Loading judgment…
Facts
The assessee, a firm engaged in real estate, declared a total income of ₹.9,200/- for AY 2017-18. The Assessing Officer reopened the assessment and added ₹.7,00,00,000/-, considering it as unexplained cash credit from a partner under section 68 of the Income Tax Act. This addition was confirmed by the CIT(A).
Held
The Tribunal held that when a partner introduces capital and provides satisfactory explanation, the burden on the firm is discharged. The credit entry cannot be treated as income of the firm. The addition made under section 68 was not justified as the assessee provided substantive evidence and the partner's contribution was confirmed.
Key Issues
Whether the addition made by the Assessing Officer under section 68 for unexplained cash credit from a partner is justified, especially when the partner's contribution is explained and confirmed.
Sections Cited
68, 147, 148, 151, 269SS, 269ST, 271D
AI-generated summary — verify with the full judgment below
Before: Shri Inturi Rama Rao & Shri S.S. Viswanethra Ravi
O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 22.08.2025 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi for the assessment year 2017-18.
The assessee raised 6 grounds amongst which the only issue emanates for our consideration as to whether the ld. CIT(A) is justified in confirming the addition made by the Assessing Officer under section 68 of the Income Tax Act , 1961 [“Act” in short].
Brief facts as emanating from record is that the assessee is a FIRM, engaged in the business of real estate and filed original return of income declaring a total income of ₹.9,200/- on 31.03.2018. According to the Assessing Officer, after recording reasons, assessment was reopened by issuing a notice dated 30.03.2021 under section 148 of the Income Tax Act, 1961 [“Act” in short], in response to which, the assessee filed return of income declaring the same income of ₹.9,200/- on 14.07.2021. Statutory notices under section 143(2) and 142(1) of the Act were issued. Further, according to the Assessing Officer, copy of reasons were provided to the assessee and asked the assessee to provide source of ₹.7,00,00,000/-, which has advanced Shri Sambandam Dhanasekaran during the period from 01.09.2016 to 29.10.2016. A draft assessment order cum show-cause notice issued to the assessee and the assessee filed reply, which is evident at para 1 to 2.2 of the assessment order. The Assessing Officer opined that the assessee is a bogus entity created to bypass the provisions of section 269SS of the Act and in the absence of any submissions in response to notice under section 142(1) of the Act, the source of fund ₹.7,00,00,000/- remained unexplained and added to the total income of the assessee under section 68 of the Act vide his order dated 29.03.2022 passed under section 147 r.w.s. 144B of the Act. Aggrieved by the same, the assessee preferred an appeal before the ld. CIT(A)/NFAC and the ld. CIT(A) confirmed the order of the Assessing Officer by holding that the submissions of the assessee are merely afterthoughts without documentary evidence in support of its claim. As aggrieved by the order of the ld. CIT(A), the assessee impugned the said order before this Tribunal.
The ld. AR Shri Y. Sridhar, C.A submits that the ld. CIT(A) erred in failing to appreciate that the order passed under section 147 r.w.s. 144B of the Act is erroneous. He argued that the ld. CIT(A) did not appreciate that the once the income is determined to be taxable in the hands of the partner of the assessee (FIRM), the same cannot be duplicated to be the income of the assessee (FIRM) as well, treating such receipt from the partner as an unexplained credit under section 68 of the Act. He placed on record copy of the assessment order dated 28.02.2023 in the case of Govinda Rajulu Srinivasan in support his contention that the same amount was also assessed in the hands of the partner of the assessee. Further, he argued that the ld. CIT(A) failed to appreciate that when the partner of the assessee (FIRM) affirm the funds infused into the current account of the assessee (FIRM) belongs to the partner, the same cannot be taxed in the hands of the assessee (FIRM) as the burden of the assessee (FIRM) stands discharged. The ld. AR placed on record the decision of the Hon’ble High Court of Madhya Pradesh at Indore reported in 245 ITR 160 (MP) in support of his contention by referring to para 5 of the said decision. He vehemently argued that the ld. CIT(A) failed to take cognizance of the order passed in the case of Shri G. Srinivasan, where the sum of ₹.7,00,00,000/- was determined as income in his hands and therefore, cannot be taxed in the hands of the assessee assessee (FIRM) while provisos to section 68 of the Act are not applicable to transactions between the assessee (FIRM) and its partners and drew our attention to the decision of the Hon’ble Supreme Court in the case of Muralidhar Jhawar and Purna Ginning and Pressing Factory [1966] 60 ITR 95 (SC).
