Farida Holdings Pvt. Ltd. Vs PCIT (ITAT, Chennai Bench)
Section 68 Has No Time Machine—Opening Lease Advances Of ₹7.65 Crore Cannot Be Taxed In A Later Year Through
Search assessment examines old lease advances
The assessee-company filed its return for AY 2019-20 declaring income of ₹21,23,700.
A search u/s 132 was conducted in the Farida Group on 23.08.2022. Consequent to the search & Explanation 2 to section 148, proceedings u/s 147 were initiated by issuing notice u/s 148 on 22.03.2023.
During the reassessment, the AO specifically called for details of lease advances received from the lessees. The assessee furnished its books, financial statements & lease agreements executed with:
- Farida Shoes Pvt. Ltd., from whom lease advance of ₹4.65 crore had been received; &
- India Shoes Export Pvt. Ltd., from whom lease advance of ₹3 crore had been received.
The aggregate lease advance was therefore ₹7.65 crore.
The documents showed that the advances had been received in earlier financial years & appeared during the relevant year merely as opening liabilities brought forward in the balance sheet.
AO taxes deemed rent—not the opening advances
After examining the documents, the AO did not doubt the existence of the lease arrangements or invoke section 68 against the lease advances.
Instead, he considered that the assessee had failed to establish the correct annual letting value of the leased properties. The AO therefore determined deemed rental income of ₹7,63,000 & ₹10,50,000 u/s 22 & 23.
The reassessment was completed u/s 143(3) r/w section 147 on 26.03.2024.
In appeal, the CIT(A) restricted the addition concerning the property leased to India Shoes Export Pvt. Ltd. to its municipal valuation of ₹1,09,375, while sustaining ₹7,63,000 relating to the property leased to Farida Shoes Pvt. Ltd.
PCIT tries to bring section 68 into the picture
The PCIT thereafter issued a show-cause notice u/s 263, alleging that the documents supporting the lease advances of ₹7.65 crore were not credible or legally sufficient.
According to the PCIT, although the identities of the lessees might not be disputed, their creditworthiness & the genuineness of the transactions required deeper examination. Merely routing transactions through banking channels & recording them in the books did not establish their genuineness.
The PCIT consequently set aside the reassessment order to the extent of examination & verification of the lease advances u/s 68.
Assessee raises enquiry, merger & wrong-year objections
The assessee challenged the revision on three principal grounds.
First, the AO had conducted a specific enquiry. He issued notice u/s 142(1), called for details & examined the lease agreements, books & financial statements. Therefore, it was not a case of lack of enquiry.
Second, the lease arrangements & deemed rental income had already formed the subject matter of appeal before the CIT(A). Consequently, the assessment order had merged with the appellate order to that extent & revision was barred by Explanation 1(c) to section 263.
Third—and most fundamentally—the lease advances were opening balances received in earlier years. Section 68 could apply only to a sum found credited in the books during the relevant previous year. It could not tax an amount merely carried forward from preceding years.
Section 263 requires both error & prejudice
Relying upon Malabar Industrial Co. Ltd. v. CIT [243 ITR 83 (SC)], the ITAT reiterated that revision u/s 263 requires satisfaction of two cumulative conditions:
The AO’s order must be erroneous, and such error must be prejudicial to the interests of Revenue.
Every revenue loss does not satisfy this test. Where the AO adopts one of the courses permissible in law, or where two views are possible & the AO adopts a legally sustainable view, the PCIT cannot revise merely because he prefers a different conclusion.
An order may be erroneous where it proceeds upon an incorrect assumption of fact or law, violates natural justice, reflects non-application of mind or is passed without necessary enquiry. None of those circumstances existed here regarding section 68.
Opening balance cannot become current-year income
The books, audited accounts & lease documents clearly demonstrated that the ₹7.65 crore represented advances received in earlier years. There was no fresh credit during FY 2018-19.
Section 68 refers to a sum found credited in the books for a previous year & permits it to be taxed as income of “that previous year.” Therefore, the year in which the credit was originally introduced is fundamental to the provision.
Since the amount was not credited during the year under consideration, the AO was not required to test it u/s 68. His decision not to make an addition was not erroneous; it was the only legally sustainable view.
Bombay & Delhi High Courts settle the year of taxability
The ITAT relied upon Ivan Singh v. ACIT [2020] 422 ITR 128 (Bom.), wherein the Bombay High Court held that credits introduced in earlier financial years could not be taxed u/s 68 in a subsequent assessment year merely because they continued to appear in the balance sheet.
