Bangalore ITAT Deletes ₹3.31 Crore Addition Under Section 68 — Journal Entry Reflecting Pre-Existing Assets Is Not an Unexplained Cash Credit

Case Overview

Case Name: Vokkaligara Thimmaiah Dinesh Kumar Bychanhally Vs ITO (ITAT Bangalore)
Appeal Number: ITA No. 2714/Bang/2025
Date of Order: 17/08/2026
Assessment Year: 2018-19
Forum: Income Tax Appellate Tribunal, Bangalore

Background and Facts of the Case

The assessee in this matter is an individual engaged in executing government works contracts, primarily road and highway construction projects tendered by the Public Works Department and other state government bodies. In addition to his proprietorship, the assessee also held partnership interests in two firms carrying on stone crusher operations. The books of accounts maintained by the assessee were duly audited under Section 44AB of the Income Tax Act, 1961, and no deficiency or irregularity was pointed out in those books either by the auditor or by the Assessing Officer.

For Assessment Year 2018-19, the assessee filed a revised return of income on 31.10.2018 declaring a total income of Rs. 1,06,67,470/-. The return was initially processed under Section 143(1) of the Act. Subsequently, the case was picked up for limited scrutiny under the e-assessment scheme, 2019, with the specific issue flagged being "Share capital / other capital."

The central question arose from a substantial jump in the proprietor's capital account. The capital as reflected in the Income Tax Return for AY 2017-18 stood at Rs. 4,07,78,004/-, whereas for AY 2018-19 the closing capital climbed to Rs. 7,38,62,106/- — a net increase of Rs. 3,30,84,102/-. The Assessing Officer issued notices under Section 143(2) and Section 142(1) calling upon the assessee to explain and substantiate this significant capital increment.

Assessment Proceedings and AO's Action

During the course of proceedings, the assessee conveyed to the Assessing Officer that the capital increment was not on account of fresh cash introduced into the business but was, in substance, an accounting adjustment. However, despite multiple opportunities extended through repeated notices under Section 142(1), detailed questionnaires, reminder notices, and a formal show cause notice, the assessee failed to file documentary support before the AO.

Given the persistent non-compliance, the AO treated the entire increase of Rs. 3,30,84,102/- [computed as Rs. 7,38,62,106 minus Rs. 4,07,78,004] as an unexplained cash credit under Section 68 of the Act read with Section 115BB. The total assessed income was accordingly computed at Rs. 4,37,51,572/- after making the impugned addition, and the assessment was completed under Section 143(3) of the Act on 16.03.2021.

The capital movement, as reflected in the audited financials, was structured as follows:

First Appeal Before CIT(A)/NFAC

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi, challenging the AO's order. Before the CIT(A)/NFAC, the assessee attempted to place on record additional evidence in support of the claim that the capital increase was merely an accounting entry reflecting assets already held in prior years.