The ld. AR argued that the ld. CIT(A) failed to note that no violation under the provisions of section 269SS of the Act with reference to the said transaction and drew our attention to the order dated 24.06.2020 in the hands of Danasekaran Sambandam passed under section 271D of the Act and argued that the penalty proceedings initiated under section 271D of the Act were dropped by holding that any payment or repayment made pursuant to current account maintained between parties cannot be treated as violation of section 269SS and section 269T of the Act. He submits that the ld. CIT(A) erred in failing to appreciate that the transactions cannot be categorised as sham or bogus when the funds received have been repaid to the partner in the succeeding years. He prayed to allow the grounds of appeal and set aside the order of the ld. CIT(A).
The ld. DR Ms. R. Anita, Addl. CIT submits that the assessee who has introduced the said capital in cash is disputed and creditworthiness not proved. The assessee is not clear who has withdrawn the money as to whether the assessee or its partner. She argued vehemently that the source of the partner is not proved and the addition made under section 68 of the Act remains unexplained. She referred to page 2 of the assessment order in the case of Govinda Rajulu Srinivasan and drew our attention to last para and submits that the assessee submitted all the relevant books of accounts including computation of income, bank statements, profit & loss account, balance sheet, etc. On examination of the same, the Assessing Officer observed that the transactions appear to be a sham transaction and the assessee failed to establish the creditworthiness and genuineness of the transaction. She vehemently argued that the method adopted by the assessee indicates to an attempt to evade taxes and supported the order of the Assessing Officer /ld. CIT(A).
Heard both the parties and perused the material available on record. We note that the brief facts emanating from the record are that the assessee is a firm engaged in the business of real estate. The assessee filed the return of income for AY 2017-18 declaring total income of ₹.9,200/-. According to the ld. AR the business of the assessee is just commenced and there was no activity, therefore, the quantum of income was low. We note that the assessee (FIRM) consists of two partners being Mr.G. Srinivasan and Mr.S. Dhanasekharen. We note that in order to accentuate the real estate business, one of the partners of the firm i.e., G. Srinivasan infused a sum of ₹.7,00,00,000/- as capital by mode of cash. The said amount was utilised by way of withdrawal by the other partner and remitted directly to the Chennai Metropolitan Cooperative Housing Society Ltd. towards proposed engagement with the Cooperative Housing Society for development of layouts. Since the said remittance was in cash, the Respondent-Revenue conducted an enquiry, reopened the assessment of the assessee (FIRM) by issuing notice under section 148 of the Act on 30.03.2021. We note that simultaneously, the assessment proceedings in the case of partner by name Mr. G. Srinivasan were reopened to conduct enquiry with reference to the infusion of capital in the assessee (FIRM). The said partner deposed a statement and affirmed the payment made by him to the assessee (FIRM) as infusing funds into the current account of the partner in the books of the assessee (FIRM). Further, we note that penalty proceedings in the case of assessee FIRM (Dhansekharen Sammandham) also initiated under section 271D of the Act for violation of section 269SS of the Act and attained a logical conclusion on 24.06.2020, which is placed on record. On perusal of the said penalty order, we note that the partner Mr. Dhanasekaren contended that he being one of the partners of the assessee (FIRM) has a current account with the assessee (FIRM) and withdrawn an amount of ₹.7,00,00,000/- in cash from the current account, in support of the same, submitted the copies of current account statement maintained by the assessee (FIRM) along with balance sheet of the assessee (FIRM). The JCIT, Non Corporate Range 8, Chennai, by placing reliance in the case of Idhayam Publications Ltd. (2006) 285 ITR 221 (Mad), wherein, it was held that any payments or repayments made pursuant to current account maintained between parties cannot be considered as violation of section 269SS of the Act. Further reading of the said penalty order, we note that the JCIT found the submissions of the assessee as genuine and acceptable and held that it is fair transaction between the assessee and the partners and dropped the penalty proceedings initiated under section 271D of the Act.
