The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 15 May deleted an addition of Rs.1.35 crore made under Section 68 of the Income Tax Act, 1961, holding that opening balances and conversion of earlier share application money cannot be treated as unexplained cash credits for the relevant assessment year. A Bench comprising Accountant Member Annapurna Gupta and Judicial Member Siddhartha Nautiyal allowed the appeal filed by NIMP Healthcare Pvt. Ltd. against the order of the CIT(A).

“Section 68 of the Act can be invoked only in respect of sums found credited during the relevant previous year and not in respect of opening balances brought forward from earlier years.”

The assessee company, engaged in the business of manufacturing chemicals, had filed its return for AY 2014-15 declaring nil income after claiming a business loss. During scrutiny assessment under Section 143(3), the Assessing Officer observed that the assessee had received unsecured loans from various parties and called upon it to establish the identity, creditworthiness and genuineness of the creditors.

The assessee furnished ledger accounts, confirmations, PAN details, income tax return acknowledgements and bank statements of the lenders. It was also explained that a substantial portion of the amounts represented conversion of share application money received in earlier years into unsecured loans and therefore did not constitute fresh cash credits during the year under consideration. However, the Assessing Officer was not satisfied with the explanation and treated unsecured loans aggregating to Rs.1.35 crore as unexplained cash credits under Section 68. The CIT(A) subsequently confirmed the addition.

Before the Tribunal, the assessee argued that the Revenue authorities had ignored documentary evidence placed on record and mechanically treated even opening balances as unexplained cash credits. It was contended that the transactions were routed through banking channels and the creditors were identifiable income-tax assessees having valid PAN details.

The Tribunal observed that the assessee had discharged the initial burden cast upon it under Section 68 by furnishing confirmations, PAN details, bank statements and income tax particulars of the lenders. It further noted that no independent inquiry was conducted by the Assessing Officer despite complete particulars being available on record. The ITAT observed that “the Assessing Officer proceeded mechanically by treating entire closing balances as unexplained cash credits without undertaking proper account reconciliation.”

The Bench also found major factual inconsistencies in the additions made by the Assessing Officer. In several cases, additions were made on the basis of entire closing balances even though only a small portion represented fresh loans received during the relevant year, while the remaining amounts were opening balances or conversion entries from earlier years.

Relying on the decisions of the Gujarat High Court in CIT v. Rohini Builders and CIT v. Ranchhod Jivabhai Nakhava, the Tribunal held that once PAN details, banking records and income tax particulars are furnished, additions under Section 68 cannot be sustained merely on suspicion without further inquiry by the Department.

Holding that substantial portions of the impugned additions related to opening balances and not fresh credits during the year, the Tribunal concluded that the addition under Section 68 was legally unsustainable. Thus, the ITAT deleted the entire addition of Rs 1.35 crore and allowed the appeal of the assessee.