Section 68 Addition on Group Company Loans Deleted: ITAT Ranchi

Shah Brothers Vs ACIT/DCIT (ITAT Ranchi)

A “Shell Company” Label Cannot Replace Evidence: ITAT Deletes ₹4.74 Crore Addition

The controversy

Can unsecured loans from group companies be treated as the assessee’s own unaccounted money merely because the Department describes the lenders as “shell companies”? The Ranchi Tribunal answered this on the evidence before it: an allegation of accommodation entries must be supported by cogent material capable of displacing the assessee’s documentary explanation.

The Tribunal deleted an addition of ₹4,74,21,634 under section 68, holding that the assessee had sufficiently established the identity of the creditors, their creditworthiness and the genuineness of the transactions.

Loans already examined in scrutiny

Shah Brothers, a partnership firm, had originally undergone scrutiny assessment for AY 2017-18. According to its submissions, the Assessing Officer specifically called for particulars of unsecured loans from Altop Commodities Pvt. Ltd. and Percy Commercial Pvt. Ltd. The details were furnished, and the assessment was completed under section 143(3) on 18 December 2019, without an adverse inference concerning these loans.

A search was subsequently conducted in the Shah Group on 4 November 2022. Thereafter, the assessment was reopened under sections 147/148. The Assessing Officer treated the credits relating to the two companies as the firm’s own unaccounted money routed through shell concerns.

The addition comprised ₹2,49,81,920 relating to Percy Commercial and ₹2,24,39,714 relating to Altop Commodities.

Why the first appeal failed

The CIT(A) upheld the addition, relying on alleged non-existence of the companies at their declared premises, cash deposits, circular banking transactions, amalgamations and absence of genuine business operations.

According to the appellate authority, the assessee had failed to demonstrate the real source of funds in the creditors’ hands. The circumstances were considered sufficient to treat the loans as accommodation entries. Reliance was also placed on McDowell & Co. and the principle of examining substance over form.

The assessee, however, maintained that these conclusions did not address the actual documents furnished or establish that its own money had travelled through the lenders.

The documentary explanation

The assessee explained that both creditors were group companies and RBI-registered NBFCs since 2003, regularly filing returns and undergoing income-tax assessments.

It furnished PAN particulars, MCA records, audited financial statements, assessment details, account confirmations and loan ledgers. The loans were received through banking channels, and repayments were also made through banks. Interest was credited or paid after deduction of tax at source.

Another significant circumstance was that the two loan accounts carried opening balances aggregating to approximately ₹38 crore, which had not been disturbed. The disputed addition concerned the movement in those accounts during the relevant year.

The assessee therefore argued that the lenders were established entities with an existing financial relationship with the firm, rather than newly introduced concerns supported only by incorporation papers.

The address verification lost its force

The Department relied on inspectors’ reports stating that no office was found at the addresses visited.

The assessee countered this with INC-22A ACTIVE filings and addresses appearing in the creditors’ own assessment records. The Tribunal recorded the explanation that the inspectors had visited incorrect addresses and consequently reported that the companies did not exist.

The creditors’ amalgamations were also explained with reference to Calcutta High Court orders passed in July 2014. These circumstances formed part of the material considered by the Tribunal while rejecting the allegation that the companies were merely fictitious lending vehicles.

Interest included in the alleged loan receipt

The assessee highlighted that ₹1,11,21,634 of the addition represented interest credited to the lenders, rather than fresh loan funds received by the firm. This comprised ₹81,39,714 relating to Altop and ₹29,81,920 relating to Percy.

It argued that interest debited as expenditure could not simply be characterised as its own unaccounted money received back through the creditors. It also pointed to the inconsistency in questioning the loans while allowing the related interest expenditure.

This was an assessee’s contention recorded in the order; the Tribunal did not deliver a separate ruling on the treatment of interest under section 68. It deleted the entire addition on the overall merits.

What the Tribunal actually held

The Tribunal found that all three requirements of section 68 had been sufficiently explained. The Revenue had not identified defects in the documents or produced evidence establishing that the firm’s own money had been routed through the alleged shell companies.

It held that additions cannot rest on surmises, conjectures and unsupported allegations. The creditors’ audited accounts, assessment history, recorded existence and group relationship supported the explanation furnished.

Accordingly, the entire addition was deleted and the appeal allowed.

Author’s comments

The decision’s practical strength lies in the distinction between raising suspicion and proving an unexplained credit. A “shell company” label does not answer audited financial records, confirmations and banking evidence unless the Department demonstrates why that evidence is unreliable.

Equally, the order should not be presented as holding that PAN, banking transactions or RBI registration automatically settle every section 68 dispute. The Tribunal accepted the cumulative evidence in this particular case. Though objections concerning change of opinion and absence of incriminating search material were recorded, the operative relief rested on the merits of the addition.

Suspicion may justify investigation; sustaining an addition requires evidence.

