Capital contribution by a partner through banking channels cannot be added as unexplained cash credit.

The Appellant-assessee filed its return for AY 1997-98 declaring a loss.

During scrutiny, the Assessing Officer (AO) observed that the firm had revalued its land and building and credited the surplus to partners' accounts.

Shri S.B. Jariwala (HUF) was admitted as a partner on 09.11.1996 and contributed ₹6,40,000 as capital.

The AO added this amount as unexplained cash credit under Section 68 of the Income Tax Act, 1961, as the partner failed to provide a personal confirmation due to inter-partner disputes and lacked a PAN at the time.

The CIT(Appeals) and the ITAT confirmed this addition, holding that the assessee failed to prove the creditworthiness of the partner or the genuineness of the transaction.

1. Whether, in the facts and circumstances of the case, the Tribunal erred in law in confirming the addition of ₹6,40,000 under Section 68 of the Income Tax Act, 1961, without taking into consideration the evidence on record, resulting in a perverse finding.

Section 68 of the Income Tax Act, 1961, which provides that if any sum is found credited in the books of an assessee and the assessee offers no explanation or an unsatisfactory explanation about its nature and source, the sum may be charged to income tax.

CIT v. Pankaj Dyestuff Industries (IT Reference No. 241 of 1993), which established that if a partner admits to the capital contribution, the firm’s primary onus is discharged; any further inquiry into the partner's source of funds should be conducted in the partner's individual assessment rather than the firm's.

The High Court observed that the ITAT committed a grave error by ignoring documentary evidence.

The assessee had produced pay-in slips and accounts showing that the ₹6,40,000 was received through bank instruments (Demand Drafts) on specific dates following the partner's induction.

The Court noted that the Revenue did not dispute the induction of the partner or the receipt of funds via bank channels.

Once the firm identifies the partner and shows the receipt of capital through bank channels, it has discharged its primary onus under Section 68.

The ITAT’s finding was deemed "perverse" because it claimed there was no evidence of the mode of payment despite demand draft details being on record.

The absence of a partner's confirmation due to a dispute does not invalidate the objective evidence of the transaction.

It held that the Tribunal's finding was perverse for ignoring material evidence.

The Court ordered the deletion of the ₹6,40,000 addition made under Section 68, as the assessee had sufficiently explained the nature and source of the credit as a partner's capital contribution.

The Tax Appeal was allowed.