Sovalaram Vs DCIT (ITAT Bangalore)
A ₹29 lakh seizure led to a different addition
In Sovalaram v. DCIT, ITA No. 928/Bang/2026, the Bengaluru Bench of the Income Tax Appellate Tribunal examined an addition of ₹17,67,684 under section 68 for assessment year 2020–21. The inquiry began after police found ₹29 lakh with the assessee during the Karnataka Assembly election period in 2023. The addition under appeal, however, concerned entries in his earlier statement of affairs: cash and bank balances, sundry debtors, commission receivable and a house advance.
The assessee told the department that the seized ₹29 lakh belonged to Mahalakshmi Bags, a proprietorship of Shri Mukesh Kumar. The order records that Shri Mukesh Kumar also claimed ownership of that cash. The Tribunal’s decision does not determine the tax treatment or ownership of the seized ₹29 lakh. Its focus is the separate addition made when the Assessing Officer examined the assessee’s financial position for financial year 2019–20.
The assessee had disclosed commission and interest income. His statement of affairs showed capital of about ₹21.20 lakh at 31 March 2020. The Assessing Officer questioned how that position could be supported by his disclosed income and sought evidence for several entries. Unconvinced by the replies, he added ₹2,43,534 relating to cash and bank balances, ₹12,24,150 of sundry debtors, ₹1 lakh of commission receivable and ₹2 lakh of house advance. The Commissioner (Appeals) admitted additional material supplied by the assessee but upheld the additions.
Closing cash cannot simply be compared with one year’s income
The Assessing Officer arrived at the cash and bank addition by comparing their combined closing balance of about ₹5.96 lakh with commission income of ₹3.52 lakh for the year and treating the difference as unexplained. The assessee argued that a closing balance may include money brought forward from earlier years. It cannot necessarily be explained, or rejected, solely by comparing it with income earned during the current year. He also claimed to have received part of an earlier commission receivable during the year.
The Tribunal did not finally accept either side’s calculation. It found that the source and availability of the cash still needed verification. The order leaves unclear whether the assessee maintained regular books or had merely prepared statements of affairs, and what records supported those statements. The Tribunal therefore sent the ₹2,43,534 issue back to the Assessing Officer. The assessee must provide a cash-flow statement and supporting details, including a day-to-day cash book if available, so that the closing balance can be examined on its own facts.
Sundry debtors require an explanation of their origin
The largest component was ₹12,24,150 shown as sundry debtors. The assessee maintained that ₹9,24,150 was an opening balance carried forward from 31 March 2019. He argued that an amount already outstanding at the start of the year could not simply be taxed again in assessment year 2020–21. He also objected to treating an asset shown in a statement of affairs as an unexplained cash credit without examining the transaction behind it.
The Tribunal considered the information insufficient for a final decision. The names and addresses of the debtors, the nature of the outstanding amounts and the transactions that created them had not been adequately established. It therefore restored this issue as well to the Assessing Officer. The assessee must supply complete debtor details and explain the basis of each balance; the Assessing Officer must verify that material and decide the matter afresh in accordance with law.
The remand is significant. The Tribunal neither deleted nor finally sustained the additions for cash and bank balances and sundry debtors. It directed a factual examination, including the assessee’s claim that part of the debtor balance came from an earlier year.
Two additions deleted outright
The Tribunal reached a final conclusion on the other two entries. It found that the ₹1 lakh commission receivable had already been offered to tax. Adding the same amount again would tax it twice, so the Tribunal deleted that addition.
The ₹2 lakh house advance was a rental security deposit paid by the assessee through banking channels. The bank account supported the payment, and the rental agreement had also been placed before the appellate authorities. The Tribunal held that this payment could not be sustained as an unexplained cash credit and deleted the addition.
Accordingly, ₹3 lakh of the ₹17,67,684 addition was deleted outright, while the remaining cash and debtor issues were returned for fresh adjudication. The appeal was partly allowed. The grounds concerning interest and penalty initiation were dismissed as consequential or premature.