Cases Discussed

• PCIT Vs Abhisar Buildwell (P) Ltd., (2023) 454 ITR 212 (SC) — relied upon in the assessee’s written submissions and summarised by the Tribunal for the proposition concerning completed/unabated assessments and incriminating material found during search.
• CIT Vs Continental Warehousing Corporation/All Cargo Global Logistics Ltd., (2015) 374 ITR 645 (Bombay High Court) — cited in support of the assessee’s jurisdictional contention concerning completed assessments and incriminating search material.
• CIT Vs Kelvinator of India Ltd., (2010) 320 ITR 561 (SC) — cited for the principle that reassessment must rest on tangible material and cannot be founded merely on a change of opinion.
• ACIT Vs Marico Ltd., (2020) 425 ITR 177 (SC) — cited in the written submissions concerning reopening on an issue examined during the original assessment.
• CIT Vs Orissa Corporation (P) Ltd., (1986) 159 ITR 78 (SC) — relied upon for shifting of the onus after the assessee furnishes the identity and particulars of creditors.
• CIT Vs Lovely Exports (P) Ltd., (2008) 216 CTR 195 (SC) — relied upon by the assessee on the consequences of establishing the identity of the creditor/subscriber.
• DCIT Vs Rohini Builders, (2002) 256 ITR 360 (Gujarat High Court) — cited for discharge of the initial section 68 burden through creditor identity, particulars, confirmations and banking evidence.
• Orient Trading Co. Ltd. Vs CIT, (1963) 49 ITR 723 (Bombay High Court) — cited for the proposition that the assessee may be required to explain the source of credits in its books but not ordinarily the source of the source.
• Nemi Chand Kothari Vs CIT, (2003) 264 ITR 254 (Gauhati High Court) — cited in the written submissions on the source-of-source issue.
• Aravali Trading Co. Vs ITO, (2008) 220 CTR 622 (Rajasthan High Court) — cited for the proposition that once the existence of creditors and receipt through cheque are established, the assessee need not prove the creditors’ source of funds.
• Marshall Sons & Co. (India) Ltd. Vs ITO, (1997) 223 ITR 809 (SC) — cited concerning the binding legal effect of a court-sanctioned amalgamation scheme.
• Union of India Vs Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) — cited to qualify the use of McDowell and the substance-over-form doctrine in relation to legitimate transactions and structures.
• Vodafone International Holdings B.V. Vs UOI, (2012) 341 ITR 1 (SC) — cited for respecting legitimate corporate structures and the “look at” rather than indiscriminate “look through” approach.
• DCIT Vs OMGL Refinery LLP, ITA No. 1931/JPR/2025, order dated 25.08.2026 (ITAT Jaipur) — cited for the proposition that low returned income by itself cannot negate creditworthiness where audited financial statements disclose adequate financial capacity.
• CIT Vs Smt. P. K. Noorjahan, (1999) 237 ITR 570 (SC) — cited concerning the discretionary expression “may” in deeming provisions and the proposition that an unsatisfactory explanation need not automatically result in addition.
• PCIT Vs NRA Iron & Steel Pvt. Ltd., (2019) 412 ITR 161 (SC) — relied upon in the CIT(A)’s reasoning for the proposition that incorporation details, PAN and bank statements by themselves may not suffice where surrounding circumstances indicate accommodation entries.
• Rajmeet Singh Vs Income Tax Officer, Ward-2(3), Ranchi, Tax Appeal No. 01 of 2020 (Jharkhand High Court) — relied upon by the CIT(A) on section 68; the assessee distinguished it on the ground that it involved failure to establish identity, creditworthiness and genuineness of creditors giving cash loans.
• McDowell & Co. — relied upon by the CIT(A) for lifting the corporate veil and substance over form; the assessee disputed its application to the documented group-company loan transactions.

FULL TEXT OF THE ORDER OF ITAT RANCHI

1. This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), Patna-3, Patna [in short, the ld. CIT(A)] dated 05/03/2026 for the Assessment Year (AY) 2017-18, wherein the assessee has raised following grounds of appeal:

“1. The order of the Commissioner of Income Tax, Appeal, Patna-3 is bad in Law and Facts.

2. The Learned Commissioner of Income Tax, Appeal, Patna-3 has erred in confirming the addition of Rs. 4,74,21,634/- u/s 68 of the Income Tax Act r.w.s 115BBE considering the unsecured loan received from group entity as unaccounted own money.

3. The Learned Commissioner of Income Tax, Appeal, Patna-3 has erred in confirming the addition of Rs. 4,74,21,634/-u/s 68 of the Income Tax Act which includes Interest paid to these companies on loan of Rs.1,11,21,634.

4. For that, other grounds if any would be urged at the time of the hearing.”

2. Facts of the case, in brief, are that a search and seizure operation was conducted in the case of Shah Group of cases on 04/11/2022. During the search and seizure operation, incriminating materials were found and seized from the premises of its group concerns. The assessee M/s Shah Sponge & Power Ltd., was also covered in that search. It has been stated in the impugned assessment order that on the basis of the seized documents, it was seen that during the F.Y. 2016-17 relevant to A.Y. 2017-18, the assessee has received unsecured loans amounting to ₹ 4,74,21,634/- from two entities- M/s Percy Commercial Ltd– Rs.2,49,81,920/- and M/s Altop Commodities Pvt. Ltd.- Rs.2,24,39,714/- respectively. Accordingly, notice under Section 143(2) of the Income Tax Act, 1961 (in short, the Act) was issued on 25/11/2024. Further, a notice under Section 142(1) of the Act was also issued to the assessee asking it to explain the source of unsecured loans. The Assessing Officer, further, issued show cause notice and asked the assessee as to why a sum of ₹ 4,74,21,634/- should not be added to the total income of the assessee on the ground that it was his own unaccounted money which has been routed through the shell companies back to the bank accounts of the assessee. Though, the assessee submitted various details to explain that the unsecured loans taken from the two companies were genuine as both the companies are regularly assessed to tax and have been filing their returns of income regularly, the Assessing Officer did not accept the explanations offered by the assessee and made the addition of ₹ 4,74,21,634/- u/s 68 of the Act.

3. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the ld. CIT(A), who vide the impugned order dated 05/03/2026, dismissed the appeal of the assessee on the ground that the assessee has failed to produce independent evidence demonstrating the source of funds in the hands of the creditor companies. No evidence of substantial loan portfolio, recovery statements, interest income pattern, or deployment of funds consistent with NBFC business has been furnished. Advancement of large unsecured loans without commensurate commercial rational and in close proximity to cash deposits defies ordinary business prudence. Further, the cumulative effect of (i) non-existence at declared premises during verification, (ii) shell entity amalgamations, (iii) disproportionate cash deposits including demonetization currency, (iv) circular bank transactions and (v) absence of genuine business operations, clearly establish that the unsecured loans represent accommodation entries. The ld. CIT(A) also held that the assessee has failed to discharge the statutory burden cast upon him under Section 68 of the Act. The ld. CIT(A) also placed reliance on the ratio laid down by the Hon’ble Supreme Court in the case of McDowell & Co. which permits lifting of corporate veil where transactions are structured to evade tax. The ld. CIT(A) also mentioned in the impugned order that the Hon’ble Supreme Court has upheld the principle that ‘substance’ has precedence over ‘form’.

4. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before this Tribunal.

5. During the appellate proceedings before us, the assessee has filed written submissions on 01/09/2026 which is given as under: –

“The appellant is a partnership firm. Its return of income for A.Y. 2017-18 was originally the subject of a scrutiny assessment completed under section 143(3) of the Act on 18.12.2019. In the course of that original assessment, and specifically by notice dated 31.10.2019 vide notice ITBA/AST/F/17/2019-20/1019636868(1), the appellant was called upon to furnish complete details of the unsecured loans obtained from M/s Altop Commodities Pvt Ltd and M/s Percy Commercial Pvt Ltd. The appellant furnished the details called for, and the assessment was completed without any adverse inference on the said loans.

A search and seizure action under section 132 of the Act was conducted on the Shah Group of cases on 04.11.2022, ie. long after the assessment for A.Y. 2017-18 had attained finality. Thereafter, notice under section 148 was issued and the assessment was reopened under section 147. In response to the notices, various details and submissions were made. In the reassessment, the AO added Rs. 4,74,21,634/-treating the unsecured loans (and interest thereon) received from the aforesaid two companies as the appellant’s own unaccounted money routed through “shell” concerns U/s. 68 of the Income Tax Act without considering the replies/submissions filed against the same.

The break-up of the impugned addition, as recorded by the AO and the CIT(A), is as under:

Two facts on the face of the record are of significance and are undisputed: (i) the amount actually added is only the net receipt in the two loan accounts during the year under consideration; and (ii) the opening balances in the said accounts – Rs. 29,06,70,902/ in the case of Altop and Rs. 9,00,41,475/- in the case of Percy, aggregating to about Rs. 38 crore were accepted and were not disturbed. Of the amount added, a sum of Rs. 1,11,21,634/- is not loan at all, but interest credited by the appellant to the two creditors after deduction of tax at source. No incriminating material found during the search has been brought on record, Reopening has been done based on the Unsecured Loan received from RBI Registered NBFC group company, Addition has been made on account of unsecured loan received, which has been examined and allowed in the original assessment proceedings u/s 143(3), is a “mere change of opinion”.

Beyond a bald averment in the reasons that these companies are Shell Company, Assessing Officer has not indicated as to what material were available to form his belief. Addition is based merely on a change of opinion and the A.O. has without any tangible material or independent inquiry passed the assessment order.

Of the total addition, Rs. 1,11,21,634/-represents interest credited by the appellant to the two creditors – Rs. 81,39,714/- to Altop and Rs. 29,81,920/- to Percy on which the appellant deducted tax at source and paid it over to the credit of the Central Government. Interest so credited is the appellant’s own expenditure debited to its profit and loss account; it is not money received by the appellant, and it is not a ‘sum credited’ representing an unexplained receipt of the nature that section 68 is directed at. It could not, as a matter of law, be added as unexplained cash credit.

The position is compounded by an internal contradiction in the Revenue’s approach: the interest presupposes and arises out of the very loan. To treat the interest as the appellant’s own unaccounted money is necessarily to accept that a loan existed on which interest ran. At best, the interest could have been examined for allowability as a deduction under section 36(1)(iii)/37 a question of computation of business income but it could not be roped into section 68. To this extent the addition is unsustainable on the very terms of the section

The appellant’s submissions fall under two broad heads (A) preliminary and jurisdictional objections going to the root of the reassessment; and (B) submissions on the merits of the addition under section 68. They are summarized below and elaborated thereafter.

(a) The reassessment for a completed/unabated assessment is unsustainable in the absence of any incriminating material found in the search qua the appellant

(b) The reassessment is founded on a mere change of opinion, the very loans having been examined and accepted in the original section 143(3) assessment

(c) On merits, the appellant discharged the initial onus under section 68 as to identity, creditworthiness and genuineness

(d) Interest of Rs. 1,11,21,634/- is not a ‘sum credited’ of the nature contemplated by section 68 and could not be added thereunder.

