Vokkaligara Thimmaiah Dinesh Kumar Bychanhally Vs ITO (ITAT Bangalore)
Bangalore ITAT Deletes ₹3.31-Crore Section 68 Addition: Journal Entry Recording Pre-existing Assets Is Not Unexplained Cash Credit
The assessee, a government contractor, showed an increase of ₹3.31 crore in his capital account during AY 2018-19. The AO treated the entire increase as unexplained cash credit under Section 68, since the assessee had not furnished supporting documents during assessment. The CIT(A) also refused to admit the additional evidence, despite the assessee explaining that floods and natural calamities had disrupted normal life in his locality.
Before the Tribunal, the assessee explained that the increase comprised:
- ₹50.68 lakh of taxable income already offered during the year, after adjusting drawings; and
- ₹2.80 crore representing pre-existing personal assets and liabilities brought into the proprietary books through a consolidated journal entry on 1 April 2017.
The evidence established that the assets had been acquired in earlier years. These included house plots purchased between 2001 and 2010, a BMW motorcycle acquired in 2015, a Volkswagen car purchased in February 2017, personal bank accounts and capital held in partnership firms. They were introduced into the proprietary balance sheet merely to present a realistic financial position for obtaining banking facilities.
The ITAT held that Section 68 applies where a credit appearing in the books remains unexplained. Here, there was no fresh inflow of cash during the relevant year. The credit arose from a journal entry recording assets already owned by the assessee, and their nature and source were satisfactorily established. Further, taxing income already declared during the year would amount to duplication.
Accordingly, the Tribunal deleted the entire addition of ₹3,30,84,102 under Section 68.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC, Delhi dated 15.11.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1082650097(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2018-19.
2. The assessee has raised the following grounds of appeal:-
GROUND.No.1.
The Ld CIT (A) erred in confirming the Asst. order of the AO for making the addition of Rs.3,30,84,102 /- U/sec.68 in the Asst Order, on the wrong presumption that it is an investment made during this year, as proposed in Show cause Notice U/sec. 69. Hence based on the facts and circumstances of the case the assessment is bad in law.
GROUND.No2.
The Ld. CIT (A) and the Ld.AO erred in assessing the Income under sec.68, for the increase in the capital account, on the assumption that there is corresponding asset acquired during the year with that money , on a wrong assumption, against the actual facts.
GROUND NO.3.
The Ld. CIT (A) erredin confirming the assumptionof the Ld.AO. for applying the provisions of Sec.68 of the Act , for the evident assets acquired much earlier to the previous year, and brought into accounts only during the year, without admitting the supplementary evidences.
GROUND No.4.
The Ld.AO erred in Including the Already Offered taxable income as Cash credit Under se. 68, which amounts to taxing the Income twice in the same year.
GROUND No.5.
The appellant prays the Hon’ble ITAT, based on the above Grounds to delete the Total addition of Rs 3,30,84,102/- made in the Assessment of the appellant Under Sec. 68 and render justice in this regard.
GROUND No.6.
Appellant Prays the Hon’ble ITAT to permit the Appellant to add, delete, modify any other grounds at the time of further hearings, and to submit the Additional submissions , with prior permission.
3. The brief facts of the case are that the assessee being an individual is carrying on the business of government works contracts. The assessee is also a partner in two partnership firms that were involved in stone crusher business for the past few years including AY 2018–19. The books of accounts of the assessee are audited under the provisions contained in the section 44AB of the Act. The assessee filed the revised return of income for the AY 2018–19 on 31.10.2018 declaring total income of Rs. 1,06,67,470/-Thereafter, the said return was processed u/s. 143(1) of the Act by accepting the income returned. Subsequently, the case of the assessee was selected for limited scrutiny under the e-assessment scheme, 2019 on the issue of “Share capital / other capital”.
Accordingly, the notices u/s. 143(2) and 142(1) of the Act were issued wherein the assessee was asked to explain the reasons for substantial increase in capital of an amount of Rs. 3,30,84,102/-during the year under consideration in comparison to the profit after tax of the assessee for AY 2018–19 taking the total amount of proprietor’s capital as on 31.03.2018 to an amount of Rs. 7,38,62,106/- shown in the income tax return filed for AY 2018 – 19 and in comparison to the proprietor’s capital of an amount of Rs. 4,07,78,004/- shown in the income tax return filed for the AY 2017–18. The assessee was also asked to submit documentary evidences in support of the source for substantial increase in the capital.
