Partnership Firm not liable to Explain Source of Capital Introduced by Partners: ITAT

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By Rasheela Basheer – On March 27, 2022 12:00 pm

Partnership Firm - Source of Capital - capital - Partners - ITAT - firm - Taxscan

The Delhi bench of the ITAT, on Friday held that the partnership firm would not be liable to explain the source of capital introduced by the partners to such Firm under section 68 of the Income Tax Act, 1961.

The assessee, which is a partnership firm, was selected through CASS for scrutiny and statutory notice u/s 143(2)of the Act was issued. The partners of the assessee had issued capital of Rs. 2 crore each in the firm for which explanation was sought to explain the source of the amount of Rs. 4 crores introduced by the partners in the firm. The assessee informed the AO that amount was introduced by way of cheques by the two partners but the cheques could not be cleared and were returned by the assessee within two days. The assessee also submitted that this exercise was done to improve the bank ratio to satisfy the bankers of the assessee from which credit facilities were obtained.

After perusing the facts and documents, the Tribunal found that the AO had observed from the books of accounts that the entry was fictitious and was reversed immediately in next FY on 1/4/2014, without any actual cash flow.

“But Ld AO was carried away by morality of accounting practices by holding that there is no concept like notional entries in the preparation of books of accounts and to which more pragmatic view was taken by the Ld FAA by accepting the plea of assessee and observing in para 11 of its order that “ the entire story is one of series of entries passed with a view of shoring up its current ratio for showing the same to the bank for better interest on loans raised,” the Tribunal observed.

Relying on the provisions of the Act, the two-Member bench comprising Sh. R.K.Panda, Accountant Member And Sh. Anubhav Sharma, Judicial Member observed that even otherwise the onus on the assessee was discharged with the explanation that there was no actual flow of funds and that explanation being factual could not have been rebutted on deemed fiction.

“Thus Ld. FAA was correct in following the ratio laid by Hon’ble Calcutta High Court in Jatia Investment Co. Ltd. V. CIT(1994) 206 ITR 718 (Cal), that fictitious entry not backed up by funds may not be taxable as “Cash Credit”, the Tribunal said.

Dismissing the appeal filed by the Revenue, the Tribunal concurred with the findings of the First Appellate Authority and held that “Then FAA has also taken into consideration the fact that the entries were not from strangers but from the partners by way of introduction of capital so the correct course would have been to bring the capital introduced to tax in the hands of the partners as their unexplained income.”To Read the full text of the Order CLICK HERE

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