Massive Additions Based on Bank Credits of a Trust Set Aside – ITAT Orders Fresh Verification of Reconciliation

St. Anne’s Educational Society Vs DCIT (ITAT Bangalore)

Massive Additions Based on Bank Credits of a Trust Set Aside – ITAT Orders Fresh Verification of Reconciliation

Bangalore ITAT set aside additions aggregating to over ₹23 crore relating to Section 68, alleged undisclosed income, and short application of funds, holding that the entire case was built on incorrect bank receipt figures and unverified assumptions.

AO had treated a portion of bank credits as unexplained and computed further additions by:

• Adopting gross bank deposits of ₹54.35 crore,
• Treating differences as unexplained u/s 68,
• Alleging shortfall in 85% application, resulting in additional income.

However, the assessee demonstrated through detailed reconciliation that:

• The bank figure itself was incorrect and later rectified,
• It included inter-bank transfers, contra entries, typographical errors, opening balances, and grants,
• After adjustments, the actual income matched audited financial statements.

Tribunal observed:

• Both AO and CIT(A) failed to examine reconciliation and supporting evidence,
• Additions were made mechanically without identifying specific unexplained credits,
• CIT(A) passed a non-speaking order ignoring detailed submissions.

ITAT held that:

• When comprehensive reconciliation is furnished, authorities must verify each component,
• Additions based on gross bank credits without proper analysis are unsustainable.

Accordingly, the Tribunal set aside the entire matter to AO for fresh adjudication, directing:

• Proper verification of reconciliation,
• Examination of books, bank statements, and evidence,
• Passing of a speaking order after giving opportunity to assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The present appeal filed, at the instance of the assessee, is directed against the order passed under section 250 of the Income Tax 1961 pertaining to A.Y. 2018-19 at National Faceless Appeal Centre-NFAC, Delhi.

2. The interconnected connected issues raised by the assessee are that the learned CIT(A) erred in confirming the additions of Rs. 6,59,15,785/-, Rs. 14,50,86,661/- and Rs. 2,02,87,355/- made on account of alleged unexplained cash credit under section 68 of the Act, undisclosed income, short utilization of income respectively.

3. The facts in brief are that the assessee is a public-charitable educational society running school and pre-university colleges in Bangaluru. For the year under consideration, the income tax return of the assessee was selected under scrutiny under E-assessment scheme on the issue of large receipts and accumulation of income. During the assessment proceedings, the AO found that the bank account of the assessee for the year was credited/deposited for Rs. 54,35,54,830/-which included fixed deposit of Rs. 82,85,299/- and contra entries of Rs. 8,70,54,110/- only whereas the assessee has shown turnover/ gross receipts of Rs. 38,22,99,623/- only. The AO held that after considering the turnover, fixed deposit and contra entry, a sum of Rs. 6,59,15,785/-(Rs. 54,35,54,830 — Rs. 38,22,99,299 — Rs. 8,70,54,110 — 82,85,299) remains out of total deposit/credit in bank, the source of which and nature was not explained. Hence, the AO treated the same as unexplained cash credit under section 68 of the Act and added to the total income of the assessee.

3.1 Further the AO found that the assessee was required to apply 85% of turnover (Rs. 38,22,99,623/-) towards the object which comes at Rs. 32,49,54,690/- whereas the assessee applied Rs. 17,98,68029/-only. Therefore, the AO treated the difference of Rs. 14,50,86,661/- (Rs. 32,49,54,690 – 17,98,68029) as income from undisclosed sources and added to the total income of the assessee.

3.2 In addition, the AO in the computation of income & liability also made addition of Rs. 2,02,87,355/- on account of alleged shortfall of application of 85% of the income.

4. The aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the additions made by the AO.

5. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

6. The learned AR before us filed a paper book running from pages 1 to 589 and written submissions have 6 pages. The learned AR submitted that the additions made by the Ld. AO and confirmed by the Ld. CIT(A) are entirely based on an incorrect appreciation of facts and without considering the reconciliation statements and supporting evidence placed on record. The Ld. AR submitted that the entire addition originates from the figure of Rs. 54,35,54,830/- considered by the AO as receipts credited in the bank account. It was submitted that this figure itself was wrongly stated in the initial submission and the same was duly clarified before the AO as well as before the Ld. CIT(A) (refer pages 192 to 194 of the paper book). However, both the authorities proceeded on the incorrect figure without appreciating the correction statement filed by the assessee during the proceedings before the respective authorities.

6.1 The Ld. AR further submitted that a detailed reconciliation statement was filed before the Ld. CIT(A) explaining the nature and components of the said amount (refer page 248 of the paper book). It was submitted that the said reconciliation clearly demonstrated that the amount of Rs. 54,35,54,830/- included several items which are not in the nature of income. These included inter-transfer within bank accounts of Rs. 3,46,30,475/-, typographical errors aggregating to Rs. 15,27,82,529/-, and salary grant not taken earlier amounting to Rs. 2,70,76,620/-. It was submitted that after giving effect to these corrections, the correct figure of receipts comes to Rs. 38,32,18,446/-which is duly supported by reconciliation already submitted before the Ld. AO (refer page 192 of the paper book). The Ld. AR emphasized that this reconciliation has not been disputed on facts but has been ignored.

