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Facts
The assessee, a partnership firm, was engaged in the purchase of immovable property using capital contributions from its partners. The Assessing Officer (AO) taxed the entire capital contribution as income. The National Faceless Appeal Centre (NFAC) partially upheld the AO's order, disallowing certain capital contributions.
Held
The Tribunal held that the capital contributions made by the partners were genuine and sufficiently explained. The Tribunal noted that the transactions were routed through bank accounts and supported by documentary evidence. The Tribunal also referred to judicial precedents that support the deletion of additions made on account of capital introduction by partners when the sources are explained.
Key Issues
Whether the addition of Rs.1,83,25,000/- made by the AO and sustained by the NFAC on account of capital contribution is valid when the assessee has explained the nature and source of the funds.
Sections Cited
143(3), 147, 144B, 68
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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of NFAC for the assessment year 2014-15 dated 30.3.2024. The assessee raised following main grounds: “2. The Hon’ble NFAC ought to have held that the addition of Rs.1,83,25,000/- is bad in law.
The Hon’ble NFAC, Delhi, ought to have accepted that the firm had purchased the immovable property out of the capital contributed by the partners.
The Hon’ble NFAC ought to have appreciated that in the facts and the circumstances of the case no addition can be made in the hands of the appellant.
5. The Hon’ble NFAC ought to have accepted the explanation of the appellant and deleted the addition of Rs.1,83,25,000/-“.
Ensure Builders and Developers, Bangalore Page 2 of 18 2. Facts of the case are that the assessee is a partnership firm registered in December, 2013 with 3 partners namely a. Sri. Vijay Bhaskara Reddy, b. Sri. Suresh Babu Mitta and c. Sri. Rama Kishore C., who retired on 12.03.2014. The total capital contribution from the partners of the partnership firm is Rs.3,26,25,000/- (Rupees Three Crore Twenty Six Lakhs and Twenty Five Thousand only). The capital contribution of the partners into the partnership firm are as follows: Name of Partner Amount as capital Vijay Bhaskara Rs.1,23,25,000/- Reddy Suresh Babu Mitta Rs.1,28,00,000/- Rama Kishore C Rs.75,00,000/- 2.1 Pursuant to capital contribution and the partnership firm purchased immovable property for Rs. 3,15,48,050/- (Rupees Three Crore Fifteen Lakhs Forty Eight Thousand and Fifty only) wholly from the capital contribution of the partners which was received in the bank account of the partnership firm.
2.2 This being the case, the Assessing Officer has taxed the entire capital contribution that is to say that the Assessing officer has considered the total capital contribution as the total income of the assessee being the Assessee herein and held that the entire sum of Rs. 3,26,25,000/- (Rupees Three Crore Twenty Six Lakhs Twenty Five Thousand only) is liable to be taxed under Section 143(3) read with Sections 147 and 144B of the Income-Tax Act, 1961 (in short “The Act”).
2.3 Further, the capital contribution of the partners and the source has been explained the partners of the partnership firm. During the proceedings before the Assessing Officer, the partners Ensure Builders and Developers, Bangalore Page 3 of 18 were unable to submit the bank statements as the subject-matter is over 8 years and requested for time. In the meantime, the assessing officer erred in passing the assessment order under Section 147 read with Section 144B without granting the partners of the assessee sufficient time to produce the documents and without considering the explanation given by the partners.
2.4 Thereafter, upon passing the assessment order, the assessees challenged the same before the NFAC and the pleaded that no opportunity was given by the Assessing Officer to produce documents and without any application of mind the assessment order was passed. The Assessee and the partners produced various documents as proof of source of funds. The AO was provided an opportunity to provide his comments to submissions, grounds and evidence and a remand order was issued on 05.03.2024 but remand report was not received.
2.5 The NFAC concluded that the assessee has not established the genuineness of certain amounts allegedly received from the partners. The sum in question is a sum of Rs. 1,08,25,000/- from Mr. Vijay Bhaskara Reddy and a sum of Rs.75,00,000/- from Mr. Rama Kishore C totaling to Rs.1,83,25,000/-. The NFAC has accepted the other receipts and thus partly allowed the appeal of the assessee. Hence, the assessee is in appeal before us.
