The NICA Private Limited was converted into NICALF LLP. Prior to conversion, the company had share capital and y Reserves & Surplus. Post-conversion, both these amounts were credited to the partners’ capital accounts in the LLP. The AO held that this crediting of accumulated profits to partners’ capital violated S. 47(xiiib) (f) of the Income-tax Act, which prohibits any direct or indirect payment to partners from accumulated profits for 3 years post-conversion. The AO treated the said amount as an unexplained credit u/s.68, and added it to the total income u/s. 115BBE. The CIT (A) deleted the addition, holding that no actual payment was made to partners and hence there was no violation of S. 47(xiiib) (f). The conversion was deemed tax-neutral, having complied with all conditions from (a) to f) of the said section.The Tribunal held that mere crediting of accumulated profits to the partners’ capital accounts, without any actual payment or withdrawal, does not amount to unexplained income. Hence, S. 68, which applies to unexplained cash credits, is not attracted. Further, any violation of S. 47(xiiib)(f), which relates to capital gains exemptions on conversion, cannot be the basis for invoking S. 68, particularly when the credit is not unexplained and does not arise in the assessee’s account but rather in the partners’ capital accounts. (AY. 2017 -18 )