Author’s comment
The case shows why each balance sheet item must be examined for what it represents and when it arose. A closing cash figure is not the same thing as current-year income. A debtor balance may have been brought forward, while a house advance paid by cheque is an outflow supported by a bank entry. Those distinctions cannot be resolved by treating every questioned figure alike.
The assessee still has work to do on remand. The Tribunal required a traceable explanation for the cash and identifiable underlying transactions for the debtors. The election-period seizure prompted scrutiny, but it did not answer those questions for assessment year 2020–21.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. This appeal is filed by Mr Sovalaram [the Assessee/Appellant] against the appellate order passed by the NATIONAL FACELESS APPEAL CENTRE (NFAC), in which the appeal filed by the assessee against the reassessment order dated 04.02.2025 passed u/s 147 of the Income Tax Act, 1961 (hereinafter referred to as the Act) by the AO, in which an addition of Rs.17,67,684/- has been made to the return of income of the Appellant, was dismissed.
2. The Assessee has raised the following grounds of appeal:
A. GENERAL GROUNDS:
1. The order dated 04.12.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [“CIT(A)”] under section 250 of the Income-tax Act, 1961 (“the Act”), in so far as it confirms the addition made under section 68 of the Act of Rs.17,67,683/- is contrary to law and facts of the case.
2. The CIT(A) and AO erred in not appreciating that the Appellant had duly offered the income earned during the year to tax.
3. The CIT(A) and AO erred in not appreciating that the Appellant was not required to maintain its books of accounts and thereby erred in relying on the statement of affairs submitted by the Appellant vis a vis the return of income.
4. The CIT(A) has erred in holding that the Appellant was following mercantile system of accounting without appreciating that the Appellant was following cash system hence, the amounts credited in the statement of affairs were immaterial.
5. The CIT(A) and AO while drawing adverse inference erred in not discharging the onus of proving that the assets recorded existed.
6. The Ld.AO erred in charging tax at higher rate under section 115BBE of the Act on the additions made under section 68 of the Act.
B. GROUNDS ON MERITS: Addition made under section 68 of the Act:
i. Additions of Excess of cash in hand & bank over commission income:
7. The CIT(A) and AO have erred in treating Rs.2,43,534/- as unexplained cash credit by comparing the closing balances of cash in hand / bank with the closing balance of commission declared in the balance sheet without appreciating that same were cumulative of the opening balances and could not be compared with the income of the relevant year.
ii. Additions with respect to Sundry debtors:
8. The CIT(A) and AO erred in treating sundry debtors of Rs.12,24,150/- as unexplained cash credits under section 68 without appreciating that the sundry debtors were asset entries and not credits in the books.
9. Without prejudice to the above, the CIT(A) and AO having relied on the statement of affairs voluntarily submitted by the Appellant have erred in not appreciating that the amount of sundry debtors represented opening balance which was continued during the year.
iii. Additions with respect to Commission receivable:
10. The CIT(A) and the AO erred in making addition of Rs.1,00,000/- towards commission receivable despite the same forming part of commission income already offered to tax.
iv. Additions with respect to house advance:
11.The CIT(A) and AO erred in invoking Section 68 on house advance of Rs.2,00,000, treating it as unexplained cash credit, without appreciating that the same represents legitimate rental security deposit paid via banking channels and supported by rental agreement.
12. The CIT(A) and AO have erred in making the addition of house advance without any material to establish that the payment represented undisclosed income of the Appellant.
C. CONSEQUENTIAL GROUNDS:
13. The CIT(A) and AO erred in charging interest under section 234B and 234C of the Act.
14. The Ld.AO erred in initialing penalty proceedings under section 271AAC of the Act.
Each of the above grounds are independent and without prejudice to the other ground of appeal preferred by the Appellant.
The Appellant reserves the right to further add, alter or amend each one of the above grounds of appeal.
