₹37 Crore Came by Bank &; Went Back by Bank: ITAT Rejects Revenue’s Section 68 Challenge

ITO Vs Wisdom Inc. (ITAT Rajkot)

₹37 Crore Came by Bank &; Went Back by Bank: ITAT Rejects Revenue’s Section 68 Challenge

Summary:

Relevant Facts

The assessee filed its return for AY 2023-24, declaring total income of ₹2,31,57,990. The case was selected for scrutiny, during which notices u/s 143(2) & 142(1) were issued.

The AO noticed that the assessee had received unsecured loans of ₹21 crore from Bloom Dealers Pvt. Ltd. & ₹16 crore from Mukund Securities & Investment Ltd., aggregating to ₹37 crore.

The assessee was asked to furnish lender addresses, PAN details, ledger accounts, confirmations, interest rates, TDS particulars & copies of income-tax returns to establish their identity, creditworthiness & genuineness.

According to the AO, only partial information was initially furnished. Notices u/s 133(6) were therefore issued directly to both lenders. Although responses were not received immediately, the assessee subsequently furnished bank certificates & confirmations. Both lenders also independently responded to the statutory notices.

Mukund Securities furnished the assessee’s ledger account, loan confirmation, bank statements, balance sheet & profit & loss account. Bloom Dealers furnished its ledger account, confirmation & return copies.

The AO, however, compared the income disclosed by the lenders in their returns for AYs 2021-22 to 2023-24 with the substantial loans advanced. Since the returned incomes were comparatively modest, he concluded that the lenders lacked financial capacity. The entire amount of ₹37 crore was added u/s 68.

The CIT(A)/NFAC deleted the addition, primarily because the loans had been substantially repaid during the same year & the balance was repaid in the immediately succeeding year. The Revenue challenged this relief before the Tribunal.

Loan Repayment Details

The loan of ₹16 crore from Mukund Securities was fully repaid during the relevant year along with interest of ₹36,65,269.

Regarding Bloom Dealers, the aggregate outstanding, including interest, was ₹21,84,31,336. The assessee repaid ₹19,84,12,843 during the year, while the remaining ₹2,00,18,493 was repaid in the succeeding year.

The accounts were therefore completely squared up through regular banking channels. The Department did not dispute the repayments or bring any material suggesting that they were sham, circular or funded by the assessee itself.

Issue Involved

The principal issue was whether a loan addition u/s 68 could be sustained merely because the lenders’ returned income appeared low compared with the amount advanced, despite lender confirmations, financial records, bank statements & complete repayment through banking channels.

A connected issue was whether the CIT(A) erred by deleting the addition on the basis of repayment without separately recording a detailed finding regarding the lenders’ creditworthiness.

Revenue’s Contentions

The Revenue argued that subsequent repayment did not automatically establish the genuineness of the original credits. The assessee was independently required to prove identity, creditworthiness & genuineness when the loans were received.

According to the Revenue, the CIT(A) deleted the addition merely because the loans were later repaid. He did not properly examine whether Bloom Dealers & Mukund Securities possessed sufficient financial capacity at the time of advancing the amounts.

The Revenue therefore requested that the appellate order be set aside & the AO’s addition restored.

Assessee’s Submissions

The assessee supported the CIT(A)’s order, contending that the loans were conducted entirely through normal banking channels. The transactions were supported by confirmations, lender ledgers, returns, bank statements & direct replies filed by the lenders u/s 133(6).

The assessee emphasised that repayment was not a mere accounting adjustment. Funds had actually moved back to the lenders through identifiable banking transactions. The accounts stood fully squared up, partly during the relevant year & partly in the immediately following year.

Reliance was placed upon Gujarat High Court decisions including Pr. CIT v. Ambe Tradecorp Pvt. Ltd., CIT v. Ayachi Chandrashekhar Narsangji, Pr. CIT v. Ojas Tarmake Pvt. Ltd. & Pr. CIT v. Merrygold Gems Pvt. Ltd.

These decisions recognised that loan credits cannot be viewed in isolation where repayment is established through documentary evidence & accepted by the Department without adverse investigation.

The Tribunal noted that the Revenue could not controvert the factual assertion that the entire ₹37 crore had been repaid through banking channels.

Tribunal’s Findings & Legal Reasoning

The Tribunal recorded that receipt of ₹21 crore from Bloom Dealers & ₹16 crore from Mukund Securities was undisputed. It also found that the CIT(A), after examining documentary evidence, had recorded a categorical finding that the loan accounts were fully squared up through banking channels.

Such repayment provided substantial support to the genuineness of the transactions. The Department had accepted the outgoing repayments without alleging that the funds had returned to the assessee or formed part of a circular arrangement.

The Tribunal relied particularly upon Merrygold Gems, where the Gujarat High Court held that once loan repayment is established through documentary evidence, the original credit cannot be examined in isolation, especially when the Department accepts repayment without conducting an adverse probe in the repayment year.

Applying this binding jurisdictional precedent, the Tribunal found no infirmity in the CIT(A)’s decision. The addition of ₹37 crore u/s 68 remained deleted, while the Revenue’s appeal was dismissed.

