ITO, WARD-1(2)(1), AHMEDABAD, AHMEDABAD vs. MS GOODFARM REARING, AHMEDABAD

The assessee is a partnership firm engaged in the business of cattle/poultry/aqua/livestock and dairy farms. It was constituted on 31.10.2017 with two partners namely Goodfarms Calfcare LLP and Rellonge Traders LLP. The firm filed its return of income for A.Y. 2018-19 on 24.12.2018 declaring nil income. The case was selected for complete scrutiny under the e-Assessment Scheme, 2019, specifically on the issue of “Share Capital / Other Capital." During the year under consideration, the assessee introduced capital amounting to Rs.16,00,00,000/-, of which Rs.8,00,00,000/- was contributed by each of the two partners.

During the course of assessment proceedings, the AO issued notices under sections 143(2), 142(1) and 133(6) of the Act. The assessee furnished its partnership deed, audited financials, ITRs, bank statements, and ledger accounts of the partners. In response to the show-cause notice dated 24.02.2021, the assessee submitted that the capital was introduced by its partners through banking channels and supported by ledger accounts and confirmations. However, the AO held that only Rellonge Traders LLP responded to the notice under section 133(6) of the Act and provided documentary evidence. The other partner, Goodfarms Calfcare LLP, did not respond. Relying solely on the non-response, the AO treated the capital contribution of Rs.8,00,00,000/- by Goodfarms Calfcare LLP as unexplained cash credit and made an addition under section 68, taxing the same under section 115BBE of the Act. Penalty proceedings under section 271AAC(1) of the Act were also initiated.

The assessee preferred an appeal before the CIT(A) and contended that it had duly discharged the initial burden cast upon it under section 68 of the Act by submitting - Identity and legal status of the partners (both LLPs separately assessed to tax), - Copies of their PAN, ITRs, bank statements, and confirmations, - Ledger accounts and proof of credit through banking channels, and - Audited financial statements demonstrating the capital position of the partners.

The assessee submitted that the non-response of Goodfarms Calfcare LLP to the AO's notice under section 133(6) of the Act was never communicated to the assessee and that it could not be held liable for such third-party non-compliance. Moreover, the AO did not identify any defect, inconsistency, or insufficiency in the documents filed by the assessee.

The CIT(A) agreed with the assessee and held that the addition was based merely on suspicion and non-compliance under section 133(6) of the Act, without bringing any adverse material on record to rebut the documents filed by the assessee. The CIT(A) also relied on several judicial precedents, including those of the Hon'ble Gujarat High Court in the case of CIT v. Pankaj Dyestuff Industries (I.T. Ref. No. 241 of 1993), holding that capital introduced by a partner cannot be assessed as unexplained income in the hands of the firm if the partner is a taxpaying entity. Accordingly, the CIT(A) deleted the addition of Rs.8,00,00,000/- under section 68 of the Act.

Aggrieved by the order of CIT(A) the Revenue is in appeal before us with following grounds of appeal:

During the course of hearing before us, the Learned Departmental Representative (DR) reiterated the findings recorded by the AO and submitted that the creditworthiness of the partner, Goodfarms Calfcare LLP, which had introduced capital of Rs.8,00,00,000/- was not established by the assessee. It was pointed out that despite opportunity, the said partner failed to respond to the notice issued under section 133(6) of the Act, and no explanation or supporting material was placed to demonstrate the source of such capital in the hands of the LLP. Therefore, the addition made by the AO under section 68 was justified and should be sustained. The DR placed strong reliance on the decision of the Hon'ble Rajasthan High Court in the case of Kailash Chand Agarwal v. ITO [(2017) 394 ITR 771], wherein it was held that the burden of proving the identity of the creditor, their creditworthiness and the genuineness of the transaction rests on the assessee.

The Learned Authorized Representative (AR) appearing on behalf of the assessee submitted that the impugned addition made under section 68 of the Act in respect of capital introduced by the partner, is wholly misconceived. The AR submitted that the assessee is a partnership firm, and the amount of Rs.8,00,00,000/- received during the year under consideration represents capital contribution from its partner, Goodfarms Calfcare LLP. It was contended that the said capital was duly recorded in the books of the assessee-firm and received through proper banking channels. The AR further submitted that it is a settled legal position that no addition under section 68 of the Act can be made in the hands of a partnership firm in respect of capital introduced by its partner, where the identity, genuineness of the transaction and creditworthiness of the partner stand duly established. In support of this contention, reliance was placed on various judicial precedents including the judgement of Hon'ble High Court of Gujarat in case of CIT v. Pankaj Dyestuff Industries – I.T. Ref. No. 241 of 1993 and PCIT v. Vaishnodevi Refoils & Solvex reported at (2018) 89 Taxmann.com 80.

