Ashim Ashitbaran Desai Vs DCIT (ITAT Mumbai)
AO Compared Wrong Years, Taxed Sale Proceeds Twice & Gave HUF Partition a “Nil Cost”: ITAT Deletes Additions u/s 68 & Restores Indexed Cost u/s 49(1)(i)
Summary:
The assessee, an individual practising as an ENT specialist, filed his return declaring total income of ₹3,26,67,910. The case was selected for scrutiny concerning substantial capital-gain set-off & investment in property.
The AO completed the assessment at ₹42,07,62,833, making additions of:
- ₹15,79,17,123 for alleged unexplained increase in capital;
- ₹15,20,64,000 as unexplained bank credit;
- ₹20,93,000 toward cash deposits;
- ₹6,60,01,104 as LTCG on sale of immovable property; &
- ₹1,00,19,696 by denying set-off of property-related LTCL against LTCG from shares.
The CIT(A) partly allowed the appeal. Both the assessee & Revenue approached the ITAT.
₹15.79-Crore Addition Based on Wrong-Year Comparison
The AO compared the capital balance of ₹19,72,88,298 as on 31.03.2020 with the balance of ₹35,52,05,421 as on 31.03.2022. On that basis, the difference of ₹15.79 crore was added u/s 68.
The Tribunal held that comparing capital balances of two non-consecutive years was an elementary error that destroyed the computation itself.
The capital account for the relevant year opened with ₹21,00,66,964. Credits included professional profit, house-property income, capital gains, LLP profit, income from other sources, PPF interest, tax refund & ₹6,73,03,842 received on partition of the HUF.
After drawings & tax payments, the account closed at ₹35,52,05,421. Every material credit was traceable to the return, computation, audited accounts or partition deed.
Section 68 applies to a specific credit whose nature & source remain unexplained. It does not authorise addition of an arithmetical difference derived by comparing unrelated year-end balances.
The ITAT therefore deleted ₹15,79,17,123 instead of permitting another round of verification.
Professional Cash Deposits Explained
The assessee had deposited cash aggregating to ₹20,93,000. The AO added the amount because the cash book & bank book were allegedly not furnished.
The Tribunal found that the assessee’s reply dated 20.03.2024 & cash-book summary were available on record. As a practising doctor, he routinely received consultation & OPD fees in cash. These receipts formed part of the audited professional accounts.
Neither the AO nor the CIT(A) identified any date-wise cash deficit or defect in the audited books. Once deposits were recorded & sourced from disclosed professional receipts, absence of a separately styled “bank book” could not render them unexplained.
The addition of ₹20,93,000 was deleted.
HUF Partition Does Not Give the Asset Nil Cost
Flat No. 2106, The Imperial, Tardeo, had been purchased on 21.02.2008 jointly by the assessee & Dr. Ashit Baran R. Desai HUF for ₹7,12,95,000.
Under a deed of full partition dated 05.01.2021, the HUF’s share was allotted to the assessee, making him the absolute owner.
The CIT(A) treated the cost of the share received on partition as nil because the assessee had not paid consideration for it. The Tribunal held that this ignored the express statutory fiction u/s 49(1)(i).
Where a capital asset becomes the assessee’s property upon total or partial partition of an HUF, its cost is deemed to be the cost for which the previous owner acquired it. Explanation 1(i)(b) to section 2(42A) similarly includes the previous owner’s holding period.
Accordingly, the share obtained on partition could not be assigned nil cost.
Applying the historical cost of ₹7,12,95,000 & cost inflation indices of 129 and 317, the indexed cost was determined at ₹17,51,97,791. Against sale consideration of ₹15.36 crore, the correct LTCL was ₹2,15,97,791.
The addition of ₹6,60,01,104 was deleted.
The ITAT noted that ₹2,17,15,010 mentioned elsewhere was an arithmetical inconsistency & directed adoption of the correct figure appearing in the return and computation.
Set-Off of LTCL Allowed
Once full indexed cost was restored, the assessee became entitled—subject to applicable statutory rate/category restrictions—to set off the eligible property LTCL against LTCG of ₹1,00,19,696 from equity shares/equity-oriented mutual funds.
The AO was directed to allow the set-off & carry forward the eligible balance loss.
Sale Consideration Could Not Be Taxed Again u/s 68
The registered sale deed recorded consideration of ₹15,36,00,000. After TDS of ₹15,36,000, the net amount credited to the bank was ₹15,20,64,000.
The AO accepted the sale deed & computed capital gains on the gross consideration, yet simultaneously treated the corresponding net bank credit as unexplained u/s 68.
