2022 (12) TMI 303 - AT - Income Tax

Unexplained cash credit u/s. 68 - partnership firm requirement to explain source of income for partners regarding amount contributed by them towards capital of firm - HELD THAT - Assessee has filed all requisite details at the time of hearing before ld. CIT(A). The assessee has filed copies of return of the partners who introduced capital, their respective bank statements were furnished and the confirmations of the three partners were also furnished before CIT(A). CIT(A) made a specific noting that on examination of the bank account for each of the three partners, it is apparent that there was no cash deposit before the cheque/transfer of funds by the respective partners to the assessee firm. The CIT(A) has also made a nothing that the assessee firm has submitted name/address/bank statement/acknowledgement of ITR and also confirmation of ledger accounts of the respective partners. In the case of Principal Commissioner of Income-tax-4 v. Vaishnodevi Refoils Solvex 2018 (1) TMI 861 - GUJARAT HIGH COURT High Court held that when assessee had furnished details with regard to source of capital introduced in firm and concerned partner had also confirmed such contribution, it could be concluded that assessee had duly discharged onus cast upon it. Therefore, if Assessing Officer was not convinced about creditworthiness of partner who had made capital contribution, inquiry had to be made at end of partner and not against firm. Notable, the SLP filed by the Department against the above order has also been dismissed by Hon'ble Supreme Court 2018 (7) TMI 651 - SC ORDER Again the High Court in the case of CIT v. M. Venkateswara Rao 2015 (3) TMI 153 - ANDHRA PRADESH HIGH COURT held that contribution made by partners to capital of assessee-firm would constitute very substratum for business of firm and it is difficult to treat pooling of such capital, as credit. The High Court held that it is only when entries are made during course of business that can be subjected to scrutiny under section 68. Therefore, partnership firm is not required to explain source of income for partners regarding amount contributed by them towards capital of firm. Thus, in view of the above discussion, the assessee has sufficiently charged the onus against upon him in the instant set of facts. Accordingly, we find no infirmity in the order of CIT(A) who has taken into consideration all the details filed by the assessee and thereby deleted the additions. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961.
2. Deletion of disallowance of interest as business expenditure under Section 37(1) read with Section 36(1)(iii) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Cash Credit under Section 68:

The Assessing Officer (AO) observed that the assessee, a partnership firm engaged in the business of a builder and contractor, introduced capital by three partners amounting to Rs. 1,93,84,419/-. The AO required the assessee to prove the identity, genuineness of the transaction, and creditworthiness of the depositors/partners. Despite multiple opportunities, the assessee failed to provide the necessary details, including confirmations from the partners. Consequently, the AO treated the capital introduced by the partners as unexplained cash credit under Section 68 of the Income Tax Act, 1961, and added the amount to the total income of the assessee firm.

In appeal, the assessee contended that the partners had acquired agricultural land intending to develop it through the partnership firm. Due to legal restrictions, the land was acquired in the partners' names, and the capital contribution was made in tranches. The assessee submitted additional evidence, including ledger accounts, bank statements, and income tax returns of the partners, to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) found that the assessee had discharged the onus by providing the necessary documents, confirming the identity, creditworthiness, and genuineness of the transactions. The CIT(A) noted that no cash deposits were made before the transfer of funds by the partners to the firm and deleted the addition made by the AO.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had filed all requisite details, including copies of returns, bank statements, and confirmations of the partners. The Tribunal referred to the case of Principal Commissioner of Income-tax-4 v. Vaishnodevi Refoils & Solvex, where the High Court held that if the amount received by the assessee-firm is duly reflected in the books of account maintained by the concerned partner and confirmed by the partner, the addition under Section 68 should be set aside. The Tribunal concluded that the assessee had sufficiently discharged the onus and found no infirmity in the CIT(A)'s order.

2. Deletion of Disallowance of Interest as Business Expenditure under Section 37(1) read with Section 36(1)(iii):

The AO disallowed an amount of Rs. 20,46,990/- out of the interest expenditure claimed by the assessee, reasoning that the interest was on the unexplained cash credit introduced as capital. The AO held that since the capital introduced was treated as unexplained income, the corresponding interest expenditure could not be allowed as a business expense under Section 37(1) read with Section 36(1)(iii) of the Income Tax Act, 1961.

The CIT(A), however, allowed the interest expenditure, noting that the assessee had provided sufficient evidence to establish the genuineness of the capital introduced by the partners. The CIT(A) observed that the assessee had filed confirmations, PAN numbers, and bank statements of the partners, which demonstrated that the capital introduction was genuine and not the assessee's own undisclosed income.

The Tribunal agreed with the CIT(A)'s findings, emphasizing that the assessee had discharged the onus by providing detailed evidence. The Tribunal referred to relevant case laws, including the decision in the case of Prayag Tendu Leaves Processing Co. v. CIT, which held that under Section 68, the AO could not ask the partnership firm to explain the source of income of the partners. The Tribunal concluded that the interest expenditure was allowable as the capital introduced by the partners was genuine.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that deleted the addition of Rs. 1,93,84,419/- as unexplained cash credit and allowed the interest expenditure of Rs. 20,46,990/-. The Tribunal found that the assessee had sufficiently discharged the onus of proving the identity, creditworthiness, and genuineness of the capital introduced by the partners. The order was pronounced in the open court on 14-10-2022.