SUBRAMANIAN SHANMUGANATHAN,CHENNAI vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1) TRICHY, TRICHY

The brief facts of the case are that the assessee is an individual engaged, inter alia, in the business of money lending and is also deriving rental/house property income. For the impugned assessment year, the assessee filed his return of income on 13.06.2016 declaring a total income of Rs.13,87,910/-.Thereafter, the assessment was reopened by issuance of notice u/s.148 of the Act. In response thereto, the assessee filed the return of income on 20.07.2017 declaring the same total income of Rs.13,87,910/-. The AO,completed the reassessment proceedings vide order u/s.143(3) r.w.s 147 of the Act dated 12.09.2017, accepting the income returned by the assessee.

Subsequently, the aforesaid reassessment order dated 12.09.2017 was subjected to revisionary proceedings u/s.263 of the Act by the learned Principal Commissioner of Income Tax (“Ld. PCIT”). The Ld. PCIT was of the view that the AO, while completing the reassessment, had failed to make proper enquiries with regard to, inter alia, (i) the difference in the opening and closing balances appearing in the proprietor’s capital account, and (ii) the cash deposits made in the bank accounts of the assessee. Accordingly, vide order dated 22.03.2021 passed u/s.263 of the Act, the Ld. PCIT set aside the reassessment order dated 12.09.2017 and directed the AO to frame the assessment afresh after examining the aforesaid issues.

Pursuant to the directions contained in the order passed u/s.263 of the Act, the matter was assigned to the Faceless Assessment Unit and fresh assessment proceedings were initiated. During the course of such set-aside proceedings, notices u/s.142(1) of the Act were issued calling upon the assessee to furnish the requisite details and explanations. According to the AO, there was no effective compliance with the notices so issued. Consequently, an ex parte assessment order dated 29.03.2022 came to be passed u/s.144 r.w.s 263 of the Act determining the total income of the assessee at Rs.10,81,55,110/-, after making additionstowards the alleged

In pursuance of the directions of the Hon’ble High Court, the assessment proceedings were recommenced. The AO issued notices/show- cause notices from time to time and also afforded opportunity of hearing, including through video conferencing. The two principal issues which fell for consideration in the set-aside assessment proceedings were: (i) the alleged difference of Rs.93,10,200/- in the proprietor’s capital account; and (ii) cash deposits aggregating to Rs.9,24,57,000/- made in the various bank accounts of the assessee.

In response to the notices issued by the AO, the assessee filed explanations contending, in substance, that the alleged difference of Rs.93,10,200/- in the proprietor’s capital account did not pertain to the year under consideration but related to an earlier assessment year and, therefore, no addition on that account could be made in assessment year 2013-14. Insofar as the cash deposits aggregating to Rs.9,24,57,000/- were concerned, it was explained that the assessee was carrying on money-lending and chit fund activities and that the deposits and withdrawals appearing in the bank accounts represented business transactions and circulation/rotation of funds in the course of such activities. It was further contended that the nature and source of the bank transactions had already been examined during the earlier reassessment proceedings culminating in the order dated 12.09.2017.

The AO, however, was not satisfied with the explanations offered by the assessee. According to the AO, despite opportunities having been afforded, the assessee had not furnished complete and verifiable documentary evidence in the form of books of account, cash book, bank book, party-wise particulars and comprehensive reconciliation of the transactions so as to establish the nature and source of the impugned cash deposits. The AO was similarly of the view that the assessee had failed to satisfactorily reconcile and substantiate the alleged difference appearing in the proprietor’s capital account.

The AO, therefore, rejected the explanations of the assessee and proceeded to treat the sum of Rs.93,10,200/- representing the alleged difference in the proprietor’s capital account as unexplained. Likewise, the aggregate cash deposits of Rs.9,24,57,000/- appearing in the bank accounts were treated as unexplained cash credits u/s.68 of the Act. Consequently, the AO completed the assessment determining the total income at Rs.10,31,55,110/-, after making additions of Rs.93,10,200/- towards the alleged unexplained difference in capital and Rs.9,24,57,000/- u/s.68 of the Act in respect of the cash deposits.

Aggrieved by the aforesaid additions and the assessment so framed, the assessee carried the matter in appeal before the Ld.CIT(A).

The Ld.CIT(A), vide the impugned appellate order dated 13.02.2026, partly allowed the appeal of the assessee by granting relief in respect of the addition made towards the alleged difference in the capital account. However, the Ld. CIT(A) sustained the addition of Rs.9,24,57,000/-, made by the AO by

The Ld. CIT(A), while adjudicating grounds of the assessee relating to the addition of Rs.93,10,200/- on account of difference in the proprietor's capital account, considered the findings recorded by the AO as well as the explanation furnished by the assessee. The Ld.CIT(A) observed that the AO had noticed a difference between the closing capital as on 31.03.2012 at Rs.77,35,435/- and the opening capital as on 01.04.2013 at Rs.1,70,45,635/-, resulting in a difference of Rs.93,10,200/-. According to the Ld.CIT(A), despite several opportunities having been afforded during the course of assessment proceedings, the assessee could not furnish a proper reconciliation, break-up of the capital account or supporting documentary evidence explaining the aforesaid difference.

The Ld. CIT(A) further noted that the assessee had disclosed different figures of proprietor's capital at different stages, viz., in the original return of income, the return filed in response to notice issued u/s.148 of the Act and the financial statements produced during the course of assessment proceedings. The explanation of the assessee that such discrepancy had arisen on account of inadvertent and incorrect reporting by the erstwhile Income-tax Practitioner and that corrected/revised financial statements were subsequently furnished was not accepted by the Ld.CIT(A), principally on the ground that the revised figures were not supported by contemporaneous books of account or other primary evidence.