3.1 During the course of assessment proceedings, the assessee submitted that the capital introduction was infact adjustment to the capital account and not by way of actual capital brought in. Thereafter, despite giving several opportunities by the AO by issuing notices u/s. 142(1) of the Act along with the detailed questionnaire, reminder notices as well as show cause notice, the assessee did not file any reply. As the assessee had failed on each and every occasion to co-operate with the AO and failed to substantiate with documentary evidences the substantial increase in capital during FY 2017-18 in comparison to preceeding FY 2016-17, the entire increase in capital of Rs. 3,30,84,102/- [Rs. 7,38,62,106 – Rs. 4,07,78,004] was disallowed as claimed in the ITR of AY 2018–19. Hence, an amount of Rs. 3,30,84,102/- treated as income from other sources u/s. 68 of the Act r.w.s. 115BB of the Act. Thus, the AO completed the assessment proceedings on a total assessed income of Rs. 4,37,51,572/-.
4. Aggrieved by the order of the AO dated 16.03.2021 passed u/s. 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A)/NFAC.
5. The ld. CIT(A)/NFAC dismissed the appeal of the assessee by not admitting the additional evidences filed by the assessee stating that since all evidences filed before him were already in possession of the assessee, the assessee could have filed it before the AO. Further, the assessee had failed to furnish any satisfactory explanation for the failure to submit the same before the AO during assessment proceedings and under such circumstances, the additional evidences filed before the ld. CIT(A)/NFAC was not admitted. The ld. CIT(A)/NFAC further observed that no reason was adduced for not producing the additional evidences before the AO and accordingly, rejected the application for admission of additional evidences despite the fact that the assessee had categorically stated to have back to back flood and natural calamities in his localities where the day to day life was in havoc and distress.
6. Again, aggrieved by the order of the ld. CIT(A)/NFAC dated 15.11.2025, the assessee has filed the present appeal before this Tribunal. The assessee has also filed 2 nos. of paper books comprising of total 350 pages containing therein the written submissions along with notices, orders, all the evidences filed before the ld. CIT(A)/NFAC along with the case laws relied upon by the assessee.
7. Before us, the ld. AR of the assessee vehemently submitted that before the ld. CIT(A)/NFAC, the assessee had produced all the evidences but the ld. CIT(A)/NFAC did not admit the additional evidences merely by stating that the assessee could have filed the same before the AO. Further, the ld. AR submitted that the increase in capital was on account of adjustment to capital and not on account of actual capital brought in or introduced during the year under consideration. Further, it is submitted that all the assets and liabilities of earlier years were brought into the books by way of journal entry as on 01.04.2017 and now accounted for in the books of accounts as part of business. The proof of existence of the assets and liabilities prior to 31.03.2017 were filed as part of additional evidences however, the ld. CIT(A)/NFAC did not consider the same. It is contended that mere bringing into the books of the assessee which were existing in the earlier years acquired with taxable income cannot be treated as income of the current year u/s. 68 of the Act. Lastly, it is submitted that mere accounting entry and revaluation of the asset cannot result into a taxable income.
8. Before us, the ld. DR on the other hand vehemently submitted that no details were brought before the AO as well as before the ld. CIT(A)/NFAC and accordingly, the case may be dismissed as the assessee failed to substantiate his claim.
9. We have heard the rival submission and perused the material available on record. It is an undisputed fact that the assessee is a class-1 contractor and predominantly, is into the govt. contracts & undertakes construction of highway and other roads which are tendered by the PWD and other govt. departments. The assessee also owns a stone crusher and manufactures M-sand and Jelly which are used in his construction works. Further, certain quantity of Jelly and M-sand which are procured in excess of the requirement is also sold in the open market. Undisputedly, the books of accounts of the assessee are also audited by a Chartered Accountant as per provisions contained in section 44AB of the Act. The Chartered Accountant as well as the AO could not point out any defects in the books of accounts maintained by the assessee.
