In a recent ruling, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, dismissed the appeal filed by the Income Tax Department by Quashing the Additions of Rs.179 crore by stating that share of profit from LLP is exempted.
Arun Sangal, appellant-assessee, a medical professional, filed his returns for the Assessment Year (AY) 2018-19. The appeal concerned an addition of over Rs. 179 crore made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, alleging unexplained cash credits in the assessee’s hands.
The dispute arose when the AO noticed a substantial discrepancy between the assessee’s closing capital balance for AY 2017-18 and opening capital balance for AY 2018-19. The AO observed a difference of Rs. 183.99 crore, leading him to question the source of the increase.
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The assessee explained that the capital balance had increased due to his share of profits from a Limited Liability Partnership (LLP), Radius Township LLP, in which he was a partner. The profits accumulated over the previous two years were incorporated into his medical profession’s balance sheet for the first time.
The AO, however, remained unconvinced by the explanation, accepting only Rs. 4.4 crore of withdrawals from the LLP, while treating the remaining Rs. 179.59 crore as unexplained cash credit. This led to the addition of Rs. 179.59 crore under section 68 of the Act, invoking provisions of section 115BBE, which taxes unexplained income at a higher rate.
On appeal, the Commissioner of Income Tax ( Appeals ) CIT(A) reversed the AO’s decision. The CIT(A) concluded that the assessee had furnished adequate documentary evidence, including the detailed explanation of the capital account increase and supporting documents such as audited accounts and income tax returns of both the assessee and the LLP.
The assessee had also disclosed his share of profits from the LLP in previous years’ returns, and the income was exempt under section 10(2A) of the Act.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The CIT(A) emphasized that the capital balance increase was properly reflected in the medical profession’s balance sheet as a journal entry, and the income had already been assessed at the LLP level. Thus, the CIT(A) found no merit in the AO’s addition of Rs. 179.59 crore as unexplained cash credit.
During the ITAT proceedings, the Revenue failed to counter the arguments presented by the assessee, who had provided detailed evidence showing that the capital balance increase was legitimate and in accordance with tax laws. The ITAT upheld the findings of the CIT(A)-NFAC, agreeing that the addition was unwarranted.
The two member Bench comprising of Satbeer Singh Godara(Judicial Member) and M Balaganesh(Accountant Member) underscored the importance of maintaining transparency in financial disclosures and demonstrates the tax authority’s responsibility to adequately consider the facts and evidence before making additions to an assessee’s income.
This ruling provides significant relief to the assessee, setting a precedent in cases involving capital balances in partnerships and LLPs, particularly where the profits are exempt under section 10(2A).
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