2023 (12) TMI 32 - HC - Income Tax

Addition u/s 68 - capital introduced by the partners - AO subsequently disallowed the interest paid to the partners on the capital introduced by them - burden of proof - assessment in hands of partners or firm? - As argued by appellant, the Hon ble ITAT has erroneously mis-interpreted the provisions of Section 68 and have also held taxing the credits by the partners in the hands of the assessee firm - Hon ble ITAT had reversed the order of the CIT (Appeals) holding that the appellant has not been able to provide sufficient material to establish the source of income of the partners who had invested in the appellant s partnership firm - HELD THAT - If in a proceeding u/s 68 of the Act, the assessee has been able to explain the sources of income, which in the instant case, the appellant had been stating that the capital investment made by the partners of the said firm is sufficient to meet the requirement under Section 68 of the Act. Thereafter, if at all, if the respondent-Department was not satisfied with the explanation, it was for them to have got it verified from the partners. Rather than still pursuing the matter before the appellant s partnership firm, which is otherwise impermissible. In the instant appellant having said that the capital investment is that made by the partners. Applying the aforesaid judicial precedents of M. Venkateshwar Rao 2015 (3) TMI 153 - ANDHRA PRADESH HIGH COURT , M/s. Nova Medicare 2023 (3) TMI 218 - TELANGANA HIGH COURT and Lovely Exports (P) LTD 2008 (1) TMI 575 - SC ORDER the burden now shifts upon the respondent-Department to get it counter verified from the partners from their books of accounts ascertaining whether such investments have been made or not. In the absence of such an enquiry/verification from the partners by the respondent-Department, the order of the Assessing Officer, as also the stand taken by the Hon ble ITAT would not be sustainable and the same deserves to be and is accordingly set aside/quashed. The order passed by the CIT (Appeals) stands affirmed. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of addition under Section 68 of the Income Tax Act, 1961.
2. Double taxation of credits in the hands of the firm and individual partners.
3. Disallowance of interest payment under Section 40(b) of the Income Tax Act, 1961.

Summary:

Issue 1: Validity of Addition under Section 68 of the Income Tax Act, 1961

The appellant, a partnership firm, filed its return of income for the assessment year 2014-2015. The Assessing Officer (AO) made an addition of Rs. 2,71,00,000/- and Rs. 54,50,207/- under Section 68 of the Act, citing unexplained credits from partners. The CIT (Appeals) reversed this addition, stating the firm is not required to explain the sources of the partners' capital contributions. The ITAT reversed the CIT (Appeals) order, reinstating the AO's additions. The High Court referenced Section 68, which requires the assessee to provide a satisfactory explanation for any credited sums. The Court cited precedents, including Commissioner of Income Tax v. M. Venkateshwar Rao and Commissioner of Income Tax v. Lovely Exports (P) LTD, establishing that the firm should not be taxed for partners' capital contributions if the sources are explained. The Court concluded that the burden of verifying the partners' sources lies with the respondent-Department, not the firm. Consequently, the AO's and ITAT's orders were set aside, affirming the CIT (Appeals) decision.

Issue 2: Double Taxation of Credits in the Hands of the Firm and Individual Partners

The appellant argued that taxing the credits in the hands of the firm results in double taxation, as the amounts were already taxed in the hands of individual partners. The Court agreed, noting that the firm had disclosed the partners' contributions, and the Department should verify the sources from the partners' accounts. The Court reiterated that taxing the firm for partners' contributions is impermissible, citing relevant judicial precedents. Thus, the addition under Section 68 was deemed unsustainable.

Issue 3: Disallowance of Interest Payment under Section 40(b) of the Income Tax Act, 1961

Although the appeal included a question regarding the disallowance of interest payment under Section 40(b), the appellant's counsel did not argue this point. Therefore, the Court did not address this issue in detail.

Conclusion

The High Court allowed the appeal, setting aside the AO's and ITAT's orders and affirming the CIT (Appeals) decision. The Court held that the firm is not required to explain the sources of partners' capital contributions, and the burden of verification lies with the Department. The appeal was allowed with no order as to costs, and any pending miscellaneous petitions were closed.