The Tribunal also relied upon CIT v. Usha Stud Agricultural Farms Ltd. [2009] 183 Taxman 277 (Delhi), which held that an opening credit balance relating to earlier years could not be subjected to section 68 in the current year.
Accordingly, the AO had adopted a view fully supported by binding judicial precedent.
PCIT’s jurisdiction collapses on a mistaken fact
The PCIT proceeded on the mistaken factual assumption that section 68 was capable of applying to the impugned lease advances during AY 2019-20.
Since there was no fresh credit, no lawful addition could have been made u/s 68 in that year. Consequently, the AO’s failure to make an impossible addition could not render his order erroneous or prejudicial to Revenue.
The Tribunal found it unnecessary to decide the assessee’s remaining objections, including the doctrine of merger, & left them open.
Decision
The ITAT held that the AO’s treatment of the opening lease liabilities was a plausible & legally correct view.
As the essential jurisdictional conditions for section 263 were absent, the PCIT’s assumption of revisionary jurisdiction was wholly without authority of law.
The order u/s 263 concerning the ₹7.65 crore opening lease advances was quashed & the assessee’s appeal was allowed.
Cases Discussed
- Malabar Industrial Co. Ltd. v. CIT [243 ITR 83 (SC)]
- CIT v. Vijay Kumar Koganti [273 Taxman 394 (Mad.)]
- Ivan Singh v. ACIT [2020] 422 ITR 128 (Bom.)
- CIT v. Usha Stud Agricultural Farms Ltd. [2009] 183 Taxman 277 (Delhi)
- CIT v. Bhaichand H. Gandhi [1982] 11 Taxman 59/[1983] 141 ITR 67
- CIT v. Lakshman Swaroop Gupta & Brothers [1975] 100 ITR 222
- Bhor Industries Ltd. v. CIT [1961] 42 ITR 57 (SC)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHENNAI
This is an appeal preferred by the assessee Company against the order of the Learned Principal Commissioner of Income Tax (hereinafter referred to as “the Ld.PCIT”), Chennai-1, passed u/s.263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 20.03.2026 for the Assessment Year (hereinafter referred to as “AY”) 2019-20.
2. The assessee has raised the grounds of appeal, which are noted as under:
1. The order passed by the learned Principal Commissioner of Income Tax, PCIT (Central), Chennai-1 under section 263 of the Act is bad in law, without jurisdiction and liable to be quashed.
2. The learned PCIT erred in law and on facts in invoking the provisions of Section 263 of the Act and setting aside the assessment order, without satisfying the mandatory conditions that the order is both erroneous and prejudicial to the interests of the Revenue.
3. The learned PCIT failed to appreciate that the assessment order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interests of the Revenue, as the AO had conducted proper enquiries and applied his mind to the facts and issues involved.
4. The learned PCIT erred in revising the assessment order merely on a change of opinion, which is not permissible under law.
5. The learned PCIT erred in holding that there was lack of enquiry, whereas in fact, adequate enquiries were conducted by the learned AO and the assessment order was passed after due verification.
6. The learned PCIT failed to appreciate that the issue had already been adjudicated by the Hon. Commissioner of Income Tax (Appeals) and therefore, the invocation of Section 263 on the similar issue amounts to review of an appellate order, which is impermissible in law.
7. The learned PCIT erred in not appreciating that the assessment order, to the extent it was subject matter of appeal before the CIT(A), had merged with the appellate order, and therefore, the same could not be revised under Section 263.
8. The learned PCIT erred in holding that the addition under Section 68 was warranted, without appreciating that the transaction in question had actually taken place during earlier assessment years and the transaction was not taken place in the financial year relevant to the assessment year under consideration. The learned PCIT failed to demonstrate how the assessment order was prejudicial to the interests of the Revenue, which is a sine qua non for invoking Section 263.
9. The learned PCIT erred in law and on facts in directing the Assessing Officer to examine and make addition under Section 68 of the Act in the year under consideration, without appreciating that the impugned transaction pertains to earlier assessment years and not to the relevant previous year.
10. The learned PCIT failed to appreciate that Section 68 can be invoked only in respect of sums found credited in the books of account of the assessee during the relevant previous year, and not for transactions recorded in earlier years.
11. The learned PCIT erred in ignoring that there was no fresh credit. entry in the books of account during the year under consideration, and therefore, the provisions of Section 68 are not applicable. Opening balance cannot be taxed under Section 68 of the Act. The learned PCIT failed to appreciate that the impugned amount represents an opening balance brought forward from earlier years, which cannot be treated as unexplained cash credit under Section 68 in the current year.