The Ld.CIT(A) also rejected the contention of the assessee that the alleged difference, being referable to the capital balance of the preceding year, could not be brought to tax in the assessment year under consideration. According to the Ld. CIT(A), since the opening capital as on 01.04.2013 was reflected in the financial statements relevant to the year under appeal and the

However, while considering the quantum of addition, the Ld.CIT(A) noticed that an addition of Rs.78,19,519/- on account of unexplained difference in the proprietor's capital had already been made and confirmed in the immediately preceding assessment year, i.e., A.Y. 2012-13. Since the opening capital for the year under consideration necessarily had its genesis in and flowed from the closing capital of the immediately preceding year, the Ld.CIT(A) held that the amount which had already suffered addition in A.Y. 2012-13 could not once again be brought to tax in the year under consideration, as the same would result in taxation of the very same amount twice.

Accordingly, the Ld.CIT(A) allowed telescoping/set-off to the extent of Rs.78,19,519/- against the impugned addition of Rs.93,10,200/- and sustained only the balance amount of Rs.14,90,681/-, treating the same as incremental unexplained capital for the year under consideration. The AO was, therefore, directed to grant set-off of Rs.78,19,519/- already subjected to tax in A.Y. 2012-13 and restrict the addition to Rs.14,90,681/-, after verification of the capital figures flowing from the preceding year. Thus, the Ld. CIT(A) granted relief of Rs.78,19,519/- and sustained the addition to the extent of Rs.14,90,681/-.

Insofar as the grounds relating to the addition of Rs.9,24,57,000/- towards cash deposits in the bank accounts are concerned, the Ld.CIT(A) noted that the AO had found cash deposits aggregating to Rs.9,24,57,000/- in four bank accounts maintained by the assessee and his proprietary concern during the relevant previous year. The AO treated the entire amount as unexplained cash credit u/s.68 of the Act.

Before the AO as well as the Ld.CIT(A), the assessee explained that he was carrying on finance/money-lending activities and was also participating in various chit fund schemes and, therefore, there were frequent cash withdrawals and corresponding redeposits in the bank accounts. It was further contended that the cash withdrawals available with the assessee constituted the source for the subsequent cash deposits and, therefore, the gross deposits appearing in the bank accounts could not, by themselves, be regarded as unexplained income.

The Ld.CIT(A), however, was not persuaded by the aforesaid explanation. According to the Ld.CIT(A), except for furnishing copies of the bank statements, the assessee had not produced books of account, cash book, bank book, party-wise and date-wise particulars of the alleged money- lending transactions, confirmations from the concerned parties, agreements or other documentary evidence in support of the nature and source of the cash deposits. The Ld.CIT(A) further observed that, despite specific requisitions having been made by the AO calling for the particulars of the money-lending activities, names and PANs of the parties, details of receipts and repayments, particulars of chit fund transactions, income earned therefrom and a cash-flow statement, the assessee had failed to furnish the requisite details.

The Ld.CIT(A) also rejected the contention of the assessee that the provisions of section 68 of the Act had no application to the cash deposits appearing in the bank accounts. The Ld.CIT(A) held that, in the absence of regularly maintained books of account and credible documentary evidence establishing the nature and source of the cash deposits, the AO was justified in treating the deposits as unexplained. According to the Ld.CIT(A), the mere assertion that the deposits represented transactions arising out of finance business, chit fund activities and redeposit of earlier cash withdrawals, without supporting material and reconciliation, was insufficient to discharge the onus cast upon the assessee.

The Ld.CIT(A) further observed that adequate opportunities had been afforded by the AO to explain the transactions and that the assessment order reflected consideration of the bank statements and the explanation offered by the assessee. The Ld.CIT(A), therefore, held that the assessee had failed to satisfactorily establish the nature and source of the cash deposits aggregating to Rs.9,24,57,000/-.

In the light of the aforesaid findings, the Ld.CIT(A) upheld the action of the AO in treating the entire cash deposits of Rs.9,24,57,000/- as unexplained cash credit u/s.68 of the Act and confirmed the addition in toto.

Thus, by the impugned appellate order dated 13.02.2026, the Ld.CIT(A) partly allowed the assessee's claim in respect of the addition towards difference in the proprietor's capital account by restricting the addition from Rs.93,10,200/- to Rs.14,90,681/-, whereas the addition of Rs.9,24,57,000/- made by the AO in respect of cash deposits in the bank accounts was confirmed in its entirety.

Aggrieved by the aforesaid order passed by the Ld. CIT(A), the assessee has preferred the present appeal before us.

The Ld.AR appearing for the assessee vehemently assailed the addition sustained by the Ld. CIT(A) and submitted that the entire addition proceeds on an erroneous comparison of two figures which are neither comparable nor represent the same component of the capital account. The Ld.AR submitted that, once the capital account is properly reconciled year after year, there is absolutely no difference between the closing capital of the immediately preceding assessment year and the opening capital of the year under consideration and, therefore, there is no unexplained accretion to capital

The Ld. AR took us through the year-wise movement in the capital account and furnished the following reconciliation in support of his contention:

The Ld. AR submitted that the above reconciliation clearly demonstrates the continuity of the capital account. The closing capital as on 31.03.2012 relevant to AY 2012-13 was Rs.1,86,87,129/- and the very same amount was carried forward as the opening capital as on 01.04.2012 relevant to AY 2013- 14. Thus, according to the Ld.AR, there is not even a rupee's difference between the closing capital of the preceding year and the opening capital of the year under appeal.

