Kruti Manufacturers And Traders Pvt Ltd Vs DCIT (ITAT Mumbai)
Section 68 Cannot Tax the Closing Balance as Though It Were the Year’s Fresh Credit: ₹3.55-Crore Addition Remanded Since Opening Balance Was Already ₹3.73 Crore – ITAT Mumbai
Summary: The assessee-company filed its return for AY 2012-13 declaring Nil income after reporting a loss of ₹1,53,56,815.
During the relevant year, the company had a loan account in the name of Shri Deepak S. Desai, its Managing Director. The AO treated the sum of ₹3,55,66,822 appearing in that account as unexplained cash credit and made an addition u/s 68.
The assessee explained that the loan transactions were routed through regular banking channels by means of account-payee cheques. The identity of the lender was not in dispute, and confirmations and bank statements had been submitted during the assessment proceedings.
Shri Deepak Desai carried on a proprietary business and maintained books of account for that concern. He did not, however, maintain separate personal books of account or a personal balance sheet.
The AO considered the absence of personal books and personal balance sheet significant. According to him, the assessee had failed to satisfactorily establish the lender’s creditworthiness and the genuineness of the transaction. He therefore added the entire closing balance of ₹3.55 crore u/s 68.
Before the CIT(A), the assessee contended that non-maintenance of separate books for personal transactions could not automatically render the loan non-genuine. The lender was not a stranger but was the company’s own Managing Director. His identity was established and the loan had travelled through disclosed banking channels.
The assessee argued that the AO had made the addition largely on presumptions without bringing any specific adverse evidence on record. Nevertheless, the CIT(A), NFAC, sustained the addition.
The assessee carried the matter to the Tribunal and placed on record a paper book containing its financial statements, the loan confirmation, the lender’s statement of total income and balance sheet, and the accounts and return of his proprietary concern, M/s Kruti Associates.
Before the ITAT, the assessee’s counsel drew attention to a crucial feature of the confirmation account which had apparently escaped proper consideration by the lower authorities.
The confirmation showed an opening balance of ₹3,73,64,315 in the lender’s account. In other words, the amount outstanding at the beginning of the relevant financial year was already higher than the amount ultimately added by the AO.
The same account also reflected debit transactions aggregating to ₹4,05,15,000 during the year. After taking into account the transactions on both sides, the account disclosed a net closing balance of ₹3,55,66,822.
It was precisely this closing balance that the AO had added as unexplained cash credit.
The Tribunal observed that the opening balance and debit transactions appearing in the confirmation had not been properly considered while making the addition. These facts were essential because section 68 operates with reference to sums found credited in the books of an assessee for the relevant previous year.
A closing balance does not necessarily represent a fresh credit introduced during that year. It may include amounts brought forward from earlier years and may be the net result of several credits and repayments. Therefore, the actual entries arising during the relevant period must be identified and verified before section 68 is applied.
At the same time, the Tribunal noticed that the relevant submission based upon the complete movement in the confirmation account had not been made before the AO in this form. It therefore considered it appropriate to give the AO an opportunity to verify the figures instead of deleting the addition outright.
The matter was remitted to the AO for the limited purpose of verifying the confirmation letter placed on record. The AO was specifically directed to ascertain the correctness of the amounts appearing therein, particularly the opening balance of ₹3.73 crore—which exceeded the addition itself—and the debit transactions aggregating to ₹4.05 crore.
After carrying out this verification, the AO was directed to consider the assessee’s claim in accordance with the satisfaction derived from the verified facts.
The assessee was to be given a reasonable opportunity of being heard and permitted to furnish further material necessary to substantiate its explanation.
The grounds were accordingly allowed for statistical purposes, and the matter stood restored to the AO for limited verification.
Legal Principle
For making an addition u/s 68, the AO must identify the credit actually appearing in the assessee’s books during the relevant previous year. The year-end closing balance cannot mechanically be treated as the year’s unexplained cash credit without examining the opening balance, fresh credits, repayments and other movements in the ledger account.
Author’s Comment
The most striking feature is mathematical rather than mysterious. The AO added the closing balance of ₹3.55 crore even though the account opened with a higher balance of ₹3.73 crore and contained debits of ₹4.05 crore.
If the opening balance represents an amount brought forward from an earlier year, it ordinarily cannot be taxed u/s 68 in the current year merely because it continues to remain outstanding. What requires examination is the fresh credit, if any, recorded during the relevant previous year.
However, the Tribunal has not deleted the addition and has not conclusively accepted the lender’s creditworthiness. It has also not finally decided whether maintaining only proprietary-business books, without separate personal books, is sufficient. Those matters remain subject to verification.
On remand, the assessee should provide a complete ledger reconciliation, lender’s bank statements, source-wise explanation of fresh credits, evidence of repayments and linkage with the lender’s capital or proprietary accounts.