12. The learned PCIT erred in invoking Section 263 of the Income-tax Act, 1961 on an issue which is legally unsustainable as no addition under Section 68 of the Act could have been made in the year under consideration in the first place. The order passed under Section 263 of the Act is bad in law as it proceeds on incorrect assumption of facts that the impugned transaction occurred during the year under consideration, whereas in reality it pertains to earlier years.
13. The order passed by the learned PCIT is arbitrary, bad in law, and passed without proper appreciation of facts and legal position.
14. The appellant craves leave to add, alter, amend, or withdraw any of the above grounds at the time of hearing.
3. Briefly stated the facts of the case are that, the assessee is a company which had filed its return of income u/s 139(1) of the Act for AY 2019-20 on 30.09.2019 declaring income of Rs.21,23,700/-. A search and seizure operation was carried out in the case of M/s Farida Group of companies and others on 23.08.2022, to which the assessee belongs. Consequent to the search and as per clause (I) of explanation 2 of section 148 of the Act, the reopening proceedings u/s 147 of the Act was initiated by issuance of notice u/s 148 on 22.03.2023. In response to the same, the assessee filed its return of income on 20.04.2023 declaring an income of Rs.21,23,700/-. Subsequently, statutory notice u/s 143(2) and 142(1) of the Act were issued by the AO, which were complied with. The AO in the notice u/s 142(1) of the Act, had inter alia called for the details of lease advances received from the lessee.
In response, the assessee vide reply submitted on 20.01.2024 had furnished the lease agreements and financial statements of the payer/lessee and Books of accounts. The relevant screenshot of the electronic submission of these documents is extracted below:-
4. After going through these documents, the AO observed that the assessee had received lease advances in earlier year(s) to the tune of Rs. 7.65 crores comprising of Rs.4.65 crores and Rs.3.00 crores from M/s Farida Shoes Private Limited & M/s India Shoes Export Private Limited in respect of its properties located at Ambur Taluk, Gudiyattam Road, Chinnavarigam Village, Vellore District. The AO also took note of the rental agreements with these two lessees dated 15.03.2017 & 01.04.2017 respectively. According to the AO, the assessee had not adduced any cogent evidence in support to determine the annual letable value (ALV) of these properties and thereafter proceeded to determine the deemed rental income of Rs.7,63,000/- and Rs.10,50,000/- qua these two properties, which was brought to tax u/s 22 & 23 of the Act. The AO thus completed the assessment u/s 143(3)/147 of the Act vide order dated 26.03.2024. Aggrieved by assessment order, the assessee preferred an appeal before the Ld. CIT(A) who vide order dated 17.04.2025 partly allowed the appeal by restricting the addition relating to property leased to M/s India Shoes Exports Pvt Ltd to Rs.1,09,375/- (Municipal Valuation) and sustaining the addition of Rs.7,63,000/- in respect of property leased to M/s Farida Shoes Pvt Ltd.
5. Later on, the Ld. PCIT in exercise of the revisionary powers vested u/s 263 of the Act issued show cause to the assessee dated 10.03.2026 observing that the assessment order passed u/s 147/143(3) of the Act dated 26.03.2024 was erroneous and prejudicial to the interests of the Revenue. According to the show cause, the supporting documents furnished by the assessee for the lease advance of Rs.7,65,00,000/- [Rs 4,65,00,000 + Rs 3,00,00,000] are not credible and legally untenable, and the same requires proper examination with reference to the provisions of Section 68 of the Act. In response, the assessee filed its objections on 18.03.2026. The Ld. CIT(A) however was not convinced with the same and set aside the assessment order u/s. 147 of the Act dated 26.03.2024, to the extent of examination and verification of the lease advance amount of Rs.7,65,00,000/-, under the provisions of Section 68 of the Act.
6. The Ld. AR for the assessee assailed the action of the Ld. PCIT on several fronts. Firstly, he contended that the issue relating to the lease advances had been specifically examined by the AO, when he called for the lease agreements, documents etc. He showed that, the AO took note of the fact that these lease advances were received in earlier years and did not dispute its genuineness and thus proceeded to estimate the deemed rental income in relation to the properties leased to M/s Farida Shoes Private Limited & M/s India Shoes Export Private Limited. He submitted that this issue of lease advances and the deemed rent estimated thereon was the subject matter of appeal before the Ld. CIT(A) who had partially upheld the action of the AO. According to him, therefore, the doctrine of merger applied to the present case and that the exercise of revisionary jurisdiction was unsustainable in light of the exception set out in Explanation 1(c) to Section 263 of the Act.