Elaborating further, the Ld. AR submitted that the fundamental error committed by the AO was in treating the intermediate/balancing figure of Rs.1,70,45,635/- as though it represented the opening capital of the assessee and thereafter comparing the same with the figure of Rs.77,35,435/- appearing in the original balance sheet filed for AY 2012-13. According to the Ld.AR, such comparison is inherently fallacious because the figure of Rs.1,70,45,635/- is merely a balancing figure arrived at after adjusting the rental income and drawings pertaining to the current year from the opening capital. It does not represent either the opening capital as on 01.04.2012 or the closing capital as on 31.03.2012. Therefore, the very foundation on which the alleged difference of Rs.93,10,200/- was worked out by the AO is factually misconceived.

The Ld.AR further submitted that the figures can be appreciated in their proper perspective only by examining the complete movement in the capital

The Ld. AR then adverted to the position obtaining in AY 2012-13 and submitted that the revised balance sheet furnished during the reassessment proceedings disclosed the closing capital at Rs.1,86,87,129/-. The said capital was arrived at after taking the relevant opening capital, rental income, drawings and the current year's profit of Rs.31,32,175/-. Significantly, the return filed by the assessee in response to the notice issued u/s.148 of the Act for AY 2012-13, together with the revised financial statements furnished during the reassessment proceedings, was examined by the AO and the reassessment was ultimately completed. Thus, the closing capital of Rs.1,86,87,129/- pertaining to the immediately preceding year stood explained on the basis of the reconstructed/reconciled capital account furnished in those proceedings.

The Ld.AR submitted that the AO, instead of comparing the closing capital as on 31.03.2012 with the opening capital as on 01.04.2012, adopted the figure of Rs.77,35,435/- appearing in the original balance sheet for AY 2012-13 and compared the same with the balancing figure of Rs.1,70,45,635/- worked out for AY 2013-14. On such an erroneous comparison, the AO arrived at the alleged variation of Rs.93,10,200/-. According to the Ld. AR, this exercise amounts to comparing two fundamentally different figures drawn from

The Ld. AR further pointed out that the fallacy in the approach adopted by the AO becomes apparent from the manner in which the Ld.CIT(A) himself granted substantial relief. Out of the addition of Rs.93,10,200/- made by the AO, the Ld.CIT(A) accepted the assessee's explanation to the extent of Rs.78,19,519/- and restricted the addition to Rs.14,90,681/-. According to the Ld.AR, once the reconciliation explaining the variation in capital was substantially accepted, there was no independent factual basis for sustaining the residual amount of Rs.14,90,681/-.

The Ld.AR contended that the Ld.CIT(A), while granting partial relief, failed to carry the reconciliation to its logical conclusion. The crucial test, according to the Ld.AR, is whether the opening capital appearing in the books for the year under consideration is in excess of, or otherwise different from, the closing capital of the immediately preceding year. In the present case, both figures admittedly stand at Rs.1,86,87,129/-. Therefore, there is complete numerical identity and continuity between the two years. When the opening capital has merely been brought forward from the closing capital of the preceding year, there can be no question of treating any portion thereof as fresh or unexplained capital introduced during the year under consideration.

The Ld.AR emphasised that an addition on account of unexplained capital necessarily presupposes the existence of some fresh credit, introduction or accretion during the relevant previous year for which the assessee is unable to offer a satisfactory explanation. In the present case, no such fresh introduction of capital has been identified by the AO. There is no finding that any sum of Rs.14,90,681/- was introduced by the assessee during the relevant previous year, nor has any corresponding credit entry representing such alleged introduction been pointed out. The addition,

It was further submitted that the reconciliation has to be examined as a whole and not by picking isolated figures from different financial statements. The opening capital, additions by way of income/profit, reductions by way of drawings and the resultant closing capital constitute an integrated capital account. Once these components are reconciled, an intermediate balancing figure cannot independently acquire the character of an unexplained credit. The approach adopted by the AO, according to the Ld. AR, effectively ignores the accounting movement in the capital account and creates a notional difference where none actually exists.

The Ld.AR thus submitted that, for the year under appeal, the closing capital as on 31.03.2012 and the corresponding opening capital as on 01.04.2012 were identically reflected at Rs.1,86,87,129/-, and therefore, there was no difference whatsoever in the opening capital warranting any addition.

Accordingly, the Ld.AR submitted that once the above factual position is appreciated, the entire premise for making an addition towards variation in

In the light of the foregoing, the Ld. AR submitted that the assessee has fully reconciled the capital account and established an unbroken nexus between the closing capital of AY 2012-13 and the opening capital of AY 2013- 14. The Ld.AR, therefore, pleaded that the addition of Rs.14,90,681/- sustained by the Ld.CIT(A), being devoid of any factual or legal basis, deserves to be deleted in its entirety.

The Ld.AR, appearing on behalf of the assessee submitted that there is no difference between the opening capital of the impugned AY and the closing capital of the preceding AY. The Ld.AR submitted that the opening capital as on 01.04.2012 was Rs.1,86,87,129/- whereas corresponding closing capital as on 31.03.2012 was also Rs.1,86,87,129/-. To demonstrate this, the Ld.AR furnished a reconciliation statement which is reproduced as under:

The Ld.AR referring to the above table submitted that the AO had erroneously compared the balance figure of Rs.1,70,45,635/- with the capital balance of Rs.77,35,435/- reported in the return of income filed u/s.139(1) for the preceding assessment year i.e., A.Y.2012-13 and erroneously concluded that there is a difference in capital to the extent of Rs.93,10,200/- for the

With regard to the addition of Rs.9,24,57,000/- made by the AO and sustained by the Ld.CIT(A) by treating the cash deposits made into the bank accounts of the assessee as unexplained cash credits u/s.68 of the Act, the Ld.AR submitted that the authorities below had failed to appreciate the peculiar nature of the assessee's business and had proceeded on the erroneous premise that every cash deposit appearing in the bank accounts represented a fresh and independent unexplained credit in the hands of the assessee.

