ITAT Restores ₹1.30 Cr Loan Addition u/s 68 on Fund Trail Evidence

Deluxe Recycling India Private Limited Vs ITO (ITAT Mumbai)

Low Returned Income Cannot Sink a Loan Without Examining the Fund Trail—ITAT Admits Repayment Evidence &; Restores ₹1.30 Crore Addition u/s 68

Summary:

The controversy

The assessee, Deluxe Recycling India Private Limited, was engaged in manufacturing eco-friendly particle boards. Its return for AY 2017-18 was selected for limited scrutiny under CASS. During assessment, the AO noticed that the assessee had received an unsecured loan of ₹1.30 crore from Mrs. Nisha J. Savla, sister of one of its directors.

To establish the loan transaction, the assessee furnished the creditor’s confirmation, return of income, bank statement & ledger account. It also explained that the creditor had arranged the funds from her husband, brother, mother-in-law, HUF & sale of shares.

The AO, however, observed that Mrs. Nisha J. Savla had returned an income of only ₹2,24,666 and, therefore, lacked the financial capacity to advance ₹1.30 crore. According to the AO, confirmations and evidence establishing the creditworthiness of the persons who had provided funds to her were not satisfactorily produced. The entire loan was consequently treated as an unexplained cash credit u/s 68, taxable at 60% u/s 115BBE, besides initiation of penalty proceedings u/s 271AAC(1).

Family funding trail questioned

The assessee explained that the funds received by Mrs. Nisha J. Savla included amounts from Mr. Jatin Savla, Mr. Jignesh Shah, Jatin Savla HUF & Mrs. Lataben Savla, besides proceeds from the sale of shares.

Before the lower authorities, the assessee had furnished documents not merely relating to the immediate creditor but also relating to the persons who constituted the alleged source of her source. These included confirmations, returns of income, computations, bank statements, PAN particulars & addresses.

Nevertheless, the CIT(A) sustained the addition. The principal reason was that the persons who had transferred money to the immediate creditor had comparatively modest returned incomes. The CIT(A) regarded the amounts advanced by them as disproportionate to their declared incomes and held that their creditworthiness remained unproved.

Thus, although the money had moved through banking channels and the relevant bank accounts were placed on record, the lower authorities remained unconvinced about the nature & origin of the credits appearing immediately before the loan was advanced.

Additional evidence before the ITAT

Before the ITAT, the assessee moved an application under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 for admission of additional evidence.

The evidence comprised the ledger account of Mrs. Nisha J. Savla showing subsequent repayment of the loan, supporting bank statements & affidavits from Mr. Jatin Savla, Mr. Jatin Savla in his capacity as Karta of the HUF, Mr. Jignesh Shah & Mrs. Lataben Savla.

The assessee contended that it had already discharged its primary burden u/s 68 by establishing the identity of the creditor, genuineness of the transaction & creditworthiness, and had even furnished material explaining the source from which the creditor obtained the funds.

It was further argued that the CIT(A)’s adverse conclusion regarding the creditworthiness of the persons behind the immediate creditor was not specifically confronted to the assessee. The affidavits were therefore produced to answer those observations. Evidence regarding repayment could not have been produced earlier because repayment was a subsequent event.

ITAT’s ruling

The Mumbai ITAT observed that the controversy centred upon the addition of ₹1.30 crore u/s 68 and that the principal reason for sustaining it was the alleged failure to establish the creditworthiness of the immediate creditor as well as the persons who supplied funds to her.

The Tribunal noted that the assessee had already furnished the confirmation, return of income, bank statement & ledger account of Mrs. Nisha J. Savla. Certain documents concerning the persons constituting the source of her funds had also been furnished. However, the CIT(A) sustained the addition primarily because their creditworthiness was considered unsatisfactory.

In these circumstances, the affidavits of the fund providers and the documentary evidence showing repayment of the loan had a direct bearing on the dispute. Such evidence was relevant for determining whether the transaction was genuine and whether the financial trail stood satisfactorily explained.

Accordingly, the ITAT admitted the additional evidence under Rule 29. Since the evidence required factual examination, reconciliation & verification, the Tribunal restored the entire issue to the AO for fresh adjudication.

The AO was directed to examine the additional evidence and verify the identity & creditworthiness of the creditor, genuineness of the transaction, source of the funds claimed by the assessee & subsequent repayment of the loan. The assessee was directed to furnish the necessary documents and cooperate in the proceedings. A reasonable opportunity of hearing was also mandated.

Importantly, the ITAT clarified that it had not expressed any opinion on the merits of the addition. The assessee’s appeal was therefore allowed only for statistical purposes.

Author’s comments

The order reinforces that returned income alone is not a conclusive measure of creditworthiness. A person may advance money from accumulated capital, sale proceeds, borrowings, gifts or funds received from identifiable persons. What matters is whether the financial capacity and the actual movement of money are established through reliable evidence.

At the same time, routing funds through relatives does not automatically prove genuineness. Where money is credited shortly before being transferred, the assessee should preserve a complete trail comprising confirmations, bank statements, returns, capital accounts, affidavits & documents explaining the underlying source.