3. During the Karnataka Assembly Elections, 2023, the assessee, Shri Sovalaram, was intercepted on 17.03.2023 by a police team led by the Police Inspector, Halasurugate Police Station, and cash of Rs.29,00,000/- was found in his possession. The information was thereafter reported to the Income Tax Department. Pursuant to summons, the assessee’s statement was recorded, in which he stated, in response to Question No. 8, that the cash belonged to M/s Mahalakshmi Bags, a proprietary concern of Shri Mukesh Kumar (PAN: BCZPK1339J). The Department, through its standing counsel, sought custody of the cash seized by the police. By order dated 17.05.2023, the Court directed that the cash be released to the Income Tax Department. Thereafter, a warrant under section 132A was executed on the Police Inspector, Halasurugate Police Station, on 10.06.2023, pursuant to which Rs.29,00,000/- was seized and deposited into the Central Government account. Based on Shri Sovalaram’s statement, summons were also issued to Shri Mukesh Kumar, proprietor of M/s Mahalakshmi Bags, requiring him to appear and explain the source and ownership of the cash. In response, Shri Mukesh Kumar stated that the seized amount of Rs.29,00,000/- belonged to him.
4. On examination of the assessee’s return of income, it was noted that, for the year under consideration, he had disclosed only commission income and interest income under the head “Income from Other Sources”. No other income was declared either in the current year or in the preceding and succeeding assessment years. In his reply dated 15.11.2024, the assessee did not furnish details or documentary evidence explaining the nature and source of the entries appearing in his balance sheet. He also failed to explain how, solely from commission income over the years, he had accumulated a capital account balance of Rs. 21,19,993.84/-. As no credible or satisfactory explanation, supported by relevant evidence, was furnished, a specific show-cause notice dated 30.12.2024 was issued, giving him a final opportunity to substantiate the nature and source of the credits in his books of account. As per the balance sheet, the assessee reported cash in hand of Rs. 3,27,664/- and a cash balance with Punjab National Bank of Rs. 2,68,179.84/-, aggregating to Rs. 5,95,843.84/-. Against commission income of Rs. 3,52,310/- declared for the year, the balance amount of Rs. 2,43,533.84/- remained unexplained. Further, the assessee did not explain or substantiate the commission receivable of Rs.1,00,000/- and house advance of Rs. 2,00,000/- reflected in the balance sheet. In the absence of supporting evidence, these amounts were also treated as unexplained. The balance sheet further showed sundry debtors of Rs.12,24,150/-. Since the assessee was not carrying on any business and was stated to be doing only job work for Mahalakshmi Bags, the existence of sundry debtors was held to be unexplained. The assessee was given an opportunity through the show-cause notice to explain the said entry, but no satisfactory explanation or supporting documents were furnished. Accordingly, the sundry debtors were also treated as unexplained. Based on the above findings, the aggregate amount of Rs.17,67,684/-, comprising sundry debtors, house advance, commission receivable and unexplained cash/bank balance, was treated as unexplained cash credit under section 68 of the Income-tax Act and added to the assessee’s total income, taxable under section 115BBE for AY 2020-21.
5. On appeal before the learned CIT – A assessee submitted that during appellate proceedings, appellant has contended that cash in hand and bank balance reflected in the balance sheet represent cumulative figures comprising opening balances and current year receipts. These balances are carried forward year after year and cannot be equated only with the income of the current year receipts. The appellant further contended that appellant had received commission both in cash and through bank. The opening balance in commission receivable has been received through bank and during the year appellant has also received through cash. The appellant has also contended that sundry debtors of Rs.12,24,150/- is opening balance of previous year ending on 31.03.2019. The appellant has requested to admit statement of affairs for period ending on 31.03.2019 as additional evidence under rule 46 A of the Income Tax Act. The appellant has constantly followed mercantile system of accounting, whereas income is accounted on accrual basis. The appellant has declared Rs.3,52,310/- as income received from commission. The appellant has received commission of Rs.2,52,310/- by cash and Rs.1,00,000/- as receivable. On the request of the assessee the learned CIT – A refer the issue to the file of the learned assessing officer for seeking the remand report which never came and therefore the learned CIT – A passed the order. The learned CIT – A admitted all the evidences furnished by the assessee and thereafter confirm the addition in the hands of the assessee stating that these are all the make-believe statements made by the assessee. Thus the appeal was dismissed.
