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Facts
The assessee, Claymine Microns LLP, filed its return for AY 2018-19, which was finalized accepting returned income. The Principal Commissioner of Income-tax (PCIT) invoked Section 263, alleging the assessment order was erroneous and prejudicial to revenue as the Assessing Officer (AO) did not conduct sufficient verification regarding capital introduced by partners. The PCIT specifically doubted the creditworthiness of 14 out of 28 partners who contributed a significant amount of capital.
Held
The Tribunal held that the assessee had discharged its primary onus under Section 68 of the Act by providing details of the partners' identity, creditworthiness, and genuineness of the transactions. The Tribunal noted that the AO had conducted independent inquiries, and the PCIT's observation that no explanations were provided was factually incorrect. Citing various High Court judgments, the Tribunal concluded that even if creditworthiness was not fully satisfactory, the capital contribution could not be taxed in the hands of the firm.
Key Issues
Whether the PCIT was justified in invoking Section 263 of the Income-tax Act for alleged inadequate verification of capital introduced by partners, when the AO had conducted inquiries and the assessee had provided supporting documents?
Sections Cited
143(3), 144B, 263, 68, 115BBE, 133(6), 142(1)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & DR. DINESH MOHAN SINHA
आदेश /ORDER Per, Dr. A. L. Saini, AM:
By way of this appeal, the assessee has challenged the correctness of the order dated 31.03.2024 passed by the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) under section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2018-19. Grievances raised by the assessee, which, being interconnected, will be taken up together, are as follows:
“1. On the facts and in the circumstances of the case as well in law, the Ld PCIT Rajkot has erred in law and in facts in holding that the assessment order dated 23.04.2021 for A.Y. 2018-19 has been passed by the Assessing Officer without making necessary examination/ verification/ enquiries and accordingly, the same is held to be erroneous in so far as it is prejudicial to the interest of Revenue.
2. That on the facts and the circumstances of the case and in law, the Ld PCIT Rajkot has erred in law and in facts in assuming jurisdiction in as much as Assessment 2018-19 Claymine Microns LLP vs. PCIT Order of AY 2018-19 passed u/s 143(3) of the Act dated 23.04.2021 is neither erroneous nor prejudicial to the interest of the revenue.
3. The appellant further reserves it’s right to add, alter, amend or modify any of the aforesaid grounds before or at the time of hearing of an appeal.”
The facts of the case which can be stated quite shortly are as follows: The assessee, (M/s Claymine Microns LLP) had filed its return of income for assessment year (A.Y.) 2018-19, on 29.09.2018, declaring total income of Rs. 40,510/-. The assessment was finalised u/s 143(3) r.w.s 144B of the Income- tax Act, 1961, on 01/04/2021, accepting returned income of Rs. 40,510/-.
Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), has exercised his jurisdiction under section 263 of the Income-tax Act, 1961. On perusal of case records, it was observed by ld PCIT that the assessee firm had introduced amount in the form of capital amounting to Rs.7,22,50,000/-, received from its 28 partners. On perusal of assessment records and after verification of bank statements, returns of income and computations, submitted by the assessee, during the course of the assessment proceedings, it was noticed that 14 partners (out of all the 28 partners) did not have enough credit worthiness to introduce amount of capital. In the present case, apart from filing of ITR, Bank Statement and Computations, no explanation of the 14 partners was available on record explaining the nature and source of their investment recorded in the books of assessee. The total capital introduced by such partners is Rs.4,77,74,600/-. The ld.PCIT noticed that assessment records reveal that the assessee has submitted details like, ITR, PAN, bank statement of all the partners. Other than these details no other details to prove creditworthiness of the investors have been filed. Further on perusal of the income shown by the above 14 persons and the capital introduced in the firm, it has been seen that the capital introduced is 6.55 times to 25.30 times of the return income shown by the partners. Therefore, it proves that these partners
Page 2 of 16 2018-19 Claymine Microns LLP vs. PCIT are not persons having capacity to introduce huge capital in the firm. During the assessment proceedings, the assessing officer should have carried out the investigation regarding the creditworthiness of such partners.Considering such facts, notice u/s 263 of the Act was by ld.PCIT issued, vide notice dated 04.03.2023 and duly served upon the assessee.
