Tanish Agriscience Private Limited Vs ITO (ITAT Delhi)
Share Capital Without Fresh Money, Cash Deposits From Old Debtors: Two Section 68 Additions Deleted
Two additions in a pesticide trader’s assessment
Tanish Agriscience Private Limited, a trader in agricultural pesticides, declared income of ₹12,84,380 for assessment year 2017–18. Following scrutiny, the Assessing Officer (AO) made several additions. Two of them reached the Delhi ITAT: ₹49 lakh for an increase in share capital and ₹1,46,49,950 for cash deposits associated with the demonetisation period. The CIT(A) had upheld both.
The two additions raised different questions under Section 68. Had fresh, unexplained money entered the company when its share capital increased? And were the bank deposits new income, or collections against sales and debtors already reflected in its books? The Tribunal accepted the company’s explanations and deleted both additions.
The ₹49 lakh share capital increase
The AO saw that paid-up share capital had risen from ₹1 lakh to ₹50 lakh. He asked for subscriber details, confirmations and bank statements. According to the assessment order, the company did not furnish the requested material despite repeated notices. Near the end of the assessment, it stated that 4,90,000 shares of ₹10 each had been issued by converting outstanding loans from directors and their relatives. The AO found the explanation inadequately supported and treated ₹49 lakh as an unexplained credit.
Before the Tribunal, the company pointed to its audited accounts, unsecured loan ledgers and filings with the Registrar of Companies. Its case was that the loans were opening balances outstanding as at 31 March 2016 and had been converted into equity during the year. No fresh funds were infused when the shares were allotted; the conversion was recorded through accounting entries. The company also relied on its PAS-3 and SH-7 filings and related challans.
The Tribunal accepted that factual account. It referred to the Gauhati High Court’s decision in CIT v. Goldstone Cements Ltd. concerning conversion of unsecured loans into share capital through journal entries. On the material described in its order, the Tribunal held that the ₹49 lakh addition could not stand.
The finding is tied to the conversion of an existing loan balance, supported by the accounts and corporate filings. It should not be read as a general rule that any amount labelled “share capital” is beyond Section 68 scrutiny. The history and genuineness of the outstanding loans remain relevant facts in another case.
Cash deposited during demonetisation
The AO also examined deposits made between 9 November and 30 December 2016. He counted ₹1,30,11,500 in one Axis Bank account, ₹13,38,450 in an HDFC account and ₹3 lakh in another Axis account, arriving at ₹1,46,49,950. He found the company’s explanation unsatisfactory, particularly because its records showed credit sales rather than cash sales and, in his view, adequate debtor confirmations had not been furnished. He added the full amount under Section 68.
The company’s explanation before the Tribunal focused on collections of outstanding trade debtors. It said the main Axis deposits comprised ₹1,20,54,500 on 17 November 2016 and ₹9,57,000 on 19 December 2016. It produced a party-wise collection report, account confirmations, bank records and a letter said to have been given to the bank manager with collection details. The company argued that the underlying sales had already been recorded under the mercantile system of accounting. Receipt of an old debtor balance and deposit of that cash in a bank did not create a second item of income.
The company also disputed the AO’s treatment of the other two amounts. It said the relevant HDFC statement did not show a ₹13,38,450 cash deposit of the kind identified in the assessment order. As to the ₹3 lakh, it contended that the deposit was made on 31 March 2017, after the demonetisation window, and had wrongly been counted as a deposit during that period.
Why the Tribunal deleted the addition
The Tribunal found force in the company’s documentary explanation and its objections to the AO’s aggregation of the deposits. It accepted the contention that collections from previously recorded debtors could not simply be taxed again as unexplained income, and it noted the challenges concerning the HDFC entry and the timing of the ₹3 lakh deposit. It accordingly deleted the cash-deposit addition and allowed the company’s appeal.
There are numerical and date slips in the written order. While the disputed cash addition is repeatedly stated as ₹1,46,49,950, the operative paragraph refers to ₹1,46,49,500. The heading and signature date give 28 September 2026 as the pronouncement date, while one closing line says 7 July 2026, the date recorded for the hearing. The assessment and bank records should be used to verify the precise amount when giving effect to the decision.
Author’s comment
The share capital issue illustrates the value of tracing an entry back to its opening balance. A rise in paid-up capital does not necessarily mean that the company received fresh money in that year. Where a genuine outstanding loan is converted, the loan ledger, audited balance sheet and allotment filings should be read together.
