2020 (5) TMI 188 - AT - Income Tax

Addition u/s 69 - deposit made into the partnership firm by partners - business had not commenced or just commenced - HELD THAT - As decided in SMT. PK NOORJAHAN 1997 (1) TMI 6 - SUPREME COURT where any assessee had not carried on any business activity, it cannot be presumed to have earned any income Assessee has not carried on any business activity and earned any income. In such circumstances, it could only have received capital contribution from the partners. Capital contribution by the partners cannot be treated as income of the assessee and if the partners are not able to explain the sources for their investment, the AO can only make the addition in the hands of the partners and not in the hands of the assessee firm. Further in the dissolution deed of the assessee firm dated 10/04/2000 also, there is a mention of the return of the capital and this deed is not disputed by the AO. Addition made in the hands of the assessee firm is not justified and, therefore, the said addition is deleted. - Decided in favour of assessee.

Summary

Issues:
Delay in filing appeal before Tribunal, Condonation of delay, Addition of unexplained investment by assessee firm, Assessment proceedings, Genuineness of capital contribution by partners, Treatment of capital contribution as unexplained income, Legal precedents on unexplained income, Dissolution of assessee firm.

Analysis:
1. Delay in filing appeal before Tribunal & Condonation of delay:
The assessee filed an appeal for the AY 1998-99 with a delay of 30 days, citing the Managing Partner's illness as the reason. The Tribunal, after considering the reasons, condoned the delay and admitted the appeal for hearing and adjudication.

2. Addition of unexplained investment by assessee firm:
The AO added &8377; 40 lakhs as unexplained investment by the assessee firm under section 69 of the IT Act. The CIT(A) confirmed the addition, leading to an appeal before the ITAT. The Tribunal found that the firm did not carry out any business activity except for the failed land purchase deal. Relying on legal precedents, the Tribunal held that unexplained income cannot be presumed if no business activity was conducted. The addition of &8377; 40 lakhs was deemed unjustified and deleted.

3. Assessment proceedings & Genuineness of capital contribution by partners:
The AO directed the assessee to provide material regarding the partners' investment for land purchase. Despite summons, the partners did not appear, leading to the assessment being completed. The Tribunal emphasized that if partners cannot explain their capital sources, additions should be made in their hands, not the firm's. The dissolution deed also confirmed the return of capital. The Tribunal allowed the appeal, deleting the addition of &8377; 40 lakhs.

4. Treatment of capital contribution as unexplained income & Dissolution of assessee firm:
The Tribunal highlighted that capital contributions from partners should not be treated as income for the firm, especially when no business activity was conducted. The dissolution deed further supported the return of capital. Consequently, the addition of &8377; 40 lakhs in the hands of the assessee firm was deemed unjustified and deleted.

In conclusion, the ITAT Hyderabad partially allowed the assessee's appeal, emphasizing the importance of genuine explanations for capital contributions and the treatment of unexplained income in cases of non-business activity. The decision was based on legal precedents and the dissolution deed of the assessee firm.