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Facts
The assessee, a limited liability partnership, filed a return showing a loss. The Assessing Officer (AO) made additions regarding capital contribution and advances under Section 69 of the Income Tax Act, which were confirmed by the CIT(A). The assessee challenged these additions before the Tribunal.
Held
The Tribunal held that the AO and CIT(A) failed to appreciate the explanations and documents provided by the assessee regarding capital contribution and advances. The Tribunal found that the capital contribution and advances were genuine and should not have been added to the assessee's income.
Key Issues
Whether the additions made by the AO and confirmed by the CIT(A) under Section 69 of the Act on account of capital contribution and advances were justified. Whether the assessee's explanations and documentary evidence were adequately considered.
Sections Cited
68, 69, 36(1)(viia), 143(2), 115BBE
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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI. LAXMI PRASAD SAHU & SHRI. SOUNDARARAJAN K
Per Laxmi Prasad Sahu, Accountant Member :
This appeal filed by the assesseeisagainst the Order passed by the CIT(A) vide DIN and Order No.ITBA/NFAC/S/250/2024-25/1064855009(1) dated 14.05.2024, on the following grounds of appeal:
The learned Commissioner of Income Tax (Appeals) (hereinafter 1. referred as "CIT (A)" for brevity) has erred in passing the order in the manner passed by him and the order therefore is bad in law. The learned CIT(A) has erred in passing the order before the expiry 2. of time granted for submission of details. The learned CIT (A) has erred in passing the order without granting 3. for the personal hearing via video conferencing to explain further, specifically requested by the appellant.
Page 2 of 9 GROUNDS RELATING TO ADDING A SUM OF Rs.7,69,56,639 UNDER SECTION 68 OF THE ACT 4. The learned CIT(A) erred in confirming the addition of Rs.7,69,56,639 under section 68 of the Act. The section provides for treating any sum found credited in the books of an assessee as income, if the assessee offers no explanation about the nature and source of the same or the explanation offered by him is not satisfactory in the opinion of A.O.
5. The learned CIT(A) and AO erred in not appreciating the explanation and documents produced before them. CIT(A) ought to have appreciated the fact that the said amount was brought in by a Partner of the LLP. Partner is an assessee in the very same Circle. GROUNDS RELATING TO DISALLOWING A SUM OF Rs.1,15,00,000 UNDER SECTION 69 OF THE ACT 6. The learned CIT(A) erred in confirming the addition of Rs.1,15,00,000 under section 69 of the Act. The appellant had granted project advances over a period of time during earlier years. The appellant had made a provision for doubtful debts in its books. The said provision was added back to income in the computation of income. Thus the amount was already offered to tax. Yet the CIT(A) invoked section 69 and brought the amount of Rs 1,15.00,000 as income and taxed the same. Section 69 has no applicability at all.
The learnedCIT(A) and AO erred in not appreciating the explanation and documents produced before them. GROUNDS RELATING TO ADDING A SUM OF Rs.8,85,00,000 UNDER SECTION 69 OF THE ACT 8. The learned CIT(A) erred in confirming the addition ofRs.8,85,00,000 under section 69 of the Act.
9. CIT(A) ought to have considered the fact that this amount represents advances paid to 4 entitles through banking channels. Bank statements submitted have not been considered. It is apparent that funds were brought n by its Partner. This fact is admitted in the assessment order itself.
Page 3 of 9 10. The learned CIT(A) and AO erred in not appreciating the explanation and documents produced before them. Such as confirmation from the parties and the bank transactions.
The appellant further prays that a stay of collection of demand be granted till the disposal of appeal. The appellant is facings sevier financial difficulties and is not capable of making a payment of such a large sum as tax based on a deemed income which was never received by the appellant.
The appellant submits that each of the above grounds or sub-grounds are independent and without prejudice to one another.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal
at any time before or at the time of hearing of appeal, so as to enable the income tax appellate Tribunal to decide the appeal according to law.
