2019 (2) TMI 1204 - AT - Income Tax

Undisclosed investment u/s.69 - payment of on money for purchase of land admeasuring 3 acres 9 guntas - HELD THAT - CIT (Appeals) in First Appellate Proceedings directed the AO to ascertain the status of income offered/taxed on substantive basis in the hands of other partners. The Assessing Officer in his report pointed that apart from Shri B.R. Patil no other partner of the firm has admitted investment in land in their respective return of income. As observed that it was the first year of existence of the firm and the land in question was purchased before registration of the partnership deed. Thus, in absence of income of its own, the firm could not have invested for purchase of land. Therefore, the investment has to be considered in the hands of the partner as their respective unexplained investment. Since, partners of the firm failed to respond to the notices issued by Assessing Officer, the entire investment of ₹ 15,45,00,000/- was added as unexplained investment u/s.69 of the Act, on protective basis in the hands of assessee partnership firm. It is an undisputed fact that the registered sale deed for purchase of land was executed on 10.10.2007 and the partnership deed was executed on 26.10.2007. Since, the partnership deed is subsequent to the date of purchase of land, the partnership firm by no means could have made investment for purchase of land. Consequently, no addition on account of unexplained investment in land purchased prior to existence of assessee (partnership firm) could have been made in the hands of assessee, not even on protective basis. No infirmity in the order of CIT (A), hence, the same is upheld and the appeal of Revenue is dismissed.

Summary

Issues:
- Addition of undisclosed investment u/s.69 of the Income Tax Act, 1961 on protective basis.
- Validity of the deletion of the addition by the Commissioner of Income Tax (Appeals).
- Assessment of unexplained investment in the hands of the partnership firm.

Analysis:

1. The appeal pertains to the addition of ?15,45,00,000/- as undisclosed investment u/s.69 of the Income Tax Act, 1961 on a protective basis. The Assessing Officer made this addition due to non-compliance by the partners of the firm regarding the source of investment for the purchase of land. The partners failed to respond to notices, leading to the addition in the hands of the assessee partnership firm.

2. The Commissioner of Income Tax (Appeals) deleted the addition after analyzing the order of the Settlement Commission and the report of the Assessing Officer. It was found that the investment in land was made by individuals who later became partners in the firm. Therefore, the protective addition made by the Assessing Officer was deemed unjustified and was consequently deleted.

3. The Revenue challenged the findings of the Commissioner of Income Tax (Appeals) regarding the deletion of the addition. During the appeal, it was argued that the partnership firm, being formed after the purchase of the land, could not have made the investment. The Revenue insisted on the addition being upheld, emphasizing the non-disclosure by the partners and the lack of income of the firm in the relevant period.

4. The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), stating that the partnership firm, established after the land purchase, could not have invested in the property. As the partnership deed was executed subsequent to the land purchase, the investment had to be attributed to the partners individually. Therefore, the addition of ?15,45,00,000/- in the hands of the partnership firm was deemed unwarranted, and the appeal of the Revenue was dismissed.

5. The judgment clarified that no addition could be made in the hands of the partnership firm for the investment made before its existence, even on a protective basis. The decision was based on the sequence of events and the inability of the firm to have generated income at that initial stage. The order of the Commissioner of Income Tax (Appeals) was upheld, and the appeal of the Revenue was deemed meritless and subsequently dismissed.