Addition Under Section 69 Unproductive When Immovable Property Purchases Are Recorded in Books

By | August 15, 2026
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Addition Under Section 69 Unproductive When Immovable Property Purchases Are Recorded in Books

Issue

Whether an addition under Section 69 for unexplained investments can be made in the hands of a partnership firm when the acquisition of immovable properties is fully recorded in the firm’s books of account and funded through partners’ capital contributions.

Facts

  • Assessee Profile: The assessee is a partnership firm engaged in real estate development, assessed for Assessment Year 2016–17.
  • Property Acquisition: The firm purchased immovable properties during the relevant year, which were fully and explicitly recorded in its regular books of account.
  • Funding Source: The source of funds for the property purchases was consistently explained and shown as capital contributions made by the partners, which were credited to their respective capital accounts.
  • AO’s Disallowance: The Assessing Officer (AO) made an addition under Section 69 in the hands of the firm, reasoning that the partners had filed returns reflecting meagre income and failed to adequately substantiate the source of cash introduced into the firm.
  • Evidentiary Compliance: The identity of the partners was never disputed. The firm furnished the partners’ PAN details, returns of income, balance sheets, and capital account statements before the AO.

Decision

  • Applicability of Section 69: The Tribunal held that Section 69 applies strictly to unrecorded investments. Since the investments in immovable properties were duly recorded in the firm’s books of account, Section 69 could not be invoked.
  • Recorded Source of Capital: Because the funds were clearly credited in the partners’ capital accounts and the partners’ identities were established through tax returns and balance sheets, any inquiry into the source of capital belonged in the hands of the individual partners, not as an unexplained investment of the firm.
  • Addition Deleted: The addition made under Section 69 was held to be unsustainable both on facts and in law.
  • Outcome: Decided entirely in favor of the assessee.