(e) The proviso to section 68 (source of source) has no application to loans, and in any event the source stood explained

(f) Cash deposits, if any, in the creditors’ own bank accounts are assessable, if at all, in the hands of those companies and not the appellant

(g) The share capital of the creditors arose from amalgamations sanctioned by the Hon’ble High Court and cannot be collaterally treated as bogus, least of all in A.Y. 2017-18

(h) The impugned appellate order suffers from non-application of mind and borrowed reasoning and is liable to be set aside.

Jurisdictional submission

A completed assessment cannot be disturbed absent incriminating material found in search

The original assessment for A.Y. 2017-18 was completed under section 143(3) on 18.12.2019. The search took place on 04.11.2022. As on the date of search, therefore, the assessment for the year stood completed and unabated. It is settled law that in respect of a completed/unabated assessment, no addition can be made unless it is founded upon incriminating material unearthed in the course of the search relatable to that assessee and that assessment year.

The proposition is confirmed by the Hon’ble Supreme Court in PCIT v. Abhisar Buildwell (P) Ltd, (2023) 454 ITR 212 (SC), affirming CIT v. Continental Warehousing Corporation/All Cargo Global Logistics Ltd, (2015) 374 ITR 645 (Bom), and the line of authority holding that completed assessments can be interfered with only on the basis of incriminating material found during the search.

In the present case, the appellant categorically contended before the lower authorities that no incriminating material whatsoever was found or seized from the appellant’s premises in the course of the search. That contention was met not with any reference to seized material qua the appellant, but with a bald assertion that the case was reopened “on the basis of search and seizure action and seized documents”. The order does not identify a single seized document belonging to the appellant that evidences the alleged routing of funds. The addition is, in truth, built entirely on the Kolkata Directorate’s “shell company” database, third-party field-verification and bank analysis none of which constitutes incriminating material found in the search of the appellant. The addition is therefore without jurisdiction.

Change of opinion

The very unsecured loans that form the subject-matter of the addition were specifically enquired into during the original section 143(3) proceedings. By notice dated 31.10.2019 the AO called for full particulars of the loans from Altop and Percy, the appellant furnished them; and the assessment was completed on 18.12.2019 accepting the loans.

To reopen the concluded assessment and take a contrary view on the self-same material is a classic change of opinion, which does not confer jurisdiction to reassess.

The law is settled by CIT v. Kelvinator of India Ltd, (2010) 320 ITR 561 (SC) (reassessment must rest on “tangible material” and not on a mere change of opinion. ACIT v. Marico Ltd, (2020) 425 ITR 177 (SC), where the non-rejection of the assessee’s explanation in the original assessment was amount to the AO forming an opinion, so that reopening on the same issue is a change of opinion and without jurisdiction.

Supreme Court in the case of ACIT Vs. Marico Ltd dismissed the SLP of the department and confirmed the order of the Bombay High Court which held

“Thus, we find that the reasons in support of the impugned notice are the very issue in respect of which the Assessing Officer has raised the query dated 25 September 2017 during the assessment proceedings and the Petitioner had responded to the same by its letters dated 10 December 2017 and 21 December 2017 justifying its stand. The non-rejection of the explanation in the Assessment Order would amount to the Assessing Officer accepting the view of the assessee, thus taking a view/forming an opinion. Therefore, in these circumstances, the reasons in support of the impugned notice proceed on a mere change of opinion and therefore would be completely without jurisdiction in the present facts. Accordingly, the impugned notice dated 27 March 2019 is quashed and set-aside.”

MERITS OF THE ADDITION UNDER SECTION 68

The three ingredients of section 68 identity, creditworthiness and genuineness stood discharged

The initial onus under section 68 is to establish (i) the identity of the creditor, (ii) its creditworthiness, and (iii) the genuineness of the transaction. Once that onus is discharged, it shifts to the Revenue. The appellant placed on record, in respect of both creditors: PAN and master data from the MCA; the fact of their being Non-Banking Financial Companies registered with the Reserve Bank of India since 2003; audited financial statements; income-tax returns and assessment particulars; confirmations of accounts, and complete ledger extracts evidencing receipt of the loans through regular banking channels with interest paid after deduction of tax at source.

Identity is not in dispute; the lower authorities have so recorded. The two creditors are not fly-by-night entities but group companies of the Shah family (its members having been directors since 2009), regularly assessed to tax Altop having returned income of Rs. 1,41,75,263/-and Percy Rs. 64,67,222/- for A.Y. 2014-15, both assessed under section 143(3). Their creditworthiness is writ large on their assessed balance sheets, which already carried loans to the appellant of about Rs. 38 crores at the beginning of the year.

As to identity and the shifting of onus,

CIT v. Orissa Corporation (P) Ltd, (1986) 159 ITR 78 (SC), held that once the assessee furnishes identity and particulars of creditors, the onus shifts; the Revenue must pursue the creditors before making an addition.

CIT v. Lovely Exports (P) Ltd, (2008) 216 CTR 195 (SC), held that Where identity of the subscriber/creditor is established, the sum cannot be regarded as the assessee’s undisclosed income; remedy, if any, lies against the creditor.