4. In response, to the notice under section 263 of the Act, the assessee submitted its reply, dated 11.03.2023, before the Ld. PCIT along with documentary evidences. The assessee submitted that in the absence of any income or existence of any source of income during the year under consideration, the impugned fresh capital received prior to the commencement of commercial operation and income generating activity cannot be regarded as unexplained/undisclosed income in the hands of the assessee- firm by invoking the provisions of section 68 of the Act. The decision taken by the A.O. during the assessment proceedings cannot be regarded as erroneous even on any different ground alleging inadequate verification/inquiries by the A.O. It is clearly evident from the assessment records that the A.O. had carried out independent inquiries by issue of notices u/s 133(6) of the Act and called for requisite explanations from all the 28 partners in pursuance thereof, all the 28 partners including the impugned 14 partners have duly responded and furnished the details as required by the A.O. The assessee submitted that during the course of assessment proceedings, the assessing officer had raised specific queries, vide notice u/s 142(1) dated 04.12.2020 with respect of the fresh capital contribution by the partners and in response thereto, assessee furnished a detailed submissions, vide letter dated 06.01.2021 and furnished complete details of partners as well as placed on records the third-party documentary evidences. The fresh capital introduced by the said 14 partners cannot be brought to tax in the hands of assessee -firm, even if the creditworthiness of the said partners or their explanations about source of the funds is not found to be Page 3 of 16 2018-19 Claymine Microns LLP vs. PCIT acceptable or satisfactory in view of the binding legal position settled for years by the Hon'ble jurisdictional Gujarat High Court in case of CIT vs. Pankaj Dyestuff Industries (dated 06.07.2005 in Tax Appeal No. 241 of 1993) [Page No. 69-77].
5.However, Ld. PCIT rejected the above contention/ reply of the assessee and held that as per the information available on record, during the year under consideration, total capital amounting to Rs.7,22,50,000/- has been introduced by its 28 partners. Out of the 28 partners, 14 partners did not have enough credit worthiness to introduce amount of capital. The total capital introduced by such partners is Rs. 4,77,74,600/-. Therefore, ld.PCIT was of the view that assessee’s case is a fit case for invoking section 263 of I. T. Act as the twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (i) it is prejudicial to the interests of the revenue are satisfied. Accordingly, the impugned assessment order passed by the A.O. u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961, on 23/04/2021 was set aside by ld PCIT for fresh assessment only to the extent of the issue discussed (supra).
6. Aggrieved by the order of the Ld.PCIT, the assessee is in appeal before this Tribunal.
Shri Hardik Vora, Learned Counsel for the assessee submitted that during assessment proceedings, the assessing officer issued notice u/s.142(1) of the Act, which is placed at paper book page no.26, wherein the assessing officer has raised relevant question, which is reproduced below:
“9. It is seen from the Balance sheet for the AY 2018-19 there is a substantial introduction of capital as compared to the corresponding previous year as under. Provide the details of the various categories of share capital as under: S.No. Share Capital AY 2018-19 AY 2017-18 Increase in capital 1 Authorized
2 Issued, subscribed and fully paid up 3 Subscribed but not fully paid 4 Share premium account Total 8. In response to the notice of the assessing officer, the assessee submitted its reply before the assessing officer, along with relevant annexures and documents, which is reproduced on Page No.30 of the paper book, which is as follows:
12. To substantiate the identity and creditworthiness of the above shareholders to whom shares were allotted during the year as well as the genuineness of the transaction, provide documentary evidence such as: Answer: Annexure-7 Assessee is LLP and proofs for creditworthyness of Partners are enclosed.
The Ld. Counsel for the assessee further submitted that during the assessment proceedings, the assessing officer also issued further notice u/s.142(1) of the Act, which is placed at paper book page no.9, asking the assessee to file the details of capital introduced. In response to the notice of the assessing officer, dated 19th April, 2021, the assessee filed the detailed reply before the assessing officer, which is reproduced below:
“In connection with above and in continuation to earlier replies, we submit the following further details/clarifications: 1. Your honour may kindly appreciate that the confirmations submitted by the assessee contains the details of partners i.e. the name of the party, details of amount received, amount repaid during the year along with the detailed address and pan number of the said party. Further the said capital were received and repaid by normal banking channel. Therefore considering the above mentioned facts and the submission the identity of the said party is clearly established and further the amount received and repaid is along through the banking channel and therefore the genuineness of the said loan transactions along with the creditworthiness is established beyond doubt.