The Ld. AR submitted that it is an admitted position that the assessee was engaged in the business of money lending and chit-related activities. In the ordinary course of such business, monies were withdrawn from the bank accounts and advanced to various borrowers and, upon repayment or recovery of such advances, the amounts were once again deposited into the bank accounts either by the assessee himself or, in certain cases, directly by the debtors. Thus, the deposits and withdrawals appearing in the bank accounts formed part of a continuous cycle of deployment, recovery and redeployment of the same circulating funds. The cash deposits could not, therefore, be viewed in isolation from the corresponding withdrawals and treated in their entirety as unexplained income of the assessee.

In support of the above contention, the Ld.AR invited our attention to the bank statements placed at pages 7 to 56 of the paper book and demonstrated that substantial cash withdrawals and payments through bearer cheques preceded the subsequent cash deposits. According to the Ld.AR, these withdrawals represented monies deployed in the money-lending business and the subsequent deposits represented, substantially, recovery of the very same monies from the borrowers. The pattern of transactions appearing in the bank accounts, when considered as a whole, clearly demonstrated continuous circulation and rotation of funds rather than generation of fresh unexplained money on every occasion of deposit.

The Ld. AR further invited our attention to the findings recorded by the Ld.CIT(A), wherein it was noticed that the aggregate credits in the bank accounts during the relevant assessment year amounted to approximately Rs.24.76 crores, whereas the corresponding debits aggregated to approximately Rs.24.68 crores. The Ld.AR submitted that the close proximity between the aggregate credits and debits itself lends substantial support to the assessee's explanation that the transactions represented frequent rotation and recycling of the same funds in the course of the money-lending activity. Had the deposits represented independent and unexplained receipts, there could not have been such a corresponding and almost matching movement of funds by way of withdrawals and debits.

The Ld.AR further submitted that, significantly, the very issue relating to the source and nature of cash deposits in the assessee's bank accounts had already been specifically examined and verified by the AO in the course of the earlier assessment proceedings completed u/s.143(3) r.w.s 147 of the Act. During the course of the said proceedings, the assessee had furnished the relevant bank statements, details of transactions and explanation regarding the nature of the cash withdrawals and subsequent deposits. Upon

Referring to the aforesaid finding, the Ld. AR submitted that the same assumes considerable evidentiary significance. It was not a case where the AO had merely reproduced the explanation offered by the assessee without examining its veracity. On the contrary, the AO had specifically recorded that the explanation was “verified with the bank statement” and thereafter arrived at a positive factual conclusion that the withdrawals represented amounts lent to various parties, while the subsequent deposits represented repayment of such loans together with interest received thereon. Thus, the nexus between the withdrawals, lending activity and subsequent deposits was subjected to verification in the course of statutory assessment proceedings and was affirmatively accepted by the AO.

The Ld. AR submitted that merely because the aforesaid finding came to be recorded in an assessment order which was subsequently subjected to revisionary proceedings, the factual verification undertaken by the AO and the evidentiary value of the bank statements on the basis of which such finding was recorded do not cease to exist. The underlying bank transactions remain the same. The contemporaneous finding of the AO, rendered after examination of the very bank statements now relied upon for making the impugned addition, constitutes a material circumstance which could not have been brushed aside without bringing any contrary material on record.

The Ld. AR contended that the AO had thus recorded two distinct and material findings upon verification of the bank accounts, namely, that the withdrawals represented monies advanced to various borrowers and that the deposits represented repayment of such loans together with interest. Once the withdrawals are accepted as deployment of funds by way of loans, the subsequent recovery of the principal amount cannot, by any stretch of reasoning, be regarded as income of the assessee. The recovery of the principal amount merely restores to the assessee the capital or circulating funds earlier deployed in the lending activity and does not give rise to any real income. The Ld. AR submitted that, in a money-lending business, the amount advanced to a borrower constitutes deployment or application of funds and, when such amount is subsequently recovered, the principal component merely represents recoupment of the amount earlier advanced. What can partake the character of income is the interest, finance charge or other income earned from such lending activity and not the gross recovery consisting of both principal and interest. Therefore, treating the entire amount deposited in the bank account as unexplained income would necessarily result in treating recovery of the assessee's own circulating capital as income, which is contrary to the basic principles governing computation of real income.

The Ld. AR further submitted that the methodology adopted by the AO results in an inherently untenable consequence. The withdrawals from the bank accounts, which constituted deployment of funds for lending, have not been treated as unexplained investments or unexplained expenditure. However, when the very funds returned to the banking channel upon repayment by the borrowers, the entire deposits have been sought to be treated as unexplained credits. Such an approach artificially severs the deposits from the corresponding withdrawals and ignores the continuous flow and rotation of funds demonstrated by the bank statements. The source of a subsequent deposit cannot be examined by isolating that deposit from the

The Ld. AR further invited our attention to page 12 of the impugned assessment order and submitted that even the AO, while making the impugned addition, had recorded a categorical factual finding that the cash deposits in the bank accounts were made either by the assessee himself or directly by the debtors. The AO had further observed that substantial amounts of cash were being deposited into the bank accounts and thereafter withdrawn through cheques. According to the Ld. AR, these very findings of the AO support, rather than contradict, the case of the assessee.

