Telangana High Court
Agarwal Industries Pvt. Ltd vs Dcit, Circle-1(1) on 22 July, 2026
Author: P.Sam Koshy
Bench: P.Sam Koshy
IN THE HIGH COURT FOR THE STATE OF TELANGANA
AT HYDERABAD
THE HON'BLE SRI JUSTICE P.SAM KOSHY
AND
THE HON'BLE SRI JUSTICE NARSING RAO NANDIKONDA
INCOME TAX TRIBUNAL APPEAL No.73 of 2023
DATE: 22.07.2026
Between:
M/s. Agarwal Industries Pvt. Ltd.
...Appellant
AND
DCIT, Circle-1(1), Hyderabad.
...Respondent
JUDGMENT:
(per Hon’ble Sri Justice P.Sam Koshy)
Heard Mr. Vedula Srinivas, learned Senior counsel
representing Ms. Vedula Chitralekha, learned counsel for the
appellant; and Ms. B. Sapna Reddy, learned Senior Standing Counsel
for Income Tax Department appearing on behalf of the respondent.
2. The instant appeal under Section 260A of the Income Tax Act,
1961 (for short the ‘Act’) has been filed by the appellant challenging
the order passed by the Income Tax Appellate Tribunal, Hyderabad
Page 2 of 15
Bench ‘A’, Hyderabad (for short the ‘ITAT’) in
ITA.No.60/Hyd/2018, decided on 19.01.2023.
3. Vide the impugned order; the ITAT dismissed the appeal
preferred by appellant who appealed against the unwarranted addition
of unexplained cash credits received by appellant under Section 68 of
the Act, for the assessment year 2010-11.
4. The brief facts of the case are that the appellant is a company
which filed its return of income on 03.02.2011, admitting an income
of Rs.43,10,278/- under regular provisions of the Act and income of
Rs.3,47,58,664/ under the provisions of section 115JB of the Act. The
return was processed under Section 143(1) of the Act. Subsequently,
the case was converted to scrutiny through Computer-Assisted
Scrutiny Selection (for short, ‘CASS’). In response to the notices
issued under Section 143(2) and 142(1) of the Act, the authorized
representatives of the appellant appeared from time to time and
furnished the information called for. After hearing the authorized
representatives and after verifying the information filed, the Assessing
Officer completed the assessment order by making various additions
Page 3 of 15
and passed an order under Section 143(3) of the Act, dated
28.03.2013.
5. Being aggrieved by the order passed by the Assessing Officer,
the appellant filed an appeal before the Commissioner of Income Tax
(Appeals) (for short ‘CIT(A)’) vide Appeal No.0078/CIT(A)-1,
Hyd/2013-14/2017-18. However, the CIT(A) also did not grant the
relief sought for by the appellant. The reasons and the findings of the
CIT(A) while disposing of the appeal was based on the three
observations which are enumerated below:
a) First addition of Rs.5,25,00,000/- under Section 68 of the
Act towards unexplained cash credits to the appellant by
one, Smt. Hema Kedia by way of cheque, which was
categorically instructed not to cash-in owing to the fact that
Smt. Kedia was not having adequate amount in her bank.
b) Second addition of Rs.10,00,000/- under Section 68 of the
Act towards unexplained cash credits which was a return of
payback amount to the appellant for an unsecured loan by a
borrower namely, Smt. Ranjana Agarwal.
Page 4 of 15
c) Third addition of Rs. 23,18,298/- under Section 68 of the
Act towards difference in interest as per Form 26AS,
whereas during the assessment proceedings, the Assessing
Officer had noticed that there is a difference of interest
receipts held by the appellant and the amounts mentioned
did not tally and led to a difference to the tune of
Rs.23,18,298/- which was added by the CIT(A).
6. On appeal before the ITAT, it was held that the arguments
submitted by the appellant were not satisfactory and the reasons put
forth were also devoid of merit, and hence, the ITAT did not interfere
with the findings and order of the CIT(A) and dismissed the appeal
preferred by the appellant.
7. It is this impugned order of the ITAT which is under challenge
in this instant appeal.
8. Learned Senior Counsel for the appellant submitted that the
sums received from Smt. Hema Kedia and Smt. Ranjana Agarwal,
amounting to Rs.5,25,00,000/- and Rs.10,00,000/- respectively, were
duly verified and that there was no dispute raised against the fact that
Page 5 of 15
the funds belonged to the above-named persons. The credit
worthiness of the two persons was duly accepted by the assessing
authorities. Despite tracing and declaring the origin of the amounts
received by the appellants, the assessing authorities made the addition
against the appellant under Section 68 of the Act, which is an
unwarranted and unreasonable action by the respondent.
9. Learned Senior Counsel for the appellant further contended that
the invocation of ‘doctrine of real income’ by the ITAT was
unwarranted, since the appellant proved that the funds belonged to
Smt. Hema Kedia which was also held confirmed by the statement
given by Smt. Hema Kedia before the authority concerned during the
assessment proceedings, that the ITAT went into the ‘approbate and
reprobate theory’ against the appellant which did not apply to facts of
the case at hand.