6.2 The Ld. AR submitted that even the corrected figure of Rs. 38,32,18,446/- includes opening balance of Rs.7,40,80,208/- which cannot be treated as income of the year under consideration. After reducing the same, the effective receipts come to Rs. 30,91,38,238/-only. It was further submitted that even this amount contains several components which are not in the nature of income. These include contra entries between units of Rs. 8,70,54,110/- (refer pages 193 and 248 of the paper book), expenses such as printing and stationery, remuneration, electricity charges, PF and PT contributions aggregating to Rs. 8,48,520/- which are already considered in income and expenditure account (refer pages 193 and 248 of the paper book), building fund of Rs. 38,32,000/- which is directly taken to balance sheet, and salary grant of Rs. 2,70,76,674/- which is netted off in the income and expenditure account. The Ld. AR also submitted that accrued interest of Rs. 3,98,730/- has already been considered separately.

6.3 The Ld. AR submitted that after giving effect to all these adjustments, the resultant income comes to Rs. 19,07,25,656/- which exactly matches with the income reflected in the audited income and expenditure account (refer page 10 of the paper book). Therefore, it was argued that there is complete reconciliation between bank receipts and audited income and there is no unexplained income as alleged by the Revenue.

6.4 On the issue of addition under section 68 of the Act amounting to Rs. 6,59,15,785/-, the Ld. AR submitted that the Ld. AO has mechanically treated the difference as unexplained cash credits without identifying any specific credit entry. It was submitted that once the entire receipts are duly reconciled and explained with documentary evidence, there is no basis to invoke the provisions of section 68 of the Act. The Ld. AR emphasized that section 68 can be invoked only when a specific credit remains unexplained, which is not the case here.

6.5 With regard to the addition of Rs. 14,50,86,661/- treated as income from undisclosed sources on the basis of alleged short application of income, the Ld. AR submitted that the Ld. AO has proceeded on an incorrect computation of gross receipts and application. It was submitted that the Ld. AO adopted an inflated figure of receipts and applied 85% requirement without considering the correct income as per books. Once the correct income of Rs. 19,07,25,656/- is considered, there is no shortfall in application.

6.6 The Ld. AR further submitted that both the Ld. AO and Ld. CIT(A) have ignored the voluminous documentary evidence placed on record and have made ad hoc additions without proper verification. It was submitted that the Ld. CIT(A) has dismissed the appeal without dealing with the reconciliation statement and supporting evidence, thereby passing a non-speaking and cryptic order.

6.7 The Ld. AR therefore submitted that the entire additions are based on erroneous assumptions, incorrect figures and non-consideration of evidence. It was prayed that the additions made under section 68 of the Act as well as addition on account of alleged undisclosed income be deleted in full. Alternatively, it was submitted that the matter may be restored to the file of the Ld. AO for proper verification of the reconciliation and evidences placed on record.

7. On the contrary, the learned DR before us, though supported the order of lower authorities but raised no serious objection for setting aside the issue to the file of the AO for fresh adjudication as per law.

8. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, it is noted that the entire additions made by the Ld. AO under section 68 of the Act, addition on account of alleged undisclosed income and short application of income are primarily based on the figure of bank receipts considered at Rs. 54,35,54,830/-. The case of the assessee, on the other hand, is that the said figure itself was incorrectly taken in the initial submission and the same was subsequently reconciled and explained with supporting evidence placed before the Ld. AO as well as Ld. CIT(A). On perusal of the records, we find that the assessee had furnished a detailed reconciliation statement explaining the nature of various entries forming part of the said receipts. The reconciliation, as claimed by the assessee, includes inter-bank transfers, contra entries, typographical errors, opening balances and other items which are not in the nature of income. The assessee has also placed reliance on supporting documents and has demonstrated that the final income as per reconciliation matches with the audited income and expenditure account.

8.1 However, we find that neither Ld. AO nor the CIT(A) has properly examined the reconciliation statement and the supporting evidence placed on record. The Ld. AO has proceeded on the basis of gross bank credits and has made additions by simply reducing certain items without undertaking a complete verification of the nature of entries. Similarly, Ld. CIT(A), while confirming the additions, has not dealt with the detailed reconciliation and evidence furnished by the assessee and has passed a non-speaking order on this aspect.

8.2 In our considered view, when the assessee has placed a detailed reconciliation supported by documentary evidences explaining the nature of receipts, it is incumbent upon the authorities below to examine the same in a proper and judicious manner. The additions made without such verification cannot be sustained. The issue involved is primarily factual in nature and requires thorough verification of books of accounts, bank statements, reconciliation statements and supporting documents. Therefore, in the interest of justice and fair play, we deem it appropriate to set aside the impugned order of the Ld. CIT(A) and restore the entire issue to the file of the Ld. AO for fresh adjudication. The Ld. AO is directed to examine the reconciliation statement and all supporting evidence placed in the paper book, verify the nature of each component of the receipts, and thereafter decide the issue afresh in accordance with law. The assessee is also directed to furnish all necessary details and evidence as may be required by the Ld. AO and extend full cooperation during the set aside proceedings. Needless to say, the Ld. AO shall provide adequate opportunity of being heard to the assessee before passing the order. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

9. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in court on 15th day of April, 2026