The Tribunal held that these conclusions could not coexist. The registered conveyance, TDS trail & bank credit conclusively established the nature & source of the receipt.
A seller who proves a genuine registered sale is not additionally required to prove the purchaser’s source of funds unless evidence suggests that the transaction is sham or the seller’s money was routed back. No such material existed.
The CIT(A)’s deletion of ₹15,20,64,000 was upheld & the Revenue’s appeal was dismissed.
Authors’ Comments
The order corrects three fundamental errors: section 68 requires an identified unexplained credit, HUF partition carries the previous owner’s cost & an accepted sale consideration cannot be taxed again as an unexplained bank deposit.
It also demonstrates the value of a complete capital reconciliation. Once every movement was traceable, remand was unnecessary.
The result was decisive: the assessee’s appeal was allowed, while the Revenue’s appeal was dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These cross appeals are directed against the order dated 30.01.2026 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [“CIT(A)”] under section 250 of the Income-tax Act, 1961 [“the Act”], arising from the assessment order dated 22.03.2024 passed under section 143(3) read with section 144B of the Act for assessment year 2022-23. Since both appeals arise from the same order and involve common facts, they were heard together and are disposed of by this consolidated order.
2. The assessee has raised the following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not quashing the assessment order when the Assessing Officer did not consider the reply dated 20.03.2024 and did not furnish a remand report despite repeated directions of the learned CIT(A).
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not quashing the assessment order passed without issuing a draft assessment order as mandated under section 144B(1)(xxi) and without entertaining the request for video conferencing under section 144B(6)(viii) of the Act.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in restoring the addition on account of increase in capital, instead of deleting the addition of Rs.15,79,17,123 made under section 68 read with section 115BBE of the Act, though the Assessing Officer compared balances of two non-consecutive years and did not identify any unexplained component for the relevant previous year.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs.20,93,000 under section 68 read with section 115BBE without appreciating that the cash deposits were duly recorded in the audited regular books of account.
5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in sustaining long-term capital gain of Rs.6,60,01,104 by restricting the indexed cost of acquisition to 50%, without appreciating that the assessee became absolute owner pursuant to partition of the Hindu undivided family and that section 49(1)(i) read with Explanation 1(i)(b) to section 2(42A) required adoption of the cost and period of holding of the previous owner.
6. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not allowing set-off of long-term capital loss of Rs.2,17,15,010 on sale of immovable property against long-term capital gain of Rs.1,00,19,696 on sale of equity shares/equity-oriented mutual funds.
7. The assessee craves leave to add, alter, amend, modify or delete any of the foregoing grounds.
3. The Revenue has raised the following grounds of appeal:
1. Whether the learned CIT(A) erred in deleting the addition of Rs.15,20,64,000 made under section 68 read with section 115BBE without appreciating that the assessee failed to prove the identity, creditworthiness and genuineness of the payer?
2. Whether the learned CIT(A) was justified in holding that a credit stated to be sale consideration of immovable property could not be examined under section 68 without examining the source of funds in the hands of the purchaser and genuineness of the transaction?
3. Whether the learned CIT(A) erred in deleting the addition merely because capital gain was assessed on the same transaction?
4. Whether the learned CIT(A) ignored the finding that the assessee failed to furnish confirmation, PAN, bank statement, payment trail and evidence of the purchaser’s creditworthiness?
5. Whether the order of the learned CIT(A), deleting Rs.15,20,64,000 without a conclusive finding on identity, creditworthiness and genuineness of the payer, is perverse and contrary to section 68 read with section 115BBE?
4. Briefly stated, the assessee is an individual and a practising ENT specialist. He filed his return of income on 07.10.2022 declaring total income of Rs.3,26,67,910. The case was selected for scrutiny for, inter alia, large capital gain set-off against capital loss and large investment in property. The Assessing Officer completed the assessment at Rs.42,07,62,833 after making additions of Rs.15,79,17,123 towards alleged unexplained increase in capital, Rs.15,20,64,000 towards an alleged unexplained bank credit, Rs.20,93,000 towards cash deposits, Rs.6,60,01,104 as long-term capital gain on sale of immovable property, and Rs.1,00,19,696 by denying set-off against capital gain on sale of shares/equity-oriented mutual funds.