The cash-deposit issue calls for an equally careful bank-by-bank and date-by-date reconciliation. A bank deposit is a movement of money; its tax character depends on the source. If it represents collection of an already recorded trade receivable, adding the deposit again can duplicate income. But that explanation needs a reliable trail from the original sale to the debtor account, collection and bank deposit. This case succeeded on the Tribunal’s acceptance of that factual trail and the identified errors in the AO’s deposit calculation.
Cases Discussed
- Commissioner Income-tax, Guwahati v. Goldstone Cements Limited, Meghalaya, Writ ITA/8/2022, dated 17.12.2024 (Gauhati High Court) — Relied upon for the proposition that conversion of an unsecured loan into equity share capital through a journal entry could not, on the facts considered, invoke Section 68; the Tribunal followed the decision while deleting the ₹49 lakh addition.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal of assessee is arising from the order dated 20.1.2026 of the National Faceless Appeal Centre (NFAC)/Commissioner of Income Tax (Appeals) (hereinafter referred as CIT(A)) in appeal No. CIT(A), Delhi-9/10650/2019-20. Assessment in this case was framed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred as Act), vide order dated 27.12.2019 passed by the ITO, Ward 25(1), New Delhi for the relevant assessment year 2017-18.
2. The assessee has raised as many as 12 grounds of appeal, but he only argued the Ground No. 4 & 5 which read as under:-
(4) That the learned CIT(A) grossly erred in law on the facts and circumstances of the case in dismissing the appeal of the Assessee company by confirming the impugned order dated 27.12.2019 passed by the Assessing Officer under Section 143(3) of the Act by making an impugned addition of Rs. 49 lakhs to the total income of the Assessee company on account of unexplained receipt of share capital under Section 68 of the Act without appreciating the facts of the case and in contradiction to the provision of the Act which is bad in law and liable to be deleted.
(5) That the learned CIT(a) grossly erred in law and on facts of the case in dismissing the appeal of the Assessee company by confirming the impugned order dated 27.12.2019 passed by the Assessing Officer under Section 143(3) of the Act by making an addition of Rs. 1,46,49,950/- to the total income of the appellant company on account of unexplained cash credit during the year in violation of Section 68 of the Act without appreciating the facts and circumstances of the case and in contradiction to the provision of the Act which is bad in law and liable to be deleted
3. The brief facts of the case that the Assessee company filed its return of income under Section 139(1) on 31st October 2017 declaring income of Rs. 12,84,380/-. The case was selected for scrutiny under CASS. Notice under Section 143(2) was issued on 16.8.2018 and served. Subsequent notice, under Section 142(1) was issued from time to time. The Assessee filed copy of return in Form No. 6 along with audit report under Section 44AB in form number 3CD, copies of financial accounts and schedules thereto and furnished details, information and explanation. The assessee company is engaged in the business of trading in pesticides used in agricultural activities. The Assessee has disclosed sales of Rs. 5,68,68,505/-, as against sales of Rs. 4,66,36,215/- in the immediately preceding year. After considering the submission, the income is computed at Rs. 2,09,25,063/- by making various additions. Against the order of the Assessing Officer, the Assessee appealed before the learned CIT(A), who vide impugned order dated 20th January 2026, dismissed the appeal of the Assessee, by upholding the order of the Assessing Officer. Aggrieved with the order of the learned CIT(A), the Assessee appealed before us. We have heard the rival contention and gone through the facts and circumstances of the case.
4. As regards unexplained receipt of share capital is concerned, AO noted that the paid-up share capital has increased by Rs. 49 lakh from Rs. 1 lakh to Rs. 50 lakh as compared to preceding year. Vide notice under Section 142(1) dated 14.11.2019, the assessee company was asked to provide names, addresses, PAN, comma, amount of subscriber with confirmed copies of account and copies of bank statement of the subscribers highlighting the transactions, but the assessee did not furnish information as called for. The assessee was again asked to furnish pending information vide notice under Section 142(1) dated 19.12.2019. Even despite this notice, the assessee did not furnish the requisite information. So, as per the provision Section 68, where any sum of money 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 as the income of the assessee of that previous year. The onus of proving such credits remains on the person in whose books such sum is credited. If such person fails to offer an explanation or the explanation is not found satisfactory, then the sum is deemed to be income of the assessee of the previous year in which sum is found credited. In this case the assessee has not filed any information. As per AO, in this case the assessee has not filed any information in this respect and has not proved source of credit in the paid-up share capital. However, the assessee filed letter dated 25.12.2019 stating therein that there is increase in the paid-up capital from Rs. 1 lakh to Rs. 50 lakh by issue of 490000 shares @of Rs. 10 per share. It is further stated that the said increase in the share capital has been made out of loans outstanding from the directors and relatives of directors of company. AO noted that the assessee has not submitted details of loan outstanding in view of which the share capital is received. Thus, the AO was not satisfied with the explanation given by the assessee at the fag end of the year when the assessment getting barred by limitation. Therefore, he added Rs. 49 lakhs as income of the assessee under Section 68 of the Act. Against this the assessee appealed before the Ld. CIT(A), who confirmed the action of the AO. Now on this issue the assessee is in appeal before us.
