ITAT Hyderabad on Section 68: Opening Loan Balance Not Taxable, Matter Sent Back for Verification

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) in Sree Tirumala Spices Vs ITO has reiterated an important principle relating to Section 68 of the Income Tax Act 1961: an opening balance of a loan brought forward from earlier years cannot be treated as unexplained cash credit in the current year, provided no fresh credit has arisen during that year.

At the same time, the Tribunal recognized that this position is subject to factual verification. Since the assessee’s claim that the amount was only a carried-forward balance required examination of books, confirmations, and bank records, the ITAT remanded the issue back to the Assessing Officer (AO) for fresh verification.

Background of the Dispute

Assessment Framework

  • Assessee: A partnership firm, Sree Tirumala Spices
  • Assessment Year (AY): 2022-23
  • Return of income: Filed on 29/10/2022 declaring total income of Rs. 25,96,510/-
  • Type of assessment: Scrutiny under Section 143(3) r.w.s. Section 144B

The case was flagged under CASS for the following risk parameters:

  • High level of liabilities when compared with the income declared
  • Significant payments to parties not registered under GST

Loan from Creditor – Core Issue

During scrutiny, the AO noticed an unsecured loan liability in the name of Sri K. Narasimha Rao standing at Rs. 55,53,709/- as on 31/03/2022 in the assessee’s books.

Key facts noted during assessment:

  • Closing balance as on 31/03/2021 towards the same party: Rs. 92,53,709/-
  • During FY 2021-22, assessee claimed to have repaid Rs. 37,00,000/-, reducing the balance to Rs. 55,53,709/-
  • The assessee produced a confirmation from the creditor

However, the AO compared the creditor’s returned incomes over three years and found them relatively modest:

  • AY 2021-22: Rs. 7,52,490/-
  • AY 2022-23: Rs. 8,00,560/-
  • AY 2023-24: Rs. 8,77,200/-

On this basis, the AO doubted whether Sri K. Narasimha Rao had the financial capacity to extend or maintain such a large loan.

AO’s Reasoning and Addition Under Section 68

The AO held that:

  • The assessee failed to satisfactorily prove the creditworthiness of the lender
  • The genuineness of the loan transaction remained unsubstantiated
  • The assessee did not adequately discharge the onus imposed by Section 68

As a result, the AO:

  • Treated the entire outstanding loan balance of Rs. 55,53,709/- as unexplained cash credit under Section 68
  • Taxed the said addition under Section 115BBE
  • Initiated penalty proceedings under Section 271AAC

Proceedings Before CIT(A)

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi. The challenge covered:

  • Addition of Rs. 55,53,709/- under Section 68
  • Disallowance of Rs. 1,47,000/- of expenses

Assessee’s Contention Before CIT(A)

The assessee argued:

  1. The amount of Rs. 55,53,709/- was not a new loan received in AY 2022-23, but the balance brought forward from the previous year.
  2. During the relevant year, the assessee had made repayments of Rs. 37,00,000/- to the same creditor, reducing the balance from Rs. 92,53,709/- to Rs. 55,53,709/-.
  3. Under Section 68, only amounts credited during the relevant previous year can be treated as unexplained cash credits. Hence, an opening balance cannot be taxed in the current year as income under Section 68.
  4. The assessee produced copies of the account of Sri K. Narasimha Rao for the earlier two assessment years, to show that the loan originated in earlier years and not in AY 2022-23.

On these premises, the assessee requested deletion of the addition.

Findings of the CIT(A)

The CIT(A) upheld the addition. The reasoning can be summarised as follows:

  • The CIT(A) agreed that there was an opening balance of Rs. 92,53,709/- and a **repayment of Rs.