Balance Sheet Entries Under Section 68 Scrutiny: How ITAT Bangalore Evaluated Each Addition Independently in Sovalaram vs DCIT

Background and Context

The Bengaluru Bench of the Income Tax Appellate Tribunal (ITAT) delivered its ruling in Sovalaram Vs DCIT (ITA No. 928/Bang/2026) on 21st September 2026, addressing a reassessment addition of ₹17,67,684/- made under Section 68 of the Income Tax Act, 1961 for Assessment Year 2020–21.

The matter originated from an incident during the Karnataka Assembly Elections in 2023, when the assessee was intercepted by police on 17.03.2023 and cash of ₹29,00,000/- was found in his possession. The Income Tax Department was subsequently informed, and following court directions dated 17.05.2023, the cash was released to the department. A warrant under Section 132A was executed on 10.06.2023, and the amount was deposited into the Central Government account.

Importantly, however, the ITAT's adjudication in this appeal was not about the ownership or tax treatment of the ₹29,00,000/- seized cash. The assessee had stated during his recorded statement that the cash belonged to M/s Mahalakshmi Bags, a proprietary concern of Shri Mukesh Kumar (PAN: BCZPK1339J), who also independently claimed ownership of the same. The Tribunal's focus remained squarely on the additions made by the Assessing Officer (AO) upon examination of the assessee's financial position as reflected in his balance sheet for Financial Year 2019–20.

What the Assessing Officer Found

On examining the assessee's return of income, the AO noted that the assessee disclosed only commission income and interest income under "Income from Other Sources." The assessee's balance sheet showed a capital account closing balance of ₹21,19,993.84/- as on 31.03.2020, against an opening balance of ₹18,04,688/-. The AO questioned how this financial position could be sustained purely from the disclosed income and issued a show-cause notice dated 30.12.2024 seeking explanation.

Since no satisfactory documentary evidence was provided, the AO treated the following amounts as unexplained cash credits under Section 68:

These amounts were also subjected to tax under Section 115BBE, which applies a higher rate to unexplained cash credits.

Proceedings Before the Commissioner (Appeals)

Before the National Faceless Appeal Centre (NFAC), the assessee submitted additional material under Rule 46A of the Income Tax Act, including the statement of affairs for the period ending 31.03.2019. The assessee contended that:

• Cash in hand and bank balances were cumulative figures, not merely current-year income
• Sundry debtors of ₹12,24,150/- represented an opening balance carried forward from 31.03.2019
• Commission receivable of ₹1,00,000/- had already been offered to tax
• The house advance of ₹2,00,000/- was a rental security deposit paid through banking channels

The Commissioner (Appeals) admitted the additional evidence but dismissed the appeal, characterising the assessee's explanations as "make-believe statements." The remand report from the AO, sought during appellate proceedings, was never received, yet the order was passed without it.

Grounds of Appeal Before the ITAT

The assessee raised the following grounds before the ITAT: