MAHANT CONSTRUCTION LLP,KANDIVALI WEST, MUMBAI vs. DY.COMMISSIONER OF INCOME TAX 24(1),MUMBAI, LALBAUG, MUMBAI

The Assessee has raised various grounds, which, in substance, challenge the confirmation of the addition of ₹3,40,55,000/-, made by the Assessing Officer under section 69A of the Act, in respect of capital contributions introduced by its partners.

In the instant case, the Assessee, an LLP engaged in the business of construction and real-estate development, filed its return of income declaring “NIL” income. During the assessment proceedings, the Assessing Officer noticed that capital aggregating to ₹3,40,55,000/- had been introduced by four partners, namely, Shri Umang M. Mehta, Shri Paras K. Doshi, Smt. Roopa S. Ajmera and Smt. Bhavna Ajmera.

The Assessee furnished confirmations of the partners and its bank statement reflecting the receipt of capital through banking channels. The Assessing Officer also issued notices under section 133(6) of the Act to the partners. However, except Shri Umang M. Mehta, the other partners did not respond directly to such notices. The Assessing Officer, therefore, held that the Assessee had failed to satisfactorily establish the identity and creditworthiness of the partners and the genuineness and source of the capital contributions. Consequently, the entire amount of ₹3,40,55,000/- was treated as unexplained money under section 69A of the Act.

During the appellate proceedings, the Assessee furnished further documentary evidence, including the returns of income, computations, balance sheets, PAN details, bank statements and capital accounts of the partners. The Ld. Commissioner forwarded the documents to the Assessing Officer and called for a remand report. Though the Assessing Officer examined the additional evidence, however, he objected to its admission under Rule 46A and also maintained that the immediate source of the capital contributions had not been satisfactorily established.

The Ld. Commissioner, after considering the remand report and the rejoinder filed by the Assessee, sustained the addition. The Ld. Commissioner principally observed that the amounts credited in the bank accounts of the partners had originated from certain third persons and that the Assessee had failed to establish the financial capacity of such persons and the commercial genuineness of the underlying transactions. The Ld. Commissioner further held that, even though the Assessing Officer might have referred to an incorrect provision, the addition could still be sustained under section 69A of the Act.

The Ld. Counsel for the Assessee submitted that the impugned amount represented partners’ capital, duly disclosed in the balance sheet, capital accounts and banking records of the Assessee. It was further submitted that the identity of all the partners stood established, the transactions were routed through banking channels and the relevant supporting documents had been furnished before the authorities below.

The Ld. Counsel further contended that section 69A of the Act applied only where the Assessee was found to be the owner of money, bullion, jewellery or other valuable article, which was not recorded in the books of account. In the present case, the capital contributions were disclosed and identifiable and, therefore, could not be regarded as unexplained money belonging to the Assessee. It was also submitted that the Assessee-LLP could not be required to establish the source of source of the partners’ funds.

On the contrary, the Ld. Departmental Representative relied upon the orders passed by the authorities below and submitted that the Assessee had failed to establish the creditworthiness of the partners and the genuine source of the substantial capital introduced by them.

We have heard the parties and considered the rival submissions and perused the material available on record. We observe that section 69A of the Act could be invoked, where the Assessee was found to be the owner of money, bullion, jewellery or other valuable article, which was not recorded in the books of account, if any, maintained by the Assessee, and no satisfactory explanation regarding its nature and source was offered. Thus, the foundational requirement for invoking section 69A was that the money should be found in the ownership or possession of the Assessee and should remain unrecorded or unexplained.

In the present case, the impugned amount was not found in the possession of the Assessee, as any unrecorded cash or money. On the contrary, it represented capital contributed by identified partners through banking channels. The amounts were reflected in the Assessee’s bank statement, balance sheet and respective partners’ capital accounts. Therefore, the nature of the receipts, namely, partners’ capital contribution, was never in dispute.