5. In appeal, the learned CIT(A) noticed that the Assessing Officer had compared the capital balance as at 31.03.2020 with that as at 31.03.2022. The learned CIT(A) accordingly directed the Assessing Officer to verify only the capital movement relating to financial year 2021-22 and restrict the addition to any unexplained portion found on verification. The addition of Rs.15,20,64,000 of unexplained bank credit was deleted on the ground that the credit represented the net sale consideration of the same property whose transfer and consideration had been accepted while computing capital gains. However, the learned CIT(A) confirmed the cash-deposit addition and the computation of capital gain by restricting the indexed cost to 50%, and consequently denied the set-off. Both sides are in appeal.
6. The learned Authorised Representative submitted that a detailed reply dated 20.03.2024 and the underlying records were available before the Assessing Officer, but were not considered. Referring to the paper books, he submitted that the audited capital account gives a complete reconciliation: the opening balance was Rs.21,00,66,964; credits included professional profit, disclosed capital gains, income from other sources, tax refund and Rs.6,73,03,842 received on partition of the HUF; and the debits comprised drawings and taxes. Therefore, the closing balance of Rs.35,52,05,421 contained no unidentified credit. Regarding Rs.20,93,000, he submitted that the assessee routinely received consultation and OPD fees in cash and deposited the same in the bank, and that the deposits were reflected in the cash-book and in the audited professional accounts.
7. On the property issue, the learned Authorised Representative submitted that Flat No.2106, The Imperial, Tardeo, Mumbai, had been acquired on 21.02.2008 jointly by the assessee and Dr. A.B.R. Desai HUF for an aggregate consideration of Rs.7,12,95,000. Under the deed of full partition dated 05.01.2021, the HUF’s share was allotted to the assessee, who thus became absolute owner. By virtue of section 49(1)(i), the cost to the previous owner could not be treated as nil. The indexed cost of Rs.17,51,97,791 was therefore correctly claimed against sale consideration of Rs.15,36,00,000, resulting in long-term capital loss and consequential set-off against long-term capital gain of Rs.1,00,19,696. As regards the Revenue’s appeal, the credit of Rs.15,20,64,000 in the bank account on 16.03.2022 was the sale consideration of Rs.15,36,00,000 less tax deducted at source of Rs.15,36,000, received under the registered sale deed. The same receipt could not simultaneously be accepted as sale consideration and taxed as an unexplained credit.
8. The learned Departmental Representative supported the assessment order on the issues raised by the assessee. In the Revenue’s appeal, he submitted that the assessee did not discharge the requirements of section 68 concerning the purchaser and that assessment of capital gain did not, by itself, preclude examination of the bank credit. He accordingly prayed that the relief granted by the learned CIT(A) be reversed.
9. We have heard the rival submissions and carefully considered the assessment order, the impugned appellate order, the written submissions and the paper books. We first take up ground No.3 of the assessee’s appeal concerning the capital account. The addition of Rs.15,79,17,123 has been made on the difference between capital balance of Rs.19,72,88,298 as at 31.03.2020 and Rs.35,52,05,421 as at 31.03.2022. Thus, as rightly noticed by the learned CIT(A), balances of two non-consecutive years were compared. This elementary error destroys the very computation on which the addition rests.
10. More importantly, the capital account for the relevant previous year, placed at page 75 of the factual paper book, opens with Rs.21,00,66,964 and records the following credits: house-property income of Rs.6,05,161; professional profit of Rs.2,72,22,591; share of profit from LLP of Rs.1,68,757; book gain on property of Rs.4,73,48,915; long-term gain on shares of Rs.99,02,127; short-term gain on shares of Rs.37,85,928; income from other sources of Rs.16,20,779; PPF interest of Rs.6,08,529; income-tax refund of Rs.9,30,620; and Rs.6,73,03,842 on partition of the HUF. After drawings and tax-related debits, the closing capital is Rs.35,52,05,421. The corresponding streams are traceable to the return, computation, audited accounts and partition deed. The Assessing Officer did not identify a single specific credit in this reconciliation whose nature and source remained unexplained.
11. Section 68 operates upon a sum found credited in the books for which the assessee offers no satisfactory explanation about its nature and source. It does not authorise addition of an arithmetical difference drawn from capital balances of two non-consecutive years, particularly when the current-year capital movement is reconciled to disclosed and recorded sources. The learned CIT(A), having found that the Assessing Officer had undertaken no meaningful verification and having himself possessed the complete reconciliation, ought to have deleted the addition instead of directing another round of examination. We accordingly delete the addition of Rs.15,79,17,123. Ground No.3 is allowed.
