2019 (6) TMI 1111 - AT - Income Tax

Assessment of partners v/s partnership firms - search u/s 132 - whether the profit would have been taxed in the hands of the partners if the partners would have collected the money out of their sources? - HELD THAT - The issue raised by the assessee stands covered in his favor by the order of this tribunal in the case of Bhagwan bhai Karmanbhai Ajara 2017 (4) TMI 1450 - ITAT AHMEDABAD in the given facts and circumstances of the case and on the basis of seized records, investment in Samarpan Scheme was made by USCKP from the funds receivecd from its members and therefore, the impugned addition is uncalled for in the assessee's hands. In the result, no interference is called for in the order of ld. CIT(A) who has rightly deleted the impugned addition. If the money would have been collected from the five individual partners out of their own resources then the profit arising from the sale would, have to be taxed in their individual hands in not in the hands of the firm. It is a fact that the Assessing Officer has assessed the income on sale of the land in the hands of the firm where the partners are not sharing the profits equally. The addition made by the Assessing Officer has not on sound footing. The same is hence deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the profit from the sale of land should be taxed in the hands of the individual partners or the firm.
2. The legitimacy of the addition of ?9 lakhs to the total income of the assessee by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Taxation of Profit from Sale of Land:
The primary issue raised by the assessee was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in observing that the profit would have been taxed in the hands of the partners if the partners had collected the money from their resources. The assessee, a partner in Uma Shakti Corporation (USC), was subjected to a search under Section 132 of the Income Tax Act, where a partner admitted that five individuals had contributed ?45 lakhs for the Samarpan project. The AO found that the names did not appear in the partnership deed of Shree Krishna Corporation, which executed the project. The AO issued a Show Cause Notice (SCN) to the assessee to explain the source of the ?9 lakhs contribution, but the assessee did not respond. Consequently, the AO added ?9 lakhs to the assessee's total income.

The CIT(A) noted that USC invested ?45 lakhs in the land for the Samarpan project, later sold to Shree Krishna Corporation, and the profit was declared in USC's tax return, accepted by the AO. The CIT(A) observed that the ?45 lakhs contribution was made by five partners, while USC had six partners, and the profit-sharing ratios were unequal. Hence, it was concluded that the firm's funds were utilized for the purchase, not individual partners' resources, and the profit should be taxed in the firm's hands.

2. Legitimacy of Addition of ?9 Lakhs:
The assessee argued before the CIT(A) that the ?9 lakhs investment by partners was from the extra collection of USC, and the firm offered the profit for taxation. The CIT(A) found that the firm's funds were used for the land purchase, and the profit was shared among six partners, indicating the investment was from the firm's unaccounted collection. The CIT(A) deleted the ?9 lakhs addition made by the AO, holding that the investment was not from unaccounted funds.

The Tribunal noted that the issue was covered in favor of the assessee by a previous order in the case of ACIT vs. Bhagwanbhai Karmanbhai Ajara, where it was held that the investment in the Samarpan project was made by USC from funds received from its members. The Tribunal found that the AO's addition was based on a mere noting of ?9 lakhs contribution without considering that the profit was taxed in USC's hands. The Tribunal agreed with the CIT(A) that the firm's funds were used, and the addition was uncalled for.

Conclusion:
The Tribunal concluded that the funds for the Samarpan project were from USC's unaccounted collection, and the profit should be taxed in the firm's hands. The addition of ?9 lakhs to the assessee's income was deleted, and the appeal was allowed in favor of the assessee. The judgment emphasized that the firm's funds were utilized, and the profit was rightfully taxed in the firm's hands, not the individual partners.