2024 (3) TMI 420 - AT - Income Tax

Unexplained cash credit u/s 68 - Bogus capital introduced by the partners of the assessee-firm - as per CIT(A) Agriculture income shown by the partners was highly inflated and actually there was not enough income to justify the capital introduction - HELD THAT - The identity of the partners was not doubted. We have also noted the fact that these partners have confirmed having introduced aforestated capital in the assessee-firm. Where the identity of the partners was not doubted and partners had confirmed introduction of capital in the assessee-firm during the year, the issue stands covered by the decision of Pankaj Dyestuff Industries 2005 (7) TMI 601 - GUJARAT HIGH COURT wherein held that addition, if any, in such circumstances ought to have been made in the hands of the partners alone who had owned up the money introduced as capital as belonging to them but failed to prove their creditworthiness. Even otherwise we find that the returns filed by these partners prove their creditworthiness since the income though returned as agricultural income was not accepted by the department in toto but the portion not accepted was treated as income from other sources of these partners. Thus the quantum of income returned by these partners was accepted by the Revenue albeit under different head of income. Thus there can be no case of the Revenue now to hold that creditworthiness of the partners is not proved on account of their agricultural income not being accepted by the Revenue. Thus we hold that the addition made to the income of the assessee as unexplained capital of partners, is not sustainable and the same is therefore directed to be deleted. The ground no.2 is allowed. Adhoc disallowance of expenditure incurred by the assessee - assessee contended before us that in the preceding year in the case of the assessee, the disallowance had been restricted to Rs. 1,50,000/-, and he pleaded for relief accordingly in the present case also - HELD THAT - DR was unable to controvert the above contention of the Ld.CIT(A). Thus we direct the AO to restrict the expenditure to Rs. 1,50,000/-. Decided partly in favour of assessee.

Summary

Issues involved:
The judgment involves issues related to the assessment order under section 143(3) of the Income Tax Act, 1961 and the addition of fresh capital by partners treated as unexplained cash credit under section 68 of the Act. The judgment also deals with the ad-hoc disallowance of expenses claimed by the assessee.

Issue 1 - Assessment Order under Section 143(3):
The appeal was filed against the order passed by the Ld. Commissioner of Income-Tax (Appeals) pertaining to Assessment Year 2012-13. Ground no.1 challenging the assessment order was dismissed due to lack of specific arguments.

Issue 2 - Addition of Fresh Capital by Partners:
The challenge in this issue was to the addition made to the income of the assessee, confirmed by the Ld. Commissioner of Income-Tax (Appeals), of Rs. 1,20,00,000 on account of treating the capital introduced by the partners as unexplained cash credit. The partners failed to prove the credit-worthiness and genuineness of the transactions, resulting in the addition being confirmed.

The partners introduced a total of Rs. 1.20 crores into the firm, but the assessee failed to prove the genuineness and credit-worthiness of the transactions. Despite submitting various documents, including the partners' income details, the AO and Ld.CIT(A) found discrepancies in the partners' agriculture income, leading to the confirmation of the addition.

The Tribunal held that the addition was not sustainable as the partners' creditworthiness was proven through their income tax returns, even though the department did not fully accept their agricultural income. The decision of the Hon'ble Gujarat High Court in a similar case supported the deletion of the addition, emphasizing that any addition should have been made in the hands of the partners, not the firm.

Issue 3 - Ad-hoc Disallowance of Expenses:
The issue pertained to the ad-hoc disallowance of expenses claimed by the assessee. The AO made a disallowance of Rs. 1,00,00,000, which was reduced to Rs. 50,00,000 by the Ld.CIT(A). The assessee argued for a restriction to Rs. 1,50,000 based on the treatment in the preceding year, which was accepted by the Tribunal.

The Tribunal directed the AO to restrict the expenditure to Rs. 1,50,000, partially allowing the appeal on this ground. Overall, the appeal of the assessee was partly allowed in the judgment pronounced on 23rd February 2024 at Ahmedabad.