12. Ground No.4 concerns cash deposits aggregating to Rs.20,93,000. The Assessing Officer made the addition because, according to him, the cash book and bank book were not furnished. The record, however, contains the assessee’s reply dated 20.03.2024 and the cash-book summary at page 237 of the factual paper book. The assessee is a practising medical professional, his accounts are audited, cash consultation/OPD receipts form part of the professional receipts, and the deposits are recorded in those accounts. Neither the Assessing Officer nor the learned CIT(A) pointed out any date-wise deficit in the cash balance or any defect in the audited books. Once the deposits are found recorded and sourced from the disclosed professional cash receipts, the absence of a separately styled “bank book” cannot sustain an addition of the deposits as unexplained cash credits. The addition of Rs.20,93,000 is deleted and ground No.4 is allowed.
13. Ground No.5 relates to the indexed cost of Flat No.2106, The Imperial, Tardeo. The purchase deed dated 21.02.2008 shows an aggregate acquisition cost of Rs.7,12,95,000 in the hands of the two co-owners assessee and Dr Ashit Baran R Desai (HUF). The deed of full partition dated 05.01.2021, placed in the factual paper book, shows that the HUF’s share in the property was allotted to the assessee. The learned CIT(A) accepted the partition deed but held that the cost of the share received on partition was nil because it was received without consideration. This conclusion overlooks the express deeming provision in section 49(1)(i).
“49. (1) Where the capital asset became the property of the assessee—
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family; …
the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.”
14. The statutory fiction therefore substitutes the cost to the previous owner for the cost in the hands of the recipient on partition. Explanation 1(i)(b) to section 2(42A) similarly includes the period for which the asset was held by the previous owner. Consequently, the share obtained by the assessee on partition cannot be assigned a nil cost. Since the aggregate historical cost was Rs.7,12,95,000 and the applicable cost inflation indices are 129 and 317, the indexed cost works out to Rs.17,51,97,791. Against sale consideration of Rs.15,36,00,000, the resultant long-term capital loss is Rs.2,15,97,791 as disclosed in the computation of income (the figure of Rs.2,17,15,010 occurring at certain places in the orders/submissions is an arithmetical inconsistency). The Assessing Officer is directed to adopt the correct figure as per the return and computation. The addition of Rs.6,60,01,104 is deleted. Ground No.5 is allowed.
15. Ground No.6 is consequential. Once the indexed cost is allowed in full and the long-term capital loss on the property is restored, the assessee is entitled, subject to the statutory rate/category restrictions, to set off the eligible long-term capital loss against the long-term capital gain of Rs.1,00,19,696 arising on sale of equity shares/equity-oriented mutual funds, as claimed in the return. The Assessing Officer is directed to allow the set-off and carry forward the balance eligible loss in accordance with law. Ground No.6 is allowed.
16. In view of the relief granted on merits, grounds Nos.1 and 2 challenging the validity of the assessment on account of the faceless assessment procedure and denial of video hearing have become academic and are left open. Ground No.7 is general and requires no separate adjudication.
17. We now take up the Revenue’s appeal. The material facts are straightforward. The registered sale deed dated 16.03.2022 records sale consideration of Rs.15,36,00,000 for Flat No.2106. After deduction of tax at source at one per cent amounting to Rs.15,36,000, the net sum credited to the assessee’s bank account was Rs.15,20,64,000. In paragraph 4.4 of the assessment order, the Assessing Officer expressly accepted the transfer and the gross consideration and computed capital gain on that very transaction. Yet, in paragraph 4.2, the corresponding net bank receipt was treated as unexplained. These two conclusions cannot coexist.
18. The Revenue’s insistence that the assessee must additionally establish the purchaser’s source of funds is misplaced in the facts of this case. The assessee proved the nature and source of the receipt through the registered conveyance, the TDS trail and the bank credit, and the Department itself accepted the underlying transfer and consideration. Section 68 does not require a seller, after proving a genuine registered sale and receipt through banking channels, to prove the source of the purchase money in the purchaser’s hands in the absence of any material suggesting that the apparent transaction is sham or that the assessee’s own money was routed back. No such material or enquiry is referred to in the assessment order. The registered deed, tax deduction and banking trail conclusively identify the receipt. We therefore find no infirmity in the conclusion of the learned CIT(A) deleting the addition. We clarify that the addition actually made was Rs.15,20,64,000, though the concluding sentence of the appellate order inadvertently refers to Rs.15,36,00,000. The deletion is sustained to the extent of the addition made. Grounds Nos.1 to 5 of the Revenue’s appeal are dismissed.
19. In the result, the appeal of the assessee in ITA No.2087/Mum/2026 is allowed and the appeal of the Revenue in ITA No.3381/Mum/2026 is dismissed.
Order pronounced in the open court on 17/08/2026.
