Income-tax addition for partners’ capital contribution cannot be made in firm’s hands, ITAT holds

5-Second Takeaway

Addition under s. 68 could not be made in the hands of the partnership firm for capital introduced by its partners. If the Revenue doubted the partners’ creditworthiness or the genuineness of their contribution, any addition had to be made in the partners’ hands, not in the firm’s hands.

The case concerned capital introduced into a partnership firm by two partners. The Assessing Officer treated contributions of Rs. 44,50,000 and Rs. 70,00,000 as unexplained on the footing that the partners’ creditworthiness and the genuineness of the capital introduction had not been established, and the CIT(A) upheld that view.

The tribunal noted that the partners had admitted making the capital contributions. It held that once capital is introduced by partners into a firm, the absence of satisfaction about the partners’ creditworthiness does not justify an addition in the firm’s hands under s. 68.

Relying on earlier authority, the tribunal reiterated that any unexplained element, if at all, must be examined in the hands of the partners who made the contribution. The addition of Rs. 1,14,50,000 was therefore deleted.

The appeal was allowed.