The breakup of the impugned addition of Rs. 3,30,84,102/- as per the audited financial statements are as below:
| Opening capital b/f as on 01.04.2017 | 4,07,78,004 |
| Add: Consolidated adjustment entry | 2,80,16,118 |
| Add: This year net profit | 75,89,300 |
| Sub Total | 7,63,83,422 |
| Less: Drawings of this year | 25,21,316 |
| Closing capital as on 31.03.2018 | 7,38,62,106 |
On perusal of the written submissions as well as the paper books furnished by the assessee, we observed that the contention of the assessee is that the impugned additions made of Rs. 3,30,84,102/-includes two components i.e. (i) The taxable income already offered in the present year under house property, business and under the head other sources amounting to Rs. 50,67,984/- (after deducting the personal expenses withdrawal from Capital account) and (ii) the credit entry to capital account for bringing the earlier year assets into the books of accounts. Thus, the main contention of the assessee is that the increase in capital account is on account of passing a journal entry as on 01.04.2017 for bringing in all the assets existing prior to the commencement of previous year i.e. prior to 01.04.2017. The assessee also contended that there is no cash credit as contemplated in section 68 of the Act and it is only the assets accounted for in this year under consideration which were already existed in the earlier years and brought into books of accounts as on the opening day of the year under consideration by duly debiting the assets and crediting the capital account. Accordingly, it is not an unexplained cash credit as held by the authorities below. Lastly, the assessee contended that to bring a realistic picture in the balance sheet, the earlier omitted personal assets were brought into the balance sheet as the bankers mainly insisted on this realistic presentation, as a proprietor, while evaluating the financial statements for advancing the loans. Generally, the bank extends its credit facilities based on the capital of the proprietor and thus, mere accounting entry will not result into a taxable income in the hands of the assessee.
9.1 We are of the considered opinion that the assessee is able to explain the sources of Rs. 50,67,984/- being taxable income already offered in the year under consideration after deducting the personal expenses withdrawal from the capital account. Now, with regard to increase in capital account to the extent of net assets of Rs. 2,80,16,118/- by passing journal entry on 01.04.2017, in our considered opinion, the assessee is able to demonstrate before us that all these assets were existed prior to the commencement of the previous year i.e. prior to 01.04.2017 and there is no cash credit in the year under consideration as contended by the Authorities below. We also observed that the Volkswagen car was purchased on 11.02.2017 by obtaining a loan of Rs. 26,00,000/- Further, the BMW bike was purchased on 01.03.2015 taking a loan of Rs. 20,00,000/-. It is also observed that the assessee had purchased 6 house plots in between the years 2001 and 2010. These are all personal assets brought into the books of accounts of the business as on 01.04.2017. Further, the three personal bank accounts maintained with Vijaya Bank and HDFC Bank was also brought into the books of accounts as on 01.04.2017. Lastly, we observed that the capital in partnership firm and also two bank accounts maintained with HDFC and Axis Banks were introduced to his proprietary business by way of journal entry on 01.04.2017. Thus, the assessee has clearly established the fact that all these assets were acquired in the earlier years introduced in the proprietary business by increasing the capital by way of passing the journal entries as on 01.04.2017.
9.2 Before proceeding further, it is apposite here to take note of the section 68 of the Act, which reads as under:-
“68. Cash credits.—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 [Assessing Officer], satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year
[Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10.]”
Thus, from the plain reading of section 68 of the Act, it is clear that the following conditions must be satisfied in order to invoke the provisions of section 68 of the Act:-
(i) Any sum must be found to be credited in the books of an assessee maintained for any previous year
(ii) The assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactorily.
Then the sum so credited may be charged to income tax as the income of the assessee of that previous year.
9.3 Thus in the present case, we found that the addition made u/s. 68 of the Act to the extent of Rs. 2,80,16,118/- was on account of opening balance of capital account introduced by way of Journal entry. The assessee in our opinion by submitting the evidences before us clearly established the fact that the asset introduced by increasing the capital of the assessee was acquired in the earlier years. It is well settled law that addition u/s. 68 of the Act can be made where the nature and source of credit in the books of accounts were not offered for explanation or the explanation offered is not satisfactorily explained by the assessee. In our considered opinion, in the present case, the assessee had satisfactorily explained the nature and source of increase in capital by way of journal entry for the assets acquired in the earlier years and therefore, we are inclined to delete the entire addition of Rs. 3,30,84,102/- as made by the AO u/s. 68 of the Act.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 17th Aug, 2026