Practical Implications

The decision confirms that actual repayment through banks is a powerful corroborative circumstance in section 68 disputes. It becomes especially persuasive when lenders confirm the transaction, respond u/s 133(6) & provide financial records.

However, repayment alone should not be treated as a universal substitute for proving all three ingredients of section 68. Taxpayers should preserve lender confirmations, PAN, returns, balance sheets, bank-source details, interest payments, TDS compliance & repayment trails.

The Revenue may still investigate whether repayments are circular, accommodation entries or funded indirectly by the assessee. In the absence of such contrary evidence, however, a completed banking cycle cannot be disregarded merely because the lenders reported comparatively low taxable income.

Cases Discussed

• Pr. CIT v. Ambe Tradecorp Pvt. Ltd.; (2022) 145 taxmann.com 27 (Gujarat)
• CIT, Rajkot-1 Vs. Ayachi Chandrashekhar Narsangji; [2014] 42 taxmann.com 251 (Gujarat)
• Pr. CIT Vs. Ojas Tarmake (P) Ltd.; [2023] 156 taxmann.com 75 (Gujarat)
• Principal Commissioner of Income-tax vs. Merrygold Gems (P.) Ltd.; [2024] 164 taxmann.com 764 (Gujarat), dated 11.06.2024

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, RAJKOT BENCH

Captioned appeal filed by the revenue, pertaining to Assessment Year (AY) 2023-24, is directed against the order under section 250 of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] passed by the National Faceless Appeal Centre [hereinafter referred to as ‘NFAC’], dated 04.08.2025, which in turn arises out of an order passed by assessing officer u/s. 143(3) of the Act, dated 22.03.2025.

02. Brief facts of the case are that the assessee filed its return of income for the assessment year under consideration declaring a total income of Rs.2,31,57,990/-. The case was selected for scrutiny, and notices under sections 143(2) and 142(1) of the Income-tax Act, 1961, were issued. In response, the assessee furnished the requisite details. During the course of assessment proceedings, the Assessing Officer observed that the assessee had obtained unsecured loans of Rs.21,00,00,000/- from Bloom Dealers Private Limited and Rs.16,00,00,000/- from Mukund Securities and Investment Limited. The assessee was required to furnish the addresses, PAN, ledger accounts, loan confirmations, rate of interest, details regarding deduction of tax at source, and copies of the income-tax returns of the lenders so as to establish their identity, creditworthiness, and the genuineness of the transactions. According to the Assessing Officer, the assessee furnished only partial details. Consequently, notices under section 133(6) of the Act were issued to both the lenders. As no immediate reply was received, the assessee was again called upon to establish the identity, creditworthiness of the lenders, and the genuineness of the loan transactions. In response, the assessee furnished certificates from the bank evidencing the loan transactions and confirmations from both lenders. Subsequently, both lenders also responded to the notices issued under section 133(6) of the Act. Mukund Securities and Investment Limited furnished the assessee’s ledger account in its books, loan confirmation, bank statements, balance sheet, and profit and loss account. Bloom Dealers Private Limited furnished the assessee’s ledger account, loan confirmation, and copies of its return of income. However, on examining the returns of income of both lenders for Assessment Years 2021-22, 2022-23 and 2023-24, the Assessing Officer observed that their returned incomes were comparatively meagre vis-à-vis the huge loans advanced to the assessee. He, therefore, concluded that the lenders lacked the financial capacity to advance loans aggregating to Rs.37,00,00,000/-,and held that the assessee had failed to establish the creditworthiness of the lenders. Accordingly, the Assessing Officer made an addition of Rs.37,00,00,000/- under section 68 of the Act and completed the assessment under section 143(3) read with section 144B of the Act.

03. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A), who deleted the addition.

The relevant extracts from Ld.CIT(A)’s findings, as contained in Paragraph-5.1 to 6 of the Appellate Order, are reproduced hereunder:

“5. Decision:

Ground of appeal no. 1: This ground being general in nature is not adjudicated upon.

5.1 Grounds of appeal no. 2, 3 and 4: The appellant has challenged the addition made by the AO of Rs. 37 crores contending that the AO had erred in concluding that the appellant had failed to prove the creditworthiness of the lenders when all the supporting evidences in this regard were on record and on the pretext that the impugned loan amounting to Rs. 37 crores was squared-up to the maximum extent in the AY under consideration itself and partly in the subsequent year for which reliance has been placed on various decisions of Hon’ble Jurisdictional High Court of Gujarat.

