Partner's Share of Firm Profit Cannot Be Assessed as Unexplained Cash Credit Under Section 68 — ITAT Mumbai Allows Appeal on Dual Grounds
Overview of the Dispute
The Income Tax Appellate Tribunal, Mumbai "H" Bench, examined an appeal filed by Ketan Tokershi Shah against the order passed by the Commissioner of Income Tax (Appeals), Pune-11, dated 09.02.2023, pertaining to Assessment Year 2016-17. The appeal raised two distinct and significant issues — first, whether the Deputy Commissioner of Income Tax possessed the requisite jurisdiction to conduct the assessment, and second, whether a partner's share of profit from a partnership firm could legitimately be assessed as unexplained cash credit under Section 68 of the Income-tax Act, 1961.
The Tribunal ultimately ruled in favour of the assessee on both counts — holding the assessment void for want of jurisdiction and, additionally, directing deletion of the impugned addition on substantive merits.
Background Facts
The assessee, an individual, held partnership interests in several firms, one of which was M/s Monarch and Qureshi Builders, a real estate and construction enterprise. For Assessment Year 2016-17, the assessee filed a return of income on 12/10/2016 declaring total income of Rs. 11,50,250/-.
During scrutiny proceedings, the Assessing Officer observed that the assessee had claimed a share of income from partnership firms aggregating Rs. 11,97,78,596/- as exempt. This figure comprised Rs. 6,16,83,505/- attributable to M/s Monarch and Qureshi Builders and Rs. 3,99,50,000/- from M/s Ravi Developments.
The Assessing Officer further noted that M/s Monarch and Qureshi Builders had declared income of Rs. 12,33,67,010/- for Assessment Year 2015-16 under the Income Declaration Scheme, 2016 (IDS-2016), but had not discharged the tax liability arising under that scheme. On this basis, the Assessing Officer took the position that the assessee's corresponding share of profit from the firm could not be treated as exempt, and proceeded to assess the credit of Rs. 6,16,83,505/- as unexplained cash credit under Section 68 of the Income-tax Act, 1961.
First Appellate Stage: CIT(A) Upholds the Addition
The assessee challenged the addition before the CIT(A), Pune-11, without success. The CIT(A) upheld the Assessing Officer's action, recording the following findings:
"15. In the present case an amount of Rs. 6,16,83,505/- has been credited in the capital account of the assessee on 01/04/2015. Further, the said credit entry is not a mere book entry because out of this amount, the appellant has utilized Rs. 3,76,74,930/- by way of cash withdrawal on 30/12/2016. Therefore, the said credit entry of Rs. 6,16,83,505/- clearly falls within the ambit of sec. 68 of the Act..."
"19. Considering the totality of facts of the case, I am of the opinion that the appellant has miserably failed in discharging his onus for satisfactorily explaining the credit entry of Rs. 6,16,83,505/- made in his capital account on 01/04/2015. Therefore, the addition of Rs. 6,16,83,505/- made by the Assessing Officer u/s 68 of the Act, is upheld."
Dissatisfied with this outcome, the assessee preferred a further appeal before the ITAT Mumbai.
Issues Before the ITAT Mumbai
Before the Tribunal, the assessee raised three grounds on merits concerning the Section 68 addition, along with the following additional jurisdictional ground:
"Additional Ground of Appeal: – 1 That on the facts and circumstances of the case and in law, the assessment order passed by Ld. DCIT is wholly without jurisdiction. Hence, the assessment order along with consequential proceeding are liable to be quashed. It is humbly submitted that as per CBDT Instruction No. 1/2011 dated 31-01-2011, if the declared income of the assessee is less than Rs. 20 lakhs, the jurisdiction of the assessee case lies with ITO and not with DCIT. In the present case for AY 2016-17, the assessee has declared an income of Rs. 11,50,260/-. Therefore, in view of the aforesaid instruction, the jurisdiction of the assessee case lies with ITO and not with DCIT. Hence, the assessment order passed by Ld. DCIT is wholly without jurisdiction and liable to be quashed."