The Ld.AR contended that once the AO himself accepts that deposits were also being made directly by the debtors, such deposits necessarily corroborate the assessee's explanation that monies advanced in the course of the lending activity were being repaid by the borrowers into the bank accounts. Similarly, the finding regarding repeated deposits followed by withdrawals establishes continuous circulation of funds. The AO, therefore, could not have relied upon one part of the transactional pattern for drawing an adverse inference while completely ignoring the corresponding withdrawals and the business purpose for which those withdrawals were made.

The Ld.AR emphasized that section 68 of the Act cannot be applied mechanically merely because credits are found in a bank account. The essential enquiry is into the nature and source of the credits. In the present case, the nature and source stood explained by the assessee with reference to the money-lending activity, the preceding withdrawals, the subsequent recoveries and the overall movement of funds reflected in the bank statements. More importantly, the very explanation had earlier been subjected to verification by the AO with reference to the same bank statements and had been found to be factually correct. In the absence of any material brought on record to demonstrate that the impugned deposits represented monies originating from sources outside the disclosed business cycle, the entire cash deposits could not be characterised as unexplained credits.

The Ld.AR further submitted that the Revenue cannot simultaneously accept the existence of the money-lending activity, the withdrawals made for advancing monies to borrowers and the fact that debtors were depositing monies into the bank accounts, and yet proceed to treat the entire subsequent deposits as unexplained income. Such an approach would amount to taxing the same circulating capital repeatedly each time it re-enters the bank account. The frequency and magnitude of the deposits cannot determine their character as income; what is material is the source from which the deposits emanated. Where the source is recovery or redeposit of monies earlier withdrawn and deployed in the business, the gross deposit cannot constitute taxable income.

The Ld.AR accordingly submitted that the impugned addition of Rs.9,24,57,000/- proceeds on a fundamentally erroneous assumption that each cash deposit represents a separate unexplained inflow, without appreciating the corresponding withdrawals, the nature of the assessee's money-lending business, the rotation of funds and the factual findings already recorded upon verification of the bank statements. The material available on record, including the almost corresponding magnitude of credits and debits, the repeated withdrawals and redeposits, the direct deposits by debtors and the earlier categorical verification by the AO, establishes a clear and proximate nexus between the amounts withdrawn, advanced and subsequently recovered.

The Ld.AR, therefore, submitted that there was no justification either in facts or in law for treating the aggregate cash deposits of Rs.9,24,57,000/- as unexplained cash credits u/s.68 of the Act. At the highest, what could constitute income in the course of the assessee's money-lending activity is the income element embedded in the transactions, namely, the interest earned on the advances, which had already been considered as income in the earlier

Per contra, the Ld.DRvehemently supported the orders passed by the authorities below and submitted that the findings recorded by the AO, as affirmed by the Ld.CIT(A), are based on proper appreciation of the facts and material available on record and, therefore, do not call for any interference. Accordingly, the Ld.DR prayed that the order of the Ld.CIT(A) be upheld and the appeal filed by the assessee be dismissed.

We have heard the rival submissions, perused the orders of the authorities below and carefully considered the entire material placed on record. We have also examined the assessment order originally passed u/s.143(3) r.w.s147 of the Act dated 12.09.2017, the consequential assessment order passed pursuant to the revisionary directions by the ld.PCITissued u/s.263 of the Act, the impugned appellate order of the Ld.CIT(A), the bank statements, the reconciliation of the proprietor’s capital account, the financial statements and the other material forming part of the paper book. We have further taken note of the decision of the Co-ordinate Bench of the Tribunal, Chennai, in Sundaram Subramanian v. ITO, ITA Nos.2419 & 2420/Chny/2025, order dated 12.01.2026, wherein, on materially comparable facts involving money-lending activity coupled with recurring cash deposits and withdrawals, the Tribunal considered the commercial substance of the transactions and brought to tax the real income embedded therein instead of treating the aggregate bank deposits as unexplained income.

On a consideration of the rival contentions and the material available on record, two substantive issues arise for our adjudication. The first relates to

The first issue emanates from an original addition of Rs.93,10,200/- made by the AO on account of an alleged discrepancy in the proprietor’s capital. The Ld.CIT(A), after noticing that a sum of Rs.78,19,519/- had already suffered addition in the immediately preceding assessment year, granted set- off to that extent and sustained the balance amount of Rs.14,90,681/-. The assessee assails the sustenance of the said balance on the ground that there was no fresh introduction of capital whatsoever during the relevant previous year and that the entire addition has arisen from comparison of figures which are neither corresponding nor comparable.

At the outset, we find considerable force in the contention of the assessee. In a case where an addition is sought to be made on account of an alleged unexplained introduction in the proprietor’s capital, the primary enquiry necessarily has to be whether there was any fresh credit or accretion to the capital account during the relevant previous year for which no satisfactory explanation is forthcoming. Such an enquiry cannot legitimately commence and conclude merely by comparing two isolated figures appearing at different stages of the capital account without appreciating the intervening entries and the chronological movement of the account.

The AO proceeded on the premise that the capital reflected in the earlier financial statements was Rs.77,35,435/-, whereas a figure of Rs.1,70,45,635/- appeared in the capital reconciliation furnished for the year under consideration. By mechanically deducting the former figure from the

In our considered opinion, the approach adopted by the authorities below overlooks the most fundamental aspect of the matter, namely, the continuity of the capital account. The correct starting point for examining the capital position for the year under appeal is the closing capital as at the end of the immediately preceding previous year and its correspondence with the opening capital as at the beginning of the current previous year.