2. Further due to Covid Pandemic and due to lockdown in Gujarat and Morbi, offices are closed. The assessee and its partners had great difficulties, in the process of getting the copies of ITR and Bank statement of the said partners. The assessee therefore requests your honour to kindly consider the above mentioned submission that the identity and genuineness and creditworthiness is proved beyond doubt.
3. Vide your notice dated 19.04.2021, as per para "c" your good self has stated that "Nine partners replied to notice u/s. 133(6) and provided the capital account, banks statement
Page 5 of 16 and income tax particulars." In the above connection, all the remaining 19 partners have replied to the 133(6) notice on 19.04.2021 & 20.04.2021 and have furnished their bank statement & ITR. Acknowledgements of all the 19 partners dated 19.04.2021 & 20.04.2021, as a proof of required documents asked u/s. 133(6), are being submitted in annexure A.
In this connection, remaining 19 partners have submitted their reply to the notice u/s. 133(6) (Acknowledgements for the dated 19.04.2021 & 20.04.2021 is submitted in annexure A). List of all the 19 partners mentioned above along with PAN, details of Capital and amount of capital received are being submitted in tabular format in Annexure B.
Vide your notice dated 19.04.2021, as per para "d" your good self has stated that "It can be clearly seen from the above table that out of 28 partners only 18 partners are filing return of income. In connection with the above, it is humbly submitted that all the 28 partners are filling their return of income. For all the 28 partners, last 2 years ITR details along with their date of filing of IT return and GTI are being submitted in tabular format in Annexure C.
Moreover, all the 28 partners have provided documentary evidence to substantiate the identity, creditworthiness and genuineness of transactions by furnishing the ITR of last 2 years with annual accounts of the partners. Similarly furnished partners capital account along with supporting of source of capital introduced by the partners.
7. Thus, as far as the introduction of capital by partners in the books of accounts of the LLP is concerned, we had furnished two years ITRs along with annual accounts of the partners which include the balance sheet as well. Thus, the source of the fund received in the hands of the LLP stand explained as all the three ingredients of section 68 of the Act i.e. Identity, Capacity and Genuineness of transition are discharged by the LL.P 8. Judiciaries have time and again held that the assessing authority should restrict the verification of cash credit received to the extent of verification of source/creditworthiness of creditor and not to verify the "source of source In this regard, reliance is placed on following decisions: (i) High Court of Gujarat in the case of CIT v. Pragati Co-operative Bank Ltd. 278 ITR 170,179 wherein vide para 18 has held that; "This court is in respectful agreement with the aforesaid principles. In the case of Deputy CIT v. Rohini Builders [2002] 256 ITR 360, this court has while dismissing the departmental tax appeal upheld the approach of the Tribunal based on the judgment of the Patna High Court that an assessee can be asked to prove the source of credit in the books but cannot be asked to prove the source of the source." (ii) Hon'ble High Court of Jharkhand in the case of Prayag Tendu Leaves Processing Co. v. CIT (2018) 400 ITR 120 (Jharkhand) In view of the fact the amount received from its partners RJ and AJ by account payee cheques or by bank drafts by the assessee firm, the department cannot ask the assessee-partnership firm about the source of income of RJ and AJ. The assessee firm can show the source of income of the partnership firm, but 'the source of source' cannot be shown by the assessee-firm. This aspect of the matter has been properly appreciated by the Tribunal, while allowing the appeal preferred by the assessee- firm. It appears that department has given a notice to assessee-firm giving details as to how RJ and AJ got cash and from whom. This is an error apparent on the face of the Page 6 of 16
record, the assessee-firm cannot explain 'the source of', source of income partnership firm. If the department wants to reopen the assessment of RJ and AJ, it is always permissible in eye of law subject to the restriction imposed by the Income-tax Act of limitation etc (iii) Hon'ble High Court of AP & Telangana in the case of CIT vs. M. Venkateswara Rao (2015) 279 CTR 313 Even otherwise, it is evident that the respondent explained the amount of Rs. 76,57,263 as the contribution from its partners. That must result in a situation, where section 68 of the Act can no longer be pressed into service. However, in the name of causing verification under section 68 of the Act, the Assessing Officer has proceeded to identify the source for the respective partners to make that contribution. Such an enquiry can, at the most be conducted against the individual partners. If the partner is an assessee, the concerned Assessing Officer can require him to explain the source of the money contributed by him to the firm. If, on the other hand, the partner is not an assessee, he can be required to file a return and explain the source. Undertaking of such an exercise, vis-a-vis the partnership firm itself, is impermissible in law. (iv) Hon'ble High Court of Gujarat in the case of Pr. CIT vs. Vaishnodevi Refoils&Solvex (2018) 253 Taxman 135 (Gujarat) When the assessee has furnished the details with regard to the source of the capital introduced in the firm and the concerned partner had confirmed such contribution, the assessee had duly discharged the onus cast upon it. Thereafter, if the Assessing Officer was not convinced about the creditworthiness of the partner who had made the capital contribution, the inquiry had to be made at the end of the partner and not against the firm. (v) Hon'ble High Court of Gujarat in the case of DCIT vs. Rohini Builders However, in respect of all the 21 creditors the assessee has furnished their complete addresses along with GIR numbers/permanent account numbers as well as confirmations along with the copies of assessment orders passed in the cases of creditors at serial Nos. 1, 2, 4, 5, 6, 7, 9, 10, 11, 12 and 16. In the remaining cases where the assessment orders passed were not readily available, the assessee has furnished the copies of returns filed by the creditors with the Department along with their statement of income. All the loans were received by the assessee by account payee cheques and the repayments of loans have also been made by account payee cheques along with the interest in relation to those loans. It is also pertinent to note that in respect of some of the creditors the interest was credited to their accounts/paid to them after deduction of tax at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the Assessing Officer. (vi) Hon'ble High Court of Gujarat in the case of Pr.CIT v. Veer Gems 2018 TaxPub(DT) 261 (Guj-HC) Assessing officer made disallowance on account of unexplained capital introduced by partners. Tribunal noted that assessee had filed tax details of all the partners and that assessing officer had not disputed that the credits in the accounts of the partners were not deposits from the partners. Thus, Tribunal deleted the addition in the hands of the firm and contended that if anything remained unexplained, the addition could only be made in the hands of the partners. Following the ration of decision of High Court in Pankaj Dyestuff Industries rendered in Tax Appeal No.241 of 1993, wherein
Page 7 of Claymine Microns LLP vs. PCIT it was held that when the unexplained capital was introduced by the partners, such unexplained addition could only be made in the hands of the partner, thus, Tribunal was justified in deleting the addition made in the hands of assessee firm.
9. In view of the above, primary onus casted on the assessee firm in terms of the provision of Section 68 of the Act, i.e., to prove the identity and creditworthiness of the depositor (partner) as well as genuineness of transaction has duly been discharged.
However, without prejudice to the above, as regards to substantiate the source of funds in the hands of the partners as desired, it is submitted that the partners have separately vide notice u/s 133(6) of the Act had been asked to substantiate. Since the task was voluminous and as mentioned above due to Covid Pandemic and due to lockdown in Morbi and Gujarat, offices are closed, and could be submitted only on 19.04.2021 & 20.04.2021.
11. It is pertinent to mention here that the assessee's financial activities and office is in Gujarat region. Hence, decision taken by the Hon'ble High Court of Gujarat in various cases should be taken for consideration, which justify the assessee's case to prove the identity and creditworthiness of partner as well as genuineness of transaction has duly been discharged.” 10.Therefore, Ld. Counsel for the assessee contended that during the assessment proceedings, the assessing officer conducted sufficient enquiry by issuing two notices and in response to these notices, the assessee submitted its reply before the assessing officer along with documentary evidences and after considering the reply of the assessee, the assessing officer has framed the assessment order, therefore, order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the Revenue. Hence, the jurisdiction exercised by the Ld.PCIT u/s.263 of the Act should be quashed.
On the other hand, Ld. CIT.DR for the Revenue submitted that assessing officer has not conducted proper enquiry and the assessee has not submitted the Bank Statement in respect of the some of the partners. Besides, the issue involved under consideration, is complex and critical, therefore, the assessing officer, should have conducted further enquiry during the assessment proceedings which he has failed to do so. Therefore, to that extent the order passed by the assessing officer is erroneous and prejudicial to the interest of the Revenue.