Gujarat High Court in Deputy Commissioner of Income Tax v. Rohini Builders [(2002) 256 ITR 360 (Guj)], held that once an assessee furnishes the names, addresses, permanent account numbers and confirmation letters of creditors, the initial burden of proof under Section 68 of the Income Tax Act, 1961, is successfully discharged

The assessee is only required to establish the identity of the creditors, the genuineness of the transaction, and the capacity/creditworthiness of the lenders regarding the amount advanced through normal banking channels. Once the primary onus is fulfilled by the taxpayer, the burden shifts entirely to the Revenue to conduct further inquiries and bring positive material on record to prove that the funds actually belonged to the assessee.

All the loans were received by the assessee by banking channel and the repayments of loans have also been made through banking channel along with the interest in relation to those loans. It is rather strange that although the Assessing Officer has treated the cash credits as non-genuine, he has not made any addition on account of interest paid by the assessee in relation to those cash credits, which has been claimed as business expenditure and has been allowed by the Assessing Officer. It is also pertinent to note that in respect of the creditors the interest was credited to their accounts/paid to them after deduction of tax at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the Assessing Officer. Thus, it is clear that the assessee had discharged the initial onus which lays on it in terms of section 68 by proving the identity of the creditors by giving their complete addresses, Permanent accounts numbers and the copies of assessment orders\details wherever available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723.

Altop Commodities Pvt Ltd

Company was incorporated in 1994. Nature of business is -Other financial services. Shri Sumitra Kumar Shah, Shri Swayam Prakash Shah and Shri Gyan Murti Shah are the directors in this company.

Altop Commodities Pvt Ltd is a Group company and RBI-registered NBFC company since 2003 and regularly assessed to Income Tax. Detail of the returned income and assessment U/s 143(3) is as below:-

Asst. Year	Taxable Income	Tax Paid	Assessed U/s	Assessed Income
2011-12	3,337,279	1,162,426	143(3)
2012-13	6,541,280	2,167,816	143(3)/148
2013-14	1,322,274	416,501		1,745,674
2014-15	14,175,263	4,599,163	143(3)	14,299,460
2015-16	21,309,288	7,295,046
2016-17	16,237,827	5,773,905	148A(d)
2017-18	8,104,248	2,597,918	143(3),148A(d)	8,104,250
2018-19	4,388,954	1,557,805

From the perusal of the above, it can be seen that the company has been regularly assessed to Income Tax, and for the AY 2014-15 declared returned income of Rs 1,41,75,263/-case was selected based on the information of the Amalgamation of the company with various companies and it has been assessed U/s 143(3). Hence the claim that the company is a shell company is not based on a correct appreciation of the fact.

Percy Commercial Pvt Ltd

Company was incorporated on 1993. Nature of business is -Commercial loan activities.

Percy Commercial Pvt. Ltd.

Asst. Year	Taxable Income	Tax Paid	Assessed U/s	Assessed Income
2011-12	3,663,411	1,264,120	143(3)	202,366,860
2012-13	4,715,582	1,564,521
2013-14	2,199,973	703,060
2014-15	6,467,222	2,169,038	143(3)	6,905,000
2015-16	6,217,444	1,971,413
2016-17	6,095,643	1,980,589	143(3)/147	6,845,640
2017-18	1,784,011	555,704	143(3)	1,784,010
2018-19	2,310,890	651,454

Sri Sumitra Kumar shah, Shri Swayam Prakash Shah and Shri Gyan Murti Shah are the directors of this company. Percy Commercial Pvt Ltd is a Group company and RBI-registered NBFC company since 2003 and regularly assessed to Income Tax. Detail of the returned income and assessment U/s 143(3) is as below: –

From the perusal of the above, it can be seen that the company has been regularly assessed to Income Tax and for the AY 2014-15 declared returned income of Rs 64,67,222/-case was selected based on the information of the Amalgamation of the company with various companies and has been assessed U/s 143(3). Hence claim that the company is a shell company is not based on a correct appreciation of the fact.

Non-existent when Income Tax department visited the premises.

During the course of search & seizure procedures ITI’s were deputed by the Investigation wing of the Kolkata and they visited the places and reported that at the company address no office was found. Place Visited

Percy Commercial Pvt. Ltd Floor no-2, Diamond Chamber, 38, N.S. Road, Dalhousie, Kolkata We have submitted the INC 22A ACTIVE (Active Company Tagging Identities and Verification) submitted to the Registrar of Companies regarding the address of the Company from the verification of the same it can be seen that the address of the company is 37/1, DR.GCC ROAD, WARD NO-6 KESTO PATTY GHATAK BAGAN, P.O TELINIPARA KOLKATA Hooghly West Bengal 712125 From the perusal of the demand notice for AY: 2017-18 ITBA/AST/S/156/2019-20/1020627375(1) 18/11/2019 also it can be seen that the address in the said order is same as above.

Altop Commodities Pvt Ltd 3/13, Bansdroni, Sardamoni Park, Pirupukur Road, Kolkata -700070

We have submitted the INC 22A ACTIVE (Active Company Tagging Identities and Verification) submitted to the Registrar of Companies regarding the address of the Company from the verification of the same it can be seen that the address of the company is 3/13 SARDAMONI PARK PIRPUKUR ROAD, P.O BANSDRONI KOLKATA West Bengal 700070

From the perusal of the Order u/s 143(3) AY: 2017-18 ITBA/AST/S/143(3)/2019-20/1015681920(1) 08/04/2019 also it can be seen that the address in the said order is ALTOP COMMODITIES PRIVATE LIMITED 3/13, SARDAMONI PARK PIRPUKUR ROAD BANSDRONI KOLKATA 700070, West Bengal

From the perusal of the above submission, it can be seen that Income Tax inspectors visited the wrong address and reported that the company does not exists.