On verification of the reconciliation placed before us, we find that the assessee’s closing capital as on 31.03.2012 was Rs.1,86,87,129/-. The opening capital as on 01.04.2012 is also shown at precisely Rs.1,86,87,129/-. Thus, the closing balance of the immediately preceding year has been carried forward, without any difference whatsoever, as the opening balance of the year under consideration. The numerical continuity is complete.This fact, in our view, goes to the root of the controversy. Once the closing capital of the preceding year and the opening capital of the current year are found to be identical, there cannot be an inference of any unexplained introduction merely from the brought-forward balance. An opening balance is not, in itself, a transaction of the relevant previous year. It represents the cumulative result of transactions which have already taken place up to the close of the preceding previous year. Consequently, unless the Revenue demonstrates a fresh credit, fresh introduction or unexplained accretion arising during the year under consideration, the brought-forward capital cannot be subjected to tax in the current assessment year.

We also find that the figure of Rs.1,70,45,635/- adopted by the AO as the basis for comparison does not represent the opening capital of the assessee. The opening capital, as already noticed, was Rs.1,86,87,129/-. During the relevant previous year, rental income of Rs.10,65,000/- was credited to the capital account, whereas drawings aggregating to Rs.27,06,494/- were debited. Upon giving effect to these two movements, the resultant balance comes to Rs.1,70,45,635/-. Thereafter, the current year’s profit of Rs.16,81,900/- was credited, resulting in the closing capital of Rs.1,87,27,535/-.

The movement of the capital account, therefore, demonstrates that the sum of Rs.1,70,45,635/- is merely an intermediate arithmetical balance arrived at after taking into account certain credits and debits during the year. It is neither the opening capital for the year under consideration nor the closing capital of the immediately preceding year. Consequently, comparing this intermediate figure with an isolated figure of Rs.77,35,435/- appearing in an earlier financial statement and treating the difference as unexplained capital is, in our view, inherently erroneous.

It is trite that an addition to income cannot be founded merely upon an arithmetical mismatch unless the mismatch is shown to represent an actual transaction having income character in the relevant previous year. The charge to tax is attracted to real income or to amounts which are statutorily deemed to be income upon satisfaction of the prescribed conditions. A mere numerical difference generated by comparison of two non-corresponding figures cannot, by itself, constitute an unexplained credit.

Significantly, neither the AO nor the Ld.CIT(A) has identified any particular entry in the capital account representing introduction of Rs.14,90,681/-. There is no finding regarding the date on which the alleged capital was introduced, the manner or mode of its introduction, the source

In our considered view, a residual arithmetical figure cannot acquire the character of taxable income merely because a larger addition has been partly telescoped or set off. The Ld.CIT(A), having accepted that Rs.78,19,519/- pertained to and had already suffered addition in the preceding assessment year, was required to undertake a further enquiry as to whether the balance amount of Rs.14,90,681/- represented any independent introduction of capital during the current previous year. No such exercise has been carried out. In the absence of identification of a corresponding transaction in the current year, the balance cannot be sustained merely as a consequential residue.

There is yet another aspect of the matter. If any part of the opening capital represented an unexplained introduction made in an earlier previous year, the taxability thereof, subject of course to the provisions of law governing that year, has to be considered in the assessment year corresponding to the year in which such introduction actually occurred. An amount cannot be shifted from one assessment year to another merely because it continues to appear as a brought-forward balance in the subsequent year. The year of taxability cannot be divorced from the year in which the taxable event is alleged to have arisen.

Viewed from any angle, therefore, the addition sustained by the Ld.CIT(A) cannot survive. The assessee has demonstrated complete continuity between the closing capital of Rs.1,86,87,129/- as on 31.03.2012 and the opening capital of the identical amount as on 01.04.2012. The subsequent movement of the capital account is also arithmetically reconciled.

We, therefore, hold that the addition of Rs.14,90,681/- sustained by the Ld. CIT(A) is devoid of factual foundation and cannot be sustained in law. The AO is accordingly directed to delete the addition in entirety. The corresponding ground of appeal raised by the assessee is allowed.

We shall now advert to the principal controversy relating to the addition of Rs.9,24,57,000/-, being the aggregate cash deposits made in the assessee’s bank accounts during the relevant previous year. The AO treated the entire amount as unexplained cash credits u/s.68 of the Act and the Ld.CIT(A) confirmed the addition. The case of the assessee, however, is that he was admittedly carrying on money-lending activity; that monies withdrawn from the bank were advanced to various borrowers; that recoveries of such advances, together with interest, were deposited back into the bank accounts; and that the recovered amounts were again deployed in the same business. It is therefore contended that the gross deposits cannot be regarded as income and that, at the highest, only the income component embedded in the lending operations can be brought to tax.

The controversy, therefore, cannot be adjudicated merely by looking at the aggregate quantum of credits appearing in the bank accounts. The true nature and character of the deposits have to be ascertained having regard to the assessee’s business, the corresponding withdrawals, the frequency and pattern of deposits and withdrawals, the surrounding circumstances and, importantly, the findings recorded by the Department itself in the earlier proceedings concerning the very same bank accounts.

It is an admitted position that the assessee was engaged in money- lending activity. This is not a case where, confronted with unexplained bank

In the said proceedings, the AO had called for the bank statements and supporting details and, upon examination thereof, specifically recorded that the assessee was engaged in chit contribution and lending monies to various parties; that the withdrawals represented amounts lent to such parties; and that the subsequent deposits represented repayment of such loans together with interest. These are findings recorded by the AO upon examination of the contemporaneous banking transactions and cannot be lightly brushed aside.

