Case Law Details
ACIT Vs Kind Building Solutions Private Limited (ITAT Delhi)
No Section 68 Addition Where Assessee Proved Identity, Creditworthiness and Genuineness of Loans: ITAT; ITAT Upholds Deletion of ₹14.20 Crore Addition Because AO Conducted No Independent Inquiry; Loan Addition Quashed Because Revenue Produced No Evidence Linking Assessee to Accommodation Entries: ITAT; Section 68 Addition Cannot Rest on General Allegations Against Lenders, Rules ITAT.
The Revenue filed an appeal against the order dated 30.08.2024 passed by the National Faceless Appeal Centre (NFAC) for Assessment Year 2015-16. The dispute related to the deletion of an addition of ₹14.20 crore made under Section 68 of the Income Tax Act, 1961 on account of alleged unexplained cash credits.
The assessee had filed its return declaring a loss of ₹1,57,97,650. The case was selected for limited scrutiny under CASS on various issues, including large squared-up loans during the year, real estate business with high closing stock, mismatch in payments to related persons, and property transactions reported in Form 26QB.
During the assessment proceedings, the Assessing Officer (AO) found that the assessee had received loans from two companies, namely Mekaster Finlease Ltd. and RKG Finvest Ltd., amounting to ₹11 crore and ₹3.20 crore respectively. These loans were received and repaid during the same year.
The AO observed that search and seizure proceedings had been conducted in Financial Year 2010-11 on parties related to these lending companies and that they were allegedly engaged in providing accommodation entries. Based on this background, the AO treated the loans of ₹14.20 crore as unexplained cash credits under Section 68.
The assessee contended that the transactions were genuine. It submitted confirmations, income tax particulars, bank statements, audited financial statements of the lenders, and details showing repayment of the loans through account-payee cheques. The assessee also pointed out that interest had been paid on the loans and tax had been deducted at source. It further stated that both lenders were Non-Banking Financial Companies (NBFCs) governed by RBI regulations.
The AO, however, concluded that the lenders were paper companies used for providing accommodation entries. According to the AO, possession of PAN, filing of income tax returns, NBFC status, and high net worth were insufficient to establish genuineness. The AO also held that repayment of the loans was irrelevant for invoking Section 68, which deals with unexplained credits.
On appeal, the CIT(A)/NFAC deleted the addition. The appellate authority observed that the assessee had furnished details regarding identity, source, creditworthiness, genuineness of transactions, and proof of repayment. It found that the AO had rejected the documentary evidence primarily on the basis of suspicion and general observations.
The CIT(A) noted that the AO had relied only on the modus operandi allegedly discovered during search and survey proceedings conducted in FY 2010-11 involving related parties of the lenders. No specific evidence concerning the loans received by the assessee during the relevant assessment year had been brought on record.
According to the CIT(A), the AO’s conclusions were based on circumstantial evidence rather than direct evidence. The appellate authority held that where circumstantial evidence is relied upon, all surrounding circumstances must be considered. In this context, the fact that the assessee had repaid the loans assumed significance and could not be ignored.
The CIT(A) further observed that although the AO doubted the source of repayment, no direct evidence was produced to establish that the repayment was false, sham, or fraudulent. There was also no finding that the money repaid through banking channels had subsequently returned to the assessee. The absence of such evidence was considered relevant while evaluating the genuineness of the transactions.
The appellate authority also noted that the AO’s observation that most assets of the lending companies consisted of loans and advances did not by itself establish any adverse inference because such characteristics are common to NBFCs and financial institutions.
Further, the CIT(A) held that, in the facts of the case, the burden of proving the “source of the source” could not be imposed on the assessee, especially when no direct evidence had been brought against it and the loans had already been repaid.
Accordingly, the CIT(A) concluded that neither direct evidence nor sufficient circumstantial evidence existed to sustain the addition and therefore deleted the addition of ₹14.20 crore.
The Tribunal examined the matter and upheld the findings of the CIT(A). It observed that the assessee had discharged its burden under Section 68 by furnishing confirmations, income tax particulars, bank statements, audited financial statements of the lenders, and explanations regarding repayment.
The Tribunal further noted that the AO had not conducted any independent inquiry or investigation and had relied solely on material arising from search proceedings conducted in FY 2010-11. No material had been brought on record to rebut the evidence furnished by the assessee.
Finding no error in the order of the CIT(A), the Tribunal affirmed the deletion of the addition and rejected all grounds raised by the Revenue.
As a result, the Revenue’s appeal was dismissed.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal filed by the Revenue is directed against the order of the Ld. National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “NFAC”] dated 30.8.2024 arising out the assessment order 30-12-2017 u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”) pertaining to A.Y. 2015-16.
2. The grounds raised in Revenue’s appeal read as under:-
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 14,20,00,000/- on account of unexplained credits u/s. 68 of the Act?
2. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs. 14,20,00,000/- ignoring the fact that unsecured loans were received from companies in which the directors are accommodation entry providers Sh. Surender Jain and Sh. Virender Jain?
