2022 (1) TMI 1410 - AT - Income Tax

Addition u/s. 68 - unexplained partners investment in the assessee-firm - source for the amount introduced in the firm as capital and loan was not properly explained - since the interest credited to the partners account was in violation of the provisions of section 40(b) AO disallowed the claim of expenditure towards such interest and added the same in the hands of the assessee - HELD THAT - With respect to unexplained cash brought into the firm as partner s capital and loan from partners, neither the Ld. AR nor the assessee has established that the amount was accounted in the books of the respective partners of the firm. The amount is credited in the books of the assessee firm during the relevant assessment year without any corresponding entries in the books of the respective partners of the firm and there is no evidence to establish that the source of those funds are genuine and accounted. It is also obvious that the entire amount is appropriated and utilized by the assessee firm and not by the partners of the assessee firm. From the above provisions of section 68 and the facts of the relevant case before us it is crystal clear that the assessee firm is directly hit by the provisions of section 68 of the Act. Needless to mention that if the partners of the assessee-firm had introduced the cash in their respective books and thereafter transferred the same to the books of the assessee firm then probably the onus may be on the partners of the assessee firm to establish the source of the cash brought into their respective books and therefore addition may not be made in the hands of the assessee firm depending on the facts and circumstance of the case. In the case of the assessee it is apparent that the cash was never introduced in the books of the partners of the assessee firm, but it was merely introduced in the books of the assessee firm. Therefore, the onus is on the assessee firm to establish the genuineness of the cash introduced in its books. Since the assessee firm has failed to establish the genuineness of the cash introduced in its books obviously the addition has to be made in the hands of the assessee firm as held by the Ld. AO. Therefore, we hereby set aside the order of the Ld. CIT (A) and confirm the order of the ld. AO on this issue. Further, neither the Ld. AR nor the assessee could establish that the amount debited in the P L Account of the assessee firm as interest payable / paid to the partners of the assessee firm are not in violation of the provisions of section 40(b) of the Act. CIT (A) has deleted the addition without making a clear finding on the issue. No merit in the order of the Ld. CIT (A) on this issue also. Accordingly, we hereby set-aside the order of theCIT (A) on this issue and the order of the Ld. AO is hereby confirmed. Decided in favour of revenue.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act for unexplained partners' investment in the assessee-firm.
2. Deletion of addition made under Section 40(b) of the Income Tax Act towards interest claim debited to the Profit & Loss Account of the assessee-firm.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68:
The Revenue challenged the deletion of an addition amounting to Rs. 3,25,50,207/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, which pertains to unexplained partners' investment in the assessee-firm. The AO had observed that the partners introduced cash into the firm as capital and loans, for which the source was not explained. The amounts introduced were detailed as follows:
- Capital: Rs. 2,71,00,000/-
- Loan: Rs. 54,50,207/-

The AO treated these amounts as unexplained credits and added them to the income of the firm. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted these additions by relying on a decision from the Hon'ble Telangana & Andhra Pradesh High Court, which held that the source of the partners' contributions should be scrutinized in the hands of the individual partners, not the firm. The CIT(A) directed the AO to delete the addition in the firm’s hands but allowed for the possibility of assessing these amounts in the individual partners' assessments if they failed to explain the sources satisfactorily.

2. Deletion of Addition under Section 40(b):
The Revenue also challenged the deletion of an addition of Rs. 27,00,000/- made under Section 40(b) of the Income Tax Act, which pertains to the interest debited to the Profit & Loss Account of the assessee-firm. The AO had disallowed the interest claimed on the unexplained capital introduced by the partners, arguing that the interest credited to the partners' accounts violated the provisions of Section 40(b).

The CIT(A) deleted this addition as well, reasoning that if the partners' contributions were legitimate, the interest paid on these contributions should not be disallowed. The CIT(A) did not find a clear violation of Section 40(b) provisions.

Tribunal's Decision:
Upon appeal, the Tribunal carefully examined the materials on record and the arguments presented by both sides. The Tribunal found that the assessee-firm failed to establish the genuineness of the cash introduced in its books, as the amounts were not accounted for in the partners' individual books. Consequently, the Tribunal held that the firm was directly hit by the provisions of Section 68, which necessitates that the assessee must explain the nature and source of any credited sum. Since the firm could not satisfactorily explain these credits, the Tribunal reinstated the AO's addition of Rs. 3,25,50,207/- under Section 68.

Regarding the interest disallowed under Section 40(b), the Tribunal noted that the CIT(A) deleted the addition without a clear finding on the issue. Since the assessee could not establish that the interest debited was not in violation of Section 40(b), the Tribunal confirmed the AO's addition of Rs. 27,00,000/-.

Conclusion:
The Tribunal set aside the CIT(A)’s order and confirmed the AO’s additions under both Section 68 and Section 40(b). The appeal of the Revenue was allowed, and the judgment was pronounced in the open court on January 31, 2022.