7. Secondly, he argued that the issue relating to deemed advances had been specifically enquired by the AO, who had called for the details u/s 142(1) of the Act and therefore it not a case of non-enquiry. Relying upon the decisions of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) and Hon’ble Madras High Court in the case of CIT Vs Vijay Kumar Koganti (273 Taxman 394), he thus submitted that the revisionary order passed u/s 263 of the Act for alleged inadequacy of enquiry was bad in law. Thirdly, the Ld. AR pointed out that the impugned sum of Rs.7,65,00,000/- had been received from the tenants, M/s Farida Shoes Private Limited &M/s India Shoes Export Private Limited way back and that this amount represented opening balance of liability brought forward from earlier years. He invited our attention to the financials of the company, which we find to evidence the fact that the impugned sum represented credit relating to earlier year and not the relevant year. He submitted that the rigors of section 68 can be applied only to sums found credited in the books of accounts in that particular year, and not those which were credited in earlier years. He thus pleaded that, the Ld. PCIT had acted on mistaken assumption of fact and therefore according to him, the provisions of Section 68 had no application in relation to the impugned amount of Rs.7,65,00,000/-. Per contra, the Ld. CIT DR appearing for the Revenue vehemently supported the action of the Ld. PCIT.
8. We have heard both the parties and perused the records. Before we advert to the facts us, let us take note of the position of law governing the issue before us. The assessee has challenged in the first place, the very usurpation of jurisdiction by Ld. Principal CIT to invoke his revisional powers enjoyed u/s 263 of the Act. Therefore, first we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is existing in this case before the Pr. CIT rightfully exercises his revisional power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in Malabar Industries Ltd. v. CIT (supra) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; [because AO has to discharge dual role of an investigator as well as that of an adjudicator] then in aforesaid any event the order passed by the AO can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries Co. Ltd. (supra) held that this phrase i.e. “prejudicial to the interest of the revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.
9. Keeping the aforesaid judicial dictum in mind let us examine the legal issue raised by the assessee against the impugned action of the Ld. PCIT to exercise the revisional jurisdiction u/s 263 of the Act. So we have to see whether the Ld. PCIT was correct in finding fault with the order of the AO. For that we have to examine and find out whether the issue/fault on the basis of which the Ld. PCIT has interfered with the order of the AO dated 26.03.2024 was erroneous or not i.e., whether the AO had acted erroneously by not examining the identity, creditworthiness and genuineness of the opening balances of lease liabilities brought forward from earlier years. According to the Ld. PCIT, while the identity of the parties may not be in dispute, the creditworthiness and genuineness of the transaction require deeper examination, particularly in view of the substantial quantum of lease advance involved and that only because the transactions were routed through banking channels and recorded in books of accounts did not, by itself, establish genuineness within the meaning of Section 68 of the Act.
10. We first consider it fit to address the merits of the issue and the correctness of the action of the AO in not adding the opening balance of liabilities, u/s 68 of the Act. As noted earlier, the AO had inter alia called for the details of lease advances from the assessee. The reply furnished by the assessee, in response to notice u/s 142(1) of the Act reveals that, the assessee had furnished the lease agreements, books of accounts, financial statements etc., all of which clearly showed that the impugned lease advances were received in earlier years [Refer page 9 to 12 PB, wherein reply filed by assessee includes copy of respective lease agreements, which documents are found placed therein; & Refer pages 13 to 18 PB, wherein respective balance-sheets & relevant schedules of assessee and other two companies are found placed therein]. In fact, the audited financials also reflected that the impugned sum represented opening balance brought forward from earlier years. On these given facts, the AO had proceeded to only examine the issue relating to the taxability of rental income emanating from these lease agreements. Hence, there is merit in the submission of the Ld. AR that, when the impugned amount was not received during the year, which was discernible from the details furnished by the assessee, there was no reason for the AO to examine the lease advances on the touchstones of Section 68 of the Act as the impugned credit was not received during the relevant AY 2019-20. We are in agreement with the assessee on the fundamental principle that, the rigors of section 68 can be applied only to sums found credited in the books of accounts in that particular year, and not those which were credited in earlier years. Hence, according to us, the AO was not required to apply the provisions of Section 68 to the opening balance of liabilities which was brought forward from earlier years. The case of the assessee is found to be supported by the decision of the Hon’ble Bombay High Court in the case of Ivan Singh v. Asstt. CIT [2020] 422 ITR 128 rendered on same set of facts as involved in the present case. In the decided case, the Hon’ble High Court is noted to have deleted the addition made u/s 68 of the Act on account of sums which were credited in earlier years and had been brought forward in balance-sheet in the relevant year. The relevant findings of the Hon’ble High Court are as follows:
“3. Insofar as the first substantial question of law is concerned, Dr. Daniel has pointed out that section 68 of the Income-tax Act, 1961 (IT Act), is very clear in providing that where any sum is found to be credited in the books of the assessee for the 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 the income tax as the income of the assessee of that previous year. Relying upon several decisions, Dr Daniel submits that since, it is the case of Revenue that some amounts were found credited in the book of account for the financial year 2006-07, there was no question of taking cognizance of such amounts for the assessment year 2009-10 and the corresponding previous year 2008-09. He submits that on this short ground, the first substantial question of law, is liable to be answered in favour of the appellant-assessee and against the respondent-Revenue.
