2020 (1) TMI 395 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - HELD THAT - There was no credit on account of loan or any sum as contemplated under the provisions of section 68 of the Act in the year under consideration in the books of account of the assessee, therefore, we are of the view that no such addition is warranted under section 68 of the Act. As such, the amount was credited in the account of the partner, thus even if it is assumed that the provisions of section 68 are attracted then it would be applied in the hands of the partner of the assessee. It is because the amount was credited in the account of the partner by way of adjustment entry. As such, the assessee is outside the purview of the provisions of section 68 of the Act. - Decided in favour of assessee. Addition u/s 41 - Cessation of liability - HELD THAT - A plain reading of the provisions reveals that it is applicable with respect to the trading liabilities and there is no information available on record suggesting that the impugned liabilities were representing the trading liabilities. As such, it was noticed that the assessee out of such loan and liabilities has advanced a sum of ₹ 1,39,35,033/- to its group concerned and this fact has not been doubted by the authorities below. Therefore, in the absence of documentary evidence it cannot be assumed that there was trading liability which has ceased to exist in the books of accounts. Indeed the liabilities in the books of accounts of the firm have ceased to exist as the same was transferred to the account of the partner. But, it does not mean that the trade creditors have waived their rights for the amount receivable from the assessee. As such, now the partner was liable for the payment of such amount as it was transferred to his individual account by the assessee. It is also a fact on records that, the partners are liable for the liabilities of the partnership firm. Thus, the liability of the partnership firm is not limited unlike the body corporate. Thus, we are of the view that the liability has not ceased to exist in true sense in the given facts and circumstances as it has shifted to the partner of the firm who was always otherwise liable for such liability in his personal capacity being partner. We hold that the provisions of section 41(1) of the Act cannot be invoked in the given facts and circumstances. Accordingly we reverse the order of the authorities below. - Decided in favour of assessee. Penalty u/s 271(1)(c) - HELD THAT - The quantum addition made by the AO has already been deleted by us in the appeal filed by the assessee. Once the quantum addition has been deleted, there is no question of claiming the penalty under section 271(1)(c) of the Act. Accordingly, we delete the penalty levied by the authorities below.

Issues Involved:
1. Addition under Section 68 of the Income Tax Act, 1961.
2. Confirmation of addition by CIT(A).
3. Non-appreciation of written submissions by the Assessing Officer.
4. Applicability of Section 68.
5. Penalty under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:
The primary issue raised by the assessee was the addition of ?2,59,33,030/- under Section 68. The assessee, a partnership firm established in 1977, had carried forward loans from various parties since the assessment year 2005-06, which were reflected in the balance sheet as of 31 March 2012. The Assessing Officer (AO) made the addition, stating that the assessee failed to provide sufficient details and proof regarding the loans, and thus, the amount was treated as unexplained cash credit under Section 68.

2. Confirmation of Addition by CIT(A):
The CIT(A) confirmed the addition, observing that the assessee did not furnish confirmations from the loan parties and that the partnership deed was made on a non-judicial stamp paper without any witness. The CIT(A) also noted that the acceptance of the loan amount in earlier years did not validate the genuineness of the transactions. The CIT(A) further held that the liabilities had ceased to exist and were taxable under Section 41(1) of the Act.

3. Non-Appreciation of Written Submissions by the Assessing Officer:
The assessee contended that the AO did not appreciate the various written submissions made, including the fact that the loans were carried forward from earlier years and were disclosed in the financial statements. The assessee argued that these were merely internal adjustments without any actual flow of funds during the year under consideration.

4. Applicability of Section 68:
The tribunal observed that the loans were taken in earlier years and disclosed in financial statements since the assessment year 2005-06. The tribunal held that Section 68 could not be applied to opening balances carried forward from earlier years, as there was no fresh credit entry in the current year. The tribunal referred to the Delhi High Court's judgment in CIT v/s Usha Stud Agricultural Farms Ltd, which supported this view.

5. Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
Since the quantum addition made by the AO was deleted, the tribunal held that there was no basis for levying a penalty under Section 271(1)(c). Consequently, the penalty imposed by the authorities was deleted.

Conclusion:
The tribunal allowed both appeals filed by the assessee, reversing the orders of the authorities below. The addition under Section 68 and the penalty under Section 271(1)(c) were both deleted. The tribunal emphasized that the liabilities had not ceased to exist in the true sense, as they were transferred to the partner's account, who was liable for them in his personal capacity. The tribunal also noted that the provisions of Section 41(1) could not be invoked, as the liabilities were not trading liabilities and the genuineness of the loans was not established.

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