In short, section 68 may question a credit, but it cannot ignore arithmetic. Before taxing a closing balance, the AO must first open the account and read what happened during the year.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
This appeal filed by assessee is against the order of the ld. CIT (A), National Faceless Appeal Centre (NFAC), Delhi, Order No. ITBA/NFAC/S/250/2025-26/1084080919(1) dated 25.12.2025 passed against the assessment order by ld. Dy. Commissioner of Income Tax 6(3) (2), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (‘the Act’) dated 03.03.2015, for Assessment Year 2012-13.
2. Assessee has raised the following grounds of appeal:
1) The learned CIT A NFAC erred in approving the stand taken by the AO that unless the lender maintains books of account of personal transactions non business assessee cannot explain the alleged cash credit ignoring that the lender has his proprietary business whose books of account are maintained.
2) The learned CIT A NFAC failed to appreciate that the lender in this case was the managing director of assessee company and erred in confirming the addition ignoring this vital fact.
3) The learned CIT A NFAC erred in not holding that in a CASS based selection of a case for scrutiny under section 143 1 of the Act the revenue non furnishing the reasons for selection of the case for scrutiny vitiates the assessment.
4) The learned CIT A NFAC erred on facts and in law in confirming the addition of Rs 35566822 under section 68 of the Act.
5) The learned CIT A NFAC erred on facts and in law in not appreciating that assessee had discharged the onus of proving creditworthiness of the lender under section 68 of the Act.
3. Brief facts of the case are that assessee filed its return of income on 28.09.2012, reporting nil total income while reflecting a loss of Rs 1,53,56,815/-. During the year, assessee received loans totalling Rs 3,55,66,822/- from Shri Deepak S. Desai who is the Managing Director of the assessee company. The lender maintained accounts for his proprietary business. He did not maintain personal books of account. Assessee submitted bank statements and loan confirmations to ld. Assessing Officer. Ld. Assessing Officer noted that the lender did not produce his personal balance sheet. He was not satisfied with the creditworthiness and genuineness of the transaction. He added Rs 3,55,66,822/- as unexplained cash credit under Section 68 of the Act. Aggrieved, assessee filed an appeal before the ld. CIT(A).
3.1. At the first appellate stage, assessee submitted that the said loan was received from Shri Deepak S. Desai through banking channels through account-payee cheques. The identity of the lender was not in dispute. Confirmations and bank statements were submitted during assessment proceedings. The lender maintained books of account for his proprietary concern. Non-maintenance of personal books of account should not make the transaction non-genuine. Ld. Assessing Officer made the addition on presumptions without presenting adverse evidence, primarily in respect of establishing creditworthiness of the lender and proving the genuineness of the transaction. Assessee has placed on record a paper book containing 28 pages. The index of the paper book is as follows:
| Sr. No. | Particulars | Page No. |
|---|---|---|
| 1. | Statement of Total Income A.Y. 2012-13 | 1 to 2 |
| 2. | Balance Sheet F.Y. 2011-12 | 3 to 11 |
| 3. | Confirmation of accounts Shri Deepak S. Desai | 12 to 13 |
| 4. | Statement of Total Income for Shri Deepak Desai | 14 to 16 |
| 5. | Balance Sheet Shri Deepak Desai | 17 to 25 |
| 6. | M/s Kruti Associates Notes to Accounts & Return A.Y. 2012-13 | 26 to 28 |
4. Before us, ld. Counsel for the assessee referred to the confirmation letter produced before ld. CIT(A). In this confirmation letter, the opening balance itself is of Rs. 3,73,64,315/-. This document is placed at page 12 and 13 of the paper book. The addition made by the ld. Assessing Officer is of Rs. 3,55,66,822/- under Section 68. Also, there are debit transactions noted in the said document, totalling to Rs. 4,05,15,000/- resulting in a net closing balance of Rs.3,55,66,822/-. It is this closing balance which has been added by the ld. Assessing Officer. These facts of the matter have not been taken into account while making the impugned addition. Since no submission was made by assessee on this account before the ld. Assessing Officer, we find it appropriate to remit the matter back to the file of the ld. Assessing Officer.
This remission is for the limited purpose of verification of the details furnished in the confirmation letter placed on record. The verification will ascertain the veracity of the amounts mentioned therein. It will more particularly verify the opening balance, which is at a higher amount than the addition made by the ld. Assessing Officer as well as the debit transactions of Rs.4,05,15,000/-. Based on the satisfaction derived from the said verification, ld. Assessing Officer is directed to consider the claim of assessee. Needless to say, assessee be given reasonable opportunity of being heard and make any further submission to substantiate its claim. Accordingly, grounds raised by the assessee are allowed for statistical purposes.
5. In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 11 September, 2026.