Further, repayment through banking channels is relevant corroborative evidence, though it does not by itself cure an unexplained credit. The AO must evaluate it together with the original receipt and the surrounding financial trail.

Deluxe Recycling India Private Limited v. ITO, ITA No.1764/Mum/2025, AY 2017-18, order dated 17 August 2026, Mumbai ITAT.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeal of the assessee filed against the order of the NFAC Delhi [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’) for Assessment Year 2017-18, date of order Commissioner of Income Tax –Circle 4(1)(2), Mumbai (for brevity ‘Ld. AO’), order passed under Section 143(3) of the Act date of order 23.12.2019.

2. The brief facts of the case are that the assessee filed the return of income which was processed under Section 143(1). Thereafter, the case was selected for limited scrutiny under ‘CASS’. During the assessment proceeding, the Ld. AO found that the assessee had received the unsecured loan from Mrs. Nisha J. Savla amounting to Rs. 1,30,00,000/-. Mrs. Nisha J. Savla is in relation to the sister of one of the Directors of assessee-company. The Ld.AO issued the notice and asked for details of loan-creditor. In compliance of the notice, the assessee submitted the identity, transaction & creditworthiness of loan- creditor. For explaining the creditworthiness of the creditor the assessee filed the details of sources of investment of loan of Mrs. Nisha J Savla which is as follows:

But the Ld. AO had asked the source of the source and the observation was noted in the impugned assessment order, which is reproduced as below:

“No confirmation from advances has been filed and neither their capacity or creditworthiness. From the above narrated facts, it is clear that Miss Nisha Rs. 1,30,000,000/- (1 Crore 30 Lakhs) as seen from the R.O.I. filed declaring income of Rs. 2,24,666/- only.

Therefore, the loans received from Nisha Jatin Savla stands unexplained, is added back to income under Section 68 of Income Tax Act, 1961 and is to be taxed at the rate of 60% under Section 115BBE(1)(i) and penalty proceeding under Section 271AAC(1) is initiated separately.”

The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) dismissed the appeal of the assessee. Being aggrieved, assessee filed an appeal before us.

3. The Ld. AR argued and filed a paper book comprising pages 1 to 73, which has been placed on record. The Ld. AR submitted that the assessee is a private limited company engaged in the manufacturing of eco-friendly particle boards at Palghar. During the assessment proceedings, the assessee furnished the return of income, confirmation, bank statement and ledger account of the loan creditor, Ms. Nisha J. Savla, which are enclosed at APB pages 22 to 33.

Apart from the details relating to the aforesaid loan creditor, the assessee also furnished confirmations from Mr. Jatin Savla and Mr. Jignesh Shah. In respect of Mr. Jignesh Shah, the assessee furnished his return of income, computation of income, confirmation and bank statement. The relevant supporting documents are enclosed at APB pages 42 to 48. Further, the assessee furnished the address and PAN details of Mr. Jatin Savla (HUF) and Mrs. Lataben Savla, which are enclosed at APB pages 49 to 52. The Ld. AR further contended that, in compliance with the notice issued under section 250 of the Act, the assessee furnished before the Ld. CIT(A) all the relevant documents explaining the source of investment/funds of the loan creditors. These documents are also enclosed at APB pages 53 to 63. Thus, evidence in support of the identity and financial particulars of the loan creditors as well as the source of the funds advanced to the assessee.

4. The Ld. AR further contended that the assessee had subsequently repaid the loans to the respective loan creditors. In support of this contention, the assessee sought to place additional evidence on record under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. The relevant submissions of the assessee in support of the admission of the additional evidence are reproduced below:

“1. The above referred appellant is moving this application under Rule 29 of the Appellate Tribunal Rules, 1963 to admit the additional evidence in Paper Book II Sr No 9-13 as under:

(i) Ledger Account of NishaSavla showing repayment of loan and supporting Bank Statements

(ii) Affidavit of Jatin Savla

(iii) Affidavit of Jatin Savla as Karta of HUF

(iv) Affidavit of Jignesh Shah

(v) Affidavit of Lataben Savla

2. In the present case, Assessee has received unsecured loan of Rs 1,30,00,000/-from Nisha Jatin Savla (sister of the director) during AY 2017-2018. Το establish the identity, creditworthiness and genuineness of the transaction, Assessee has filed before the lower authorities her return of income, confirmation, bank statement and ledger account. To further strengthen the case of the Assessee, Assessee filed ITR, confirmation and bank statement of persons who gave Nisha Savla the funds to lend to the Assessee. Thus, Assessee also established the Source of source. In spite, of the fact that Assessee has fully discharged it’s burden u/s 68, the NFAC/CIT(A) held that creditworthiness of the persons who gave money to Nisha jatin Savla was not established. However, the NFAC never confronted the Appellant with this observation. Hence, the Appellant is filing the Affidavit of persons who had given money to Nisha Savla for lending to the Appellant. Further, the loan received from Nisha Savla is repaid by the Appellant. This being a subsequent event, the details thereof are filed now.”