Amalgamation

It has been further alleged that the companies have amalgamated thus acquired bogus shares.

Altop Commodities Pvt Ltd amalgamated various companies in itself in pursuance of the order of Calcutta High Court dated 15.07.2014

Percy Commercial Pvt Ltd amalgamated various companies in itself in pursuance of the order of Calcutta High Court dated 10.07.2014

The order of the amalgamation was passed by the Hon’ble Kolkata High Court after verification of all facts and as no objection was received from the Income Tax department. Even post amalgamation Assessment U/s 143(3) was done in case of both the company.

Further, the amalgamation order was passed in FY 2014-15 relevant to AY 2015-16 not IT IS 2017-18.

Assessee has deposited his unaccounted cash in the bank account of the companies and further introduced it in its own books as unsecured loan, thus routing its funds.

A substantial plank of the addition is that the creditors’ own bank accounts reflected cash deposits (including Rs. 60,00,000/- of specified bank notes in Altop’s account during the demonetisation period) said to precede the payment to the group company.

Those deposits are in the bank accounts of Altop and Percy – separate juristic persons, separately assessed. If any such deposit is unexplained, the addition lies in the hands of that company under section 68 in its own assessment. It cannot be added in the appellant’s hands without cogent evidence of a money trail establishing that it was the appellant’s cash that was deposited – for instance, a peak analysis or date-and-amount matched nexus between the appellant’s withdrawals and the creditors’ deposits. No such nexus has been established; the assertion of ‘routing’ is a surmise. The addition on this footing is impermissible.

It has been alleged that the assessee has deposited its unaccounted cash, during the AY 2017-18 the deposit of cash in the bank account by company Altop Commodities Pvt Ltd has been duly verified by issuing notice U/s 148A(b) and vide order U/s 148A(d) after verification the reassessment proceeding was dropped with the approval of PCIT-2. Kolkata.

Both companies were subjected to 143(3) assessments also and no adverse inference has been drawn.

The proviso to section 68, inserted with effect from 01.04.2013, casts the additional “source of source” burden only in respect of share application money, share capital and share premium credited in the books of a closely-held company. It does not apply to loans, and in any event does not apply to a firm such as the appellant. To the extent the lower authorities faulted the appellant for not proving the source of the funds in the hands of the creditors qua the loans, they proceeded on an erroneous view of law.

Nemi Chand Kothari v. CIT, (2003) 264 ITR 254 (Gau), court held that An assessee is required to prove the source of the credit, not the source of the source; proviso to s.68 (source of source) is confined to share capital/premium of closely-held companies.

Aravali Trading Co. v. ITO, (2008) 220 CTR 622 (Raj) Court held that Once existence of creditors and receipt by cheque are proved, the assessee need not prove the creditors’ source of funds.

The appellant having established the identity of, and receipt from, RBI-registered NBFCs assessed to tax, the onus stood discharged.

The creditors’ share capital arose from High Court-sanctioned amalgamations and cannot be collaterally impugned and in any event pertains to an earlier year

The AO’s theory that the creditors acquired “bogus” share capital through amalgamations overlooks that the amalgamations were sanctioned by the Hon’ble Calcutta High Court after due process and without objection from the Income-tax Department. A scheme of amalgamation so sanctioned is binding and its effect cannot be collaterally re-agitated in the assessment of a third party. Further, the amalgamations took effect in F.Y. 2014-15 (A.Υ. 2015-16); any grievance regarding inflation of share capital thereby relates to that year and cannot form the basis of an addition in A.Y. 2017-18.

Marshall Sons & Co. (India) Ltd v. ITO, (1997) 223 ITR 809 (SC) court held A scheme of amalgamation sanctioned by the Court is effective and binding; its consequences cannot be collaterally ignored.

to disregard legitimate Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC) court held that McDowell does not authorise the Revenue transactions/structures; limits of ‘substance over form’.

Vodafone International Holdings B.V. v. UOI, (2012) 341 ITR 1 (SC) court held that Legitimate corporate structures are to be respected; ‘look at’, not ‘look through’.

Recently ITAT Jaipur bench in the case of DCIT Vs OMGL Refinery LLP ITA No: 1931/JPR/2025 dated 25/08/2026 held that Low Returned Income Cannot Eclipse Audited Financial Capacity. The lender’s lower returned income could not, by itself, establish lack of creditworthiness, particularly when its balance sheet disclosed substantial capital and availability of fund.

The phraseology of section 68 is clear.

The Legislature has laid down that in the absence of a satisfactory explanation; the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this, case the legislative mandate is not in terms of the words “shall be charged to income-tax as the income of the assessee of that previous year”,

Supreme Court of India in CIT v. Smt. P. K. Noorjahan [(1999) 237 ITR 570 (SC)], established a landmark principle regarding the discretionary powers of the Assessing Officer (AO) under the deeming provisions of the Income Tax Act.

Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall”. Thus, the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee.

