Case Law Details
Sree Tirumala Spices Vs ITO (ITAT Hyderabad)
The Hyderabad ITAT held that Section 68 cannot be invoked on opening balances, but remanded the matter for factual verification. The case involved addition of ₹55.53 lakh treated as unexplained cash credit, representing an outstanding loan from a creditor.
The assessee contended that the amount was not a fresh credit during the year, but merely a carried-forward opening balance, reduced from ₹92.53 lakh after partial repayment. However, the AO and CIT(A) made the addition citing lack of proof of creditworthiness and genuineness.
The Tribunal observed that if the impugned amount pertains to loans received in earlier years, no addition can be made in the current year under section 68. However, since this claim required verification, the ITAT set aside the issue to the AO.
The AO was directed to verify ledger accounts, confirmations, prior year records, and bank transactions, and delete the addition if it is established that no fresh credit arose during the year.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal filed by the assessee firm is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (for short, “CIT(A)”), dated 14/10/2025, which in turn arises from the order passed by the AO under section 143(3) r.w.s 144B of the Income Tax Act, 1961 (for short, “the Act”), dated 26/03/2024 for Assessment Year (AY) 2022-23. The assessee firm has assailed the impugned order of the CIT(A) on the following grounds of appeal before us:
“1) The order of the learned CIT (A) is erroneous to the extent it is prejudicial to the appellant herein;
2) The learned CIT (A) is not justified in confirming the addition made by the Assessing Officer of Rs.55,53,709/- representing an amount due to Sri K. Narasimha Rao;
3) The learned CIT (A) on finding that there was an opening balance and there was a repayment during the year and also finding that the closing balance as on 31.03.2022 was Rs.55,53,709/- is not justified in confirming the addition made by the Assessing Officer particularly when the said amount was not credited during the year under consideration;
4) The learned CIT(A) ought to have seen that the amount was not credited during the year under consideration and therefore, should not have been confirmed.
5) The learned CIT (A) erred in confirming addition of Rs:1,47,000/-representing the disallowance of the expenses;
6) Any other ground/grounds that may be urged at the time of hearing.”
2. Succinctly stated, the assessee firm had filed its return of income for AY 2022-23 on 29/10/2022 declaring an income of Rs.25,96,510/-. Subsequently, the case of the assessee firm was selected for scrutiny assessment under CASS for verifying two issues, viz., (i) high liabilities as compared to low income declared; and (ii) substantial payments shown to entities not registered under GST. During the course of the assessment proceedings, the AO observed that the assessee firm had disclosed an outstanding loan liability towards Sri K. Narasimha Rao of Rs.55,53,709/- on 31/03/2022 towards. The assessee, on being queried, placed on record the confirmation of the aforementioned person. However, the AO observed that the loan claimed to have been advanced by Sri K. Narasimha Rao (supra) to the assessee firm was not commensurate with his returned income for the year under consideration as well as those for the immediately preceding and succeeding year, viz., (i) AY 2021-22: Rs.7,52,490/-; (ii) AY 2022-23: Rs.8,00,560/-; and (iii) AY 2023-24: 8,77,200/-. Apart from that, the AO observed that the “balance sheet” of the assessee firm on 31/03/2021, disclosed a “closing balance” of an outstanding loan towards Sri K. Narasimha Rao at Rs.92,53,709/-. The AO not satisfied with the genuineness of the loan transaction, specifically in the backdrop of the fact that the creditworthiness of the lender to advancer the subject loan was not established, coupled with the fact that the assessee firm had failed to discharge the onus that was cast upon it to prove the genuineness of the loan transactions, held the entire amount of unsecured loan of Rs.55,53,709/- as unexplained cash credit under section 68 of the Act.
3. Aggrieved, the assessee firm carried the matter in appeal before the CIT(A) who sustained the addition of Rs.55,53,709/-. For the sake of clarity, we deem it apposite to cull out the observation of the CIT(A), as under:
“Ground no. 3: The Assessing Officer, during the assessment proceedings, observed that an amount of Rs. 55,53,709/- was shown as due to Sri K. Narasimha Rao in the books of the assessee for the year under consideration. The AO noted that although there was an opening balance of Rs. 92,53,709/-and a repayment of Rs. 37,00,000/- during the year, the balance amount of Rs. 55,53,709/-remained unsubstantiated with respect to the identity, genuineness, and creditworthiness of the lender. Consequently, the AO treated this balance as unexplained credit under Section 68 of the Income Tax Act and taxed it under Section 115BBE, initiating penalty proceedings under Section 271AAC.
The assessee, in the ground of appeal, contended that the amount of Rs. 55,53,709/- represented an opening balance carried forward from the previous year and no fresh credit was received during the year under consideration. It was argued that in accordance with the provisions of Section 68, only amounts credited in the relevant year could be assessed, and therefore, the opening balance could not be treated as assessable income. NCOME TAX DEPARTME
In support of this contention, the assessee submitted account copies of Sri K. Narasimha Rao for the previous two assessment years and maintained that these records clearly demonstrated that the credits did not relate to the year under consideration. The assessee requested that the addition made by the AO be deleted as the amount was not newly received during the year.
Upon a detailed examination of the assessment records, the submissions made by the assessee, and the relevant provisions of the Income Tax Act, it is evident that the Assessing Officer has acted strictly in accordance with law while making the addition under Section 68. The AO noted that an amount of Rs. 55,53,709/- was shown as due to Sri K. Narasimha Rao in the assessee’s books during the year under consideration. While the assessee contended that this represented an opening balance from the previous year, it is well- settled that the existence of an opening balance alone cannot relieve the assessee of the statutory obligation to substantiate the genuineness of the loan, the identity of the lender, and the creditworthiness of the party. The provision of Section 68 requires that any unexplained cash credits, loans, or amounts appearing in the books of account must be fully substantiated to be excluded from taxable income.