We are conscious that the aforesaid assessment order was subsequently subjected to revisionary proceedings u/s.263 of the Act and that the matter came to be restored for fresh examination. Nevertheless, the setting aside of an assessment for the purpose of further enquiry does not alter the objective character of the underlying bank transactions. Nor does it erase from existence the material that had been examined or the factual pattern noticed during the original proceedings. The earlier findings may not, by themselves, conclude the issue in the consequential proceedings, but they undoubtedly constitute relevant material while appreciating the explanation offered by the assessee.

What is more significant is that the factual pattern noticed even in the subsequent proceedings is substantially consistent with the explanation furnished by the assessee. The AO has noticed that the cash deposits were made either by the assessee himself or directly by the debtors. The fact that debtors themselves deposited amounts into the assessee’s bank accounts is a material circumstance which cannot be ignored while determining the

Likewise, the bank statements reveal recurring withdrawals followed by deposits and further withdrawals. The transactions are not isolated or one- sided credits. They exhibit a continuing cycle of outflow and inflow. In our view, where both sides of the bank account constitute integral parts of the same commercial activity, it would be artificial to isolate the credit entries from the corresponding debit entries and regard every credit as an independent receipt of unexplained income.

The aggregate figures reinforce this conclusion. The material placed before us indicates that the total credits in the bank accounts were approximately Rs.24.76 crores, while the corresponding debits aggregated to approximately Rs.24.68 crores. The substantial parity between the inflows and outflows is an important indicator of circulation and rotation of funds rather than accumulation of independent unexplained receipts. The transactions, viewed in their commercial entirety, exhibit deployment, recovery and redeployment of the same circulating capital.

The nature of a money-lending business must also be kept in perspective. A rupee advanced to a borrower does not cease to be the assessee’s capital merely because it leaves the bank account. Upon repayment, the principal amount comes back to the assessee and may once again be lent to another borrower. The same corpus can thus pass through the bank account several times during the course of a single previous year. Consequently, the aggregate of the deposits during the year may legitimately be many times the actual capital employed or even the amount of loans outstanding at any particular point of time.

To illustrate the fallacy inherent in taxing gross deposits, if a sum of Rs.10 lakhs is advanced, recovered and redeployed five times during the year, the banking transactions may reflect aggregate deposits of Rs.50 lakhs even though the underlying circulating principal continues to be only Rs.10 lakhs. Taxing the aggregate deposits of Rs.50 lakhs as income would result in the same principal being subjected to tax repeatedly merely because of its rotation. Such a result would be contrary to the commercial substance of the transactions and the fundamental distinction between capital receipts and income receipts.

It is in this context that the decision of the Co-ordinate Bench in Sundaram Subramanian v. ITO (supra) assumes relevance. In that case also, this Tribunal was confronted with recurring cash deposits and withdrawals arising in the course of money-lending activity. This Tribunal noticed that monies lent to various debtors were subsequently collected, that such collections comprised principal together with interest, that the collections were deposited into the bank accounts and that the amounts so recovered were thereafter recycled by lending them to other parties.

The Co-ordinate Bench recognised that, because of repeated rotation, the aggregate deposits appearing in the bank accounts could substantially exceed the amount of finance receivables outstanding at a given point of time. It therefore declined to equate the gross deposits with unexplained income and proceeded instead to determine the real income arising from the finance activity.The factual matrix before us is materially comparable. There are substantial and recurring withdrawals; there are corresponding recurring deposits; deposits have admittedly been made, inter alia, directly by debtors; and the assessee is engaged in money-lending activity. Most importantly, there is no finding supported by material that the amounts withdrawn from the bank accounts were diverted towards any identified personal expenditure, acquisition of assets, investment outside the business or any other non-

The Co-ordinate Bench in Sundaram Subramanian (supra) also took note of the decision of the Hon’ble Karnataka High Court in S.R.Venkataraman v. CIT [127 ITR 807], wherein the Court disapproved rejection of an explanation based on earlier withdrawals merely upon conjectural reasoning as to whether the assessee would have retained the cash. The Tribunal also referred to the principle flowing from the judgment of the Hon’ble Supreme Court in Sreelekha Banerjee & Ors. v. CIT [49 ITR 112] that an explanation supported by circumstances cannot be discarded on mere suspicion, surmise or conjecture so as to convert satisfactory proof into no proof.

Applying the above principles to the facts before us, we find that the assessee’s explanation is not a bare assertion. It derives support from the nature of the admitted business, the bank statements, the recurring debit- credit pattern, direct deposits by debtors and, significantly, the factual findings recorded by the AO in the original reassessment proceedings after examination of the same banking transactions.The Revenue has not brought on record any material demonstrating that the cash deposits emanated from a source independent of the money-lending activity. There is no identification of any undisclosed business, unexplained sale, unaccounted asset or any other independent source capable of generating cash deposits of the magnitude sought to be assessed. Equally, there is no finding that the corresponding

When the explanation offered by the assessee is considered in conjunction with these surrounding circumstances, the only reasonable conclusion that emerges is that the bank accounts reflected substantial recycling of funds in the course of the money-lending business. The gross amount deposited into the accounts cannot therefore be equated with income.We may also observe that the object of assessment proceedings is to determine the real taxable income of the assessee in accordance with law and not to produce an artificial figure divorced from commercial reality. Where the material demonstrates rotation of the same funds, the quantum of annual bank deposits cannot be adopted as a surrogate for income merely because the deposits are large in absolute terms.The distinction between principal and income assumes particular significance in a financing business. The principal advanced to a borrower constitutes deployment of the assessee’s circulating funds. Upon recovery, the principal component merely restores what had earlier been advanced. Such recovery does not, by itself, enrich the assessee or result in a gain. The accretion to the assessee arises from interest, finance charges or other income earned on deployment of the principal.Thus, treating every repayment of principal as income would obliterate the basic distinction between return of capital and return on capital. The former is merely restoration of the assessee’s own funds; the latter constitutes income. Income-tax can legitimately be levied upon the latter, but not repeatedly upon the former merely because the same capital moves through a bank account several times.