The AR also submitted that the assessee had discharged the initial onus cast under section 68 by furnishing complete particulars and supporting documentary evidences. It was further submitted that the Ld. CIT(A), after considering these materials and recording a factual finding in para 6.3 of the appellate order, rightly deleted the addition. It was also submitted that once the primary onus is discharged by the assessee, the burden shifts on the Revenue to prove otherwise, which has not been done in the present case.

Additionally, the assessee also placed on records the audited financial statements of Goodfarms Calfcare LLP which clearly indicated that funds invested in the assessee firm was borrowed from the holding company of the said lender. The AR pointed out that the Orbitol Investment Private Ltd. is the holding company and the said facts in duly disclosed in Note 4 to audited financial statements of Goodfarms Calfcare LLP.

We have carefully considered the rival submissions of both the parties and perused the orders of the lower authorities, along with the supporting materials placed before us. The issue in dispute relates to the addition of Rs.8,00,00,000/- made under section 68 of the Income-tax Act, 1961, being capital contribution by one of the partners; namely, Goodfarms Calfcare LLP, which was deleted by the CIT(A).

It is an admitted fact that the assessee is a partnership firm constituted by two LLPs-Goodfarms Calfcare LLP and Rellonge Traders LLP—and the contribution in question is credited in the capital account of one of the partners. The assessee had furnished all requisite documentary evidence to substantiate the identity, genuineness, and creditworthiness of the partner, including PAN, ITR, audited financial statements, bank statements, confirmations, and ledger accounts. The capital was received through banking channels and duly recorded in the books of accounts of the assessee- firm.

The AO, however, proceeded to make the addition solely on the basis that the said partner, Goodfarms Calfcare LLP, failed to respond to the notice issued under section 133(6) of the Act. The AO did not point out any defect or inconsistency in the evidences submitted by the assessee-firm. In our considered view, such non-response by a third party, without more, cannot form the sole basis for invoking section 68 of the Act in the hands of the firm when all other documentary evidences have been placed on record.

The learned CIT(A), after carefully examining the submissions and facts, rightly concluded that the assessee had discharged the initial onus cast under section 68 of the Act. He noted that the failure of the partner to respond to a notice under section 133(6) of the Act was not communicated to the assessee and, even otherwise, does not ipso facto establish that the capital is unexplained. We agree with the CIT(A)'s finding that in absence of any adverse material brought on record by the AO, the burden shifts on the Revenue to rebut the evidence furnished by the assessee, which has not been done in the present case.

The Learned AR also demonstrated that the source of funds invested by Goodfarms Calfcare LLP was traceable to its holding company - Orbitol Investment Pvt. Ltd.-as disclosed in Note 4 of the audited financial statements. This factual claim was not refuted by the Revenue.

The assessee's legal position is fortified by several judicial precedents including CIT v. Pankaj Dyestuff Industries (supra) where it was held that once the partner is identifiable and the capital is recorded through proper banking channels, no addition under section 68 of the Act can be made in the hands of the firm if there is no evidence that the amount is the firm's undisclosed income. Similarly, in case of PCIT v. Vaishnodevi Refoils & Solvex (supra), the Hon'ble Gujarat High Court upheld that once the capital is confirmed by the partner and the source is explained in the partner's books, the addition cannot be made in the hands of the firm. It is noted that the Revenue's Special Leave Petition in case of PCIT v. Vaishnodevi Refoils & Solvex is dismissed (96 taxmann.com 469).

On the contrary, the Revenue relied on the judgement of Hon'ble High Court of Rajasthan in the case of Kailash Chand Agarwal v. ITO (supra), which lays down that the firm has to establish identity, genuineness, and creditworthiness of the capital introduced. However, this judgment is distinguishable on facts, as in the present case, all three components have been duly established, and no material was brought by the AO to indicate otherwise.

In view of the above discussion, we hold that the CIT(A) was justified in deleting the addition of Rs.8,00,00,000/- made under section 68 of the Act. The assessee has satisfactorily discharged the onus cast upon it by furnishing adequate evidence to prove the identity, genuineness and creditworthiness of the partner. Therefore, we find no infirmity in the order passed by the CIT(A), and accordingly, the appeal filed by the Revenue is dismissed.

In the result, the appeal of the Revenue stands dismissed. Order pronounced in the Open Court on 1st April, 2025 at Ahmedabad. (SUCHITRA KAMBLE) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER अहमदाबाद/Ahmedabad, दिनांक/Dated 01/04/2025 टी.सी. नायर, व.नि. स. / T.C. NAIR, Sr. PS आदेश की प्रतिलिपि अग्रेषित/