5. We have heard the rival contention and gone through the facts and circumstances of the case. At the time of hearing, learned AR for the assessee submitted that the Ld. CIT(A) erred in law in confirming the action of the AO under Section 68 of the Act in confirming impugned addition of Rs. 49,00,000/- to the total income of the assessee on account of unexplained receipt of share capital under Section 68 without appreciating the fact of the case and in contradiction to the provision of law, which is bad in law and addition in dispute is liable to be deleted. At the time of hearing, learned counsel for the assessee has filed a paper book, pages 1 to 725 consisting of copy of IRT filed and 26AS for relevant assessment year; copy of certified unsecured ledgers; ROC fees challan aof PAS-3 and SH-7; copy of bank statement with Axis Bank a/c no. 910020007284401 for the relevant period; letter to the Bank Manager alognwith the partywise details of collection; copy of confirmations of debtors accounts; partywise details of cash collection against sales; copy of bank statement of HDFC a/c no. 50200005667336 for the relevant period; copy of bank statement of Axis Bank of A/c no. 910020005045477. He drew our attention towards the page numbers 66 to 71 of the paper book and stated that the total share capital increased during the year was Rs. 49 lakhs. The source of introduction of the share capital was through the conversion of the unsecured loan of directors. The opening balance outstanding in the balance sheet as per audited financials as on 31st March 2016, converted into share capital by the company without consideration amounting to rupees 49 lakhs. It is noted that no fresh fund was infused through the banking channel and the entire increase of share capital was through conversion of unsecured loan of directors, which establishes from the copy of certificate unsecured loan ledgers. It was further noted that statutory ROC, Form PAS-3, return of allotment and SH-7 notice to Registrar for any alteration of share capital was submitted to the AO during the assessment. ROC fees challan of PAS-3 and SH-7 also produced to confirm the submission of the said statutory forms. Since the AO was unable to see any bank transaction during the year, the AO considered the increased share capital as unexplained under Section 69 of the Act, which, as per the submitted document and explanation was not justified and added the amount in the total income without any application of mind. Thus such addition is untenable under the law and needs to be deleted. WE draw support from the decision of the Hon’ble High Court of Guwahati in the case of Commissioner Income-tax, Guwahati versus Goldstone Cements Limited, Meghalaya, Writ ITA/8/2022, on 17 December 2024, wherein the Hon’ble High Court of Guwahati has considered the conversion of unsecured loans by way of journal entry into equity share capital cannot invoke Section 68 of the Income Tax Act 1961. Keeping in view the aforesaid facts and circumstances of the case and respectfully following the aforesaid precedents, we find considerable force in the contention of the assessee that the addition made and confirmed by the learned CIT(a) is not sustainable in the eyes of law, hence the same is deleted. Accordingly, the ground number 4 is allowed in favor of the assessee.