3. The ld. A.R. submitted that the impugned order passed by the NFAC is opposed to law and facts of the case and liable to be dismissed. The NFAC ought to have held that the addition of Rs. 1,83,25,000/- (Rupees One Crore Eight Three Lakhs and Twenty Five Thousand only) is bad in law. He ought to have accepted the submission of the firm that the firm has purchased immoveable property out of the capital contribution of the partners and the documents for proof of the same are produced herewith. He ought to Ensure Builders and Developers, Bangalore Page 4 of 18 have appreciated in the facts and circumstances of the present case no addition can be made in the hands of the Appellant. Further, he ought to have accepted the explanation of the Appellant and delete the addition of Rs. 1,83,25,000/- and the impugned order passed is bad in law. It is trite law that the capital contribution of the firm cannot be treated and taxed as income at the hands the firm. Further, the NFAC did not appreciate or provide the appellant with an opportunity to produce the document evidencing purchase of immoveable property by the firm. The explanation of the source of funds of Mr. Vijay Bhaskarå Reddy was provided to the NFAC. However, without any application of mind without considering the submissions of the partner Mr. Vijay Bhaskara Reddy, the S NFAC passed the impugned order. The ld. A.R. submitted a summary of the source of Mr. Vijay Bhaskara Reddy as below and the bank statements of the partner are enclosed as proof. Sl. From To Date of Amount No. transaction 1. Vijay Bhaskara Ramachandraiah 14.09.2013 Rs.1,00,000/- Reddy 2. Vijay Bhaskara Ramachandraiah 07.10.2013 Rs.18,00,000/ Reddy - 3. Vijay Bhaskara Ramachandraiah 13.09.2013 Rs.17,00,000/ Reddy - 4. M. Nagamani Ramachandraiah 12.09.2013 Rs.20,00,000/ (wife of Mr. - Vijay Bhaskara Reddy) 5. M. Nagamani Ramachandraiah 07.10.2013 Rs.20,00,000/ (wife of Mr. - Vijay Bhaskara Reddy)
3.1 The ld. A.R. submitted that from the above table, it is clear that Mr. Vijay Bhaskara Reddy and his wife Mrs. M. Nagamani had provided loans for a total sum of Rs. 76,00,000/- (Rupees Seventy- Six Lakhs only) to Mr. Ramachandraiah in the year 2013. Mr. Ramachandraiah is none other than the father of Mr. Rama Kishore. The loan was provided by Mr. Vijay Bhaskar Reddy and Mrs. M. Nagamani to Mr. Ramachandraiah as Mr. Ramachandraiah desired Ensure Builders and Developers, Bangalore Page 5 of 18 to purchase an immoveable property. However, upon receipt of the loan for commercial reasons Mr. Ramachandraiah did not pursue with the purchase of immoveable property and suggested to Mr. Vijay Bhaskar Reddy that he will return the money. 3.2 He submitted that since, during the same time Mr. Vijay Bhaskara Reddy was in talks with Mr.Rama Kishore to start a partnership firm and requested Mr. Ramachandraiah to return the money in order to use as capital contribution of Mr. Viajy Bhaskara Reddy. Upon completion of discussions to formulate a partnership firm, the capital contribution to be paid by Mr. Vijay Bhaskara Reddy was Rs. 1,23,25,000/- and accordingly he contributed the same. The NFAC has only considered Rs.15,00,000/- as proper and has disallowed the balance 1,08,25,000/- Since Mr. Ramachandraiah owed a sum of Rs. 76,00,000/-, Mr.Vijay Bhaskara Reddy, he approached Mr. Ramachandraiah to return the loan of Rs. 76,00,000/- and also requested him to additionally provide a sum of Rs. 21,00,000/- (Rupees Twenty One Lakhs only) as loan to him and that he would repay the same within a period of time. 3.3 He further submitted that Mr. Ramachandraiah accordingly returned the money taken as loan earlier and also provided additional funds as loan transferred a sum of Rs. 97,00,000/ - (Rupees Ninety Seven Lakhs only) to the account of Ensure Builders and Developers directly and not to the account of Mr. Vijay Bhaskara Reddy. (The bank statement of Ensure Builders shows a receipt of Rs. 1,42,00,000/- as received from Mr. Ramachandriah and the bank statement of Mr. Ramachandriah also shows the debit entry. Out of the Rs. 1,42,00,000/ - an amount of Rs. 97,00,000/- is to be considered as receipt against Mr. Vijay Bhaskar Reddy). It was because the capital contribution of Mr. Vijay Bhaskara Reddy was not transferred from his account directly, the AO passed an order without any application of mind and the NFAC passed the impugned order without considering the submissions of the Appellant.