3. The brief facts of the case are that assessee filed return of income declaring loss of Rs. 1,57,97,650/- on 26.10.2015. The return was processed u/s. 143(1) of the Act. Subsequently, the case of the assessee was selected for limited scrutiny through CASS due to the following reasons:
– Large squared up loans during the year (From 3CD).
– Real estate business with high closing stock (verify whether assessee has adopted percentage completion method).
– Mismatch in amount paid to related persons u/s. 40A(2)(b) reported in Audit Report and ITR.
– Sale of property reported in Form 26QB.
– Purchase of property reported in From 26QB.
3.1 Notice u/s. 143(2) dated 29.4.2016 was issued and served upon the assessee. Thereafter, notices u/s. 142(1) alongwith questionnaire dated 7.10.2016 and 3.2.2017 were issued and served upon the assessee. Subsequently, another notice and questionnaire u/s. 142(1) dated 15.6.2017 was issued and served upon the assessee. The assessee company made is engaged in the business of real estate developers. AO found that two of the parties from whom loans were received during the year and repaid during the year itself were such parties in whose case search and seizure action took place about 5 years prior to the instant year in FY 2010-11 and that they were found to be engaged in the business of providing accommodation entries in assessment year 2010-11. These two entities were ‘Mekaster Finlease Ltd.’ from whom loan amount taken during the year amounting to Rs. 11,00,0,000/- and ‘RKG Finvest Ltd’ from whom loan amount taken during the year amounting to Rs. 3,20,00,000/-. With respect to this transaction, the assessee stated that it has entered a purely genuine transactions and have duly paid the interest on the amount, have made the deduction of tax at source. The assessee stated that both these companies are NBFC and are therefore governed by the provisions of the RBI. During the course of assessment proceedings, the assessee company furnished confirmations, income tax particulars as well as bank statements of both the parties, copy of the audited financials and also explained that loans stood repaid during the instant year itself by account payee chequye which were also verifiable from the bank statements as well as confirmations. But the AO held that the amount of Rs. 14.20 crores received as loan and also repaid during the instant year by the assessee is to be added under the provisions of section 68 of the Act, as the above two companies were managed by some accommodation entry provider and based on this, the AO has chosen to make the addition. Against the above, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 30.8.2024 allowed the appeal of the assessee. Aggrieved, Revenue is in appeal before the Tribunal.
4. Heard the rival contentions and perused the material on record. During under appeal, the assessee has received loan from two companies namely M/s Mekaster Finlease Ltd.’ and ‘RKG Finvest Ltd’ which were repaid during the year under appeal. The AO based upon search and survey carried out on related parties of the lending companies 5 years back in financial year 2010-11 alleged that these two entities were engaged in providing accommodation entries of loans and made the addition of the said amount as unexplained credit u/s. 68 of the Act. In first appeal, Ld. CIT(A)/NFAC has deleted the addition by observing that no material has been brought on record by making enquiries and investigations to hold that the loans taken from non-genuine loans. All the grounds are with respect to the deletion of addition by the Ld. CIT(A), who while deleting the addition has observed as under:-
“7.1 These grounds of appeal are inter-related to each other regarding the addition made by the AO u/s. 68 of the I.T. Act and therefore all are adjudicated together as under. In these grounds of appeal the appellant has contested against the addition made by the AO. The appellant claimed that the details regarding the source, identity, creditworthiness and genuineness of the transactions of having received loans were submitted before the AO alongwith the proof of repayment of the same. The appellant has also contested that the AO has failed to discharge its onus by not verifying the details submitted and arbitrarily rejecting all the documentary evidences only on the basis of suspicion, surmises and conjectures. Relevant portion of the appellant’s submission in this regard is reproduced as under:-
“……
1. It is evident from the facts as submitted in our previous submission that the loan….
7.2 In respect of the issued raised in Ground No. 2, the supporting arguments submitted by the appellant are substantially similar to those placed before the Assessing Officer. The AO has discussed at length in the assessment order that the entities from which loans have been taken by the appellant are paper companies which are used to provide accommodation entries to beneficiaries by routing money. The AO has observed that
The essential characteristic of paper companies is that they exist on paper and hence have all the paper work complete. The mere fact that the companies have a PAN, ITR and have been granted permit to carry of activities as an NBFC cannot vitiate the evidences that were found during the course of search proceedings. Detailed accounts of cash received and how they were routed through a web of companies by issuing cheques /RTGS were obtained. Based on the investigations carried out by the Department and further investigations carried out by the Serious Fraud Investigation Officer (SFIO), the Enforcement Directorate filed charges against Mr. Surender Jain and Mr. Virender Jain for money laundering. The Hon’ble Delhi High Court vide its ruling on 20.9.2017 rejected the bail application of Mr. Surendra Jain and Mr. Virendra Jain based on the facts of the case. With such facts available on record, the mere fact that the companies M/s Mekaster Finlease Ltd. and M/s RKG Finvest Ltd. possess a PAN or ITR is not sufficient to establish that the transactions was genuine.