6. As regards ground no. 5 is concerned, relating to cash deposit during the demonetization period amounting Rs. 1,46,49,950. It is noted that the assessee deposited cash of Rs. 1,30,11,500/- during 9.11.2016 to 30.12.2016. The assessee has reflected this cash deposit with Axis Bank account number 910020007284401 only, whereas the assessee has also deposited cash of Rs. 13,38,450/- with HDFC in account number 50200005766736, and Rs. 3 lakh with Axis Bank in account number 910020005045477. The assessee deposited to the total cash of Rs. 1,46,49,950/-. The assessee explained the cash deposit on account of cash in hand as on 9.11.2016, cash received on account of sales and receipt on other account during 9.11.2016 to 30.12.2016 of Rs. 1,34,87,389/-. The total cash deposited with the banks from 9.11.2016 to 30.12.2016 is Rs. 1,46,49,950/-. Whereas the assessee claims to have deposited cash of Rs. 1,30,11,500/-. AO noted that the explanation of the assessee with respect of cash deposit of Rs. 1,30,11,500/- cannot be accepted as the cash deposited with the bank works out to Rs. 1,46,49,950/-. The assessee stated that the cash deposited with the bank is on account of receipts on account of cash balances as on 9.11.2016, cash received on account of sales and cash receipt on other accounts. The assessee was asked to provide the details of month-wise sales and purchases and in response to this, the assessee filed the details, which are reproduced at page number 6 to 8 of the assessment order. Further, the assessee filed a letter dated 25.12.2019, whereby he produced a chart showing details of cash flow from 1.4.2016 to 18.11.2016 and from 9.11.2016 to 30.12.2016 along with cash flow during the aforesaid period in the preceding year, that is 2015-16. It was noted that the assessee has changed the figures on the ground that the cash was received from debtors and it is not on its own of sale. The assessee is changing its statement merely to show that the amount was received from debtors. AO noted that the assessee has not filed details of debtors with their copy of account in the books of accounts so as to establish the receipt of cash from debtors, along with their confirmation. Thus AO disbelieved the explanation given by the assessee. The assessee has disclosed cash sales at NIL. All sales are stated to be credit sales. The explanation of the assessee that the cash deposited with the bank during 9.11.2016 to 30.12.2016 is on account of cash sales was not acceptable by the AO. AO further noted that cash received from 9.11.2016 to 30.12.2016 on account of sales and other receipt is meagre as compared to amount received during demonetization period. In view of the above, AO noted that the explanation of the assessee with respect to source of cash deposited in the bank is not satisfactorily. Thus, he made the addition of Rs. 1,46,49,950/- u/s. 68 of the Act. Against the same, assessee appealed before the CIT(A), who vide his order has confirmed the action of the AO.
7. At the time of hearing, learned counsel for the assessee has stated that as per the statement, the assessee company has deposited total cash of Rs. 1,20,54,500/- on 17.11.2016 and Rs. 957,000 on 19.12.2016 totaling to Rs. 1,30,11,500/- which are reflected in the account statement. It was further submitted, that the said amount was cumulative of the cash collection before and after the Diwali season and alluring discounts and schemes were given to customers to clear the old dues and the same amount was deposited in the bank account in the same day in presence of the bank branch manager of Gujarat region and two Directors of the company. Letter to the Bank Manager along with the party-wise details of collection was duly submitted on the day of deposit. During the financial year 2016-17, no sales tax return were revised to manipulate the increment in sales figure and no scrupulous sales was increased. The reason was on account of old debtors and all the confirmations were also provided to the AO, but the AO overlooked the confirmation provided and sales tax return submitted to him and on the basis of ignorance of the accounts submitted, the AO added the amount in the total income of the assesse and passed the assessment. Reply of account confirmation and screenshot from the assessee portal attached in support of submission. Party-wise collection report also attached showing the amount received from which party and against sales of which accounting year. It was also submitted that the sales of goods already disclosed in the income tax return and the income already declared and due tax paid. Hence, the collection of such debtors cannot be taxed again on account of the collection done and same deposited in the bank. Since the books of accounts of the Assessee has been regularly maintained by the Assessee and the sales declared has been duly accepted thus, the same cannot be taxed twice on the same amount. The accounting of books of assessee is maintained as per the Mercantile Accounting System where income and expenses are booked on accrual basis accounting. Hence, the cash received from debtor on account of the sales made earlier and deposited in the bank account cannot be termed as unexplained cash deposit. It is noted that the AO has added an amount of RS. 13,38,450/- in the total income of the assessee as cash deposit during the demonetization period. there is evident amount of rupees 38,38,130 as cash book beginning to demonetization. The total income of the Assessee as cash deposit during the demonetization period. The attached bank statement does not reflect any cash deposit except an amount of Rs. 20,000 on 13/12/2016 in new currency by the party directly in the bank. The bank statement does not reflect any cash deposit of Rs. 13,38,450/- in the HDFC Bank Account No. 5020005667-836 as enumerated in the assessment order. The AO has added an amount of Rs. 3 lakhs in total income of the Assessee as per the assessment order. It was the contention of the Ld.AR that the AO had made a huge mistake in adding the said amount as the said amount was deposited in the account number 91-00200-05045-4000 on 31st March, 2017 after the demonetization period. The AO had considered the cash deposited on 31st March, 2017 as cash deposited during the demonetization, which is absurd and even oversight of the AO while passing the assessment order. Keeping in view the aforesaid factual matrix, we plausible force in the contention of the learned counsel for the assessee that the lower authorities have erred in wrongly confirmed the addition of Rs. 1,46,49,500 to the total income of the Assessee during the demonetization period without any proof regarding conventional provision which is bad in law. Thus, we delete the same and allow the ground of appeal raised by the Assessee.
8. In the result, appeal of the Assessee is allowed.
Order pronounced in the Open Court on 07/07/2026.
