No Addition Can be Made Against Firm for Capital Contributed by Partners: ITAT Upholds CIT(A)’s Ruling

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has quashed two additions made by the Income Tax Department towards the cash deposits and the unexplained capital accretion.

Cash Deposits During Demonetisation

The assessee, New Surroad Ginning and Pressing Factory, allegedly made cash deposits of Rs 1,34,20,228 during the demonetisation. The AO noted that this cash deposit during the demonetisation was much higher than the cash deposits made in the same period for the previous financial year. He made an addition of the same amount, treating it as income from unexplained sources, claiming that the assessee had not submitted any satisfactory explanation.

The CIT partly accepted the explanation and allowed 20% of the cash deposits and confirmed the balance addition. The revenue has challenged this before the ITAT. The assessee has also filed an appeal arguing that the CIT(A) should have deleted the entire addition.

Before the ITAT, the assessee submitted that it used the cash received from sales for buying raw cotton from the market and during the demonetisation, the assessee had no option but to deposit the cash in the bank. Due to this, the cash sales during the demonetisation were higher than in the earlier years.

The ITAT agreed with the assessee’s explanation that the cash sales were the normal part of the business. The ITAT concluded that the assessee had sufficiently explained the source of the cash deposits and deleted the addition of Rs 1,34,20,0228.

Unexplained Accretion to Partner’s Capital Account

The Revenue had also challenged the deletion of an addition of Rs 4,16,98,589 u/s 68 by CIT(A) towards the unexplained capital accretion to the capital account of the firm’s partner. The CIT(A) has held that section 68 cannot be invoked against a firm for capital contributions made by the partner.

ITAT upheld the CIT(A)’s findings that no additions can be made in the hands of the firms towards the capital contribution made by the partners of the firm. The assessing officer can make an inquiry against the individual partners. Therefore, this addition was deleted by the tribunal.