The Visakhapatnam Bench of Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to delete the additions made under section 68 of the Income Tax Act,1961 confirming that the source of investment was adequately explained.
Aravind Reddy Devagiri, appellant-assessee, was a managing partner in M/s. A.R. Constructions, with a 75% profit share, and also held partnership interests in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. For the Assessment Year (A.Y.) 2017-18, he filed his income tax return on March 8, 2018, reporting a total income of Rs. 7,54,800.
During the assessment process, the AO observed that while the assessee had disclosed a capital balance of Rs. 48,53,245 in M/s. A.R. Constructions, he had not accounted for capital introduced in M/s. Lakshmi Cold Storage and M/s. Vigneswara Cold Storage. Specifically, his investments amounted to Rs. 1,45,64,960 and Rs. 86,64,883, representing his 40% partnership shares in these firms.
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Believing that income had escaped assessment under section 147, the AO issued a notice under section 148 on March 12, 2020, after receiving prior approval from the Joint Commissioner of Income Tax (JCIT).The assessee did not submit a revised return but responded to notices issued under section 142(1) of the Act.
Following an examination of these responses, the AO proceeded with additions, including Rs. 11,40,665 for cash introduced in the firm under section 68 read with section 115BBE, Rs. 24,50,000 for capital introduced, Rs. 1,94,99,178 for investments in the two firms, Rs. 1,40,000 as an additional investment, and Rs. 9,65,000 under section 56(2)(x) of the Act.
Challenging these additions, the appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], reiterating the submissions made to the AO. However, the CIT(A) dismissed the appeal, upholding the AO’s additions in their entirety. Aggrieved by the decision of the CIT(A), the assessee appealed before the tribunal.
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The assessee argued against the addition of Rs. 1,94,99,178 under section 68, explaining that the funds invested in two cold storage units came from M/s. A.R. Constructions, where he was a Managing Partner. The funds, totaling Rs. 1,24,55,600 and Rs. 86,64,883, were transferred from M/s. A.R. Constructions’ bank account and credited to the appellant’s capital account in each firm.
The two member bench comprising Duvvuru RL Reddy(Judicial Member) and S.Balakrishnan(Accountant Member) reviewed the evidence, including bank records and the sale certificate, and found that the funds were indeed transferred from M/s. A.R. Constructions for the cold storage purchases. Since the transactions were recorded both in the firm’s books and in the assessee’s capital accounts in the two firms, the tribunal concluded that the source of the investment was fully explained.
Accordingly, the tribunal directed the AO to delete the addition under section 68, allowing the appeal in favor of the assessee.
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