IMPUGNED APPELLATE ORDER SUFFERS FROM NON-APPLICATION OF MIND

The impugned order is, not a considered adjudication of the appellant’s case. Section 250(6) requires the CIT(A) to state the points for determination, the decision thereon and the reasons for the decision. The order under appeal instead reproduces, as though the findings in the appellant’s case by the Assessing officer was correct and undisputed.

CIT(A) in his finding stated that I have carefully examined the assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961, the grounds of appeal, written submissions of the appellant, the remand report of the Assessing Officer (AO), rejoinder of the assessee, seized materials, bank statements, SFT data and other documents placed on record.

No remand report was called for or rejoinder was submitted by us, no notice was issued by CIT(A) after our submission made on 15/12/2025 and viewed by CIT(A) on 11/02/2026

The issue for adjudication is the addition of Rs. 4,74,21,634/-made u/s 68 r.w.s. 115BBE in respect of unsecured loans and interest received from Altop Commodities Pvt Ltd and Percy Commercial Pvt Ltd, which the AO has held to be accommodation entries representing the assessee’s own unaccounted funds routed through shell concerns.

The AO, in the assessment order, has recorded comprehensive and detailed findings based on documentary evidence, field enquiries and financial analysis. The AO observed that pursuant to search and seizure action in the Shah Group, incriminating materials were found suggesting routing of funds through controlled entities. Upon examination of seized documents and subsequent verification, the AO noted that during FY 2016-17, the assessee had received unsecured loans aggregating to Rs.4,74,21,634/- from the aforesaid two companies.

From the perusal of the above it can be seen that he has stated and recorded the finding and submission of the Assessing Office only.

The first contention regarding “change of opinion” is examined. The assessment records reveal that although queries were raised in the original assessment, the present reassessment is founded upon fresh tangible material emanating from search and subsequent investigation, including field enquiries and detailed bank analysis revealing cash layering and routing pattern. Such material was not part of the original assessment record. In light of settled law, reopening based on subsequent tangible material cannot be termed as mere change of opinion. Accordingly, the jurisdictional ground fails.

While rejecting our contention of change of opinion he has not pointed out any material or evidence found in the course of the search brought on record by the Assessing Officer. He has simply with predetermined mind rejected the claim of the Assessee.

He relied on the case of PCIT VS NRA Iron & Steel Pvt. Ltd decided by Hon’ble Supreme Court in which it categorically held that mere production of incorporation details, PAN and bank statements does not suffice where surrounding circumstances indicate accommodation entries. The assessee must prove real financial capacity and genuineness of the source of funds in the hands of the creditor.

He ignored the submission made by us that the companies from whom the said loan has been received are group company and RBI registered NBFC since 2003 and regularly being assessed to Income Tax U/s 143(3) and 147 since several years. Even for the Assessment year 2017-18 the year under consideration these companies were assessed U/s 143(3) as in case of recipient. No new fact or evidence has been brought on record by the Assessing Officer or CIT(A).

The claim of SFT data, deposit of cash and rotation of cash has been duly examined by the then Assessing officer by issue of 148A(b) notice and subsequently the submission of the company has been accepted and no action was taken with the approval of PCIT-2, Kolkata.

CIT(A) held that in the present case, overwhelming circumstantial evidence demonstrates absence of genuine financial capacity in the creditor companies. However, he has not brought any evidence on record to prove the same, whereas the assessment record of the Companies shows that they have been regularly being assessed and filing healthy returns.

He has further relied on Jurisdictional Jharkhand High Court order in case of Rajmeet Singh…. Appellant Versus Income Tax Officer, Ward-2(3), Ranchi Tax Appeal No. 01 of 2020 to say that High Court has consistently upheld additions under Section 68 where cash deposits precede cheque issuance and where the assessee fails to explain the real source of funds in the hands of the creditor.

Actually, the fact of the case is completely different and distinguishable as in this case cash loan lacs has been received by the assessee and the High Court held that the source of income in the case of the assesses has not been proved; inasmuch as, the assesses has failed to prove the identity/creditworthiness/genuineness of the creditors, who have given cash loan as claimed by them.

This demonstrates that the order was assembled mechanically from extraneous material without application of mind to the appellant’s record, and is for that reason liable to be set aside.”

6. The ld. CIT-DR, on the other hand, supported the orders of the lower authorities.

7. We have carefully considered the facts of the case, rival submissions and the judicial decisions on which both the assessee and the revenue placed reliance. To controvert the finding of the Assessing Officer and the ld. CIT(A), the submissions given by the appellant can be summarized as under:

(i) The original assessment for the assessment year under consideration was completed under Section 143(3) of the Act on 18/12/2019 and after search and seizure action conducted on 04/11/2022, the case was reopened under Section 147 and notice under Section 148 of the Act was issued. However, no incriminating material was unearthed in the course of search and therefore, in view of the decision of the Hon’ble Supreme Court in the case of PCIT v. Abhisar Buildwell (P) Ltd. (2023) 454 ITR 212 (SC), the original assessment cannot be disturbed unless some incriminating material was found during the course of search. Since, no incriminating material was found in the case of the appellant, the original assessment made on 18/12/2019 should not have been reopened because this is merely a change of opinion as the source of the unsecured loan was fully explained and accepted in the original assessment made under Section 143(3) of the Act. In view of the fact that no fresh material was brought out on record by the Assessing Officer, the additions made mechanically on the basis of extraneous material without application of mind cannot be sustained.

