Without an investigation, the firm’s cash deposit cannot be added to the partner’s personal income: ITAT

The Amritsar Bench of the Income Tax Appellate Tribunal (ITAT), comprised of Anikesh Banerjee (Judicial Member) and Dr. M. L. Meena (Accountant Member), has ruled that a firm’s cash deposit cannot be added to the partner’s income without examination. On March 15, 2013, the assessee received a notification under Section 148 of the Income Tax Act. The assessee filed his income tax return, stating NIL income because there was no income and the assessee simply acquired a property. The AO documented the reasons.

During the assessment process, the assessor explained the source of investment. The assessee said that the money of Rs. 5,00,000 was received from his father, Sahib Dayal, as part of the selling agreement for the brickkiln. A copy of the sale agreement was submitted to the lower authorities. The entire consideration for the brickkiln was declared to be Rs. 14,18,000, with an advance of Rs. 500,000 alleged to have been received. The remaining money, Rs. 1,53,750, was paid from the family’s savings. Thus, the assessee has completely explained the assessee’s stake in the purchase of property, which was the only share in M/s. Real Estate.

The AO inquired about the existence of the firm M/s. Real Estate, as the assessee was a co-owner of the firm. The business has deposited Rs. 25,67,950 in cash. Considering the cash as an unreported source, the assessee’s stake in the business was 30%, i.e., an amount of Rs.7,70,000 connected to the cash deposit in the firm’s account was added back to the assessee’s total income. However, the AO did not add any sums from his recorded observations.

The assessee complains that the AO deducted the firm’s cash deposit, M/s. Real Estate, from the assessee’s total revenue.

The assessee maintained that the firm’s cash deposit should not be included in the assessee’s total income as a partner in the firm. The independent evaluation should be done in the firm account, and the addition should be requested as a result.

The ITAT determined that AO had committed a heinous breach of natural justice. How was the sum put in the firm’s account returned to the partner’s hand without the firm’s assessment? The AO has entirely departed from the reported explanation and evaluation addendum.

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