The partnership firm cannot be taxed on capital introduced by a partner if the partner's identity and creditworthiness are established, confirming the absence of unexplained income.

आदेश/ORDER

PER MAKARAND V. MAHADEOKAR, AM:

This appeal by the Revenue is directed against the order dated 26.09.2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] for the Assessment Year (AY) 2018-19, whereby the CIT(A) deleted the addition of Rs.8,00,00,000/- made by the Assessing Officer [hereinafter referred to as “AO”] under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] vide order dated 17.05.2021 passed under section 143(3) read with section 144B of the Act.

Facts of the Case:

2. The assessee is a partnership firm engaged in the business of cattle/poultry/aqua/livestock and dairy farms. It was constituted on 31.10.2017 with two partners namely Goodfarms Calfcare LLP and Rellonge Traders LLP. The firm filed its return of income for A.Y. 2018-19 on 24.12.2018 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 amounting to Rs.16,00,00,000/-, of which Rs.8,00,00,000/- was contributed by each of the two partners.

3. During the course of assessment proceedings, the AO issued notices under sections 143(2), 142(1) and 133(6) of the Act. The assessee furnished its partnership deed, audited financials, ITRs, bank statements, and ledger accounts of the partners. In response to the show-cause notice dated 24.02.2021, 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 Rellonge Traders LLP responded to the notice under section 133(6) of the Act and provided documentary evidence. The other partner, Goodfarms Calfcare LLP, did not respond. Relying solely on the non-response, the AO treated the capital contribution of Rs.8,00,00,000/- by Goodfarms Calfcare LLP 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.

4. 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.

4.1. The assessee submitted that the non-response of Goodfarms Calfcare LLP 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.

4.2. 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 in the case of CIT v. Pankaj Dyestuff Industries (I.T. Ref. No. 241 of 1993), 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 of Rs.8,00,00,000/- under section 68 of the Act.

6. Aggrieved by the orde