10. Au contraire, learned Senior Standing Counsel for Income Tax
Department contended that the sums received by the appellant i.e.
Rs.5,25,00,000/- and Rs.10,00,000/- were nothing but bogus entries to
infuse its own funds into its company. During the assessment
proceedings, the respondent did not find any share application money
Page 6 of 15
in the balance sheet of the appellant which further raised doubts of its
origin and legality. Further, upon summons by the respondent,
Smt. Hema Kedia refused to appear and depose as to the
creditworthiness and genuineness of the transactions made by her
against the appellant. Based on the above findings, the respondent
made the above mentioned amounts under addition under Section 68
of the Act.
11. Learned Senior Standing Counsel for Income Tax Department
placed reliance on the case of CIT vs. P. Mohanakala 1 wherein the
conditions which are necessary for a transaction to fall within Section
68 of the Act were extensively discussed. The relevant paragraphs are
reproduced hereunder for ready reference, viz.,
“A bare reading of section 68 of the Income-tax Act, 1961, suggests
that (i) there has to be credit of amounts in the books maintained by
the assessee;(ii) such credit has to be a Sum of money during the
previous year; and (iii) either (a) the assessee offers no explanation
about the nature and source of such credits found in the books or
(b) the explanation offered by the assessee, in the opinion ofthe
Assessing Officer, is not, satisfactory. It is only then that-the sum so
credited may be charged to income tax as the income of the assessee
1
291 ITR 278 (SC) / [2007] 210 CTR 20 (SC)
Page 7 of 15
of that previous year. The expression “the assessee offers no
explanation” means the assessee offers no proper, reasonable and
acceptable explanation as regards the sums found credited in the
books maintained by the assessee.”
12. Having heard the contentions put forth on either side and
on perusal of records, the question of law that falls for
consideration in the instant appeal is “whether the appellant had
discharged the burden cast upon it under Section 68 of the Act
with respect to the three additions in issue, and if so, whether the
CIT(A) and the ITAT were justified in nonetheless sustaining the
said additions?”
13. It would be relevant at this juncture to take note of the
provisions of Section 68 of the Act which deals ‘Cash Credit’.
For ready reference, Section 68 of the Act is reproduced
hereunder:
“Cash credits.
68. Where any sum is found credited in the books of an assessee
maintained for any previous year, and the assessee offers no
explanation about the nature and source thereof or the explanation
offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the sum so credited may be charged to income-tax as the
income of the assessee of that previous year:
Page 8 of 15
Provided that where the sum so credited consists of loan or borrowing
or any such amount, by whatever name called, any explanation
offered by such assessee shall be deemed to be not satisfactory,
unless,–
(a)the person in whose name such credit is recorded in the books of
such assessee also offers an explanation about the nature and source
of such sum so credited; and
(b)such explanation in the opinion of the Assessing Officer aforesaid
has been found to be satisfactory:
Provided further that where the assessee is a company (not being a
company in which the public are substantially interested), and the sum
so credited consists of share application money, share capital, share
premium or any such amount by whatever name called, any
explanation offered by such assessee-company shall be deemed to be
not satisfactory, unless–
(a)the person, being a resident in whose name such credit is recorded
in the books of such company also offers an explanation about the
nature and source of such sum so credited; and
(b)such explanation in the opinion of the Assessing Officer aforesaid
has been found to be satisfactory:
Provided also that nothing contained in the first proviso or second
proviso shall apply if the person, in whose name the sum referred to
therein is recorded, is a venture capital fund or a venture capital
company as referred to in clause (23FB) of section 10.A plain reading of the aforesaid provision discloses that it
casts a burden on the assessee, once a credit entry appears in its
books of account, to satisfactorily explain three cumulative facets,
namely (i) the identity of the creditor / investor (ii) the
Page 9 of 15creditworthiness or financial capacity of such creditor to advance the
sum in question and (iii) the genuineness of the transaction itself.
It is only when the assessee fails to discharge this initial onus, or
where the explanation furnished is found unsatisfactory by the
Assessing Officer on cogent material, that the credited sum may be
treated as unexplained income and brought to tax. The provision
does not clothe the Assessing Officer with an unfettered discretion to
reject an explanation merely on suspicion, surmise or conjecture; the
rejection must be founded on objective material and must survive
scrutiny on the touchstone of the three-fold test noticed above, as has
also been amplified by the Hon’ble Supreme Court in the case of P.
Mohanakala (supra).
14. In so far as the addition of Rs.5,25,00,000/- received from
Smt. Hema Kedia is concerned, the record shows that the appellant
had furnished the confirmation letter of the creditor, her permanent
account number, her bank statement reflecting the source of funds,
and her income-tax returns demonstrating her financial standing. The
amount was admittedly received by way of an account-payee cheque,
a mode of transaction which is itself a recognised indicator of
Page 10 of 15
genuineness and which leaves a clear trail capable of verification.
The mere fact that the appellant, out of abundant caution and on the
specific instructions of Smt. Kedia who candidly informed the
appellant that she did not have sufficient clear balance in her account
at that point of time did not present the cheque for encashment
immediately, cannot by itself be elevated into a ground for doubting
the genuineness of the transaction or the bona fides of the appellant
and its endeavour to ensure that the transaction remained visible.
