Mere failure of partner to respond to notice u/s 133(6) does not ipso facto establish that the capital is unexplained – ITAT upheld deletion of addition u/s 68
In recent case, ITAT Ahmedabad has upheld that the failure of the partner to respond to a notice under section 133(6) of the Act does not ipso facto establish that the capital is unexplained. In the 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.
ABCAUS Case Law Citation:
4506 (2025) (04) abcaus.in ITAT
In the instant case, the Income Tax Department had challenged the order passed by the CIT(A) in, National Faceless Appeal Centre deleting the addition made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961 (the Act).
The assessee was a partnership firm engaged in the business of cattle/poultry/aqua/livestock and dairy farms. It was constituted with two partners LLP. The firm filed its return of income for the relevant Assessment Year 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 of Rs. 16 crores contributed equally by each of the partner LLPs.
In response to the show-cause notice 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 on partner responded to the notice under section 133(6) of the Act and provided documentary evidence. The other partner, did not respond. Relying solely on the non-response, the AO treated the capital contribution of by said partner 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 by one partner 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 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 made under section 68 of the Act.
Before the Tribunal, the Revenue placed strong reliance on the decision of the Hon’ble Rajasthan High Court 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 Tribunal observed that the AO proceeded to make the addition solely on the basis that the one partner 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. 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 Tribunal concurred 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 had not been done in the present case.
The Tribunal further observed that the assessee’s legal position was fortified by several judicial precedents including the decision of the Gujarat High Court 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 another case 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. The Revenue’s Special Leave Petition in that case was dismissed.
The Tribunal held that the CIT(A) was justified in deleting the addition made under section 68 of the Act. The assessee had satisfactorily discharged the onus cast upon it by furnishing adequate evidence to prove the identity, genuineness and creditworthiness of the partner. Accordingly, the appeal filed by the Revenue was dismissed.
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