Case Law Details
Jayesh Tokershi Shah Vs DCIT (ITAT Mumbai)
In a recent ruling, the ITAT Mumbai held that the share of profit received from a partnership firm cannot be taxed in the hands of the partner due to non-payment of taxes by the firm. The ruling clarified the tax treatment of such income. The ITAT observed that the exemption under section 10(2A) of the Income Tax Act applies to the share of profit in the hands of the partner, irrespective of the firm’s tax compliance. The ITAT’s ruling provides clarity on the taxation of share of profit from a partnership firm, affirming that it remains exempt in the hands of the partner even if the firm has not paid taxes on the declared income.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal has been preferred by the assessee against order dated 09.02.2023 passed by the Ld. Commissioner of Income-tax (Appeals)-11, Pune [in short ‘the Ld. CIT(A)’] for assessment year 20 16-17, raising following grounds:
1. That in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the addition made by the Ld. AO amounting toRs. 1,85,05,05 Rs. 6,16,83,505/- on account of alleged unexplained cash credit us. 68 of the Act.
2. Without prejudice to above, in the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the alleged income, if any, can only be taxed in the hands of the partnership firm and not in hands of the partner i.e. assessee.
3. Without prejudice to above, in the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that share of profit is always exempt in hands of the partner i.e. assessee.
2. Briefly stated facts of the case are that the assessee was partner in partnership firms and for the year under consideration filed return of income declaring total income of Rs. 11,42,500/-. In the scrutiny proceedings, the Assessing Officer observed share of partnership firm namely M/s Monarch & Qureshi Builders amounting to Rs.6, 16,83,505/-, which was claimed as exempt by the assessee. It was stated by the assessee that during the course of survey, the said firm declared an income of Rs. 12,33,67,010/- under Income Declaration Scheme (IDS), 2016 and amount of Rs.6, 16,83,505/- was assessee’s share as partner was credited out of declared profit. The Assessing Officer observed that said firm did not pay due taxes income under IDS-2016 and no reversal of share of profit was done by the assessee in the capital account. Further, the Assessing Officer observed that assessee did not revised return of income also therefore issued show cause to the assessee as to why the said share of the income should not be treated as unexplained cash credit. It was explained by the assessee that during the course of survey conducted on 28.09.2016 at the premises of the said firm M/s Monarch & Qureshi Builders made a declaration of Rs.12,33,67,010/- under IDS-2016 for assessment year 20 15-16 but due taxes of said declaration could not be paid by the said partnership firm. The assessee submitted that out of said share of profit of Rs.6,16,83,505/- and amount of Rs.3,76,74,930/- was reversed on 30.12.2016. It was further contended by the assessee a share of profit in the partnership should not be considered as unexplained cash credit as the said amount was income to the partnership firm and ought to be considered in the hands of the partnership firm only. The Ld. Assessing Officer however rejected the contention of the assessee and held the said amount of unexplained cash credit u/s 68 of the Act. Before the Ld. CIT(A), the assessee contended that income of Rs. 12,33,67,010/- declared under the IDS-2016 can only be in the hands of the partnership firm and not in the hands of the assessee because share of profit from the partnership firm was always exempt in the hands of the partners irrespective of payment taxes by the partnership firm. The Ld. CIT(A) rejected the contention of the assessee and held as under:
“13. I have examined the facts of the case and the submissions made by the appellant. It is an undisputed fact that no, income of Rs. 12,33,67,010/- has been declared in the income tax return of the film namely Ms Monarch and Qureshi Builders. On the other hand on 01/04/2015, the capital account of the appellant maintained by the said firm has been credited with an amount of Rs. 6,16.83,505/-. It is also not under dispute that till date this entry has not been reversed by the firm in the accounts. It is also a matter of fact that out of this amount credited on 01/04/2015. the appellant has Withdrawn Rs. 3,76,74;9301- in cash on 30/12/2016. Till date, the appellant has not explained as to how the Capital account has been credited on account of profit share of the firm even though no such profit has been declared by the partnership firms in its retuch of income or Pi Account.
