S: 68 : Cash credits-Unexplained Credit-Conversion of Company to LLP-Capital Account-Accumulated Profits-Capital gains-Mere accounting entry, without actual monetary benefit to the partners, does not constitute payment for alleged Violation of Section 47(xiiib)(f)-Book Entry-No Actual Payment-Burden on AO-Addition is deleted. [S. 45, 47(xxib)(f), 115BBE, Limited Liability Partnership Act, 2008, S. 56, 57]
NICAF LLP is engaged in the business of carpets and floor coverings was formed upon conversion of NICAF Pvt. Ltd. on 02.12.2016. The AO held that the pre-conversion share capital and reserves totaling ₹2.71 crore were credited to the partners’ capital accounts, allegedly violating Section 47(xiiib)(f), which bars distribution of accumulated profits within three years of conversion. Treating the amount as unexplained under Section 68 read with Section 115BBE of the ACT . The CIT(A), on appeal, deleted the addition. On appeal the Tribunal held that Section 68 of the Income Tax Act, 1961, applies only where the nature and source of a credit is unexplained. In the present case, the credit of pre-conversion reserves and share capital to the partners’ capital accounts, arising from a lawful conversion under Section 47(xiiib), constituted a known and explained source. The Tribunal further held that any alleged violation of Section 47(xiiib)(f), which restricts distribution of accumulated profits for a period of three years post-conversion, may render the transaction ineligible for capital gains exemption under Section 45, but does not attract addition under Section 68. It was also observed that a mere accounting entry, without actual monetary benefit to the partners, does not constitute “payment” within the scope of Section 47(xiiib)(f). The burden to establish the applicability of Section 68 rests upon the Assessing Officer, who failed to discharge it. Accordingly, the addition was found unsustainable, the Revenue’s appeal was dismissed, and the assessee’s cross-objection was allowed. (ITA No. 1880/Mum/2025 & C.O. No. 86/Mum/2025 dt. 18-6-2025) (AY. 2017-18)
NICAF LLP v. ITO (Mum.)(Trib.) www.itatonline.org.

[Coram: Hon’ble Shri Vikram Singh Yadav, AM, and Hon’ble Ms. Kavitha Rajagopal, JM]