SWASTIK DEVELOPERS,AHMEDABAD vs. THE INCOME TAX OFFICER WARD 3(3)(5), AHMEDABAD

2.3 In view of the totality of the circumstances and in the interest of substantial justice, we are satisfied that the assessee was prevented by reasonable cause from filing the appeal within the prescribed period. Accordingly, we condone the delay of 18 days in filing the appeal and proceed to decide the appeal on merits.

3.2 In response to notice issued under section 148 on the same date, the assessee filed return of income on 12.01.2023 declaring income of Rs. 940/- as originally declared. Notices under sections 142(1) and 143(2) were issued subsequently. Though partial compliance was made, the assessee did not respond to the final show cause notice dated 26.04.2023 issued under section 144B(xvi)(b) of the Act. The AO, therefore, proceeded to complete the reassessment ex parte and passed the order dated 23.05.2023 determining total income at Rs.4,28,64,954/-, comprising the following additions: i. Addition of Rs.2,91,23,300/- under section 69 of the Act, being unexplained investment in the purchase of immovable property; and ii. Addition of Rs.1,37,40,714/- under section 68 of the Act, being unexplained cash credits in the form of partners’ capital. 3.3 The AO held that although the assessee contended that the immovable property was purchased out of capital contributed by the partners, the explanation furnished was not substantiated with cogent and credible evidence. The AO issued notices under section 133(6) to ten of the eleven partners seeking details of their capital contributions, including their ITRs, bank statements, and explanation of specific credits. In several cases, it was observed that the partners had received funds into their bank accounts via cash deposits or third-party transfers immediately before transferring the money to the firm. The partners’ returned incomes were found to be disproportionately low vis-à-vis the capital introduced. The AO held that in the absence of satisfactory explanation, the investment of Rs.2,91,23,300/- remained unexplained under section 69, and the capital of Rs.1,37,40,714/- introduced by the remaining ten partners (except Rs.4,00,000/- explained by Dr. Asit J. Sanghavi) was deemed unexplained under section 68. Both additions were taxed under section 115BBE and penalty proceedings under section 271AAC(1) were separately initiated.

3.4 The assessee preferred appeal before CIT(A) against the order of the AO. By way of written submissions, the assessee explained that the firm was constituted on 09.11.2015 and had entered into a registered agreement for purchase of land at Paldi, Ahmedabad for Rs. 2.75 crore, which was paid over two financial years: Rs. 2.02 crore during FY 2015-16 and Rs.73 lakh during FY 2016-17. The assessee also paid stamp duty of Rs.13,48,000/- and registration charges of Rs. 2,75,300/-, making the total cost of acquisition at Rs.2,91,23,300/-. It was submitted that the payments were funded out of capital contributions received from partners amounting to Rs.2,05,25,000/- in FY 2015-16 and Rs.1,20,27,738/- in FY 2016-17. The assessee furnished capital accounts, partnership deed, bank statements of partners, and acknowledgments of their ITRs in support. The assessee further contended that the addition of Rs. 2.91 crore in A.Y. 2017–18 was factually incorrect since Rs.2.02 crore had been paid in FY 2015–16 and could not be taxed in the impugned year.

3.5 However, the CIT(A) rejected the assessee’s contentions and upheld both additions. It was observed that the assessee had failed to furnish cogent evidences to establish the genuineness and creditworthiness of the partners. The CIT(A) relied on multiple judicial precedents including CIT v. Deepak Iron & Steel Rolling Mills [(2012) 20 taxmann.com 456 (P&H)], ACIT v. Durga Granites [(2022) 138 taxmann.com 335 (Hyd)], and Sajid Khan v. PCIT [(2019) 111 taxmann.com 240 (All.)], to hold that the onus to prove source of capital introduced by partners rests upon the firm where such capital is claimed to explain a transaction.

5.1 The learned Authorised Representative (AR) further contended that the addition made under section 69A on account of unexplained investment is wholly unjustified, inasmuch as the source of funds utilised for the land acquisition stood explained by way of capital contribution from the partners. He submitted that once the capital introduced in the firm is accepted as the source of the impugned investment, no separate addition under section 69A is warranted in the hands of the firm. It was submitted that the assessee is a newly constituted partnership firm, having no other source of income or funds apart from the capital brought in by the partners. The learned AR also pointed out that the Assessing Officer had made addition of the entire amount of Rs. 2,91,23,300/- being the total cost of land acquisition, whereas in the relevant financial year, i.e. F.Y. 2016–17, the actual payment made by the firm was only Rs. 89,23,300/-, which stood fully explained by the capital introduced during the year. It was submitted that even on this count, the addition suffers from a fundamental factual error.

