Ld. CIT(A) does not require any interference and Revenue appeal is liable to be dismissed.
6.Per contra Ld. Sr. D.R. Smt. Trupti Patel appearing for the Revenue supported the order passed by the Assessing Officer and requested to uphold the same. However she could not place on record any decision in favour of the Revenue.
7. We have given our thoughtful consideration and perused the materials available on record. The Ld. CIT(A) had already extracted Jurisdictional High Court judgment in his order which is extracted at Para 4 above. When the Assessing Officer is of the view that creditworthiness of Partners who introduced capital had not been proved in that case, enquiry and additions had to be made in the hands of the Partners and not against Partnership firm. This view of Gujarat High Court was confirmed by Hon’ble Supreme Court by dismissing the SLP filed by the Revenue reported in 96 taxmann.com 469. Thus the findings arrived by Ld. CIT(A) does not require any interference and further Revenue could not place any materials in support of its ground.
7.1. Respectfully following the Jurisdictional High Court judgment, we do not find any merits in the grounds raised by the Revenue. Thus the appeal filed by the Revenue is liable to be dismissed.
8. In the result, the appeal filed by the Revenue is hereby dismissed.
Order pronounced in the open court on 28 -08-2024
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