Unexplained Partner Capital Cannot Be Taxed in Firm’s Hands: Analysis of Galaxy Buildcon Vs ITO (ITAT Raipur)

1. Background of the Dispute

The Raipur Bench of the Income Tax Appellate Tribunal in Galaxy Buildcon Vs ITO (ITAT Raipur) dealt with a core issue under Section 68 of the Income Tax Act 1961:
Whether unexplained capital introduced by partners in a partnership firm can be treated as unexplained cash credit in the firm’s hands, or whether such enquiry and addition must be confined to the partners individually.

The appeal pertained to Assessment Year 2015-16 and challenged the order of the CIT(A), Raipur-3 dated 30.01.2026, which had affirmed an addition of Rs. 1,14,50,000/- in the hands of the partnership firm under Section 68.

Galaxy Buildcon is a partnership firm engaged in construction activities. The firm was constituted on 31.10.2014 with four partners contributing capital in cash and land aggregating to Rs. 3,81,33,000/-.

2. Delay in Filing Appeal and Condonation

The assessee’s appeal before the Tribunal was filed with a delay of 9 days. An application for condonation of delay, supported by an affidavit, explained that the assessee’s father was seriously ill and the assessee was occupied in attending to him, leading to the delay in filing.

The Tribunal:

• Examined the affidavit and submissions.

• Considered the principles laid down by the Supreme Court in:

  • Collector, Land Acquisition Vs. Mst. Katiji & Ors., 167 ITR 471 (SC)
  • Inder Singh Vs. The State of Madhya Pradesh, 2025 LiveLaw (SC) 339

Relying on these decisions, the Tribunal reiterated:

• When substantial justice comes into conflict with technical considerations like limitation, substantial justice should prevail.
• Condonation of delay merely allows the matter to be decided on merits; refusal to condone can defeat a meritorious case at the threshold.
• As observed in Inder Singh Vs. The State of Madhya Pradesh, where the merits require examination, limitation alone should not obstruct consideration.

Accordingly, the delay of 9 days was condoned and the appeal was admitted.

3. Constitution of the Firm and Capital Introduced

The partnership firm was constituted on 31.10.2014 with four partners and the following capital contributions and profit-sharing ratios:

The assessee filed its return of income on 22.03.2016, declaring Nil income. The case was selected for scrutiny and notices under Section 143(2) and Section 142(1) were issued and complied with.

During assessment, the Assessing Officer (AO) focused on the nature and source of the partners’ capital credited in the books of the firm.

4. AO’s Examination Under Section 68

4.1 Partners Whose Capital Was Accepted

The AO accepted the capital contributions of:

• Sunil Sahu – Rs. 58.33 lakh
• Vijay Nagpure – Rs. 55 lakh

No addition was made in respect of these two partners.

4.2 Capital of Khushi Kundani – Issues Noted by AO

In respect of Khushi Kundani, who contributed Rs. 51 lakh, the AO observed:

• Bank statements showed that around Rs. 20 lakh out of Rs. 51 lakh was invested immediately after cash deposits in the bank account.
• The AO examined the financials of R.S. Automobile, the proprietary concern of this partner, for F.Y. 2013-14 and F.Y. 2014-15.
• Based on the balance sheet and Profit & Loss account, the AO concluded that the partner’s creditworthiness was not satisfactorily demonstrated.

4.3 Capital of Liyakat Baig – Issues Noted by AO

For Liyakat Baig, who claimed to have contributed Rs. 2.17 crore, the composition was:

• Land introduced into the firm valued at Rs. 1.47 crore
• Cash contribution of Rs. 25 lakh
• Balance through transfers, including Rs. 45 lakh identified by AO as unexplained

Observations of the AO:

• The personal return of Liyakat Baig did not disclose any capital gains in respect of the transfer of land worth Rs. 1.47 crore to the firm.

• No personal capital account or personal balance sheet was produced.

• The AO considered:

  • The Rs. 25 lakh cash introduction, and
  • The Rs. 45 lakh transferred amount

  as unexplained, particularly in the context of low returned incomes:

  • Returned income of Rs. 2,84,260/- for A.Y. 2014-15
  • Negative income of Rs. (-) 35,042/- for A.Y. 2015-16

4.4 Addition Made by AO

After further queries:

• The AO accepted the creditworthiness of:

  • Khushi Kundani to the extent of Rs. 6,50,000/-
  • Liyakat Baig to the extent of Rs. 1.47 crore (value of land)

• The remaining amounts were treated as unexplained cash credits under Section 68 in the firm’s hands:

  • Khushi Kundani – Rs. 44,50,000/-
  • Liyakat Baig – Rs. 70,00,000/-

• Total addition: Rs. 1,14,50,000/-

The AO held that the firm had not established the required tests of identity, creditworthiness and genuineness under Section 68, and therefore treated the balance capital as unexplained income of the firm.

5. Findings of the CIT(A)