Page 8 of Claymine Microns LLP vs. PCIT 12. In rejoinder, Ld. Counsel for the assessee submitted that during the assessment proceedings, before the assessing officer, the assessee has submitted Balance Sheet, Profit and loss account, Income tax Returns, PAN Number, name and address, and Confirmations etc, which has also been acknowledged by the Ld.PCIT in para 2.2 of the order of the Ld.PCIT u/s.263 of the Act dated 31st March, 2024, which is reproduced below: “2.2 The records reveal that the assessee has submitted details like ITR, PAN, bank statement of all the partners.”
Therefore, ld.Counsel stated that in fact the assessee has submitted the return of income and bank statement of all the partners and the assessing officer having examined all these evidences, framed the assessment, therefore, the order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the Revenue.
We have carefully considered the facts of the case, the submission of the Learned Counsel for the assessee and ld DR for the Revenue and evidences on record. We find that case of the assessee, under consideration was taken-up for the complete scrutiny through CASS mainly for the reason of verification of the fresh capital introduced during the year. We note that during the course of assessment proceedings, the assessing officer had raised specific queries, vide notice u/s 142(1) dated 04.12.2020, with respect of the fresh capital contribution by the partners and in response thereto, assessee furnished a detailed submissions, vide letter dated 06.01.2021 and furnished complete details of partners as well as placed on records the following third-party documentary evidences:
(a)A chart showing complete details of partners such as Name, Address, PAN and their income details (b)A copy of PAN Card of the partners (c )A copy of Capital Accounts of the Partners
Page 9 of 16 2018-19 Claymine Microns LLP vs. PCIT (d )A copy of contra-confirmation accounts from the partners duly confirming investments in the capital of assessee- firm. (e )A copy of bank statements/passbook and bank books of the partners showing capital contribution and source thereof. (f )A copy of return of income and computation of income of the partners for the years A.Y. 2018-19, 2017-18 & 2016-17 (g)A copy of annual accounts of partners including Balance- Sheet wherever applicable, duly admitting the capital contribution in the assessee- firm for F.Y. 2017-18, 2016-17 & 2015-16.
Thereafter, we note that assessing officer had issued a specific show-cause notice on 19.04.2021, proposing addition of Rs. 4,89,50,000/-u/s 68 r.ws. 115BBE in respect of capital contribution by the 19 partners who failed to respond to the notices issued u/s 133(6) of the Act and doubting their creditworthiness in view of low income. In response to the above show-cause notices, the assessee has furnished detailed submissions vide letter dated 21.04 2021 and categorically objected to proposed addition of Rs. 4,89,50,000/- u/s. 68 r.w.s. 115BBE by mainly submitting that the said 19 partners have also compiled with the notices issued u/s 133(6) on 19.04.2021 and 20.04.2021 and thereby, duly explained the factum of their capital contribution and in view of binding judicial pronouncements of Hon'ble jurisdictional Gujarat High Court in case of CIT vs. Pankaj Dyestuff Industries (dated 06.07.2005 in Tax Appeal No. 241 of 1993) wherein it was held that in the absence of any material to indicate that there were profits of the firm, the amount credited to the partners’ accounts could not be assessed in the hands of the firm. Once the partners have owned that the monies deposited in their accounts are their own, the Income Tax Officer is entitled to and may proceed against the partners and assess the same in their hands, if their explanation is not found satisfactory, the capital
We note that main allegation of Ld.PCIT was that assessing officer did not make adequate inquiries with reference to the capital contribution by partners. We find that it is not at all disputed anywhere that the assessing officer has called for requisite documents and carried out independent inquiries as deem fit, in respect of the capital contribution by the partners which were duly placed on records by the assessee- firm and after the due verification and considering the binding legal position, the assessing officer accepted the factum of capital contribution by partners. It is a very well settled position under the law that while making assessment, the assessing officer made an inadequate enquiry, that by itself, would not empower exercise of powers u/s 263 of the Act and it is only in cases of lack of inquiry, the actions can be taken u/s. 263 of the Act. Therefore, we note that the proposed revision proceedings u/s 263 of the Act is merely by distrusting creditworthiness of partners, while the identity of partners and factum of capital contribution by them remained undisputed and that it is not a case where partners are fictitious and nothing brought on record to establish that the amounts brought in by partners represented income of assessee -firm.