(ii) These two companies are not fly-by-night entities but group companies of the Shah family (its members having been Directors since 2009). Thus, it is wrong on the part of the Revenue authorities to hold that these companies are shell companies. The observations made by the authorities below that these two companies are shell companies and funds were routed through controlled entities and structured in such a way that it requires lifting of corporate veil as held by the Hon’ble Supreme Court in the case of Mc. Dowell & Co., cannot be given credence to in the absence of any incriminating material found during the course of search.

(iii) The onus casts upon the assessee under Section 68 of the Act was fully discharged by establishing the identity of the parties, their creditworthiness and the genuineness of the transactions. The loan creditors i.e., M/s Altop Commodities Pvt. Ltd. and M/s Percy Commercial Pvt. Ltd. are regularly assessed to tax and the income declared by them have been accepted by the department.

(iv) All the loans received by the assessee are through banking channels and repayments of loans have also been made through banking channels along with interest charged on these loans. It is strange that the Assessing Officer has treated the cash credits as non-genuine, he has not made any addition on account of interest paid by the assessee in respect of all those cash credits which was claimed as business expenditure and was allowed by the Assessing Officer.

(v) The appellant has also placed reliance on the decision in the case of CIT Vs Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC) wherein it was held that once the assessee furnishes identity and particulars of creditors, the onus shifts on the Revenue to disprove with the cogent evidence that the transactions are not genuine or their identity or creditworthiness are in doubt. The ld. AR also placed reliance on the decisions in the case of CIT Vs Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC) and DCIT Vs Rohini Builders (2002) 256 ITR 360 (Guj) wherein it was held that once the assessee furnishes the names, addresses, PAN and confirmation letters of creditors, the initial burden of proof casts on the assessee is successfully discharged.

(vi) Now coming to the inquiry and the findings of the Income tax Inspector, who was deputed by the Investigation Wing, Kolkata who visited the addresses of the company and reported that “no office was found at the given address.” In this regard, the appellant’s counsel has submitted that Percy Commercial Pvt. Ltd., Floor no-2, Diamond Chamber, 38, N.S. Road, Dalhousie, Kolkata are active company as per Tagging Identities and Verification. The appellant has also submitted the INC 22A ACTIVE (submitted to the Registrar of Companies) regarding the address of the Company and on verification it can be seen that the address of the company is 37/1, DR.GCC ROAD, WARD NO-6, KESTO PATTY GHATAK BAGAN, P.O TELINIPARA KOLKATA Hooghly West Bengal-712125. From the perusal of the demand notice for AY: 2017-18 ITBA/AST/S/156/2019-20/1020627375(1) 18/11/2019 also it can be seen that the address in the said order is same as above. Regarding Altop Commodities Pvt Ltd., 3/13, Bansdroni, Sardamoni Park, Pirupukur Road, Kolkata -700070 again the assessee has submitted the INC 22A ACTIVE (Active Company Tagging Identities and Verification) submitted to the Registrar of Companies regarding the address of the Company and on verification of the same, it can be seen that the address of the company is 3/13 SARDAMONI PARK PIRPUKUR ROAD, P.O BANSDRONI KOLKATA West Bengal 700070. From the perusal of the order u/s 143(3) AY: 2017-18 ITBA/AST/S/143(3)/2019-20/1015681920(1) 08/04/2019 also it can be seen that the address in the said order is ALTOP COMMODITIES PRIVATE LIMITED 3/13, SARDAMONI PARK PIRPUKUR ROAD BANSDRONI KOLKATA 700070, West Bengal. Thus, it is evident that the Income Tax inspectors visited the wrong address and reported that the company does not exists.

(vii) Further, on the allegations that the companies have amalgamated and acquired bogus shares, the appellant’s counsel submitted that Altop Commodities Pvt. Ltd., amalgamated with various companies in itself in pursuance of the order of the Hon’ble Kolkata High Court dated 15/07/2014. Similarly, Percy Commercial Pvt. Ltd. have amalgamated with various companies in itself in pursuance of the Hon’ble Kolkata High Court order dated 10/07/2014. The Hon’ble High Court after making necessary verifications of all the facts, allowed the amalgamation. Thus, there is no reason to doubt that.

8. We have considered the above submissions and we find that the appellant has sufficiently explained all the ingredients required under Section 68 of the Act i.e., the identity of the creditors, their creditworthiness and genuineness of the entire transactions. In the absence of any cogent evidence, the additions made by the AO and confirmed by the Ld. CIT (A) cannot be sustained. We are also of the opinion that the addition cannot be made on surmises and conjectures by leveling allegation without pointing out any defect in the documents and statements submitted by the appellant. We find that the Assessing Officer has failed to bring out such evidence on the basis of which it can be held that the money has been routed from the shell companies and it is the own money of the appellant which has been re-routed in the appellant’s bank accounts. The fact that all creditor companies are assessed to tax for years and their accounts are duly audited and the department has been accepting their returns of income, the existence of the company at the given address before MCA and the creditor companies belonging to the same group, it cannot be concluded that these companies are not genuine and are shell companies. Hence, the additions made by the Assessing Officer and confirmed by the ld. CIT(A) are deleted.

9. In the result, this appeal of the assessee is allowed.

Order pronounced in open court on 30/09/2026.