The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) ruled that no addition is permissible under Section 68 of the Income Tax Act, 1961, in the hands of the partnership firm but can only be examined in the hands of the individual partners.
The respondent / assessee, Samvatt Properties LLP , a Limited Liability Partnership Firm, filed its Return of Income for the Assessment Year 2016-17 on July 29, 2016, declaring nil total income. The case was selected for scrutiny assessment, and the Assessing Officer (A.O.) made an addition of ₹2, 62, 50,000/- as capital introduced by the partners. This amount was added as unexplained cash credit under Section 68 read with Section 115BBE of the Income Tax Act due to the assessee’s failure to substantiate the genuineness and source of the funds. Tax was demanded on this addition.
The assessee contested the addition by filing an appeal with the Commissioner of Income Tax (Appeals) [CIT(A)]. Upon reviewing the submissions and relevant case law, including a judgment from the High Court subsequently upheld by the Supreme Court, the CIT (A) arrived at several conclusions.
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The CIT (A) determined that the appellant firm had received capital contributions from its partners, who had acquired these funds via loans from either partners or external sources. These funds were channeled through banking transactions, thereby meeting the requirements of Section 68 of the Income Tax Act. The CIT (A) clarified that the firm was not obligated to account for the sources of these funds in the hands of the partners. Although it was noted that one partner had secured a loan through dubious transactions, the CIT (A) concluded that the firm was not liable for the actions of the partners and that any concerns should be directed towards the partners themselves rather than the firm.
D.K. Parikh, representing the assessee, provided a Paper Book containing submissions made before the lower authorities and a compilation of case laws. He argued that it is established law that no addition under Section 68 can be made in the hands of a partnership firm regarding capital contributions, as confirmed by the Gujarat High Court in PCIT vs. Vaishnodevi Refoils & Solvex. This position was affirmed by the Supreme Court through the dismissal of the Special Leave Petition (SLP) filed by the department. Therefore, the CIT (A)’s decision should be upheld, and the revenue’s appeal dismissed.
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Ms. Trupti Patel, representing the revenue, supported the A.O.’s order and requested its confirmation. However, she was unable to present any decisions favorable to the revenue.
The bench, comprising Makarand Vasant Mhadeokar (Accountant Member) and T.R. Senthil Kumar (Judicial Member), considered the materials on record and the CIT (A)’s decision, which included the relevant judgment from the Jurisdictional High Court. The Tribunal agreed with the CIT (A) that issues regarding the creditworthiness of partners should be examined in their individual cases rather than in the hands of the partnership firm. This perspective was supported by the Supreme Court’s dismissal of the revenue’s SLP.
The Tribunal found no merit in the revenue’s grounds of appeal and, therefore, upheld the CIT (A)’s decision. The appeal filed by the Revenue was accordingly dismissed.
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