We find ledger account of partner capital account of Mr.G. Srinivasan in the books of the assessee (FIRM) on record, on perusal of the same, we note that the closing balance as on 31.03.2017 is ₹.7,00,05,000/-, which clearly supports capital amount received from 01.09.2016 to 29.10.2016. Further capital account for the period of 01.04.2017 to 31.03.2018, 01.04.2018 to 31.03.2019, 01.04.2019 to 31.03.2020 and 01.04.2021 to 31.03.2022, wherein, we note credit through profit & loss account and as on 01.04.2022, the opening balance remains at ₹.7,00,17,350/-. Further, we note that from 08.02.2023 to 18.03.2024 the amounts debited to the partner’s (G. Srinivasan) capital account and the closing balance as on 31.03.2024 remains at ₹.3,64,33,764.50. Therefore, we find support from the contention of the ld. AR that the amounts were repaid to the partner in the succeeding years. We note that no verification was done in this regard by the Assessing Officer in the assessment proceedings as well as the ld. CIT(A) in the first appellate proceedings. They only proceeded to make an assessment treating the capital infusion as unexplained credit, in our opinion, is not justified when there is explanation with substantive material evidence showing the capital introduction as well as payment in the subsequent years. In this regard, we find the decision of Hon’ble High Court of Madhya Pradesh at Indore in the case of CIT v. Metachem Industries (supra), wherein, it was observed as under: 5. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under Section 69 of the Act, against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner of Income-tax (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries.
On careful reading of the above, we note that the Hon’ble High Court of Madhya Pradesh was pleased to affirm the order of the ITAT in holding that, the moment the FIRM gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the FIRM is discharged and in that case that credit entry cannot be treated to be the income of the FIRM for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under Section 69 of the Act, against the person who has not been able to explain the investment. In the present case, as is evident, the ld. CIT(A) reproduced the submissions in this regard from page 13 to 18 of the impugned order, wherein, it was vehemently contended that the assessee (FIRM) submitted the source of infusion in the current account, which was also confirmed by the other partner (Mr. G. Srinivasan), wherein, PAN, confirmation letter, ledger account were provided in response to the summon under section 133(6) of the Act. We note that the reply of the assessee (FIRM) in response to the notice under section 133(6) of the Act is reproduced in page 8 of the impugned order, wherein, it is clearly stated that the said partner Mr. G. Srinivasan could not sent his reply as the notice under section 133(6) of the Act was sent from “don’t reply income tax mail address”. Therefore, on behalf of the said partner the assessee (FIRM) provided every information relating to queries raised in notice under section 133(6) of the Act. No doubt, the Assessing Officer did not accept the said contention of that there was no opportunity to partner Mr. G. Srinivasan to give reply as the notice was sent through “don’t reply income tax mail address”. Anyway, the information of the infusion of the capital by the said partner were available before the Assessing Officer, but, however, the Assessing Officer opined the transaction of ₹,.7,00,00,000/- in cash by Mr. G. Srinivasan to Mr. S. Dhanasekaren is to circumvent established provisions of law created only as a tool to effect such transfer bypassing provisions of sections 269SS and 269ST of the Act, we find the said findings of the Assessing Officer is very contrary to the findings of the JCIT, Non-Corporate Range – 8, Chennai in penalty proceedings under section 271D of the Act, wherein, the said penalty proceeding was dropped by noting that the said transaction was made through current account maintained with the assessee (FIRM) and not a loan, further, held the contention of the assessee (FIRM) to be genuine and acceptable vide order dated 24.06.2020 vide DIN & Order No. ITBA/PNL/F/271D_1/2020- 21/1027370022(1). The relevant part of the order is reproduced herein below: The submissions and documents submitted are carefully considered. It is clearly a transaction between the assessee and the Partnership Firm in which he is a partner and the transaction was made through the current account maintained with the Firm and not a loan. So contention of the assessee is found to be genuine and acceptable. Hence, penalty proceeding u/s. 271D is hereby dropped.
On perusal of the above, we find the view of the Assessing Officer in holding that it is sham transaction bypassing the provisions of section 269SS & 269ST of the Act, is contrary to the finding of JCIT, Non- Corporate Range – 8, Chennai.
It is pertinent to note that the Assessing Officer of the said partner (Mr. G. Srinivasan) reopened his assessment basing on the report from the Department software (insight – high risk CRIU/VRU information) and issued show-cause notice seeking information on complete description of issues involved. The said partner Mr.G. Srinivasan filed all relevant books of accounts including computation of income, ITR, bank statements, profit & loss accounts, balance sheet, etc. along with ledger relating to amount of ₹.7,00,00,000/- on the issue of partnership FIRM (assessee). The Assessing Officer therein, taking due consideration of the material evidence above, added an amount of ₹.7,00,00,000/- on account of undisclosed income vide his order dated 28.02.2023 passed under section 147 r.w.s. 144B of the Act, which is on record, the said assessment was quashed by the ld. CIT(A) by holding that the Assessing Officer failed to obtain approval of specified authority i.e Principal Chief Commissioner of Income Tax as defined under section 151 of the Act from. The Revenue challenged the same before the ITAT, wherein, order of the ld. CIT(A) was confirmed vide its order dated 09.10.2025 in for AY 2017-18, the relevant portion of which is reproduced hereinunder: 7.0 We have noted that the facts of the present case are identical to those discussed in the judicial precedents hereinabove. The revenue has not been able to point out any distinguishment. Statutory provisions of the Income Tax Act as well as judicial precedents setting by Hon’ble Apex Court in the case of Rajeev Bansal, Hon’ble Madras High Court in the case of Core Logistics and ITAT Mumbai Bench in the case of Manish Financials and ITAT Delhi Bench in the case of Anurag Pandey supra clearly mandate that in cases where notice u/s 148 is to be issued beyond a period of 3 years than, the ld AO is required to obtain prior approval of Pr. CCIT as provided in Section 151(ii) of the Act. We have noted that in the present case notice u/s 148 dated 26.07.2022 was issued with the prior approval of Pr. CIT. Accordingly, we have noted that there is no infirmity in the order of the Ld.CIT(A) in quashing the notice u/s 148 and the corresponding assessment order u/s 147 r.w.s. 144BB. Accordingly, we are of the considered view that there is no case for any intervention to the order of the ld. CIT(A). The same is therefore confirmed and all the grounds of appeal raised by the Revenue are dismissed.
12. On an examination of the above, it is clear that the Assessing Officer of the said partner Mr.G. Srinivasan added the same amount in his hands as well as in the hands of the assessee (FIRM) before us. Therefore, we find force in the arguments of the ld. AR that once the income is determined to be taxable in the hands of the partner, the same cannot be duplicated to be the income of the assessee (FIRM) as well, treating such receipt from the partner as an unexplained income under section 68 of the Act. Therefore, we accept the contention of the assessee (FIRM) that its partner Mr.G. Srinivasan introduced capital into the current account of the assessee, which is supported by ledger account of the said partner in the books of assessee (FIRM) and the assessee (FIRM) discharged its duty in giving explanation by providing every detail relating to the introduction of capital by the said partner, which was confirmed by the order of the JCIT in the penalty proceedings under section 271D of the Act, consequently, the addition also made in the hands of the said partner under section 68 of the Act. Thus, we find the facts and circumstances of the on hand and the facts and circumstances before the Hon’ble High Court of Madhya Pradesh at Indore in the case of Metachem Industries (supra) are similar, respectfully following the decision of the Hon’ble High Court of Madhya Pradesh at Indore in the case of Metachem Industries (supra), we hold the credit entry cannot be treated to be the income of the assessee (FIRM) for the purposes of income-tax and therefore, the addition made in the hands of the assessee (FIRM) under section 68 of the Act, is not justified and hence, it is deleted. Thus, the ground no’s 1 to 6 raised by the assessee are allowed.
In the result, the appeal filed by the assessee is allowed. Order pronounced on 26th February, 2026 at Chennai.