2019 (4) TMI 607 - AT - Income Tax

Income From House Property OR Business income - assessee is the owner of the building comprising of 5 floors with common facility like air-condition plant, power back-up, lift, watchmen - fair market rent receipt - difference in the amount of rent charged by the assessee from the unrelated and related party - HELD THAT - Rental income of the assessee is taxable under the head House Property at the fair market rent and not under the head Business and Profession. Unexplained cash credit u/s 68 - capital contributed by the partner to the firm as unexplained cash credit - addition in the hands of the partnership firm or partner - HELD THAT - There remains no ambiguity that the assessee has shown contribution by the partner of the firm in the year under consideration. Now the question arises about the source of fund in the hands of the partner. Regarding this the law is settled that the partnership firm is not liable to justify the source of fund in the hands of the partner. In this connection we find support and guidance from the judgement of PCIT vs Vaishnodevi Refoils & Solvex reported in 2018 (1) TMI 861 - GUJARAT HIGH COURT assessee has furnished the details with regard to the source of the capital introduced in the firm and the concerned partner had confirmed such contribution, the assessee had duly discharged the onus cast upon it. Thereafter, if the Assessing Officer was not convinced about the creditworthiness of the partner who had made the capital contribution, the inquiry had to be made at the end of the partner and not against the firm. No addition made in the hands of the partnership firm on account of the capital contributed by the partner of the firm to the firm. In case any justification is required for the source of fund in the hands of the partner, then partner in his individual capacity is liable to explain. There is no liability fastened on the assessee (firm) for the explanation about the source of funds in the hands of the partner. Hence we disagree with the order of the CIT (A) and accordingly direct to the AO to delete the addition made by him. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the Reopening of Assessment under sections 148/147.
2. Computation of Income from Property.
3. Addition of Income under section 68 as Unexplained Cash Credit.

Issue-Wise Detailed Analysis:

1. Legality of the Reopening of Assessment under sections 148/147:
The assessee contested the reopening of the assessment, arguing it was "bad in Law and void and Time Barred." They claimed the Assessing Officer (AO) did not record reasons for reopening and that no income had escaped assessment. However, this ground was dismissed as not pressed by the assessee during the hearing.

2. Computation of Income from Property:
The assessee, a partnership firm, let out properties and declared rental income under "business and profession." The AO found discrepancies in rent charged to related and unrelated parties, determining a fair rent for the related party's property at ?49,95,546. The CIT(A) reduced this to ?34,01,400. The ITAT upheld the CIT(A)'s decision, referencing a previous ruling where the rental income was taxed under "Income from House Property" rather than "Business and Profession." The ITAT also dismissed the assessee's argument that the CIT(A) enhanced the rental value without issuing a notice under section 251(2) of the Act, noting the adjustment was consistent with the fair market rent increase.

3. Addition of Income under section 68 as Unexplained Cash Credit:
The AO added ?38,23,000 to the assessee's income as unexplained cash credit, questioning the source of funds contributed by a partner. The CIT(A) upheld this addition. However, the ITAT reversed this decision, citing that the firm had disclosed the partner's capital contribution in its balance sheet. The ITAT referenced the Gujarat High Court ruling in PCIT vs Vaishnodevi Refoils & Solvex, which held that the firm is not liable to explain the source of funds in the partner's hands. The ITAT directed the AO to delete the addition, emphasizing that any inquiry regarding the source should be made with the partner individually.

Conclusion:
The appeal was partly allowed, with the ITAT upholding the computation of rental income as "Income from House Property" and directing the deletion of the addition under section 68. The judgment reinforces the principle that a firm is not responsible for explaining the source of a partner's capital contribution.