Capital introduced by partner can not be taxed in firms hand as undisclosed income. It could be added in the hands of partners only – ITAT
ABCAUS Case Law Citation:
ABCAUS 2866 (2019) (04) ITAT
Important Case Laws Cited/relied upon by the parties
India Rice Mills vs. CIT reported in 218 ITR 508
The assessee was a partnership firm. The firm had challenged the order of the CIT(A) in confirming the addition made by the Assessing Officer on account of capital introduced by the one of the partner of the firm.
It was the case of the assessee that the capital introduced by any of the partners has to be taxed in the hands of the partner and not in the hands of the firm. It was submitted that the Hon’ble High Court had held so and various Benches of the Tribunal are also taking this consistent view that addition.
The Tribunal observed that it had been held in various decisions that when any partner invests or contributes in capital to the partnership firm, it is the partner who has to explain the source of such contribution and addition, if any, can be made in the hands of the partner only u/s 68 or 69 of the Income Tax Act, 1961 (the Act) and no addition can be made in the hands of the firm.
The Tribunal noted that the Hon’ble High Court while dealing with an identical case had held that it is for the partners to explain the source of the deposits and if they fail to discharge the onus, then, such deposits could be added in the hands of the partners only.
Following the decision the Tribunal opined that no addition in the hands of the firm could have been made and addition, if any, can be made only in the hands of the partner who has contributed such capital.
Accordingly, the order of the CIT(A) was set aside and the ground raised by the assessee on this issue was allowed.