5.2 In relation to the addition made under section 68 on account of partners’ capital, the learned AR submitted that the assessee had discharged the initial onus by furnishing copies of the partners’ income tax returns, bank statements, and relevant confirmations, thereby establishing their identity and creditworthiness. The genuineness of the transactions was also evidenced from regular banking channels. He contended that the lower authorities failed to appreciate the evidences in their correct perspective and proceeded to treat the capital introduced as unexplained without rebutting the documentary evidences furnished. In support of his submissions, the AR placed reliance on several judicial precedents, including decisions of co-ordinate Benches and High Courts, to argue that once the identity and creditworthiness of partners are established and the firm has no other source, addition under section 68 or section 69A in the firm’s hands is not sustainable.

5.3 The learned Departmental Representative (DR), on the other hand, supported the orders of the Assessing Officer and the CIT(A). He submitted that the reopening of the assessment under section 147 was duly justified, as the return of income filed by the assessee firm disclosed a meagre income of Rs.940/- for the year under consideration, which was prima facie disproportionate to the scale of investment made in immovable property. He further submitted that the AO had made specific inquiries, including issuance of notices under section 133(6) to the partners, but satisfactory responses were not received.

6.1 At the outset, we note that the assessee firm was constituted during the financial year 2015–16 and had entered into a registered purchase agreement for immovable property at Paldi, Ahmedabad, with the total purchase consideration amounting to Rs.2.75 crore. Additionally, stamp duty and registration charges aggregating to Rs.16,73,300/- were incurred, resulting in total investment of Rs.2,91,23,300/-. From the record, it is evident that out of the total purchase price, Rs.2,02,00,000/- was paid in F.Y. 2015–16 and Rs.89,23,300/- in F.Y. 2016–17. However, the addition under section 69A has been made for the entire amount of Rs.2.91 crore in A.Y. 2017–18, ignoring the fact that only Rs.89,23,300/- was actually paid during the relevant previous year.

6.2 This approach, in our considered view, suffers from a fundamental fallacy. The addition under section 69A must relate to the investment or expenditure actually incurred during the year under assessment. It is a well-settled principle that no addition can be made under section 69A for an amount not representing an investment made during the relevant previous year.

6.3 Even otherwise, the assessee has explained the source of the investment as capital introduced by the partners. The AR has placed on record the capital accounts of all partners, along with ITRs, bank statements, and fund trails. It is not in dispute that the assessee firm had received capital contributions aggregating to Rs.2,05,25,000/- in F.Y. 2015–16 and Rs.1,41,40,714/- in F.Y. 2016–17. It is also undisputed that the firm is newly established and had no other revenue source during the relevant year. Once the investment is funded from capital introduced by identifiable partners, and the assessee firm has disclosed the same in its books, the burden shifts upon the Department to bring material to establish that the said funds are not genuine or have been routed back by the assessee or its partners.

6.4 On the point of addition under section 68 for capital contributions received from the partners, we are of the considered view that the addition is not sustainable in law in the hands of the firm, given that the assessee has furnished (i) the names, PANs, and addresses of the partners, (ii) their ITR acknowledgments, (iii) bank statements showing fund inflow, and (iv) the linkage of capital contribution with the firm’s bank account. The Hon’ble Gujarat High Court in the case of CIT v. Pankaj Dyestuff Industries [TS- 5994-HC-2005(Gujarat)-O] held that when the partners are identified, the capital contribution is explained through proper banking channels, and income-tax records are produced, then no addition under section 68 can be made in the hands of the firm. It is also a well-settled principle of law that, in relation to assessment years prior to the insertion of the second proviso to section 68 (effective from 01.04.2023), the assessee cannot be burdened with the responsibility to prove the source of source, i.e., the origin of funds in the hands of the creditor or the partners contributing capital. Once the assessee has established the identity of the partner, genuineness of the transaction, and prima facie creditworthiness, the onus shifts to the Department to disprove the same with cogent material.

6.5 We also note that the CIT(A) has summarily brushed aside the documentary evidences placed by the assessee, without assigning cogent reasons or carrying out objective analysis of the supporting material. The appellate order does not reflect any consideration of the individual fund trail or creditworthiness established through the partners' bank accounts and returns. In our considered view, such mechanical affirmation of the AO's findings, without independent application of mind, vitiates the appellate proceedings.

6.6 In view of the foregoing discussion and respectfully following the ratio laid down in the above-mentioned judicial precedent, we are of the view that the addition of Rs.2,91,23,300/- under section 69A is factually and legally unsustainable, both on the ground that the amount was not fully paid in the relevant previous year and that the source of such investment stood explained through capital contributions and the addition of Rs.1,37,40,714/- under section 68 on account of partners’ capital is also unjustified, as the assessee has satisfactorily established the identity and creditworthiness of the partners and the genuineness of the transactions.

Accordingly, both the additions made by the Assessing Officer and confirmed by the CIT(A) are directed to be deleted.

Order pronounced in the Court on 7th August, 2025 at Ahmedabad.