Addition out of opening capital/ cash balance – whether permissible by alleging the same as unexplained?
Let’s take an example: During the course of assessment for A.Y. 2013-14, AO doubts the genuineness of capital balance as on 01.04.12.
- Assessee had filed valid return of income for A.Y. 2012-13 and the closing capital balance as disclosed as on 31.03.12 was carried forward as opening balance as on 01.04.12.
Under the above circumstances, it is not permissible to make any addition out of the opening balance of the capital account since, if the said sum was to be treated as unexplained, it could only be dealt with in the earlier years when the bogus capital, if any, may have been generated in the regular books of account. Under no circumstances, the opening balance of the capital account as on 01.04.12 could be added in the assessment year 2013-14, especially when return of income for A.Y. 2012-13 is also before the AO.
- Useful references: ITO vs. Babubhai Kanjibhai Patel-HUF [ITA Nos.342 & 4293/Ahd/2007], ACIT vs. N. Sasikala (2005) 92 TTJ 1196 (Chennai), DCIT vs. Satish Chandra Pandey, ITA No. 525/LKW/2010
- Though the closing capital balance as disclosed as on 31.03.12 was carried forward as opening balance as on 01.04.12, no valid return of income was filed for earlier A.Y. 2012-13.
Under the above circumstances, the breakup and source of opening balance of capital account and its asset backing need to be proved beyond doubt. Assessee should be able to demonstrate that opening capital is backed by assets acquired in past such as movable/immovable properties, investments, opening bank and cash balance etc. However, despite above, if opening physical cash balance is unreasonable high, having regard to the facts and circumstances of the case the same may be added as unexplained to some extent.
- Useful references: DCIT vs. Satish Chandra Pandey (ITA No. 525/LKW/2010), ITO vs. Neetu Jaiswal – ITA No. 152/Mum/2010 etc.
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