2. Briefly stated, the facts of the case are that the case was selected for complete scrutiny assessment under the e-Assessment Scheme, 2019. The assesseefiled return of income on 03.10.2018 showing loss of Rs.45,711/- and notice under section 143(2) of the Act was issued to the assessee on 29.09.2019 through e-filing portal. The case was completed under Faceless Assessment Scheme, 2019. Further, other statutory notices were issued to the assessee and the assessee furnished reply stating that during the impugned Assessment Year there was no receipt and few statutory expenses have been debited into Profit and Loss A/c which has resulted loss to the assessee as audit fee of Rs.35,400/-, MCA filing fee of Rs.9,900/- and bank charges of Rs.411/- was incurred and submitted that the provision made for doubtful debts of Rs.1,15,00,000/- has been disallowed while filing return of income, it has been shown as disallowed by the assessee. From the details submitted, it was noted that the assessee is a limited liability partnership firm incorporated on 02.02.2011 having partners Hindustan Infrastructure Projects and Engineering Pvt. Ltd., (HIPEPL) aa domestic company and P. Vijayakumar and proprietor of NAVYA GEMS having share of Page 4 of 9 55% and 45% respectively. On comparison of balance sheet for two Assessment Years, the AO observed that there is increase in the partners’ capital by Rs.7,69,56,639/- and there is also increase in loans and advances for various purposes. The AO, in respect of capital contribution, noted supra, noted that partner HIPEPL (PAN No.AAACR 8981 Q) has infused a capital of Rs.24.98 Crore after adjusting current year loss. There is net capital of Rs.23.86 Crores on 31.03.2018. The company had transferred various receivables it had to the LLP and in lieu thereof the dues were treated as capital contribution. In this regard, the AO noted that the assessee has not furnished any documentary evidence in this regard. As per the assessee’s version, the partners HIPEPL had transferred various receivables to the LLP and in lieu of capital contribution and later on receivables were paid the amount in the bank accounts. The dues were treated as capital contribution. Further, the AO noted that the assessee has made provision for bad and doubtful debts of Rs.1,15,00,000/- and subsequently it has disallowed the same under section 36(1)(viia) of the Act while contributing the taxable income during the year. It was also noted that this provision of the Act is not applicable to the assessee and while preparing financial statements, this amount has been reduced from the loans and advances. The provision has been made under inappropriate provisions of the Act which are not applicable to the assessee. This provision bears effect of reducing assets side while in introduced in balance sheet. If this provision is ruled out from the balance sheet under head ‘loans and advances’ as submitted by the assessee, balance sheet will not be in tallying position. In this situation, the asset side shall bear value of Rs.1,15,00,000/- more than the liability side. It implies that there is certainly an asset worth Rs.1,15,00,000/- which has been kept out of books by the assessee and in order to reduce amount of such asset from asset side of balance sheet, the assessee has manipulated financial statements with no reasonable business rationale by introducing provision for doubtful advances. Accordingly, the AO made addition towards provisions made under section 69 of the Act. Further, it was noted that assessee has given advances to 4 various parties of Rs.8,85,00,000/- viz., to Page 5 of 9 M/s. Jyoti Trading of Rs.2,00,00,000/-, M/s. Dolphin Trading Co of Rs.2,00,00,000/-, M/s. Navya Gems of Rs.4,00,00,000/-, Siddi Diam of Rs.85,00,000/-. The banking statement was perused. On perusal of the same, it was noted that the amount was received from M/s. Hindusthan Infra. The credits received as such have no business rationale. Assessee has no revenue from operations. No such debtor or creditor has been shown by the assessee in Income Tax Return for Assessment Years 2017-18 and 2018-19. It was also noted that the capital contribution received from M/s. Hindusthan Infra who is partner, the credit received there from has no business rationale in view of the fact that the capital infused by the said partner in partners capital account is in lieu of settlement of receivables and hence the amount should be received through banking channel. The AO observed that the assessee is unable to prove the genuineness of the transaction beyond doubt. Accordingly, capital contribution of RS. 7,69,56,639 stands unexplained and added u/s 69 of the Act. He noted that it is just a treatment of accounting terms which requires necessary entries in books of accounts. The assessee has not provided any explanation in this regard so Rs.8,85,00,000/- stand unexplained and it was also added under section 69 of the Act. Accordingly, the income was determined at Rs.17,69,56,639/- and section 115BBE of the Act was invoked after adjusting loans for the current year.
3. Aggrieved from the above Order, assessee filed appeal before the CIT(A). Before the CIT(A), assessee filed detailed written submissions which is incorporated in the CIT(A)’s Order. After considering the entire submissions and finding of the AO, the learned CIT(A) dismissed the appeal of the assessee.
Aggrieved from the above Order, assessee filed appeal before the Tribunal.