Ensure Builders and Developers, Bangalore Page 6 of 18 3.4. He submitted that the balance of Rs. 11,25,000 deposited by Mr. Vijay Bhaskar Reddy is from the hand loans received from his mother Mrs. Chowdeswary for a sum of Rs. 5,00,000/-, from his uncle Mr. Subbareddy for a sum of Rs, 2,00,000/-, from his cousin Mr. Krishana Reddy for a sum of Rs. 2,50,000/ - and from his another cousin Mr. Tirupathi Reddy for a sum of Rs. 3,00,000/-. The source of funds thus explained by the partner ought to have been considered by the NFAC and the impugned order is liable to be set- aside. 3.5 With regards to the capital contribution of Mr. Rama Kishore C of Rs.75,00,000/- the ld. A.R. for the assessee stated in the Appeal Order that for Rs. 30,00,000/- source has been confirmed but the identity of the partner in the form IT return not filed. It is submitted that Mr. Rama Kishore C was employed with EMC Software Pvt Ltd as an HR Manager from April 2013 until September 2013 for the FY 2013-14. During this employment period, all taxes were deducted at source (IDS) as per the employment income. Rama Kishore C embarked on a new venture by starting Ensure Builders as a partner, along with other partners in December 2013. Unfortunately, shortly after starting operations at Ensure Builders, Rama Kishore C, and his family encountered a serious accident in February 2014. This accident resulted in hospitalization for both Rama Kishore and his wife, which necessitated an extended period of recovery and care. As a result of these unforeseen circumstances and the focus on health and family, Rama Kishore inadvertently missed the deadline for filing his income tax returns for the financial year in question (likely FY 2013-2014). Despite intentions to file later, the opportunity to do so was missed due to the time constraints of the filing window and his personal medical and financial conditions. 3.6 He submitted that for the balance Rs. 45,00,000/- contribution by Mr. Rama Kishore C, it is submitted that Mr. Rama Chandraiah provided this amount as a loan to his son, Mr. Rama Ensure Builders and Developers, Bangalore Page 7 of 18 Kishore C. (An amount of Rs. 1,42,00,000/- was transferred directly to Ensure Builders account on 23 December 2013 by Rama Chandraiah. Out of the Rs. 1,42,00,000/- while Rs. 97,00,000/- is appropriated towards Mr. Vijay Bhaskar Reddy the balance amount of Rs. 45,00,000/ - is extended as loan to his son and is to be considered as receipt against Mr. Rama Kishore) (Transactions are reflected in both Ensure Builders bank Statement and Rama Chandraiah's Bank Statement) 3.7 The ld. A.R.. submitted that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year: [Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless - (a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: 3.8 He submitted that In the analysis of Section 68, only the credits that are not explained should be charged to the income tax as income of the assessee. However, in the given case, the assessee has clearly explained the sources of funds along with relevant supporting documents (such as bank statements, confirmation letters, etc.). Relevant Case Laws relied on as follows: 3.9 ACIT Vs Ambika Enterprises (ITAT Delhi): He submitted that the case of ACIT vs Ambika Enterprises adds to the legal understanding of capital contributions by partners in a firm and the application of section 68. The ruling underscores the Ensure Builders and Developers, Bangalore Page 8 of 18 importance of the proper attribution of responsibility for explaining the nature of funds. By upholding the order of Ld. CIT(A), the court has emphasized that if the genuineness of the sources. Therefore, section 68 will not be applicable in this case as the assessee has provided a satisfactory explanation for the nature and source of the capital introduced into the firm, and the credits are clearly reflected in the bank statements, unless the A.O(s) brought on record tangible material/ evidence to prove that the amounts, which had been received by the investors/ lenders from their sub- investors/ sub-lenders were actually received by Such sub- investors/sub-lenders from the Assessee(s) herein and that the same as unaccounted funds of the Assessee (s) herein from sources. We have carefully considered on both sides and perused the materials on record. We find that in this case there is no ambiguity about the of the partner and capital introduced from him. The ITAT held that the assessee had explained the fund flow and was not routing transactions between various companies. The assessee was the ultimate beneficiary of the funds introduced as share capital.
3.10 Madhya Pradesh High Court – CIT Vs. Metachem Industries (200) 245 ITR 160 (MP) It was held that, according to Section 68, the burden was on the assessee to satisfactorily explain the credit entry in the books of account in the previous year and in a case where satisfactory explanation had been given by establishing that the amount had been invested by a particular person, be he a partner or any individual, then the burden of the assessee firm is discharged and the credit entry could not be treated to be income of the firm. 3.11 Sanmin Trading & Holding Pvt. Ltd. vs ITO (ITAT Kolkata)
ITAT states that section 68 of the Act provides that if any sum found credited in the year in respect of which the assessee fails to explain the nature and source shall be assessed as its undisclosed income.