For the above reasons, we are unable to concur with the authorities below in treating the entire cash deposits aggregating to Rs.9,24,57,000/- as unexplained income. The approach of taxing the gross deposits disregards the corresponding withdrawals, the admitted nature of the business, the direct

Having held that the gross cash deposits cannot be brought to tax as unexplained income, the matter does not end there. It remains necessary to determine whether the assessee has fully disclosed the income component arising from the money-lending activity. The assessee cannot obtain exclusion of the principal component and, at the same time, escape taxation of the interest income actually or reasonably attributable to the deployment of such funds.The task before us is, therefore, to adopt a reasonable and judicially sustainable method for determining the income embedded in the lending operations. In this regard, we find that the methodology adopted by the Co- ordinate Bench in Sundaram Subramanian (supra) provides an appropriate guide on materially similar facts.

In Sundaram Subramanian (supra), after accepting the explanation regarding circulation of finance advances and recoveries, the Tribunal did not sustain the addition on the gross deposits. Instead, it proceeded to determine a reasonable interest yield with reference to the finance receivables outstanding at the end of the relevant financial year. The Tribunal estimated interest income at 18% per annum on such receivables, granted credit for the interest already disclosed by the assessee and sustained only the differential amount as additional business income.In our considered view, adoption of the same methodology in the present case would meet the ends of justice. It avoids the manifestly unreasonable consequence of treating circulating principal as income while simultaneously ensuring that an appropriate amount of income from the money-lending operations is subjected to tax. It thus accords with the principle of taxing the real income embedded in the admitted business activity.

The material before us shows that the outstanding sundry debtors/finance receivables as on 31.03.2013 amounted to Rs.3,68,11,013/-. Applying an interest rate of 18% per annum, consistent with the methodology followed by the Co-ordinate Bench in Sundaram Subramanian (supra), the estimated gross interest income works out to Rs.66,25,982/- (Rs.3,68,11,013/- × 18% = Rs.66,25,982/-).

It is not in dispute that the assessee has already disclosed gross interest income of Rs.58,82,910/- (Adhyam Received of Rs.13,96,590/- + Other Interest Received of Rs.44,86,320/-) from the money-lending activity. Once the income is being estimated with reference to the lending portfolio, the gross interest already offered to tax from the very same activity must necessarily be given credit. Otherwise, the same income component would suffer taxation twice.

The computation of the additional income which can therefore be sustained is as follows:

We hasten to clarify that the sum of Rs.7,43,072/- is not being sustained as an unexplained cash credit u/s.68 of the Act, nor as unexplained money under any other deeming provision. Once the bank deposits are found to substantially arise from recovery and recycling of monies in the assessee’s admitted money-lending business, the taxable component embedded therein retains the character of income from that business.The amount of Rs.7,43,072/- represents the differential business income arrived at by estimating a reasonable interest yield on the outstanding finance receivables

We are fortified in adopting the aforesaid course by the final direction issued by the Co-ordinate Bench in Sundaram Subramanian (supra), where, instead of sustaining the gross bank deposits, the Tribunal brought to tax only the difference between the interest income estimated at 18% on the finance receivables and the interest income already offered by the assessee.Judicial consistency also requires that where materially comparable facts are presented before a Co-ordinate Bench, the view already taken on an identical commercial pattern should ordinarily be followed unless there exists a distinguishing factual feature or a contrary binding precedent. No material distinction has been demonstrated before us which would justify departure from the approach adopted in Sundaram Subramanian (supra).In arriving at this conclusion, we have taken into account cumulatively: (i) the admitted money-lending activity of the assessee; (ii) the contemporaneous findings recorded in the original reassessment proceedings; (iii) the recurring pattern of substantial cash withdrawals and redeposits; (iv) the deposits made directly by debtors; (v) the substantial parity between aggregate credits of approximately Rs.24.76 crores and debits of approximately Rs.24.68 crores; (vi) the absence of any finding regarding diversion of the withdrawals to an independent purpose; and (vii) the absence of any identified independent source capable of generating the impugned cash deposits.Considered cumulatively, these circumstances establish a clear preponderance of probability that the banking transactions represented circulation of monies in the lending business and that the aggregate deposits cannot represent independent income in the hands of the assessee. The assessment of the entire deposits as unexplained cash credits, therefore, cannot be sustained.

We accordingly set aside the finding of the Ld.CIT(A) confirming the addition of Rs.9,24,57,000/- and direct the AO to restrict the addition to Rs.7,43,072/-, representing the differential interest income from the money- lending activity. Consequently, the balance addition of Rs.9,17,13,928/- is directed to be deleted.We further direct that the amount of Rs.7,43,072/- so sustained shall be assessed as income from the assessee’s money-lending business under the head “Profits and gains of business or profession” and not as unexplained cash credit u/s.68 of the Act or as unexplained money under any other deeming provision.

In the result, the grounds of appeal challenging the addition of Rs.14,90,681/- towards the alleged difference in proprietor’s capital are allowed, whereas the grounds challenging the addition of Rs.9,24,57,000/- towards cash deposits are partly allowed, in the terms indicated hereinabove.

In the result, the appeal of the assessee is partly allowed.