The learned AR reiterated the submissions made before the lower authorities and he further submitted that the AO as well as learned CIT(A) both have not Page 6 of 9 seen the accounting entries made in the books of accounts. At one side, the AO has accepted that amount paid of Rs.8,85,00,000/- in bank account out of its partner’s contribution into the bank account is from the debtors which was infused as a capital contribution in the form of receivables. However, the sams amount has been advanced to four parties. In this regard, the learned Counsel relied on the agreements (MoU) made with the parties which is placed in the Paper Book produced during the course of proceedings before the Revenue authorities. The books of accounts have been audited in spite of that, the books of accounts were not considered. The advances were given towards purchase of properties. The AO has made addition towards the capital contribution during the year which has been arrived at after the adjustments of current year loss and he referred to the audited financial statement which is placed at Paper Book Page No.52 to 66. The AO has not doubted that the amounts credited in the bank account of the assessee is received from the partner. Further, he has added the capital contribution. The capital contribution was made through book entry and receivables were infused as capital contribution later on which was materialized (credited in the bank account). On verification of balance sheet there is no receivables found. He submitted that there is project advance of Rs. 14.99,33452/- after adjustment of Rs. 1,15,00,00 towards provision and current years advance for purchase of property is Rs. 8.85.00.000/-. Now in the balance sheet, there are no receivables. The advance was given for the purchase of the property of Rs.8,85,00,000/- out of the amount received from the receivables. Therefore, there should not be any doubt that the money has not been received from the partner. If the AO had any doubt regarding source of fund or credit worthiness, he could have examined the case of the partner separately. The addition made in the hands of the partnership firm (Appellant) is not correct. Further, the provision made towards for the advance of Rs.1,15,00,000/-. The provision was made on the prudential norms as decided by the management and while filing the return of income inadvertently, it was disallowed under section 36(1)(viia) of the Act. He also agreed that the provision of section 36(1)(viia) of Page 7 of 9 the Act is not applicable to the assessee but while making the computation of income, the assessee itself has disallowed. If the Revenue authority’s view is considered, it would amount to double taxation which is not permitted in the Income Tax Act. In support of his arguments, he relied on the following judgments:
CIT vs Orissa Corpn.(P.) Ltd [1986] 25 Taxman 80F (SC) CIT vs Sree Ganesh Trading Company [2019] 107 taxmann.com 130 (Kerala) Kumar Nirman Nivesh (P.) Ltd vs ACIT [2020] 121 taxmann.com 174 (Karnataka) Cornerstone Property Investments (P.) Ltd vs ITO [2023] 152 taxmann.com 256 (Karnataka) CIT vs Devesh Agarwal [2017] 81 taxmann.com 257 (Bombay) CIT vs Taj Borewells [2007] 291 ITR 232 (Madras) SmtVimladevi Parasmal Jain vs ITO [TS-66-ITAT-2025Mum]
On the other hand, the learned DR relied on the Order of the lower authorities and submitted that the assessee has itself disallowed under section 36(1)(viia) of the Act of Rs. 1,15,00,000/- which is not applicable to the case of the assessee. He also referred to Draft Assessment Order which is placed at Paper Book Page Nos.132 to 139 and submitted that the assessee is required maintain books of accounts as per Rule 24 of the LLP Rules, 2009. Section 34 of the LLP Act is also applicable to the assessee. However, it has not complied how the assessee is able to prepare its financial statement. He further submitted that the amount advanced to four parties in the impugned Assessment Year has been written off by the assessee without any basis. Assessee is trying to reduce its assets value by Rs.1,15,00,000/- without any basis. For rest things he relied on the order of the authorities below.
Page 8 of 9 7. In the rejoinder the ld. counsel submitted that the ld. AO has not disbelieved on the Audit report prepared by the independent auditor. The auditor has reported that the assessee has maintained proper books of accounts, as required by law, which have been examined. Therefore, the allegation made by the ld. AO regarding maintain of books of accounts are baseless.
After perusing both the Orders of the authorities below, we noted that M/s. HIPE Infrastructure Projects LLP is admitted as partner. The AO has made addition towards capital infused by way of receivables through book entry (journal entry) which was realized during the year and assessee has made advances out of the funds received from receivables. There is no doubt in the banking transactions and advances given to four parties. On verification of balance sheet there is no receivables found. We note that there is project advance of Rs. 14.99,33452/- after adjustment of Rs. 1,15,00,00 towards provision and current years advance for purchase of property is Rs. 8.85.00.000/-. Now in the balance sheet, there are no receivables which clearly indicates that the earlier whatever the receivables were recorded as capital contribution have been received by the assessee. Therefore, the capital contribution and making of advances are genuine and it is not required to be added in the assessee’s hands. If the AO had any doubt, he could have made addition in the hands of the partners but not in the hand of the assessee firm. Further, in respect of addition of Rs.1,15,00,000/- while computing the income, assessee itself has disallowed and further disallowance made by the Revenue authorities would amount to double addition for computing income. The income of the assessee is computed in the line of income tax provision but not on the accounting terms. Accordingly, we do not find any merits in the Order of the lower authorities. The addition made by the AO under section 69 of the Act of Rs.8,85,000/- is not justified also if the source is explained. Here in the case on hand, the source is explained by the assessee that amounts were received from the receivables of the partners which were credited in the books of accounts of the assessee as a capital contribution.
Page 9 of 9 Considering the totality of facts and circumstances of the case, the addition made by the AO and confirmed by the CIT(A) is not sustainable. The case law relied by the ld. counsel are supports the case of the asseseee.
In the result, appeal filed by the assessee is allowed.
Pronounced in the court on the date mentioned on the caption page.