ITAT Chandigarh Strikes Down Rs. 3.85 Crore Addition on Dissolved Firm: Jugal Kishore And Sons Vs ITO

Overview of the Case

The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, delivered a significant ruling in the matter of Jugal Kishore And Sons Vs ITO, concerning Assessment Year 2015-16. At the heart of the dispute was an addition of ₹3,85,46,094 made by the Assessing Officer (AO) in the hands of a partnership firm that had already ceased to exist years before the relevant assessment year. The Tribunal ultimately sided with the assessee, holding that taxing a non-existent entity was legally unsustainable, and that bringing the same deposits to tax once again would result in impermissible double taxation.

Background and Constitution of the Firm

The assessee, M/s Jugal Kishore & Sons, was originally constituted as a partnership firm in July 2010, with two partners — Sh. Mohit Manchanda (son of Sh. Jugal Kishore) and Sanjeev Kumar (also son of Sh. Jugal Kishore). Following the formation of the firm, a cash credit limit account was opened in the firm's name with Union Bank of India, bearing Account No. 520605040200610.

However, the firm did not survive long. It was formally dissolved on 30 September 2011, and the business was subsequently taken over and continued as a proprietorship concern by Sh. Mohit Manchanda under the same trade name. Upon conversion, the KYC formalities for the existing bank account were completed, and the same bank account continued to be operated — now by the proprietor — for the purposes of the ongoing business.

How the Tax Proceedings Were Initiated

During Assessment Year 2015-16, total deposits amounting to ₹3,85,46,094 were found in the above-mentioned bank account. The Revenue proceeded on the assumption that these deposits belonged to the partnership firm and that the firm had not filed any return of income for the year under consideration.

Based on these observations, a show cause notice under Section 148A(b) of the Income Tax Act, 1961 was issued to the assessee, calling upon it to explain why the case should not be reopened under Section 148. In response to this notice, the assessee clearly communicated that the firm had been dissolved as far back as 30.09.2011, and that the business — along with the bank account — had been taken over by Sh. Mohit Manchanda as a proprietorship concern operating under the same name.

Despite this explanation, the AO passed an order under Section 148A(d) and proceeded to reopen the assessment by issuing a notice under Section 148 dated 07.04.2022. Following assessment proceedings, the AO made a blanket addition of the entire bank deposits of ₹3,85,46,094 to the income of the assessee firm.

Proceedings Before the CIT(A)

Aggrieved by the AO's order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi. Before the CIT(A), the assessee reiterated that: