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Facts
The assessee, engaged in the transportation business, had an opening capital balance of Rs. 96,10,209/- as on 01.04.2014 for AY 2015-16. The Assessing Officer (AO) treated this as an unexplained cash credit under Section 68 of the Income Tax Act, which was challenged by the assessee who claimed it was accumulated capital from previous years. The CIT(A) upheld the AO's addition.
Held
The Tribunal held that Section 68 of the Income Tax Act is applicable only to sums credited during the relevant previous year, not to opening balances brought forward from prior years. It found that the AO and CIT(A) erred by not appreciating this legal position and the fact that the business genuineness and asset ownership were not disputed. Consequently, the addition made under Section 68 was deemed unsustainable in law.
Key Issues
Whether an opening capital balance brought forward from previous years can be added as unexplained cash credit under Section 68 of the Income Tax Act in the current assessment year.
Sections Cited
68, 143(3), 115BBE, 271(1)(c), 44AE
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Asstt.Year : 2015-16 Dipakkumar Jagdishchandra Maheta The DCIT, Cir.2(1)(1) Holi Chakla Vs. Vadodara. Alipura Char Rasta Bodeli,Chhotaudepur Gujarat. PAN : AHTPM 6296 N (Applicant) (Responent) : Shhri Jigar Adhyaru, AR Assessee by Revenue by : Shri Hargovind Singh, Sr.DR सुनवाई क� तारीख/Date of Hearing : 24/07/2025 घोषणा क� तारीख /Date of Pronouncement: 29/07/2025 आदेश आदेश/O R D E R आदेश आदेश PER MAKARAND V.MAHADEOKAR, AM: This appeal by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”], dated 15.05.2024, confirming the addition made by the Income Tax Officer, Ward – 3(1)(3), Baroda [hereinafter referred to as “Assessing Officer or AO”] under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] in respect of the opening capital balance as on 01.04.2014 amounting to Rs.96,10,209/–, in the case of the assessee for the Assessment Year (AY) 2015–16.
Facts of the Case 2.1 The assessee is an individual engaged in the business of transportation under the proprietorship concern named M/s. Parul Lorry Suppliers and Freight Carriers. For the year under consideration, the assessee filed his return of income on 30.09.2015 declaring a total income of Rs.24,89,660/-. The return was processed and selected for scrutiny under CASS. Subsequently, assessment was completed under section 143(3) of the Act by the Assessing Officer vide order dated 15.12.2017.
2.2 During the course of assessment, the Assessing Officer examined the balance sheet and observed that the assessee had shown an opening capital balance of Rs.97,45,209/– as on 01.04.2014. The AO questioned the source of the said capital and called upon the assessee to furnish supporting evidences. The assessee explained that the capital balance was accumulated over the past years, having carried on the transport business for several years and having acquired trucks and business goodwill through his father. It was also stated that the assessee had declared income in the past and had withdrawn a sum of Rs.4,43,014/– in the preceding years, and that the capital was not a credit during the year but merely an opening brought forward from earlier years. However, the AO disbelieved the explanation and alleged that there was no evidence of truck purchases, that the assessee had failed to prove the source of capital investment in earlier years, and that the assessee had not filed a return of income for AY 2013– 14. Referring to human probability principles and quoting the judgment of the Hon’ble Supreme Court in CIT v. Durga Prasad More [(1971) 82 ITR 540 (SC)], the AO held that the explanation furnished was not satisfactory. The AO further observed that in the absence of any evidence of investment, purchase invoices or supporting documents, the entire capital balance of Rs.96,10,209/– was liable to be treated as unexplained. Accordingly, he made an addition under section 68 of the Act and brought the same to tax under section 115BBE at the special rate. The AO also initiated penalty proceedings under section 271(1)(c) alleging concealment of income.
The assessee preferred an appeal before the CIT(A), inter alia, challenging the addition of Rs.96,10,209/– on the ground that the opening capital balance cannot be taxed under section 68 and that no fresh credit had arisen during the relevant previous year. The assessee submitted detailed written arguments, highlighting that:
- The capital balance was carried forward from earlier years. - The assessee had been engaged in transport business for a long time and had inherited trucks and goodwill of the business. - The AO did not bring on record any material to show that the capital was created in the relevant year. - Section 68 does not apply to opening balances. - Reliance was placed on various judicial precedents, including decisions of Co-ordinate Benches in Babubhai Kanjibhai Patel, HUF (ITA No. 342 & 4293/Ahd/2007) and Satish Chandra Pandey (ITA No.525/LKW/2010) 3.1 The CIT(A), however, dismissed the appeal and confirmed the addition made by the AO. In doing so, the CIT(A) simply reiterated the findings recorded by the AO and observed that the assessee failed to substantiate the source of opening capital. No independent reasoning or adjudication of the specific legal issue raised was recorded by the CIT(A). The appellate order lacks any analysis of the submissions made by the assessee or of the settled legal position regarding the taxability of opening balances under section 68 of the Act.
Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following revised grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has grievously erred in confirming the addition of Rs. 96,10,209/- as made by the AO u/s 68 of the Act, without assigning reasons for confirming the addition and merely relying upon baseless reasons of the AO, given in the assessment order u/s 143(3) of the Act. The decision of the Id. CIT(A) iserroneous both on facts of the case as well as in law and hence the Hon'blebench is requested to delete this entire unlawful addition of Rs. 96,10,209/-as made u/s 68 of the Act.