14. The appellant has claimed that such credit entry cannot be taxed as unexplained cash credit us 68 of the Act, although no reason for same has been mentioned in the submission filed by the appellant. In this connection, it may be mentioned that the sec. 68 of the Act reads as under:
“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 Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year…
15. In the present case an amount of Rs. 6,16,83,505/- has been credited in the capital account of the assessee on 01/04/2015. Further, the said credit entry is not a mere book entry because out of this amount, the appellant has utilized Rs. 3,76,74,930/- by way of cash withdrawal on 30/12/2016. Therefore, the said credit entry of Rs. 6,16,83,505/- clearly falls within the ambit of sec. 68 of the It is a well settled legal position that in case of a credit entry, the primary onus of explaining the nature and source of said credit entry, is on the assessee and the assessee is required to prove the identity of creditor, genuineness of transaction and the creditworthiness of the creditor by way of filing the supporting documents. In the present case, the appellant has not explained as to how the amount of Rs.6,16,83,505/- was credited in his capital account even though no corresponding profit was shown by the partnership firm. It may also be mentioned that till date the appellant has not filed any financial statements of M/s Monarch and Qureshi explaining as to how credit entry on account of profit has been made in the capital account of partners, without showing corresponding profit in the P/L Account. In such situation, the genuineness as well as source of this credit entry stands unproved. Accordingly, the appellant has failed to discharge his primary onus as casted on him us 68 of the Act. It is a well settled legal position that if an assessee fails to discharge his primary onus us 68 of the Act, the Assessing Officer is justified in treating the credit as unexplained cash credit taxable u/s 68 of the Act.
16. The appellant has taken an argument that the profit of 12,33,67,010/- is taxable in the hands of the partnership firm and not in the hands of the partners. On the other hand, the partnership firm has filed appeal against the assessment order passed in its case. Thus, the appellant is taking contradictory stand. This flip-flop approach of the appellant cannot be accepted. The appellant has further contended that the entries in the books of accounts are not conclusive in determining the taxability of a transaction. While there is no dispute about this legal position, however, in the present case, the amount of Rs. 6.1 6;83, 5051-is not being taxed merely on the basis of entries in the books-of accounts. As explained earlier in this order, after crediting this amount in the capital account, the appellant has withdrawn a substantial amount of Rs. 3,76,74,930/- in cash for his use. Further, the balance amount is still outstanding as credit in his capital account. These facts clearly suggest that it is not a mere book entry which is being taxed in the hands of the appellant.
17. The appellant has further contended that the partnership firm is incurring losses. In this connection, it may be mentioned that if the firm is making losses in that case it is all the more important for the appellant to explain the source of huge cash which was withdrawn by the partners on 30/12/2016. However, same has not been explained by the It may also be mentioned that till date the appellant has not filed any financial statements of M/s Monarch and Qureshi explaining as to how credit entry on account of profit has been made in the capital account of partners, without showing corresponding profit in the P/L Account.
18. The appellant has further contended that the share of profit of a partnership firm in the hands of the partners is always exempt. This contention is of no help to the appellant because as explained earlier in this order, it is an admitted fact that no profit corresponding to Rs. 12,33,67,010/- has been shown by the firm M/s Monarch and Qureshi Builders in its return or P/L Account. Therefore, this contention of the appellant cannot be accepted in view of specific facts of this case.”
3. We have heard rival submission of the parties and perused the relevant material on record. The issue in dispute is whether the share of profit received from the partnership firm which was claimed as exempt in the hands of the assessee, could be taxed u/s 68 of the Act merely for the reason that the said partnership firm has not paid taxes on the said income of Rs. 13,33,67,010/- declared during the course of survey. Under the provisions of section 10(2A) of the Act, any share of profit of the partnership firm is exempted from the tax in hand of partner. The said share cannot become unexplained in the hands of the assessee partner merely for the reason that no tax was paid by the partnership firm. The Ld Counsel submitted that appeal filed by the said firm against the said addition is pending before the ld CIT(A). If that addition is sustained by the appellate authorities in the hands of the partnership firm, then whatever taxes has to be paid by the partnership firm and the share of profit received by the assessee would be exempted under the provisions of the Act. If said addition for the income declared in the hands of the partnership firm is not sustained then profit in the hand of the firm will reduce and corresponding share of profit in the hands of the assessee shall also be reduced but that will not raise any tax liability in the hands of the assessee. In our opinion finding of the Ld. CIT(A) on the issue in dispute is contrary to express provisions of the Act. Accordingly, we set aside the finding of the Ld. CIT(A) on the issue in dispute and direct the Assessing Officer to delete the addition made u/s 68 of the Act. The ground No. 1 to 3 of the appeal of the assessee are accordingly allowed.
3.1 Before us, the Ld. Counsel of the assessee has filed an additional ground challenging the jurisdiction of the Assessing Officer on the ground that declared income of the assessee was less than Rs.20,00,000/- and therefore, jurisdiction of the assessee lied with the Income-tax Officer and not with the Assistant Commissioner of Income-tax. Since, we have already allowed the grounds of appeal challenging the merit of the addition and therefore, this additional ground of appeal was merely rendered academic and accordingly same is dismissed. The Ld. Counsel of the assessee also submitted that it was an alternative prayer only. Accordingly, the additional ground of appeal of the assessee is dismissed as infructuous.
4. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 10/07/2023.
