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Facts
The assessee, a real estate business, filed a return declaring Nil income. The Assessing Officer (AO) treated capital introduced by partners amounting to Rs. 3,26,91,139/- as unexplained money under Section 69A of the Income Tax Act, 1961, adding it to the firm's income. The CIT(A) upheld the AO's order.
Held
The Tribunal held that the addition made by the AO was unsustainable. It was observed that the partners made substantial payments from their bank accounts for land purchase, which were reflected in sale deeds and credited to their capital accounts. The Tribunal also noted that the "source of the source" requirement under Section 68 of the Act was not applicable retrospectively to the assessment year 2017-18.
Key Issues
Whether the capital introduced by partners in the firm can be treated as the firm's unexplained income when the partners themselves have provided the source of funds, and whether Section 68 of the Income Tax Act is applicable retrospectively.
Sections Cited
69A, 115BBE, 143(3), 143(2), 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘A ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Madhusudan Sawdia
(िनधा�रण वष�/Assessment Year: 2017-18) SPA Constructions Vs. Income Tax Officer HYDERABAD Ward 8(1) PAN:ADFFS5436E Hyderabad (Appellant) (Respondent) िनधा��रती �ारा/Assessee by: Advocate S. Rama Rao राज� व �ारा/Revenue by:: Shri Ranjan Agrawala, Sr. DR सुनवाई की तारीख/Date of hearing: 20/11/2025 घोषणा की तारीख/Pronouncement: 28/11/2025 आदेश/ORDER Per Madhusudan Sawdia, A.M.: This appeal is filed by SPA Constructions (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 14.06.2025 for the A.Y 2017-18.
The assessee has raised the following grounds of appeal:
“1) The order of learned CIT (A) is erroneous both on facts and in law. 2) The learned CIT (A) erred in confirming the order of the Assessing Office in making addition of Rs.3,26,91,139/- 3) The learned CIT (A) ought to have seen that the appellant established sources for the introduction of capital of Rs.3,26,91,139/- by the partners ( Sri Y. Anand Rao Rs.1,00,13,222; Sri K.V. Prasad Rao Rs.1,10,05,965 and Sri M. Subbaiah Rs.1,16,71,952) and that, therefore, the learned CIT (A) ought to have held that no addition on this account should have been made; 4) The learned CIT (A) ought to have considered the fact that during the year under consideration no business was carried on by the appellant and that, therefore, no such addition can be made by the Assessing Officer. 5) The learned CIT (A) ought to have considered the various submissions and evidences submitted and held that no such addition can be made for the year under consideration and ought to have deleted the addition made by the Assessing Officer. 6) The learned CIT(A) ought to have seen that capital introduced by partners cannot be added when the introduction is confirmed by the partners 7) Any other ground/grounds that may be urged at the time of hearing”.
The brief facts of the case are that the assessee is a partnership firm engaged in the real estate business. The assessee filed its return of income for the assessment year 2017–18 on 09.01.2018 declaring total income at Rs. Nil. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (“the Act”) dated 17.08.2018 was issued by the Learned Assessing Officer (“Ld. AO”). During the assessment proceedings, the Ld. AO observed that the assessee
Page 2 of 10 had purchased two pieces of land during the year and that the partners had introduced capital amounting to Rs.3,26,91,139/- into the firm. The Ld. AO called for details of the land purchased and evidence substantiating the genuineness of the capital introduced by the partners, including their identity and creditworthiness. After examining the submissions, the Ld. AO held that the assessee failed to satisfactorily explain the capital introduced by the partners and treated the same as unexplained money under section 69A of the Act, read with section 115BBE of the Act. Assessment was completed by Ld. AO under section 143(3) of the Act on 27.12.2019 assessing total income of the assessee at Rs.3,26,91,139/-.
Aggrieved with the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT (A). The Ld. CIT(A), concurring with the view of the Ld. AO, dismissed the appeal of the assessee.
