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Facts
The assessee introduced capital of Rs. 2,78,14,620/- in a firm, M/s. Rudraksh Securities, which was not disclosed in his return. The Assessing Officer treated this as unexplained investment under section 69 of the Income Tax Act.
Held
The Tribunal held that the partnership deed allowed partners to open accounts for the firm's benefit and that it was common for partnership firms to use partners' accounts due to NSDL/CDSL guidelines. The assessee had discharged the onus of proving the nature and source of capital.
Key Issues
Whether capital introduced by an assessee in a firm through a partner's joint account, as per the partnership deed, can be treated as unexplained investment under section 69 if the firm itself cannot open a bank account.
Sections Cited
69, 250, 148A, 142(1), 144B, 148
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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
"ी टी.आर. से""ल कुमार, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम!। ] ] BEFORE SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2015-16 Dahyabhai Shankarbhai Patel The Income Tax Officer बनाम/ Ashutosha, 300 Kadamnagar Ward-1(3)(1), v/s. Nr. Mehsana Nagar Vadodara Nizampura, Vadodara-390 024 "थायी लेखा सं./PAN: ACSPP 2248 R (अपीलाथ$/ Appellant) (%& यथ$/ Respondent) Assessee by : Shri Sunil Talati, AR Revenue by : Shri Kalpesh Rupavatia, Sr.DR सुनवाई की तारीख/Date of Hearing : 24 /03/2025 घोषणा की तारीख /Date of Pronouncement: 25 /03/2025 आदेश/O R D E R
PER MAKARAND V. MAHADEOKAR, AM:
This appeal is filed by the assessee against the order dated 19.12.2024 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as "CIT(A)"] under section 250 of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] for the Assessment Year (AY) 2015-16, whereby the CIT(A) upheld the addition of Rs.2,78,14,620/- made by the Assessing Officer [hereinafter referred to as "AO”] under section 69 of the Act as unexplained investment. Dahyabhai Shankarbhai Patel vs. ITO Asst. Year : 2015-16 Facts of the Case:
The assessee filed his return of income for A.Y. 2015-16 declaring total income of Rs.10,30,160/-. Based on information received during the assessment of M/s. Rudraksh Securities, a partnership firm, the AO noted that the assessee had introduced capital of Rs. 2,78,14,620/- in the firm during the relevant previous year. This capital introduction was not disclosed in his return of income nor reflected in Schedule IF. Pursuant to this, the AO issued notice under section 148A(b) of the Act and after considering the reply, passed an order under section 148A(d) of the Act and subsequently issued notice under section 148 of the Act. Though the assessee filed a return in response, it was not e-verified and treated as invalid. Notices under sections 142(1) and 144B were issued. The assessee furnished partial replies. The assessee claimed that the capital introduced in the firm came from mutual fund redemptions and unsecured loans received from family members and other related parties. A detailed chart was filed showing the sources along with confirmations, PAN details, bank statements, and ITRs of the creditors. However, the AO observed that the redemption amounts were credited in the accounts of persons other than the assessee. Further, the assessee did not file the firm’s bank statement but instead furnished a joint account statement of Shri Sandeep Dahyabhai Patel and Smt. Abhipsa Sandeep Patel. The AO held that no nexus had been established between the capital contribution and the sources shown, and the capital was not routed through the assessee’s own account. Consequently, the AO treated the entire capital of Rs.2,78,14,620/- as unexplained investment under section 69 of the Act and added it to the income. Dahyabhai Shankarbhai Patel vs. ITO Asst. Year : 2015-16
3. The assessee preferred an appeal before the CIT(A) who dismissed the appeal of assessee upholding addition made by the AO. observed that the firm, M/s. Rudraksh Securities, had been constituted in 2007 and was engaged in investment and trading activities. The CIT(A) held that it was implausible for such a firm to have no bank account of its own and to carry out its transactions through a joint savings account held by two individual partners. It was further noted that the bank account of the firm (A/c No. 383010200001304) with Axis Bank was disclosed in its return. Thus, the CIT(A) concluded that the capital contribution made through a joint savings account was not proven to be genuine or belonging to the firm.
Aggrieved by the order of CIT(A) the assessee is in appeal before us with following grounds of appeal:
1. The Ld. CITA) erred in law and on facts in upholding the addition u/s. 69 of the Act, amounting to Rs.2,78,14,620/-, as an unexplained investment, without appreciating the detailed submissions and documentary evidence provided by the appellant. The addition of Rs.Rs.2,78,14,620/-is unjustified on facts and in law and is prayed to be deleted.