2. The appellant craves leave to add, alter or amend any of the aforesaid ground or grounds if necessary. 4.1 During the course of hearing before us, the learned Authorised Representative (AR) reiterated the submissions made before the lower authorities and emphasised that the assessee was engaged in the transportation business inherited from his father and had filed returns under the presumptive scheme of section 44AE of the Act in earlier years. The AR submitted that the opening capital was not a new credit during the year and merely a reflection of past accumulation, which was not taxable under section 68. He referred to the balance sheet, RC books of trucks, audited accounts for the year, and pointed out that the AO had not doubted the genuineness of the business, turnover of Rs. 4.75 crores, nor the asset side of the balance sheet which included investment in Parul Lorry of Rs.85,12,198/-. Thus, it was argued that the capital side of the balance sheet could not be doubted in isolation.
4.2 The AR also drew attention to the legal position that opening capital balance brought forward from earlier years cannot be taxed under section 68 in the current year, particularly in the absence of any new credit entry during the year. Reliance was placed on the decision of ITAT Ahmedabad in ITO vs. Babubhai Kanjibhai Patel, HUF (ITA No. 342 & 4293/Ahd/2007) and ITAT Lucknow in DCIT vs. Shri Satis Chandra Pandey (ITA No. 525/LKW/2010), which were submitted to demonstrate that taxing brought forward capital in absence of fresh inflow is unsustainable.
4.3 On the other hand, the learned Departmental Representative (DR) relied upon the assessment order passed by the AO and the appellate order passed by the CIT(A). The DR submitted that the assessee had failed to substantiate the source of the opening capital of Rs.1,00,53,222/-, and in the absence of verifiable supporting evidence for accumulation, the AO had rightly invoked section 68. It was argued that the CIT(A) had correctly confirmed the addition based on the assessee’s failure to discharge the burden of proof cast upon him.
4.4 We have carefully perused the orders of the lower authorities, submissions made by the assessee, and judicial precedents cited. The core issue for our adjudication is whether the addition of Rs.96,10,209/- made by the Assessing Officer under section 68 of the Act, being the opening capital balance reflected as on 01.04.2014 (as reduced by profits of Rs.548261/- for the A.Y. 2014-15), is legally sustainable.
4.5 It is an undisputed fact that this is the first year in which the assessee drew a complete balance sheet along with books of account, having previously returned income under section 44AE of the Act on presumptive basis. The capital balance brought forward and reflected in the opening balance sheet for A.Y. 2015–16 is therefore a cumulative figure arising from the past. There is no dispute that this figure was not credited afresh during the relevant previous year.
Section 68 of the Act reads as under:
“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
4.6 A plain reading of this section makes it evident that the deeming fiction under section 68 applies only when the sum in question is credited during the “previous year” relevant to the assessment year under consideration. In the present case, the sum of Rs.96,10,209/- is not a credit made during the previous year 2014–15 but merely a part of opening capital balance.
4.7 It is now well-settled that opening balances brought forward from prior years cannot be taxed under section 68 in the absence of any credit entry during the relevant previous year. This view finds direct support from the decision of Co-ordinate Bench in case of ITO vs. Babubhai Kanjibhai Patel (HUF) [ITA Nos. 342 & 4293/Ahd/2007, order dated 26.03.2010]. In this case, the Co-ordinate Bench agreeing with the CIT(A) held that under no circumstances, the opening balance of the capital account could be added in the year under consideration. It also decided that if the said sum was to be treated as unexplained, it could only be dealt with in the earlier years. This decision squarely applies to the present case, where the impugned addition was made solely on account of opening capital balance without any corroborative material to demonstrate that such capital was introduced in the current year. Similarly in case of DCIT vs. Shri Satish Chandra Pandey [ITA No. 525/LKW/2010, order dated 30.03.2011], the AO sought to treat the opening balance as unexplained despite the fact that the same had been brought forward from earlier years. The addition was deleted, affirming that section 68 cannot apply to such brought forward balances.
4.8 We also note that the AO has not doubted the genuineness of the business turnover or assets reflected in the books during the year. In fact, the audited books, balance sheet, and capital account were all accepted except for the opening balance, which was questioned merely due to absence of historical records or returns in one of the preceding years (A.Y. 2013–14). This cannot, in our view, constitute sufficient ground for invoking section 68.
4.9 The AO has also relied upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More [(1971) 82 ITR 540 (SC)] for applying the test of human probabilities. While the principle of examining the surrounding circumstances is well-settled, the AO must bring cogent evidence or material on record to displace the explanation offered by the assessee. In this case, the capital is supported by a running business, ownership of assets (5–6 trucks and that to inherited as claimed by the assessee), and consistent declaration of income over earlier years. The presumption drawn by the AO is, thus, based on suspicion and not supported by any material evidence.
4.10 Further, if the Department was of the view that such capital had not accrued in earlier years and was fictitious, the remedy lay in reopening past assessments, not taxing it in the current year under section 68. The law does not permit reopening by stealth or telescoping old unexplained figures into the current year by deeming fiction.
4.11 In view of the above discussion, we are of the considered opinion that the addition of Rs.96,10,209/- made under section 68 of the Act merely on the basis of opening capital balance is unsustainable in law. Both the Assessing Officer and the CIT(A) have failed to appreciate the legal position and the facts in totality. Accordingly, we direct deletion of the addition.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 29th July, 2025 at Ahmedabad.