The contention that the net worth of both these companies is high which establishes the creditworthiness of these companies is not a valid contention. The whole modus operandi is to increase the surplus and reserves of these bogus companies by channeling unexplained cash credits through various layers of bogus companies. The mere fact that there is high surplus in these companies does not substantiate that the net worth of the companies is high. Most of the assets of these companies can be attributed to the loans and advances given out by these companies. However, it is precisely these loans and advances which have been routed to several beneficiaries as an accommodation entry and cannot be considered as assets of genuine value.
The AO has observed that the appellant’s contention that the “loan has been repaid during the year and the same points to the genuineness of the loan” cannot be held as valid arguments for treating the loan as genuine. Section 68 talks only about unexplained credits. The subsequent fate of the credit received is inconsequential for invoking the section 68.
7.3 From the assessment order, it emerges that the AO has relied only on the modus operandi discovered in the case of the lending companies, based upon search and survey actions carried out on related parties of the lending companies in FY 2010-11 i.e. four years earlier. No specific evidence related to the loan taken by the appellant in the current year has been quoted by the AO. In the assessment order, the AO has discussed only the process adopted by bogus companies to accumulate funds in their bank account and the disbursement of the funds in the form of loans to the beneficiaries who, in the first place are the real owners of the funds. Thus, the discussion made by the AO in the assessment order are general in nature and no specific material has been brought on record to justify the disallowance.
7.4 Relying upon the modus operandi followed by third parties amounts to making use of circumstantial evidence and not direct evidence. In such a situation, it becomes imperative that all the surrounding circumstances must be given weightage and not merely selective circumstances. Therefore, in the context of the present case, the observation of the AO that section 68 talks only about unexplained credits and the subsequent fate of the credit received is inconsequential for invoking section 68, is not correct. In the context of the present case, the fact that the appellant has returned the loan assumes importance and ought to be taken into consideration.
7.5 The AO has expressed disbelief about the source of the repayment of the loan by observing that the source out of which the loans have been squared off appear to be mere book entries as the sale of land (from which money was sourced by the appellant to repay the loans) has been done by the appellant with a related party and a party having the same address as the directors in the appellant company. Here too, the AO has not presented any direct evidence but relied upon related party transactions to doubt the source of the repayments made by the appellant. The AO has not been able to establish that the return of the loan is false or even sham or fraudulent. There is no finding or even allegation that after the appellant returned the loan through banking channel, the money was in any manner returned to the appellant, which could then cast some shadow of doubt upon the genuineness of the repayment. The absence of evidence to assail the repayment of the loan is also a factor to be kept in mind, considering that there is no direct evidence to assail the taking of the loan.
7.6 In this view of the matter, the AO’s observation that “it is precisely these loans and advances which have been routed to several beneficiaries as an accommodation entry and cannot be considered as assets of genuine value” too is not borne out of any evidence as far as the appellant is concerned.
7.7 The AO has observed that “the mere fact that there is high surplus in these companies does not substantiate that the net worth of the companies is high. Most of the assets of these companies can be attributed to the loans and advances given out by these companies”. In this regard, it is pertinent to observe that the nature of business operations of any bank, NBFC or financial institution is to accept deposits on interest and use the deposits as a source to give loans to others at a higher rate of interest. The net income majorly arises from the differential in interest paid on deposits vis-à-vis interest received on loans given. Such income is minuscule compared to the principal amounts which are taken as deposits and given as loans. Therefore, the observation of the AO that “Most of the assets of these companies can be attributed to the loans and advances given out by these companies does contain anything adverse to the appellant, it is true for any NBFC.
7.8 The next issue is the source of the appellant’s lenders. In the present context, considering that the AO has not brought forth any direct evidence against the appellant but is relying on circumstantial evidence, and also that the appellant has repaid the money, the liability to identify the source of the source cannot be affixed upon the appellant.
7.9 In view of the above discussion, it is concluded that there is no direct evidence in the case of the appellant to sustain the addition made by the AO. Also, the circumstantial evidence too is not sufficient to sustain the addition made by the AO.
In the result, the addition made by the AO is deleted.”
4.1 It is observed that assessee company has discharged the onus that lay on it u/s. 68 of the Act by furnishing confirmations, income tax particulars as well as bank statements and audited financial statements of both the parties. Further, the assessee has repaid the loan and the immediate source of such repayments were explained before the AO. The AO without making any independent enquiries or investigation solely on the basis of material on record as a result of search carried out in FY 2010-11 as alleged these two companies are paper companies and used by Shri Surender Kumar Jain and Shri Virendera Kumar Jain to provide accommodation entries of unsecured loans. It is observed from the findings of the Ld. CIT(A) that no material was brought on record to controvert the submissions foiled by the assessee, nor any material was brought before us to support the findings of the AO. In view of these facts, we find that no error in the order of the Ld. CIT(A), as he has considered all the aspects and deleted the addition. Accordingly, we affirm the order of the Ld. CIT(A) and reject the grounds raised by the Revenue.
5. In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court 20.05.2026.
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