15. It is no doubt true that Smt. Kedia did not personally appear
before the Assessing Officer in response to the summons issued to
her. However, non-appearance of a creditor cannot be treated as fatal
to the assessee’s case once the assessee has placed on record cogent
documentary material establishing the identity of the creditor, her
creditworthiness, and the genuineness of the transaction. The
obligation of the assessee under Section 68 of the Act is to
satisfactorily explain the credit through material that is available to
and within the power of the assessee to produce. It does not extend to
compelling the physical presence of an independent third party over
whom the assessee has no control. Whereas, in the present case, the
Page 11 of 15
creditor has independently confirmed the transaction in writing and
the transaction is duly reflected in her disclosed bank account and tax
filings. The failure of the creditor to personally depose, for reasons
entirely her own, cannot be attributed to the assessee so as to convert
an otherwise explained credit into unexplained income.
16. We are also unable to sustain the reasoning of the ITAT
insofar as it proceeded to invoke the doctrine of real income and the
theory of approbate and reprobate against the appellant. The doctrine
of real income has no application whatsoever to a fact situation such
as the present, where the dispute is confined to whether a credit entry
has been satisfactorily explained under Section 68 of the Act.
Equally, the principle that a party cannot approbate and reprobate
presupposes that the assessee has taken inconsistent stands at
different points in the proceedings so as to take advantage of one
position while disowning the other. No such inconsistency has been
demonstrated by the Revenue against the appellant in the present
case. The appellant has from the stage of assessment, right up to the
instant appeal under Section 260A of the Act, maintained a
consistent stand that the sum was received from Smt. Hema Kedia
Page 12 of 15
and belonged to her. The invocation of these two doctrines by the
ITAT was misconceived and has resulted in a perverse appreciation
of an otherwise straightforward factual matrix.
17. As regards the addition of Rs.10,00,000/- concerning
Smt. Ranjana Agarwal, the material on record also discloses that this
amount represented nothing more than the repayment of an
unsecured loan earlier advanced by the appellant to her. Once it is
shown, and it is not seriously disputed that the amount in question
was originally advanced by the appellant to the borrower and merely
came back into the appellant’s books as a repayment, the character of
the receipt is self-evident and cannot be treated as an unexplained
cash credit within the meaning of Section 68 of the Act. To subject
the very same amount to tax for the second time, once as a loan
advanced out of already taxed or explained funds, and again as an
unexplained credit upon its repayment, would result in an
incongruous and unintended consequence that the provision was
never designed to bring about. The addition on this count, in our
view, proceeds on a misapprehension of the true nature of the entry
and cannot be sustained.
Page 13 of 15
18. It requires to be reiterated that the burden under Section 68 of
the Act, though lies upon the assessee in the first instance, is not an
unlimited or unending one. Once the assessee places on record
material sufficient to establish identity, creditworthiness and
genuineness, prima facie the onus shifts on the Assessing Officer to
dislodge that material by bringing independent and cogent evidence
on record. It is not open to the Assessing Officer, much less to the
appellate authorities, to reject such material on mere suspicion,
however strong, or on the basis of surmise unsupported by any
positive finding. In the present case, we find that the appellant did
place on record confirmations, bank statements, income-tax
particulars of the creditors, and books of account reflecting the
underlying transactions, thereby discharging the initial burden cast
upon it. The Revenue, on the other hand, has not brought on record
any material to independently establish that the sums in question
represented the appellant’s own unaccounted income routed back
into its books in the guise of credits.
19. The observation that no share application money was reflected
in the balance sheet does not by itself establish that the funds were
Page 14 of 15
bogus, particularly when the transactions in question were admittedly
not share application money but unsecured loans and their
repayment.
20. For all the reasons aforesaid, the substantial question of law
involved in this appeal is answered in favour of the appellant and
against the Revenue and it is held that the appellant had duly and
satisfactorily discharged the burden of proof cast upon it under
Section 68 of the Act with respect to all the three additions in issue,
and the approach adopted by the CIT(A) as well as the ITAT in
sustaining the said additions without properly appreciating the
material placed on record and by importing considerations
extraneous to Section 68 of the Act, was erroneous both on facts and
in law. The findings of the ITAT, being founded on a misapplication
of the doctrine of real income and the principle of approbate and
reprobate, and being rendered without due regard to the documentary
evidence establishing the bona fides of the appellant, cannot be
sustained and are accordingly set aside.
21. In the result, the instant appeal stands allowed. The order
passed by the ITAT, dated 19.01.2023, to the extent that sustains the
Page 15 of 15
additions of Rs.5,25,00,000/-, Rs.10,00,000/- and Rs.23,18,298/-
under Section 68 of the Act is set aside.
22. As a sequel, miscellaneous petitions pending if any, shall stand
closed. However, there shall be no order as to costs.
_________________
P. SAM KOSHY, J
_______________________________
NARSING RAO NANDIKONDA, J
Date: 22.07.2026
GSD