We note that in respect of impugned 14 partners out of total 28 partners, the identity of partners as well as the factum of their capital contribution is nowhere disputed by ld.PCIT. The ld.PCIT doubted only their creditworthiness. In fact, the identity of the said 14 partners and factum of their capital contributions can never be under dispute in view of the detailed examination carried out by the Ministry of Corporate Affairs (MCA) at time of incorporation and third-party documentary evidences already available on the records. We note that the said 14 partners are not fictitious and there is not a single evidence on records to Page 11 of 16 2018-19 Claymine Microns LLP vs. PCIT conclude that the amounts brought in by these partners were actually income of the assessee- firm. We note that the observation of ld.PCIT that no explanation of these 14 partners is available on record is factually incorrect and in direct contradiction to the assessment records itself. In fact, it is clearly evident from the assessment records that the A.O. had carried out independent inquiries by issue of notices u/s 133(6) of the Act and called for requisite explanations from all the 28 partners in pursuance thereof, all the 28 partners including the impugned 14 partners have duly responded and furnished the details as required by the A.O. Therefore, the impugned 14 partners have duly responded, during the assessment proceedings and to prove this fact, the information pertaining to 14 partners are reproduced below: Compliance to Notices u/s. 133(6) before Compliance on 19/20.04.2021 in response to issuance of SCN Notices u/s. 133(6) Kevinbhai Ravjibhai Patel Akashbhai Maheshbhai Moradiya Nileshbhai Bhanjibhai Kavar Amrutlal Ruganathbhai Detroja Pradyumanbhai Ratilal Patel Ashokbhai Rugnathbhai Detroja Ramilaben Jayasukhbhai Mendapara Dalpatbhai Rugnathbhai Detroja Ravjibhai Amababhai Ughareja Pankajbhai Durlabhjibhai Barasara Upendrabhai Nanjibhai Kaila Rajnibhai Dharmsibhai Mordiya Savanbhai Pravinbhai Khokhani Savitaben Amrutlal Detroja Thus, all the said 14 partners have furnished their explanations in response to notices u/s. 133(6) of the Act, and therefore, impugned observation of ld.PCIT is factually incorrect and misplaced. In fact, the service of notices u/s 133(6) of the Act as well as compliance by the partners in response thereto clearly proved the identity of the partners which is also not disputed by ld.PCIT. Further, the undisputed third-party documentary evidences such as contra-confirmations, bank statements, Balance Sheets and return of income of the partners clearly established the genuineness as well as factum of capital contribution by them beyond any doubts.
The above being the position, the fresh capital introduced by the said 14 partners cannot be brought to tax in the hands of assessee -firm, even if the Page 12 of 16 2018-19 Claymine Microns LLP vs. PCIT creditworthiness of the said partners or their explanations about source of the funds is not found to be acceptable or satisfactory in view of the binding legal position settled for years by the Hon'ble jurisdictional Gujarat High Court in case of CIT vs. Pankaj Dyestuff Industries (dated 06.07.2005 in Tax Appeal No. 241 of 1993) [Page No. 69-77] wherein it has been clearly held that:
13.It is not the case of the revenue that the partners of the assessee- firm are fictitious. The Income Tax Officer has not disputed that the credits in the accounts of the partners were not deposits from the partners. Moreover, it is an admitted position that this was the second year of the firm, and that it was running in loss. It is true that the Income Tax Officer did not accept the explanation given on behalf of the assessee in respect of the new deposits or cash credits in the accounts of the partners. The mere non-acceptance of that explanation does not, however, provide material for finding that the said sum represented income of the assessee- firm. As held by the Allahabad High Court in case of Commissioner of Income Tax, Allahabad vs. Jaiswal Motor Finance (supra), in the absence of any material to indicate that there were profits of the firm, the amount credited to the partners’ accounts could not be assessed in the hands of the firm. Once the partners have owned that the monies deposited in their accounts are their own, the Income Tax Officer is entitled to and may proceed against the partners and assess the same in their hands, if their explanation is not found satisfactory.