5. The Ld. DR argued and contended that the assessee has taken the unsecured loan from loan creditors Mrs. Nisha J. Savla. But the source of the loan creditors that is creditworthiness was unable to establish before the revenue authorities. The Ld. DR stands in favour of the order of the revenue authorities. The Ld. DR invited our attention in impugned appellate order para no. 4.3 which is reproduced as below:

“4.3. I have gone through the assessment order and record available. In the instant case, the Assessing Officer (A.O.) has found discrepancies related to the unexplained cash credits in the form of loans received by the assessee. The loans were advanced by multiple individuals, but the A.O. determined that these individuals lacked the creditworthiness to provide such significant amounts, leading to an addition under Section 68 of the Income Tax Act. During appeal the following has been observed: While the assessee provided bank statements and a ledger account showing the loan details, there was no confirmation from the lenders regarding their creditworthiness. The loan was taken from three family members and one HUF.

1. Jatin individual, who had returned an income of Rs. 1,83,267/-, in AY 2017-18 advanced a loan of Rs. 60,50,000. The loan amount is not justified based on the individual’s declared income.

2. Jatin HUF with a returned income of Rs. 1,56,820/- in AY 2017-18, this HUF advanced Rs. 5,50,000. The relatively low declared income of the HUF raises questions about its ability to make such a loan.

3. Jignesh, This individual had returned an income of Rs. 6,09,820/- in AY 2017- 18 and advanced Rs. 34,00,000. Again, his low income, the A.O. found the loan amount to be disproportionate to his financial capacity.

4. Lataben, With a declared income of Rs. 2,31,560/- in AY 2017-18, Lataben advanced Rs. 28,00,000. The A.O. found this loan amount to be inconsistent with her reported income.

In all the cases mentioned above, the A.O. found that the assessee failed to provide documentation proving the creditworthiness of the loan providers. The circular bank entries as explained by the AR during video conferencing are not supported by the Return of Income of the individuals providing loan or of the individuals who have provided credit in the bank account for advancing unsecured loan. The nature of credits in the bank accounts remain in question. The absence of such documentation, combined with the low declared incomes of these individuals, led the A.O. to treat the loans as unexplained cash credits under Section 68. The AO has correctly made an addition of Rs. 1,30,00,000 under Section 68. Due to the lack of sums. I am in agreement with the A.O. treating the loans as unexplained cash credits due to the insufficient documentation from the lenders and their apparent lack of creditworthiness.”

6. We have heard the rival submissions and perused the material available on record, including the paper book filed by the assessee. The controversy relates to the addition of Rs.1,30,00,000/- made under section 68 of the Act in respect of an unsecured loan received by the assessee from Mrs. Nisha J. Savla. The principal reason for sustaining the addition is the alleged failure of the assessee to satisfactorily establish the creditworthiness of the creditor and the persons from whom she had received the funds which were ultimately advanced to the assessee. We find that, during the proceedings before the revenue authorities, the assessee had furnished various documents in support of the loan transaction, including the confirmation, return of income, bank statement and ledger account of Ms. Nisha J. Savla. The assessee had also furnished certain documents relating to the persons stated to be the source of funds in the hands of Ms. Nisha J. Savla. The Ld. CIT(A), however, sustained the addition primarily on the ground that the creditworthiness of such persons had not been satisfactorily established.

7. Before us, the assessee has filed an application under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 seeking admission of additional evidence comprising the ledger account of Ms. Nisha J. Savla showing subsequent repayment of the loan along with the supporting bank statements and affidavits of Mr. Jatin Savla, Mr. Jatin Savla as Karta of HUF, Mr. Jignesh Shah and Mrs. Lataben Savla. It is submitted that the affidavits have been filed to address the observations made by the Ld. CIT(A) regarding the creditworthiness and source of funds, whereas the evidence relating to repayment pertains to a subsequent event.

8. Considering the nature of the addition and the specific findings recorded by the revenue authorities regarding the creditworthiness and source of funds, we are of the considered view that the additional evidence sought to be produced has a direct bearing on the issue under consideration and is relevant for proper adjudication of the matter. At the same time, such evidence requires factual examination and verification by the Ld. AO. Therefore, in the interest of justice, we admit the additional evidence filed by the assessee under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 and restore the issue to the file of the Ld. AO for fresh adjudication.

9. The Ld. AO is directed to take on record and examine the additional evidence filed by the assessee and to verify the identity and creditworthiness of the creditor, the genuineness of the transaction, the source of the funds claimed by the assessee, and the evidence relating to repayment of the loan, in accordance with law. The assessee is also directed to furnish all necessary documents and explanations and to cooperate with the assessment proceedings. Needless to say, the Ld. AO shall afford a reasonable opportunity of being heard to the assessee before deciding the issue afresh. We make it clear that we have not expressed any view on the merits of the addition under section 68 of the Act. Accordingly, the grounds raised by the assessee on this issue are allowed for statistical purposes.

10. In the result, the appeal of the assessee bearing ITA No.1764/Mum/2025 is allowed for statistical purpose.

Order pronounced in the open court on 17 th day of August 2026