2. The Ld. CIT(A) has erred in confirming additions u/s. 69 of the Act, without considering the fact that capital contribution introduced by the appellant in M/s. Rudraksha Securities, in Axis bank's Joint account held by other two partners. The Ld. CIT(A) has not even considered explanation provided for source of the capital contribution and confirmed addition of Rs.2,78,14,620/ as unexplained investment. The addition is factually incorrect and contrary to law, and it is respectfully prayed that the same be deleted.
The Order passed by the Ld. CIT(A) is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now. 4. Your appellant craves leave to add, alter, and/or amend all or any of the grounds before the final hearing of the appeal. Dahyabhai Shankarbhai Patel vs. ITO Asst. Year : 2015-16
During the hearing before us, the Ld.Authorised Representative (AR) submitted that the CIT(A) failed to consider the partnership deed which explicitly allows DEMAT and bank accounts to be opened in the names of partners for the benefit of the firm. Clause 11 of the partnership deed specifically authorises the second partner, Shri Sandeep Dahyabhai Patel, to hold the DEMAT account on behalf of the firm. This arrangement, the AR submitted, was necessitated by the guidelines of NSDL and CDSL which do not permit partnership firms to hold DEMAT accounts in their own names. It was further submitted that the bank account with Axis Bank (A/c No. 912010061282563), though held in the joint names of two partners, was used exclusively for the firm's transactions. This account and the related capital introduction were consistently reflected in the audited books of M/s. Rudraksh Securities for A.Ys. 2013-14 to 2015-16. Audited financial statements were placed on record. Confirmations from the creditors and proof of source of unsecured loans were also filed. The AR submitted that the firm’s assessment for A.Y. 2015-16 had been completed and no adverse finding was recorded by the AO in respect of the capital introduced or the use of the said bank account.
The Ld. Departmental Representative (DR) contended that since certain new documents were placed before the Tribunal, which were not before the lower authorities, the matter may be remanded to the AO for verification.
We have carefully considered the rival contentions and perused the records. The core issue for adjudication is whether the capital introduced by the assessee in M/s. Rudraksh Securities to the extent of Rs. 2,78,14,620/- can Dahyabhai Shankarbhai Patel vs. ITO Asst. Year : 2015-16 be treated as unexplained investment under section 69 of the Act merely because the funds were routed through a joint bank account held by the partners and not through a bank account in the firm’s own name.
7.1. The partnership-deed, particularly Clause 11, clearly authorizes the partners to open DEMAT and bank accounts in their names for and on behalf of the firm. This provision has not been disputed by the Revenue. It is also a matter of record that under the operational framework of CDSL and NSDL, partnership firms are not permitted to open DEMAT accounts in their names. Hence, accounts are opened in the names of partners for facilitating the firm's investment activities.
7.2. This brings into play the concept of beneficial ownership. While the bank and DEMAT accounts may be in the legal names of individual partners, the beneficial owner of the funds and securities therein is the partnership firm. The assessee has demonstrated that the amounts credited in the joint bank account were introduced in the books of the firm as capital, which were accepted and disclosed in the audited financials.
7.3. Further, the firm’s audited accounts for three consecutive years reflect the said bank account as belonging to the firm. There is no material on record brought by the AO to rebut this treatment or to establish that the said funds were used for personal purposes of the individual account holders. The identity and creditworthiness of the creditors, and genuineness of the transactions, remain unchallenged by the Revenue. Dahyabhai Shankarbhai Patel vs. ITO Asst. Year : 2015-16 7.4. Thus, the fact that the firm used the partner’s bank account as a conduit for receiving capital does not, in our view, vitiate the nature of the transaction. The law recognizes the distinction between legal and beneficial ownership, particularly in the context of partnerships, where the firm is not a separate juristic person distinct from its partners.
7.5. In our considered view, the assessee has duly discharged the onus of proving the nature and source of the capital introduced in the firm. The addition made by the AO, and sustained by the CIT(A), is based on a narrow interpretation of ownership and overlooks the reality of beneficial ownership and the practical constraints faced by partnership firms. Therefore, the addition made under section 69 of the Act is not sustainable and is liable to be deleted. Accordingly, the addition of Rs.2,78,14,620/- made under section 69 of the Act is hereby deleted.
In the result, the appeal of the assessee is allowed.