The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that the Assessing Officer ( AO ) must probe the creditworthiness of the partners, not the firm, when capital contributions are in doubt.
J K Associates, appellant-assessee, did not file a return of income for AY. 2017-18. The AO found that the assessee had bought property worth Rs. 1 Crore in Financial Year 2016-17, but the source of the money was not explained. So, the AO started proceedings under Section 147 of the Act. The assessment was completed on 25.03.2022, with an addition of Rs. 1 Crore for the unexplained investment in the property.
The assessee, dissatisfied with the AO’s order, filed an appeal with the Commissioner of Income Tax ( Appeals ) [ CIT ( A ) ] who upheld the AO’s decision on the unexplained investment in the property and dismissed the appeal.
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The issue was about the Rs. 1 Crore addition made by the AO for unexplained investment in property. The assessee counsel explained that the investment came from capital contributions by 12 partners, with details and confirmations provided to the AO. He clarified that the partners withdrew funds from other firms and took loans to contribute.
The assessee counsel argued that the AO was wrong to add the amount in the firm’s hands, and if there were doubts, the addition should have been made in the partners’ hands, referencing a Gujarat High Court decision.
The tribunal considered the submissions and found that the assessee explained the property was bought with Rs. 1.10 Crores in capital contributions from 12 partners. The capital accounts, income tax returns, and bank statements of the partners were submitted. The assessee also explained that the partners made withdrawals from other firms and took loans to contribute.
The two member bench comprising T.R.Senthil Kumar ( Judicial Member ) and Narendra Prasad Sinha ( Accountant Member ) disagreed with the AO, who rejected the evidence as self-serving. It ruled that the funds came from the partners’ capital contributions, not from third-party loans.
It cited a Gujarat High Court decision Vaishnodevi Refoils & Solvex, stating that if the AO doubted the partners’ creditworthiness, the enquiry should be made with the partners, not the firm. Since the AO did not question the partners’ creditworthiness, the addition of Rs. 1 Crore was deleted, and the assessee’s grounds were allowed.
In short,the appeal filed by the assessee was allowed.
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