Key Takeaways

  • Section 69 Requires Unrecorded Investments: Section 69 specifically targets investments that are not recorded in the books of account maintained by the taxpayer. Once an asset is disclosed in the books, Section 69 cannot be legally applied.
  • Firm vs. Partner Tax Liability: When a partnership firm records property purchases funded by partner capital contributions, any doubt regarding the source of those capital contributions must be examined in the hands of the respective partners (e.g., under Section 68), rather than making an unexplained investment addition on the firm under Section 69.
IN THE ITAT CHENNAI BENCH ‘B’
Balaji Associates
v.
Income-tax Officer
Manu Kumar Giri, Judicial Member
and Ms. Padmavathy S., Accountant Member
IT APPEAL No. 1329 (Chny) OF 2026
[Assessment year 2016-17]
JULY  30, 2026
Y. Sridhar, FCA for the Appellant. Shiva Srinivas, CIT for the Respondent.
ORDER
Manu Kumar Giri, Judicial Member.- This appeal is directed against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) [CIT(A)] dated 11.02.2026 for the Assessment Year (AY) 2016-17 arising out of the assessment framed u/s.147 r.w.s 144B of the Income Tax Act, 1961 (“the Act”).
2. The assessee has filed the following grounds of appeal as mentioned below: –
1. The Ld. CIT(A) erred in confirming the reopening of assessment under section 147.
2. The reopening was based on borrowed satisfaction from the assessment of one of the partners without independent application of mind by the Assessing Officer of the appellant firm.
3. The reasons recorded do not demonstrate any tangible material establishing a live link between the information received and alleged escapement of income.
4. The reopening is therefore bad in law and liable to be quashed.
5. The Ld. CIT(A) erred in confirming the addition of Rs.3,18,50,000/- as unexplained investment under section 69.
6. The investment was duly recorded in the books of account of the firm. Therefore, section 69 has no application.
7. The addition was made without rejecting the books of account.
8. The source of investment was partners’ capital contribution, which was duly explained and reflected in capital accounts.
9. Once partners have sufficient capital and the source is explained, no addition can be made in the hands of the firm.
10. The Ld. CIT(A) failed to appreciate that in the partner’s case, the addition was deleted on the ground that the property belonged to the firm.
11. Having accepted that the asset belongs to the firm, the AO cannot treat the same as unexplained without disproving source in firm’s books.
12. The appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.
3. Brief facts of the case: The assessee is a registered partnership firm consisting of eight partners engaged in the business of real estate development. For the AY 2016-17, it filed its return of income declaring Nil income, which was processed u/s.143(1) of the Act. Subsequently, during scrutiny assessment proceedings in the case of one of the partners, it was noticed that certain immovable properties had been purchased in the name of the firm. The Assessing Officer (AO) in the partner’s case treated the investment as unexplained in the hands of the partner. However, the ld.CIT(A), in the partner’s appeal, deleted the addition by holding that the property belonged to the partnership firm and not to the individual partner. Thereafter, based upon the observations made in the assessment proceedings of the partner, the AO reopened the assessment of the assessee-firm u/s.147 of the Act under the erstwhile reassessment provisions.
3.1 During reassessment proceedings, the AO noticed an increase in fixed assets amounting to Rs.3,18,50,000/- and treated the same as unexplained investment u/s.69 of the Act. The assessee explained that the investment represented capital contributions made by the partners, duly recorded in the books of account and reflected in their respective capital accounts. The books of account were produced and no defects were pointed out. The AO, however, held that the partners had returned meagre income and had failed to establish the source of cash introduced into the firm by producing bank statements or other supporting evidence. Accordingly, the addition of Rs.3,18,50,000/- was made u/s. 69 of the Act.
4. On appeal, the ld.CIT(A) upheld both the validity of reopening as well as the addition made u/s.69 of the Act.
Aggrieved, the assessee is in appeal before the Tribunal.
5. The ld. Authorised Representative (AR) submitted that the reopening is invalid since it has been initiated solely on the basis of observations made in the assessment proceedings of one of the partners without any independent application of mind by the jurisdictional Assessing Officer. He further submitted that the reasons recorded merely reproduce information received from another assessment and do not establish any live nexus between such information and escapement of income in the hands of the assessee-firm. He submitted that the investment in immovable property is admittedly recorded in the regular books of account maintained by the assessee. The ld.AR vehemently submitted that section 69 applies only where investments are not recorded in the books of account maintained by the assessee. Since the investment is duly reflected in the books, invocation of section 69 itself is legally impermissible. He further pointed out the following:
• the AO has accepted the books of account and has not rejected the same nor pointed out any defect therein;
• the source of investment has been fully explained as partners’ capital contribution duly credited in the respective capital accounts;
• the identity of the partners is not in dispute. They are regular assessees and copies of their returns of income, balance sheets and capital accounts were furnished;
• once the partners own the capital contributions, no addition can be made in the hands of the firm and, if at all, further enquiry regarding the source of funds has to be made in the assessments of the respective partners;