6. On appeal before us, the learned AR submitted that the AO erred in treating Rs.2,43,534/- as unexplained income. The addition was made by comparing the aggregate closing balance of cash in hand and cash with Punjab National Bank, amounting to Rs.5,95,843/-, with the commission income of Rs.3,52,310/- earned during the year, and by treating the difference of Rs.2,43,533/- as unexplained. According to the learned AR, this approach is incorrect because the cash in hand and bank balance shown in the balance sheet are cumulative figures comprising opening balances and receipts of the current year, and cannot be compared only with the income of the relevant financial year. It was further submitted that, during the year, the Appellant received Rs.2,75,000/- in cash out of the commission receivable of Rs.3,75,000/- from earlier years. Merely because the closing cash and bank balance exceeded the income earned during the year, it could not automatically be inferred that the excess represented unexplained income. The learned AR therefore submitted that the addition was based on an erroneous comparison and deserved to be deleted.
7. With respect to the addition towards sundry debtors, the learned AO erred in adding Rs. 12,24,150/-, without appreciating that the opening balance itself was Rs. 9,24,150/- as on 31.03.2019. No material has been brought on record to show that the sundry debtors of Rs. 12,24,150/- were fictitious, bogus, or represented unaccounted income. The statement of affairs for AY 2019-20 is enclosed as Annexure-1, and the statement of affairs for AY 2020-21 is enclosed as Annexure-2. In the absence of any such finding, the addition is based merely on suspicion and assumptions and is untenable in law and on facts. It is a settled principle that the closing balance of the preceding year automatically becomes the opening balance of the succeeding year; therefore, if such opening balance has already been considered in earlier years, no further addition can be made in the current year on the same amount, as that would result in double taxation. The Appellant accordingly prays that the addition of Rs. 9,24,150/- out of the total addition of Rs. 12,24,150/- be deleted.
8. With respect to the house advance, the addition of Rs. 2,00,000/- made by the learned AO as unexplained is wholly unjustified. During the relevant year, the Appellant entered into a rental agreement dated 24.06.2019 with Shri Umashankar, owner of the residential premises, and paid an advance of Rs .2,00,000/- through banking channels. The payment was made by cheque No. 311758 dated 10.06.2019 for Rs. 1,00,000/- and cheque No. 311759 dated 12.06.2019 for Rs. 1,00,000/-. A copy of the rental agreement is enclosed as Annexure-3 and the bank statement evidencing the payments is enclosed as Annexure-4. The Appellant therefore prays that the addition of Rs.2,00,000/- made to his income be deleted.
9. With respect to commission income, the Appellant received Rs.2,75,000/- in cash from various parties out of the outstanding commission receivable of Rs.3,75,000/- as on 31.03.2019. It is submitted that the said amount of Rs.3,75,000/- had already been disclosed as commission receivable in earlier years and taxes had been paid thereon. However, the AO again added Rs.1,00,000/- shown as commission receivable in the statement of affairs, although the same had already been offered to tax for AY 2019-20. This results in double addition of the commission receivable and reflects non-application of mind by the AO. The Appellant therefore prays that the addition of Rs.1,00,000/- made to his income be deleted.