We note that the above binding legal position propounded by the Hon'ble jurisdiction Gujarat High Court (supra) has been consistently followed by the Hon'ble High Court in subsequent judgments as well as by the Hon'ble jurisdictional Rajkot ITAT and the addition of fresh capital introduced by the partners were deleted. In addition to this, on the similar and identical facts, the issue under consideration is covered in favour of the assessee by the following direct judicial pronouncements:
(a)Hon'ble Gujarat High Court in case of PCIT vs. Vaishnodevi Refoils & Solvex-89 taxmann.com 80-, and SLP dismissed by the Hon'ble Supreme Court vide judgment reported at 96 taxmann.com 469. (b)Hon'ble Gujarat High Court in case of CIT vs. M/s. Ashirwad Construction decision dated 18.01.2010 in Tax Appeal No. 1898 of 2008. (c ) Hon'ble Gujarat High Court in case of CIT vs. M/s Raj Containers, decision dated 31.01.2012, in Tax Appeal No. 2496 of 2010.
Page 13 of 16 2018-19 Claymine Microns LLP vs. PCIT (d)Hon'ble Rajkot ITAT in case of Odedara Construction dated 31.08.2012 in by Hon'ble Gujarat High Court in 362 ITR 338. (e) Hon'ble Rajkot ITAT in case of ITO vs. Vinayak Developers - decision dated 20.01.2012 in ITA No. 69/R/1/2011. (f )Hon'ble Rajkot ITAT in case of ITO vs. Rhynothermopack Industries- decision, dated 19.03.2018, in ITA No. 607-608/R/1/2012.
In view of the above binding legal position consistently approved by the Hon'ble jurisdictional Gujarat High Court and Rajkot ITAT, we find that even in the situation when the creditworthiness or explanations of the partners are not found to be acceptable or satisfactory, the partners’ capital contribution cannot be taxed in the hands of the assessee- firm. Therefore, the proposed revision u/s 263 of the Act in the hands of assessee- firm is completely unjustified and in direct contradiction to the legal position settled by the Hon'ble jurisdictional Gujarat High Court.
We also note that by following the aforesaid legal position settled by the Hon'ble jurisdictional Gujarat High Court, in the identical situation of exercising revisionary powers u/s 263 of the Act by questioning the partners' capital contribution in the hands of the assessee- firm, recently, Hon’ble jurisdictional Rajkot ITAT in case of Lexico Ceramics vs. PCIT-1, Rajkot (decision dated 12.05.2023 in quashed the revision order u/s 263 of the Act. We note that ld.PCIT has merely compared the capital contribution by the said 14 partners with their total taxable income as per return of income. At the same time, ld.PCIT has completely lost the sight from substantial amounts of exempt income reported by partners in their return of income. However, we note that the creditworthiness of a person is required to be judged from the bank statement and Balance Sheet and not only from the income reported in the return of income. It is an undisputed fact that the said
Page 14 of 16 2018-19 Claymine Microns LLP vs. PCIT 14 partners had sufficient balance available in their bank statements and funds in their Balance Sheet while making capital contribution in the assessee- firm which clearly proves their creditworthiness for capital contribution. If this contention or yardstick as adopted by ld.PCIT is accepted, then the persons with lower income/loss in a particular year can never enter into any investment transactions in the said year which is highly incongruence and chaotic proposition. Reliance is placed on the judgement of Hon'ble Delhi High Court in case of CIT vs. Ms. Mayawati (12) taxmann.com (306) wherein it has clearly held that: "The capacity of any person does not mean how much he earns monthly or annually, but the term capacity is a wide term and that can be perceived by how wealthy he is."
Therefore, we note that since the identity of the partners as well as factum of capital contribution by them remained undisputed and that it is not a case that the partners are fictitious and nothing brought on record to establish that the amounts brought in by partners represented income of assessee- firm, there remains no scope to draw any adverse inference in the hands of the assessee- firm. In the conclusion, we are of the view that none of the reasons set out by the PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of the PCIT has to be quashed for the reason that order of the AO sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the AO ought to have made in the given facts and circumstances of the case. We accordingly quash the order u/s 263 of the Act and allow the appeal of the assessee.
Order is pronounced in the open court on 11/03/2026.