• the law does not require the assessee to establish the “source of source”;
• reliance was placed on the decisions in Pr. CIT v. Vaishnodevi Refoils & Solvex  (Gujarat)/[2018] 253   (Gujarat) [SLP dismissed Pr. CIT v. Vaishnodevi Refoils & Solvex  (SC)  (SC)], Kesharwani Sheetalaya Sahsaon v. CIT [2020]   (Allahabad), and DCIT v. ANR International Pvt. Ltd [ITA No. 5317/Del/2025 dated 05.06.2026].
6. The ld. Departmental Representative (DR) supported the orders of the lower authorities and submitted that:
• the reopening was validly initiated based upon tangible information received from completed assessment proceedings of one of the partners;
• the assessee failed to establish the actual source of cash introduced by the partners;
• mere accounting entries and capital accounts do not establish the source of investment;
• except income-tax returns and balance sheets, no bank statements or evidence showing availability of cash were furnished;
• the partners had disclosed only meagre income and their financial capacity remained unproved;
• the burden u/s.69 had not been discharged;
• the judgments relied upon by the assessee are distinguishable on facts;
• reliance was placed upon the judgment of the Hon’ble Supreme Court in Pr. CIT (Central) v. NRA Iron & Steel (P.) Ltd. [2019]  /412 ITR 161 (SC).
7. We have carefully considered the rival submissions and perused the material available on record and case law cited.
At the outset, we notice that the reassessment has been initiated solely on the basis of observations made during assessment proceedings in the case of one of the partners. The material available on record indicates that in the partner’s own appellate proceedings, the ld.CIT(A) categorically held that the property belonged to the partnership firm and not to the partner. It is only thereafter that the AO proceeded to reopen the assessment of the assessee-firm.
7.1 Even assuming that such information constituted tangible material for initiating reassessment, the addition ultimately made u/s. 69 cannot be sustained on merits. Section 69 of the Act applies only where an assessee has made investments which are not recorded in the books of account, if any, maintained by him. Thus, existence of an investment outside the books is the very foundation for invoking the provision. In the present case, there is no dispute whatsoever that the immovable properties stand recorded in the books of account of the assessee-firm. The corresponding source has been reflected through partners’ capital accounts. The books of account were produced before the Assessing Officer and no defect has been pointed out in the books. The books have never been rejected. Once these undisputed facts exist, the basic jurisdictional condition prescribed u/s.69 itself fails. A recorded investment cannot simultaneously be treated as an investment “not recorded” in the books maintained by the assessee. The AO has proceeded mainly on the premise that the partners had disclosed comparatively low taxable income and therefore lacked the financial capacity to introduce capital. Such reasoning, in our considered opinion, cannot justify an addition u/s. 69 in the hands of the firm.
7.2 The source of investment has consistently been explained as partners’ capital contribution. The identity of the partners has never been disputed. Their PAN, returns of income, balance sheets and capital accounts were furnished before the AO. The capital introduced by them has been duly credited in their respective capital accounts. Once the assessee has demonstrated that the investment has been funded out of capital introduced by identifiable partners and the same stands duly reflected in the regular books of account, the burden shifts to the Revenue. If the Revenue entertains any doubt regarding the financial capacity or source of funds available with any individual partner, the appropriate course is to examine such issue in the assessments of the concerned partners. Such doubt, by itself, cannot justify treating the recorded investment of the firm as unexplained u/s. 69 of the Act.
7.3 We also find considerable force in the contention of the assessee that the Revenue cannot simultaneously accept that the property belongs to the partnership firm, as held in the appellate proceedings of the partner, and yet invoke section 69 in the firm’s case without first disproving the entries appearing in the firm’s books of account. The reliance placed by the Revenue on the decision of the Hon’ble Supreme Court in NRA Iron & Steel (P.) Ltd.(supra) is misplaced. That decision was rendered in the context of section 68 involving unexplained cash credits where the assessee was required to establish identity, creditworthiness and genuineness of share applicants. In the present case, the addition has been made u/s. 69, notwithstanding the admitted position that the investment stands duly recorded in the books of account of the assessee. The statutory requirements governing section 69 are materially different and the primary condition for invoking that provision is absent. On the contrary, the principles laid down in Vaishnodevi Refoils & Solvex(supra) support the assessee’s case that once the capital introduced by partners stands reflected in their accounts and the partners are identifiable, no addition can ordinarily be made in the hands of the partnership firm and any further enquiry has to be directed towards the partners. Accordingly, we hold that the addition of Rs.3,18,50,000/- u/s. 69 of the Act is unsustainable both on facts and in law. Hence, the addition of Rs.3,18,50,000/- made u/s.69 of the Act is hereby deleted.
7.4 Since we have deleted the addition on merits by holding that section 69 itself has no application where the investment is admittedly recorded in the books of account, we do not consider it necessary to adjudicate the legal grounds challenging the validity of reopening u/s. 147, the same being rendered academic.
8. In the result, the appeal of the assessee is allowed.