Aggrieved with the order of the Ld. AO, the assessee is in appeal before this Tribunal. The Learned Authorized Representative (“Ld. AR”) submitted that the only issue involved in the appeal of the assessee relates to the addition of Rs.3,26,91,139/- made on account of capital introduced by the partners. He submitted that partner Shri Y. Anand Rao introduced Rs.1,00,13,222/-, Shri K.V. Prasad Rao introduced Rs.1,10,05,965/- and Shri M. Subbhaiah introduced Rs.1,16,71,952/- during the year. Referring to para no. 5 of the assessment order, the Ld. AR submitted that the Ld. AO incorrectly held that the entire capital introduced by partners was Page 3 of 10 not reflected in the account of the firm. He invited our attention to both the registered sale deeds for purchase of land placed at page nos. 18 to 43 of the paper book, especially page nos. 22, 31 and 33, which demonstrate the details of payments made to Smt. D. Poojitha (“seller”) towards purchase of land. He also referred to partners’ capital accounts placed at page nos. 44, 76 and 114 of the paper book and bank statements of the Partners placed at page nos. 51 to 58, 87 to 96 and 127 to 132, demonstrating that the partners made direct payments to the seller of land on behalf of the firm and the firm appropriately credited their capital accounts through journal entries. Thus, the finding of the Ld. AO that only a portion of the capital introduced has been come to the account of the firm is factually incorrect. The Ld. AR then referred to para nos. 5.1 to 5.3 of the assessment order wherein the Ld. AO alleged that the partners lacked creditworthiness on the basis of low income declared in their income-tax returns for AYs 2016–17 and AY 2017–18. In this regard, the Ld. AR invited our attention to the details submitted by the partners containing the date wise payments made by the partners along with the sources of such payments place at page nos. 61 to 62, 105 to 107 and 144 to 145 of the paper book related to Shri Y. Ananda Rao, Shri K.V. Prasad Rao and Shri M. Subbhaiah respectively, explaining the source of such payment. The Ld. AR further submitted that capital contribution may be made from accumulated savings, borrowings, gifts, advances or sale of personal assets and need not emanate only from current year income. He submitted that the Ld. AO did not point out any discrepancy in the bank statements or other
Page 4 of 10 supporting documents filed by the partners. Further, regarding the allegation of cash deposit of Rs.10 lakhs in the account of Shri Y. Anand Rao, the Ld. AR submitted that even if such deposit is unexplained, addition can only be made in the hands of the partner and not the firm. He placed reliance on the judgment of the Hon’ble jurisdictional High Court in the case of Nova Medicare v. ITO (459 ITR 477), wherein it was held that unexplained cash credits relating to partners must be assessed in the hands of the partners, not the firm. Finally, the Ld. AR prayed for deletion of the addition.
Per contra, the Learned Departmental Representative (“Ld. DR”) supported the order of the Ld. AO and the Ld. CIT(A). He submitted that the assessee failed to prove the “source of the source” in the hands of the partners, and therefore the addition under section 69A of the Act was justified. He prayed for dismissal of the appeal.
We have carefully considered the rival submissions and perused the material available on record. We have examined the assessment order, the order of the Ld. CIT(A), the registered sale deeds placed at page nos. 18 to 43, the partners’ capital accounts placed at page nos. 44, 76 and 114, and the partners’ bank statements placed at page nos. 51 to 58, 87 to 96 and 127 to 132 of the paper book. On perusal of the above material, we find that substantial payments towards purchase of the lands from Smt. D. Poojitha were directly made by the partners from their respective bank accounts. These payments are duly recorded in Page 5 of 10 the registered sale deeds. The assessee firm has also passed appropriate journal entries crediting the partners’ capital accounts. Thus, the observation of the Ld. AO that only a portion of the capital introduction was routed through the firm’s account is factually incorrect and does not capture the complete factual matrix. We have also examined para nos. 5.1 to 5.3 of the assessment order, which is to the following effect:
“5.1 Further, it is noticed that one of the partner Sri. Y. Anand Rao has transferred Rs. 10,00,000/- into the firm account on 09.03.2017. Before transferred the amount from his individual account vide account No.1466155000009111 maintained with Karur Vysya Bank, Sri. Y. Anand Rao has deposited cash of Rs.10,00,000/- in his account than he has transferred the same into the SPA account. On verification of the return of income of Sri Y. Anand Rao for the AY. 2016-17 & 2017-18, he has offered total income of Rs.6,02,940/- and Rs.19,21,280/- and introduced the capital of Rs.1,00,13,222/-. In view of the above the source of the capital introduction by Sri. Y. Anand Rao has no creditworthiness and his introduced capital of Rs.1,00,13,222/- is not established. 5.2 Further, it is noticed that another partner Sri. K.V. Prasad Rao has transferred Rs.20,00,000/- into the firm account on 19.03.2017 from his individual account vide account No.10742010021420 maintained with Oriental Bank of Commerce. On verification of the return of income of Sri K.V.Prasad Rao for the AY. 2016-17 & 2017-18, he has offered total income of Rs.7,63,120/- and Rs.6,21,700/- and introduced the capital of Rs.1,10,05,965/-. In view of the above the source of the capital introduction by Sri. K.V. Prasad Rao has no creditworthiness and his introduced capital of Rs.1,10,05,965/- is not established 5.3 Further, it is noticed that the third parter Sri. Y Muppi Subbaiah has transferred Rs. 5,00,000/- into the firm account on 07.03.2017 from his individual account vide account No.20144461516 maintained with Bank of India. On verification of the return of income of Sri M. Bubbaiah for the AY. 2016-17 & 2017-18, he has offered total income of Rs.16,69,670/- and Rs.22,97,640/- and introduced the capital of Rs.1,16,71,952/-. In view of the above the source
Page 6 of 10 of the capital introduction by Sri. M. Subbaiahhas no creditworthiness and his introduced capital of Rs.1,16,71,952/- is not established.”