In the present case, the assessee failed to provide adequate evidence to support the claim. No ledgers, bank statements, confirmations, or other documentary proof were furnished to demonstrate the repayment history. source of funds, or the financial capacity of Sri K. Narasimha Rao to provide such a loan. The AO provided sufficient opportunities under Section 142(1) notices to submit these documents, yet the assessee did not furnish the required evidence. The absence of supporting documentation left the AO with no option but to treat the balance as an unexplained credit under Section 68, and accordingly, it was taxed under Section 115BBE with penalty proceedings initiated under Section 271AAC.
Further, the case law cited by the assessee is not applicable to the facts of the present matter. The relied judgments pertain to situations entirely different from the instant case and cannot override the clear statutory requirement that the assessee must substantiate all unexplained credits. The legal principle established in these cases does not absolve an assessee from proving the genuineness and creditworthiness of an existing loan balance that forms part of the opening balance for the year.
In light of the above analysis, the arguments advanced by the assessee lack merit and cannot be sustained. The addition of Rs. 55,53,709/- by the Assessing Officer is supported by the material on record. Accordingly, the appeal filed by the assessee on this ground is dismissed.”
4. The assessee firm aggrieved with the order of the CIT(A) has carried the matter in appeal before us.
5. We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities, and considered the material available on record.
6. Shri S Rama Rao, Advocate, Learned Authorized Representative (for short, “Ld. AR”) for the assessee firm, at the threshold of hearing of the appeal, submitted that both the lower authorities had grossly erred in law and facts of the case in making/sustaining the addition of Rs. 55,53,709/- under section 68 of the Act. Elaborating on his contention, the Ld. AR submitted that the assessee firm had raised an unsecured loan from Sri K. Narasimha Rao in the preceding years, which during the subject year was brought forward as an “Opening balance” as on 01/04/2021 of Rs.92,53,709/-, Page-47 of APB. The Ld. AR submitted that the assessee firm had, during the subject year, repaid the amount of Rs.37,00,000/- to Sri K. Narasimha Rao, as a result whereof the outstanding loan liability towards him was scaled down to an amount of Rs.55,53,709/- as on 31/03/2022. The Ld. AR to further fortify his contention that the assessee firm had brought forward the outstanding loan of Sri K. Narasimha Rao from the preceding years, had drawn our attention to the ledger account of the said lender as appearing in the books of account of the assessee firm during the Financial Year (FY) 2020-21, which revealed, viz., (i) an opening balance on 01/04/2020 of Rs.81,99,625/-; and (ii) closing balance on 31/03/2021: Rs.92,53,709/-. Carrying his contention further, the Ld. AR submitted that as the outstanding loan of Rs.55,53,709/- towards Sri K. Narasimha Rao (supra) on 31/03/2021, found its genesis in the loan which was taken not during the subject year but in the preceding years, therefore, there was no justification for the AO to have held the same as unexplained cash credit under section 68 of the Act.
7. Per contra, Sri Dr. Sachin Kumar, Learned Senior Departmental Representative (for short, “Ld. Sr-DR”) relied on the orders of the lower authorities.
8. We have given thoughtful consideration to the contentions of both parties in the backdrop of the orders of the lower authorities. Ostensibly, as can be gathered from the copy of the account of Sri K. Narasimha Rao, i.e., lender, as appearing in the books of accounts of the assessee firm for the subject year ending 31/03/2022, there is an outstanding liability due by the assessee firm to the said lender of Rs.55,53,709/- on 31/03/2022. However, as per the aforesaid ledger account of Sri K. Narasimha Rao (loan account), we find that the outstanding loan of Rs.55.53 lakhs (approx.) finds its genesis in the “Opening balance” of Rs.92,53,709/- on 01/04/2021. The Ld. AR to fortify his aforesaid contention has also placed on record the copy of the ledger account of Sri K. Narasimha Rao (loan account) for the immediately preceding year, wherein the “Closing balance” on 31/03/2021 is disclosed at Rs.92,53,709/-.
9. In our view, if the aforesaid factual position, as has been canvassed by the Ld. AR before us, i.e., the outstanding loan of Rs.55,53,709/- due by the assessee firm to Sri K. Narasimha Rao is not out of any loan advanced during the year under consideration but finds its source in the loan advanced by the said lender in the preceding years, then no addition of the outstanding amount of Rs.55,53,709/-could have been made in the hands of the assessee firm during the subject year under section 68 of the Act. However, we are of firm conviction that the claim of the Ld. AR that the outstanding amount of Rs.55,53,709/- (supra) had not been advanced by the assessee firm during the year under consideration, but forms part of the loan received by him from the aforementioned lender in the preceding year/years, cannot be summarily accepted and would require verification. We, thus, in terms of our aforesaid observations, set aside the matter to the file of the AO for carrying out necessary verification. In case the claim of the assessee firm that the subject outstanding loan of Rs.55,53,709/- had not been received during the year under consideration but in the preceding year/years, then, the AO shall vacate the impugned addition made in its hands during the subject year.
10. Before parting, we may herein observe that the AO is directed to call for the confirmation of the aforesaid lender, viz., Sri K Narasimha Rao (supra), books of account of the assessee for the preceding years in which the subject loan is stated to have been received, as well as the bank account of the assessee in which the said loan is claimed to have been received in the preceding year/years from Sri. K. Narasimha Rao (supra).
11. We thus, in terms of our aforesaid deliberations, set aside the matter to the file of the AO with a direction to re-adjudicate the issue. Needless to say, the AO shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee firm, who shall remain at liberty to substantiate its claim based on fresh documentary evidence, if any.
12. In the result, appeal of the assessee firm is allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced in the open court on 17th April, 2026.
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