An addition cannot be made on the closing balance of assets without any fresh investment.

An addition cannot be made on the closing balance of assets without any fresh investment.

Issue

Can an Assessing Officer (AO) make an addition for unexplained investments or unexplained loans by simply treating the entire closing balance of such assets at the end of the year as unexplained, without bringing any evidence on record to show that a fresh, unexplained investment or advance was actually made during that specific year?

Facts

• The Assessing Officer (AO) made two very large additions to the assessee’s income: one for unexplained investments of ₹5.60 crore and another for unexplained loans and advances of ₹5.76 crore.
• The AO’s methodology was simplistic and flawed. He simply took the total closing balance of the investments and the loans & advances as shown in the balance sheet at the year’s end and treated these entire cumulative amounts as unexplained for the current year.
• The assessee’s appeal was eventually heard by the Income Tax Appellate Tribunal (ITAT), which deleted both additions after examining the assessee’s audited financial statements and balance sheet schedules.
• The Tribunal established two key facts:
  1. Regarding the investments, it found that no fresh investment was made during the year. The closing balance was simply the opening balance of old investments being carried forward.
  2. Regarding the loans and advances given by the assessee, it found that the source of the funds was fully explained. The funds had come from legitimate sources, namely the sale of other shares and fresh unsecured loans that the assessee had received from registered, tax-paying private limited companies.

Decision

The High Court ruled in favour of the assessee, dismissing the revenue department’s appeal against the Tribunal’s order.

• The court held that the findings of the Tribunal—that there was no fresh investment during the year and that the source of the advances was properly explained—were purely factual findings.
• These findings were properly based on the documents and evidence that were on record.
• Since the Tribunal’s factual findings were not perverse and were well-supported, no substantial question of law arose from the order that would require the High Court’s intervention.

Key Takeways

1. Additions Must Relate to the Current Year’s Transactions: An addition for an unexplained investment (under Section 69) or unexplained money (under Section 69A) can only be made for an investment or asset that has been acquired or has come into the assessee’s possession during the relevant financial year.
2. A Closing Balance is Not an “Investment”: An AO cannot treat the entire closing balance of an asset, which is a cumulative figure built up over many years, as an unexplained investment of a single year. The AO must first identify a specific, fresh investment that was made during the year and then ask for the source of that specific investment.
3. The Tribunal is the Final Fact-Finding Authority: The ITAT is the highest fact-finding body in the income tax judicial hierarchy. High Courts generally do not interfere with the factual findings of the Tribunal unless those findings are shown to be completely perverse, based on no evidence at all, or contrary to the record.
4. The Importance of Explaining the Source: The assessee in this case was successful because they were able to discharge their onus of proof. They explained the source of the funds used for giving advances by pointing to legitimate and verifiable sources like the proceeds from share sales and loans received from other tax-assessed companies.