8. On perusal of the above, we find that the Ld. AO concluded that the partners lacked creditworthiness on the basis that their incomes declared in AYs 2016–17 and 2017–18 were insufficient. In this regard, we have gone through the details submitted by the partners containing the date wise payments made by the partners along with the sources of such payments place at page nos. 61 to 62, 105 to 107 and 144 to 145 of the paper book related to Shri Y. Ananda Rao, Shri K.V. Prasad Rao and Shri M. Subbhaiah respectively, explaining the source of such payment. Further, we observe that the Ld. AO has not found any discrepancy in the bank statements, capital accounts or documents furnished. It is a settled principle that capital introduction may arise from savings accumulated over several years, borrowings, gifts or sale of personal assets. Therefore, the contention of the Ld. AO without placing on record any discrepancy in the bank statements, capital accounts or documents filed by the Partners, cannot be accepted.
9. As far as the objection of the Ld. DR regarding the requirement of proving the “source of the source” is concerned, we find that the said objection is misplaced. The requirement of proving “source of source” was brought into the statute by the Finance Act, 2022 by inserting additional conditions in section 68 of the Act with effect from 01.04.2023. The year under consideration is assessment year 2017–18. Therefore, the said
Page 7 of 10 requirement was not applicable during the relevant assessment year and cannot be applied retrospectively. Consequently, the objection of the Ld. DR on this ground fails.
Even if the creditworthiness of the partners was not fully substantiated, the legal position is that any unexplained capital introduced by partners cannot be assessed in the hands of the firm. In this regard, we have gone through para nos. 14 & 15 of the judgment of the Hon’ble Jurisdictional High Court in the case of Nova Medicare v. ITO (Supra), which is to the following effect:
“14. After thorough consideration of all relevant aspects, we are of the view that issue raised in this appeal is squarely covered by the decision of this Court in M. Venkateswara Rao (supra) which is binding on us. That was also a case where certain cash credits were advanced by the partners, which according to the revenue authorities remained unexplained and accordingly were added to the income of the firm. In the facts of that case, this Court held as follows: “7. It is a matter of record that the respondent-firm comprises of ten partners and each of them made contributions, be it in the form of cash or bank guarantees to be furnished to the Government, at the commencement of business. The returns submitted by the respondent- firm were processed, and the facts and figures furnished by it were accepted. However, the matter was reopened at a later point of time. The Assessing Officer treated the capital raised by the firm in the form of contributions made by the partners as income. This conclusion was arrived at on the ground that source of income for the partners was not explained. Learned counsel for the appellant placed reliance upon the judgment of the Patna High Court in CIT v. Anupam Udyog [1983] 142 ITR 133/15 Taxman 259. The Tribunal rested its conclusions upon the judgment of the Bombay High Court in Narayandas Kedarnath v. CIT [1952] 22 ITR 18 and that of Allahabad High Court in CIT v. Jaiswal Motor Finance [1983] 141 ITR 706.
Section 68 of the Act no doubt directs that if an assessee fails to explain the nature and source of credit entered in the books of account of any previous year, the same can be treated as income. In this case, the amount, that is sought to be treated as income of the firm, is the contribution made by the partners, to the capital. In a way,
Page 8 of 10 the amount so contributed constitutes the very substratum for the business of the firm. It is difficult to treat the pooling of such capital, as credit. It is only when the entries are made during the course of business that can be subjected to scrutiny under section 68 of the Act.
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. In the judgment relied upon by the appellant itself, the Patna High court held as under (page 137 of 142 ITR): "If there are cash credits in the books of a firm in the accounts of the individual partners and it is found as a fact that cash was received by the firm from its partners, then in the absence of any material to indicate that they are the profits of the firm, they cannot be assessed in the hands of the firm, though they may be assessed in the hands of the individual partners. Cash credits in the individual accounts of members of a joint family with third party cannot be assessed as the income of the family unless the Department discharges the burden of proof to the contrary."
10. Therefore, the view taken by the Assessing Officer that the partnership firm must explain the source of income for the partners regarding the amount contributed by them towards capital of the firm cannot be sustained in law.
As regards the other amount i.e., unexplained credit entries, the Tribunal took the view that the amount represented the security deposits made by the retail dealers, and the source thereof was properly explained. Nowhere in the order of assessment, the Assessing Officer recorded any finding to the effect that he verified the matter from the respective retail dealers and that such dealers have denied of making deposits. In the field of Arrack business, it is not uncommon that the retail dealers are required to keep security deposits with the supplier. At any rate, it is a pure question of fact.
12. Therefore, the appeal is dismissed.
Following and applying the aforesaid decision of this Court, Patna High Court in Anurag Rice Mills (supra) held that in such circumstances the unexplained cash credits would have to be assessed at the hands of the partners of Page 9 of 10 the firm and not the firm itself. Such amounts could not have been treated as income of the firm by relying upon section 68 of the Act.”
11. On perusal of above, we find that the Hon’ble Court has held that unexplained credits appearing in partners’ capital accounts must be assessed in the hands of the respective partners and not in the hands of the firm. The ratio squarely applies to the facts of the present case. Therefore, in view of the above discussion and documentary evidence on record, we hold that the addition of Rs.3,26,91,139/- made by the Ld. AO under section 69A of the Act in the hands of the firm is unsustainable. The same is directed to be deleted.
In the result, the appeal of the assessee is allowed.