Accounting principles and provisions of law do not permit addition of opening balance – ITAT

Accounting principles and provisions of law do not permit the addition in relation to an opening balance – ITAT

In a recent judgment, ITAT Lucknow has held that accounting principles and provisions of law do not permit the addition in relation to an opening balance. Adverse reference, if any, is to be taken in preceding financial year(s) and not in the current financial year.

ABCAUS Case Law Citation:
5027 (2026) (01) abcaus.in ITAT

The return of the assessee was selected for scrutiny and the Assessing Officer completed the assessment and passed assessment order u/s 143(3) of the Income Tax Act, 1961 (the Act) by making addition on account of unexplained opening balance of cash. Being aggrieved, the assessee filed appeal before CIT(A) who dismissed the appeal of the assessee.

Before the Tribunal the assessee submitted that the AO had doubted the opening balance of cash in support of which the assessee had furnished the ITR of the spouse, son and himself showing income for last three preceding years and cashflow to show the household expenses made and the closing balance of cash in hand remaining on the last day of the preceding financial year.

Thus it was submitted that, from the ITRs of appellant of last three preceding year and ITR of family members it could be presumed that he had sufficient accumulated fund to explain the opening balance.

It was submitted that the opening balance of cash was coming from the preceding year and no addition could be made in the present assessment year out of the balance of cash in hand in the preceding year.

The Tribunal observed that the opening cash balance was supported by income disclosed by the assessee in earlier years.  Further, the assessee’s family members had also disclosed income.  Based on these supporting materials, the assessee’s contention was that the opening balance is explained, was on sound footing. 

The Tribunal further observed that the Assessing Officer had failed to appreciate that it was not a requirement of law, that a taxpayer should have nil opening balance.  The relevant issue was whether, in the facts and circumstances of the case, considering the income of the ase in earlier year(s) and considering various other sources of funds in earlier year(s) the opening balance claimed by the assessee was credible or not. Revenue had failed to prove that the aforesaid amount was not out of disclosed income and other sources of funds in earlier year(s). 

The Tribunal further opined that even if for the sake of discussion it was assumed that the opening balance was not explained by income and other sources of funds in earlier years; even then accounting principles and provisions of law do not permit the addition in current year.  Opening balance was nothing but closing balance as on close of preceding financial year. Therefore, if closing balance on last day of preceding financial year (i.e. opening balance as on the first day of current financial year) was doubted, adverse reference, if any, is to be taken in preceding financial year(s) and not in the current financial year.

Accordingly, the Tribunal deleted the addition.

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