10. The learned departmental representative vehemently supported the orders of the learned that lower authorities and submitted that when the amount of cash was intercepted during the course of Karnataka election, all these explanations have been raised by the assessee. He further submitted that the learned assessing officer and the learned CIT – A has apprised all the evidences produced before them but these were merely the self-serving evidences. He submitted that it cannot be believed that a person who is going the commission income of ₹ 1 lakh would have accumulated such a huge amount and he could have prepared the balance sheet explaining everything. He explained that the assessee is a person working with the person who owned the sum of the cash found to have been seized by the honourable court during Karnataka election. Therefore the assessee has failed to explain the additions made. Thus he supported the orders of the learned that lower authorities and stated that those additions be confirmed.
11. We have considered the rival submissions and perused the orders of the lower authorities. The assessment arose from the seizure of cash of Rs.29,00,000/- from the assessee during the Karnataka Assembly Elections. The assessee was stated to be doing small job work for the person to whom the seized cash allegedly belonged. From the balance sheet furnished by the assessee, the capital account showed a closing balance of Rs.21,19,993/- as on 31.03.2020, as against an opening balance of Rs.18,04,688/-. For FY 2019-20, the assessee disclosed commission income of Rs.3,52,310/-. The balance sheet also reflected commission receivable of Rs.1,00,000/-, house advance of Rs.2,00,000/-, sundry debtors of Rs.12,24,150/- and cash in hand of Rs.3,27,664/-. The assessee was required to substantiate these entries but failed to furnish satisfactory evidence. The AO therefore made an aggregate addition of Rs.17,67,684/- under section 68 of the Act, comprising cash in hand, sundry debtors, house advance and commission receivable. The assessee did not produce credible evidence before either the AO or the CIT(A) to support these entries. His written submissions only explained how the amounts were stated to have accumulated and were not supported by reliable documentary evidence. The assessee produced copies of the bank statement, rental agreement and statements of affairs for two years. Except for the rental agreement, these documents had already been considered by the AO while making the addition. The CIT(A) admitted the additional evidence but held that it did not substantiate the assessee’s explanation. We find no infirmity in the approach of the CIT(A). However, each addition made by the AO must be examined on the basis of the material placed before us. We therefore proceed to decide the appeal ground-wise.
12. Grounds Nos. 1 to 6 are general in nature. As no separate arguments were advanced on these grounds, they are dismissed.
13. Ground No. 7 concerns the addition of Rs.2,43,534/- as unexplained cash credit, while Grounds Nos. 8 and 9 relate to the addition of sundry debtors of Rs.12,24,150/-. Both additions were made on the basis of the assessee’s annual accounts for the relevant periods and the balance sheets furnished by him. However, it is unclear whether the assessee maintained regular books of account or merely prepared statements of affairs, and on what basis those statements were prepared. The source and availability of cash shown in the accounts require verification, including whether a day-to-day cash book or cash-flow statement supports the cash balance. Similarly, the details of sundry debtors, including their names, addresses, nature of outstanding balances and whether such balances arose from any sale or other transaction of the assessee, also require examination. We therefore restore Grounds Nos. 7 to 9 to the file of the AO for fresh adjudication. The assessee shall bear the onus of producing a cash-flow statement and complete details of the sundry debtors, including names, addresses and the basis of the outstanding balances. The AO shall verify the material so produced and decide the issues afresh in accordance with law. Accordingly, Grounds Nos. 7 to 9 are allowed for statistical purposes with the above directions.
14. As regards Ground No. 10, we find that the amount of Rs.1,00,000/- representing commission income had already been offered to tax by the assessee. The same amount could not therefore be added again to his total income. Accordingly, Ground No. 10 is allowed.
15. As regards the addition of Rs.2,00,000/- towards house advance, the amount was treated as unexplained cash credit though it represented a security deposit paid by the assessee through banking channels. Since the payment is supported by the bank account, the addition cannot be sustained. Accordingly, Grounds Nos. 11 and 12 are allowed.
16. Grounds Nos. 13 and 14 are general, consequential or premature in nature and are therefore dismissed.
17. In the result, appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 21st September, 2026.