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9. From the plain reading of the provisions of section 68 of the IT Act, it does appear that where any sum is found to be credited in the books of Account maintained for any previous year and there is no proper explanation for such credit, the sum so credited can be charged to the income tax as the income of the assessee of “that previous year”
10. In the present case, the material on record indicates that the Assessing Officer has relied upon the credits for the financial year 2006-07. However, the sum so credited, in terms of such credit, is sought to be brought to tax as the income of the appellant-assessee, for the assessment year 2009-10, which means for the previous year 2008-09, in terms of the definition under section 3 of the IT Act. Dr. Daniel is justified in submitting that this is not permissible.
11. The view taken by this Court in Commissioner of Income-Tax, Poona Vs. Bhaichand H. Gandhi, 141 ITR 67 and by Rajasthan High Court in Commissioner of Income-Tax, Rajasthan Vs. Lakshman Swaroop Gupta & Brothers, 100 ITR 222, supports the contentions raised by Dr. Daniel. Similarly, we find that in M/s Bhor Industries Limited Vs. Commissioner of Income Tax, Bombay, AIR 1961 SC 1100, the Hon’ble Apex Court in the context of provisions of the Merged States (Taxation Concessions) Order (1949) has interpreted the expression “any previous year” to mean as not referring to all the previous years but, the previous year in relation to the assessment year concerned Again, this decisions also, to some extent supports the contentions of Dr. Daniel.
12. The crucial phrase in section 68 of the IT Act, which provides that the sum so credited in the books and which is not sufficiently explained may be charged to the income tax as income of the assessee of “that previous year ” also lends support to the contentions of Dr. Daniel.
13. For all the aforesaid reasons, we answer the first substantial question of law in favour of the appellant-assessee and against the respondent-Revenue.”
11. We also gainfully refer to the decision of Hon’ble Delhi High Court in the case of CIT Vs Usha Stud Agricultural Farms Ltd [2009] 183 Taxman 277 (Delhi) wherein also, the addition of credit entries pertaining to earlier years u/s 68 of the Act was held to be unjustified. The relevant excerpts from the judgment are as under:-
“7. Here, the CIT(A) has deleted the addition of Rs. 15 lakhs mainly on the ground that this credit balance of Rs. 15 lakhs is being reflected in the accounts of the assessee over the past four to five years or so and hence this was not a fresh credit entry of the previous year under consideration and these credit entries were already made and accounted for in the assessment years 1995-96 and 1997-98 which were introduced in the form of advance against breeding stallions owned by the assessee and thus these credit entries did not relate to the year under consideration for being considered under section 68 of the Act.
8. Since it is a finding of fact recorded by the CIT(A) that this credit balance appearing in the accounts of the assessee, does not pertain to the year under consideration, under these circumstances, the Assessing Officer was not justified in making the impugned addition under section 68 of the Act and as such no fault can be found with the order of the Tribunal which has endorsed the decision of the CIT(A).
9. The above being the position, no fault can be found with the view taken by the Tribunal.”
12. Thus we are of the opinion that the action of the AO not examining or adding the opening liabilities from the viewpoint of provisions of Section 68 of the Act was indeed a plausible view and is in line with the ratio of the decisions of High Courts (supra). Therefore, we find that the Ld. PCIT has not been able to make out a case that the AO’s order is erroneous as well as prejudicial to the revenue, on the impugned issue raised by him, rather, the Ld. PCIT had acted on mistaken assumption of fact that Section 68 had application in relation to the impugned amount of Rs.7,65,00,000/-. Hence on this score only the assessee succeeds on the legal issue, and therefore other legal issues raised are left open. So in the absence of the jurisdictional fact as well as law, invoking revisional jurisdiction is held to be bad in law. Therefore, the usurpation of jurisdiction by Ld. PCIT u/s 263 of the Act is held to be wholly without jurisdiction and therefore, we are inclined to quash it, and we order accordingly.
13. In the result, the appeal of the assessee is allowed.
Order pronounced on the 07th day of September 2026, in Chennai.