We further observe that the Assessee had furnished the confirmations, PAN details, returns of income, computations, bank statements, balance sheets and capital accounts of the partners. These documents established the identity of the contributors, the fact of transfer through banking channels and the recording of the amounts as partners’ capital. Though the authorities below entertained doubts regarding the immediate source of certain credits appearing in the partners’ bank accounts, however, no material was brought on record to demonstrate that the money actually belonged to the Assessee or that it had been routed back by the Assessee through the partners.

Thus, though the Assessing Officer was empowered to verify the source of funds in the hands of the partners and to take appropriate action in accordance with law, however, the addition in the hands of the Assessee could not be sustained merely because the Assessee was unable to conclusively establish the source, from which the partners themselves had obtained the funds, particularly when the primary documentary evidence furnished by the Assessee had not been proved to be false.

We further observe that for the assessment year under consideration, the Assessee was required to establish the identity and creditworthiness of the contributors and the genuineness of the transactions. The requirement to prove the source of source, in respect of loans or borrowings credited in the books of an Assessee, was introduced subsequently by the Finance Act, 2022, with effect from A.Y. 2023-24. Further, the proviso inserted by the Finance Act, 2012, relating to share capital and share premium, applied to closely held companies and not to an LLP assessed as a firm.

We also observe that the additional evidence furnished during the appellate proceedings was forwarded to the Assessing Officer, who had examined the same and submitted a detailed remand report. Therefore, the Revenue had sufficient opportunity to verify the documents, conduct enquiry from the partners and the concerned third parties and bring cogent adverse material on record. However, except drawing adverse inferences regarding the absence of loan agreements, interest, repayment terms or gift deeds, no independent material was brought on record to establish that the capital contributions were fictitious or represented the Assessee’s own unaccounted money.

The capital contribution by a partner to an LLP could not be tested entirely on the parameters of an independent commercial loan advanced by an unrelated lender. The absence of interest, security or formal repayment terms, by itself, could not establish that the capital contribution was non-genuine, particularly when the relationship of the contributors as partners and the movement of funds through their bank accounts were not disputed.

Further, the addition had specifically been made under section 69A of the Act. The essential ingredients of the said provision were not satisfied merely because the Assessing Officer was dissatisfied with the explanation regarding the source of funds in the hands of the partners. A reference to an incorrect provision might not, in every case, invalidate a lawful exercise of power, however, the substantive conditions of the provision, under which the addition was sustained, were necessarily required to be fulfilled.

We further observe that, merely because the notices issued under section 133(6) of the Act to the partners who had contributed capital remained unanswered, the addition could not be made, where the Assessee had duly discharged the initial onus cast upon it under the relevant provisions of sections 68 or 69 of the Act, as the case may be.As the Hon’ble Apex Court in CIT v. Orissa Corporation (P.) Ltd. (1986) 159 ITR 78 (SC), and the Hon’ble Jurisdictional High Court in Orchid Industries (P.) Ltd. (2017) 88 taxmann.com 502 and Creative World Telefilm Ltd. (2011) 15 taxmann.com 183, have also consistently held that, once the Assessee furnishes the names, addresses, PANs, confirmations, bank statements and other relevant documentary evidence establishing the identity and creditworthiness of the creditors and genuineness of the transactions, the initial burden cast upon it stands discharged. Though the creditors may not appear before the Assessing Officer, or may not be traceable at the addresses furnished, however, that fact alone could not justify the addition, particularly where the Revenue, despite having sufficient statutory powers and wherewithal, failed to conduct any meaningful enquiry or pursue the creditors further.

The Hon’ble Delhi High Court in CIT v. Dwarikadhish Investment (P.) Ltd. (2010) 194 Taxman 43 (Delhi), as well has also held that the onus is not static and, after the Assessee discharges its initial burden, the same shifts upon the Revenue, and the Assessee cannot ordinarily be required to prove the source of the source.

Thus, considering the peculiar facts and circumstances in totality, we reiterate that, as the Assessee had discharged the prima facie onus cast upon it, whereas the Revenue failed to bring any adverse material on record or to controvert the documents furnished by the Assessee, the addition of ₹3,40,55,000/- made under section 69A of the Act could not be sustained. Accordingly, the impugned order is set aside, and the Assessing Officer is directed to delete the addition.

In the result, the Assessee’s appeal is allowed.