ITAT Delhi Quashes Section 68 Additions on Debt-to-Equity Conversion and Demonetisation Cash Deposits

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, recently delivered a significant ruling in the case of Tanish Agriscience Private Limited Vs ITO, addressing two highly litigated aspects of Section 68 of the Income Tax Act 1961. The tribunal deleted additions amounting to Rs. 49 lakh concerning the conversion of unsecured loans into share capital and Rs. 1,46,49,950 related to cash deposits made during the demonetisation period.

This decision underscores the evidentiary value of audited financial statements, statutory corporate filings, and the fundamental principles of the mercantile accounting system. It also highlights the necessity for assessing authorities to meticulously verify bank statements and transaction dates before invoking the deeming fictions of the tax statutes.

Factual Matrix of the Assessment Proceedings

The assessee, Tanish Agriscience Private Limited, is a corporate entity engaged in the business of trading agricultural pesticides. For the relevant assessment year, AY 2017-18, the assessee filed its return of income under Section 139(1) on 31 October 2017, declaring a total income of Rs. 12,84,380. The financial records indicated a growth in business operations, with the assessee disclosing gross sales of Rs. 5,68,68,505 during the year under consideration, compared to sales of Rs. 4,66,36,215 in the immediately preceding financial year.

The return was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system. The Assessing Officer (AO) issued a statutory notice under Section 143(2) on 16.8.2018, followed by multiple notices under Section 142(1). In response, the assessee submitted its return in Form 6, the tax audit report under Section 44AB in Form 3CD, along with audited financial accounts and related schedules.

Despite the submissions, the AO finalized the assessment under Section 143(3) vide an order dated 27.12.2019, determining the total income at Rs. 2,09,25,063. This significant enhancement was primarily driven by two major additions made under Section 68 of the Income Tax Act 1961. Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] / National Faceless Appeal Centre (NFAC). The CIT(A) dismissed the appeal via an order dated 20.1.2026, upholding the AO's additions. Consequently, the assessee escalated the matter to the ITAT Delhi.

Dispute 1: Share Capital Expansion via Journal Entries

The first major ground of appeal revolved around an addition of Rs. 49 lakh made on account of an unexplained receipt of share capital.

The Assessing Officer's Observations

During the scrutiny proceedings, the AO observed that the paid-up share capital of the assessee company had increased from Rs. 1 lakh to Rs. 50 lakh during the relevant previous year. To verify the genuineness of this Rs. 49 lakh increment, the AO issued a notice under Section 142(1) on 14.11.2019, requesting the names, addresses, Permanent Account Numbers (PAN), confirmation letters, and bank statements of the subscribers. A follow-up notice was issued on 19.12.2019.