Ensure Builders and Developers, Bangalore Page 9 of 18 In the facts of the present case, both the nature & source of the share application received was fully explained by the assessee. The assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the share applicants. 3.12 The ld. A.R. further submitted that in the given case, that the Third party is "Mr. Ramachandraiah" whose income was identified, and genuineness of the transaction was also verified. He transferred a total amount of Rs.97,00,000 to M/S Ensure Builders & Develop on behalf of Mr. Vijaya Bhaskar Reddy as a part of loan repayment of Rs.76,00,000 towards Mr. Vijaya Bhaskar Reddy and the remaining amount of Rs.21,00,000 was provided additionally as a hand loan to Mr. Vijaya Bhaskar Reddy (provided schedule for your reference). And Mr. Ramachandraiah had transferred an amount of Rs.45,00,000 to M/s. Ensure Builders & Developers as a capital contribution on behalf of Mr. Rama Kishore (his son). (Confirmation letter from Mr. Ramachandraiah is provided for reference) The Source of funds of Mr. Ramachandraiah has been identified as it was a loan amount borrowed by Mr. Ramachandraiah from Reliance Capital Limited, secured against a property for an amount of Rs. 1,31,95,476. The same amount was credited in his Bank Statement on 23rd December 2013. 3.13 Further, the IT department questioned only explanation for unexplained credits, and never raised about authenticity of the transactions. The following were the summary of loans taken by Mr. Vijaya Bhaskar Reddy from various parties: S.No. From To Amount 1. M. Chowdeswari Vijay Bhaskar Reddy 5,00,000 2. Y. Subba Reddy Vijay Bhaskar Reddy 2,00,000 3. Y. Krishna Reddy Vijay Bhaskar Reddy 2,50,000 4. Y. Tirupati Reddy Vijay Bhaskar Reddy 3,00,000 Total 12,50,000 Ensure Builders and Developers, Bangalore Page 10 of 18 Therefore, in the light of the above grounds, he respectfully prayed that this Tribunal may be pleased to quash/set aside the impugned order passed by the NFAC under section 250 of the Act dated 30.03.2024.
3.14 He also drew our attention to the confirmation letters furnished by Ramachandraiah stating that he has transferred 1.42 Crores to Ensure Builders and Developers and which is apportioned as follows:
Ensure Builders and Developers, Bangalore Page 11 of 18 Ensure Builders and Developers, Bangalore Page 12 of 18 3.15 He also furnished bank statement explain the date of transaction as follows:
3.16 He also drew our attention for lending a sum of Rs.5 lakhs loan on her son Shri Vijaya Bhaskar Reddy which is kept on record at page 11 of the paper book. He also drew our attention to the confirmation letter issued by M. Subba Reddy to his uncle Mr. V.B. Reddy which is kept on record at page 12. Confirmation letter from Y.K. Reddy for giving loan of Rs.2.5 lakhs, V.B. Reddy, which is kept on record at page 13. Y.T. Reddy for giving a loan of Rs.3 lakhs to V.B. Reddy. Confirmation letter from M. Nagamani wife of Vijay Bhaskara Reddy for lending Rs.5 lakhs and also bank account statement from the respective parties in support of the transfer of amount to the concerned parties.
4. The ld. D.R. submitted that assessee has not explained the source for Rs.1,83,25,000/-. Hence, the addition has been made by ld. AO, which has been sustained by ld. CIT(A) and prayed to sustain the same.
We have heard the rival submissions and perused the materials available on record. In this case, the ld. CIT(A) confirmed the addition on the reason as follows:
Ensure Builders and Developers, Bangalore Page 13 of 18 5.1 The assessee also explained that Ramachandraiah has borrowed money from Vijay Bhaskara Reddy. The said amount of Rs.76 lakhs has been returned to the assessee to Ramachandraiah by Vijay Bhaskara Reddy as follows:
5.2 To support this, assessee filed the bank statement copy of Ramachandraiah wherein the transfer of Rs.1.42 crores to assessee is reflected.
Ensure Builders and Developers, Bangalore Page 14 of 18 5.3 Further, the ld. D.R. made a contention that there was no sources to pay Rs.1.42 crores by Ramachandraiah to present assessee. However, we notice from the above that there was an inflow by way and sum of R.1,31,95,476/- on 23.12.2013 to his bank account. The assessee also filed an evidence for sources for above amount as loan availed from Ramachandraiah from Reliance Commercial Finance Ltd. for the financial year 2014-15 relevant to the assessment year 2015-16 and thereafter, Ramachandraiah issued a cheque for Rs.1.42 crores which is apportioned as follows: i. Rs.76,00,000/- towards the repayment of a loan to Mr. Vijaya Bhaskar Reddy & his wife Ensure Builders and Developers, Bangalore Page 15 of 18 ii. An additional hand loan of Rs.21,00,000 provided to Mr. Vijaya Bhaskar Reddy iii. And the balance amount of Rs.45,00,000 provided as a loan to Mr. Rama Kishore (My son) which transferred to M/s. Ensure Builders & Developers as a capital contribution on behalf of him. 5.4 He also filed statement of account of Ramachandraiah from Reliance Commercial Ltd. from 2.12.2013 to 22.9.2014.