5.1.1 The issue of creditworthiness of the lender is not taken up as it is felt that the second contention of the appellant i.e. loans received from the lenders were squared up to the maximum extent in the AY under consideration itself and partly in the subsequent year should first be dealt with. The appellant contends that the loan received from Mukund Securities & Investment Ltd. of Rs. 16,00,00,000/- has already been repaid along with interest of Rs.36,65,269/- in the assessment year under consideration itself. Further, out of total loan received from Bloom Dealers Pvt. Ltd. of Rs.21,84,31,336/- (including interest of Rs.84,31,336/-), the appellant has repaid sum of Rs. 19,84,12,843/- during the year under consideration and balance amount of Rs.2,00,18,493/- has also been repaid in subsequent year. To substantiate its claim, the appellant has filed the copies of ledger accounts of both the lenders in its books of accounts. Further, to buttress its claim that no addition u/s 68 of the Act can be sustained when the loan received by an assessee was returned to the lender within the same FY or in the immediately next FY, the appellant has relied on various decisions of Hon’ble Jurisdictional High Court of Gujarat as under:

i. Pr. CIT vs. Ambe Tradecorp Pvt. Ltd. (2022) 145 taxmann.com 27 (Gujarat)

ii. CIT, Rajkot-1 Vs. Ayachi Chandrashekhar Narsangji [2014] 42 taxmann.com 251 (Gujarat)

iii. Pr. CIT Vs. Ojas Tarmake (P) Ltd. [2023] 156 taxmann.com 75(Gujarat)

iv. Principal Commissioner of Income-tax vs. Merrygold Gems (P.) Ltd. [2024] 164 taxmann.com 764 (Gujarat) [11-06-2024]

These decisions were perused and it is found that the Hon’ble High Court of Gujarat has held that once repayment of the loan has been established based on the documentary evidence, the credit entry cannot be looked into in isolation especially when the

Department has accepted the repayment of loan without any probe into it. On the basis of squaring-up of loan either in the same financial year in which the loan was received or in the immediately subsequent financial year, the Hon’ble High Court has deleted the addition made by the Department u/s 68 of the Act in all the above cases.

In the appellant’s case also, there is no dispute with regard to squaring- up of loan taken by it from the lenders as the date-wise repayment has been provided by it as under:

Under these factual matrices, the contentions of the appellant with regard to deleting the addition made by the AO on account of squaring-up of loans taken by it from the lenders has merits. Therefore, the addition made by the AO is deleted on this count itself and the grounds of appeal raised by the appellant are therefore allowed without going into discussion with respect to creditworthiness of the lenders.

5.2 Ground of appeal no. 5: The appellant has challenged the initiation of penalty by the AO u/s 271AAC of the Act.

5.3.1 It is felt that upon addition made by the AO u/s 68 of the Act, initiation of penalty u/s 271AAC of the Act was rightly done by him; however, as the addition made by the AO has been deleted on merits, there is no locus standi for levying such a penalty now u/s 271AAC of the Act. There, the ground raised by the appellant for initiation of penalty is dismissed.

5.3 Ground of appeal no. 6: This ground being consequential in nature, the AO is directed to charge interest u/s 234A, 234B and 234C of the Act in the hands of the appellant as per law while giving effect to this appeal order.

6. In the result, appeal filed by the appellant is partly allowed.”

04. Being dissatisfied with the relief granted by the CIT(A), the Revenue is in appeal before us.

05. At the time of hearing the Ld. DR submitted that the learned CIT(A) erred in deleting the addition of Rs.37,00,00,000/- made under section 68 of the Act merely on the ground that the loans were subsequently repaid. According to him, the Ld.CIT(A) failed to examine the issue of the creditworthiness of the lenders independently, and therefore the impugned order deserves to be set aside and that of the Assessing Officer order may be restored.

06. On the other hand, the Ld. AR supported the order of the learned CIT(A). He submitted that the entire loan transactions were carried out through normal banking channels, duly supported by documentary evidence, confirmations, bank statements and replies furnished by the lenders under section 133(6) of the Act. He further drew our attention to the findings of the of the Ld. CIT(A) order at page No. 7 to demonstrate that the entire loan amount was subsequently repaid through banking channels and the accounts stood squared up. The relevant extract of which reproduced hereunder:

Therefore, according to him, the genuineness of the transactions stood fully established. However, the Ld. DR could not controvert these factual submissions made by the Ld.AR.

07. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee had obtained unsecured loans of Rs.21,00,00,000/- from Bloom Dealers Private Limited and Rs.16,00,00,000/- from Mukund Securities and Investment Limited. While, passing the impugned order the

learned CIT(A), after examining the documentary evidence, recorded a categorical finding that the entire loans had been repaid in the subsequent year through normal banking channels and the loan accounts stood squared up. Such repayment were made through banking channels lends substantial support to the genuineness of the transactions. The learned CIT(A) has also relied upon the judgment of the Hon’ble Gujarat High Court in the case of Principal Commissioner of Income-tax v. Merrygold Gems (P.) Ltd. [2024] 164 taxmann.com 764 (Gujarat)., wherein it has been held that once the repayment of the loan is duly established on the basis of documentary evidence, the loan transaction cannot be viewed in isolation, particularly when the Department has accepted such repayment without raising any adverse inference either in the year of repayment or in the immediately succeeding year. In those circumstances, the addition made under section 68 of the Act was held to be unsustainable. We, respectfully following the ratio laid down by the jurisdictional High Court of Gujarat herein above and in view of the undisputed fact that the loans were subsequently repaid through banking channels, in subsequent year, we find no infirmity in the order of the learned CIT(A) deleting the addition of Rs.37,00,00,000/- made under section 68 of the Act.

08. Accordingly, the order of the learned CIT(A) is upheld and the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on this 28th day of August, 2026.