2021 (8) TMI 1312 - AT - Income Tax

Undisclosed investment u/s 69 in purchase of land properties - profit arising on sale of land by the firm required to be taxed in the hands of the firm OR in the hands of the partner - Assessee filed applications before the ITSC for settlement of his case in the first round of litigation - HELD THAT - We find that the addition made by the Assessing Officer is contrary to the findings and the decision of the ITSC in the assessees own cases as the ITSC, while dealing with the application of the assessees has discussed the facts and after considering the report of the PCIT under rule 9, has also rendered a categorical finding stating that we have no doubt in our mind that both the unaccounted investment in land purchased by the firm M/s RNR Devcon as well as the profit arising on sale of land by the firm are required to be taxed in the hands of the firm. The receipts of the applicants (accounted as well as unaccounted) in lieu of forgoing their partnership share to Kakwani family would be capital receipts and not revenue receipts. Therefore, even as per the categorical findings of the ITSC in the assessees own cases, the alleged unaccounted investment could not have been taxed in the hands of the present assessee. These observations of the ITSC have been accepted by the PCIT/Assessing Officer in so far as the order of ITSC has not been challenged. The Assessing Officer failed to bring any evidence suggesting that the alleged on-money for purchase of the land was paid by the assessees out of their personal resources. There is no reference of any enquiry having been conducted from the firm. Thus, the addition has been made only on surmises and conjectures. Thus, we have no doubt in our mind that the investment in land purchase by the said firm as well as the profit arising on sale of land by the firm is required to be taxed in the hands of the firm and not in the hands of the partner i.e. present assessees. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 4,62,66,000/- made by the Assessing Officer on account of undisclosed investment under Section 69 of the Income Tax Act, 1961.
2. Credibility and evidentiary value of material seized from the possession of another person.
3. Taxability of unexplained investments in the hands of the partnership firm versus individual partners.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 4,62,66,000/-
The Revenue contended that the Assessing Officer correctly added Rs. 4,62,66,000/- as undisclosed investment under Section 69 based on notings found in a pen drive seized from an accountant. The Assessing Officer asserted that the bypass land was purchased for Rs. 13.06 crores, with Rs. 9.25 crores paid off the books. However, the CIT(A) deleted this addition, reasoning that the investment was made by the partnership firm M/s RNR Devcon and recorded in its books. The Tribunal upheld CIT(A)'s deletion, emphasizing that the firm, not the individual partners, should be taxed for such investments. The Tribunal also noted that the Principal CIT and the ITSC had concluded that the unaccounted investment should be taxed in the hands of the firm.

Issue 2: Credibility and Evidentiary Value of Seized Material
The assessee argued that the seized material, which formed the basis of the addition, was neither found nor seized from them but from another individual, Shri Ashok Vaishnav. The CIT(A) and the Tribunal agreed, stating that the material's credibility and evidentiary value were questionable since it did not directly implicate the assessee. The Tribunal found no evidence suggesting that the alleged on-money was paid by the assessee out of their personal resources.

Issue 3: Taxability of Unexplained Investments
The Tribunal highlighted that under Section 4 of the Income Tax Act, a partnership firm is a distinct assessable entity separate from its partners. The investment in the land was made by the firm M/s RNR Devcon and duly recorded in its books. The profit from the subsequent sale of part of the land was also offered to tax in the hands of the firm. The Tribunal cited the Supreme Court's ruling in ITO vs. CH. Atchaiah, which mandates that income must be taxed in the hands of the right entity, in this case, the firm. The Tribunal also referenced CBDT Circular No. 8/2014, which clarifies that a firm's income should be taxed in the firm's hands, not the partners'.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decision to delete the addition of Rs. 4,62,66,000/- in the hands of the individual partners. The cross-objections filed by the assessees were deemed infructuous as the main issue had been resolved in their favor. The Tribunal's decision was based on the principle that the partnership firm, as a separate legal entity, should be taxed for the undisclosed investment, not the individual partners.