Neo Incorporation Vs DCIT (ITAT Rajkot)
ITAT Deletes ₹40 Lakh Loan Addition as Repayment, Interest and TDS Support Genuineness
TGCSK: The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has deleted an addition of ₹40 lakh under Section 68 and the related interest disallowance of ₹2,04,164, after considering evidence of loan repayment, interest payment and deduction of tax at source.
In Neo Incorporation vs. DCIT, the Tribunal also condoned a delay of 917 days in filing the appeal. It accepted the explanation involving disputes among partners, closure of business and failure of the tax consultant to communicate the appellate order. The appeal concerning Assessment Year 2012-13 was allowed.
Background: Assessment Reopened Following Investigation Wing Information
The assessee, a partnership firm, filed its return on 29 August 2012, declaring total income of ₹36,79,520. A scrutiny assessment completed on 17 February 2015 accepted the returned income.
Subsequently, the Assessing Officer received information from the Investigation Wing arising from a search in the Bhanwarlal Jain group. According to that information, Malhar Exports was a bogus concern engaged in providing accommodation entries through unsecured loans.
The information identified the assessee as a beneficiary of loans amounting to ₹41,83,748. The Assessing Officer consequently issued a Section 148 notice dated 26 October 2016.
In response, the assessee requested that its original return be treated as the return filed pursuant to the notice.
AO Added ₹40 Lakh and Disallowed Related Interest
During reassessment, the Assessing Officer asked the firm to explain the transaction and furnish evidence establishing its genuineness.
The assessee submitted documentary evidence, including income-tax return details, bank statements and confirmations. It maintained that the transaction had taken place through banking channels and that the loan had been repaid in the subsequent year.
The Assessing Officer rejected the explanation and added ₹40 lakh under Section 68 towards the unsecured loan received from Malhar Exports. He also disallowed interest expenditure of ₹2,04,164.
The CIT(A), National Faceless Appeal Centre, confirmed the additions through an order dated 31 July 2023. The assessee then approached the Tribunal.
Delay of 917 Days Condoned
The appeal before the Tribunal was delayed by 917 days.
The assessee explained that severe disputes among its partners had eventually led to closure of the firm’s business with effect from AY 2016-17. No active partner remained to manage taxation matters.
It further submitted that the appointed tax consultant had failed to communicate the status of the CIT(A)’s order and had not handled the tax proceedings properly.
The Revenue opposed condonation, arguing that the assessee had not demonstrated sufficient cause and that the delay reflected deliberate inaction or negligence.
The Tribunal found the reasons stated in the affidavit convincing and sufficient. Referring to judicial decisions favouring a pragmatic and liberal approach, it held that the circumstances justified condonation in the interest of justice.
It also accepted that the firm should not be penalised for the consultant’s mistake in the circumstances presented.
Documentary Evidence Supported the Loan Transaction
On merits, the assessee’s representative referred to the lender’s bank statement, income-tax return, contra confirmation, balance sheet and profit and loss account.
The records also included a detailed breakup of loans and advances reflecting the assessee’s name.
The representative submitted that the firm had paid interest on the borrowing and deducted TDS at 10%. Bank statements were also furnished to establish repayment in the subsequent year.
The Revenue’s representative primarily supported the Assessing Officer’s findings.
After examining the material, the Tribunal found that the bank statement and ledger account established repayment of the loan. No amount remained outstanding to the lender.
It further observed that payment of interest and deduction of the requisite TDS strengthened the evidence supporting the genuineness of the borrowing.
Gujarat High Court Decisions Followed
The Tribunal relied on CIT vs. Ayachi Chandrashekhar Narsangji, concerning deletion of a cash-credit addition where the Department had accepted repayment of the loan in the subsequent year.
It also referred to Ojas Tarmake (P.) Ltd., [2023] 156 taxmann.com 75 (Gujarat). That decision concerned loans returned through banking channels and upheld the Tribunal’s deletion of the Section 68 addition on the facts established.
Following these binding jurisdictional High Court precedents, the Tribunal deleted both the loan addition and the related interest disallowance.
Decision and Significance
The assessee secured relief of ₹42,04,164, comprising the unsecured loan addition and interest disallowance.
The decision highlights the importance of examining repayment records, banking evidence, lender documents, interest payments and TDS compliance together when assessing the genuineness of a disputed loan.
It also illustrates how an adequately explained delay, supported by an affidavit and accepted as sufficient cause, can permit an appeal to be decided on its merits.
Cases Discussed
- M/s. Garg Bros. Pvt. Ltd. & Others vs. DCIT, ITA Nos. 2519 to 2521/Kol/2017, 18.04.2018
- Investment Trust v. Ujagarsingh (Supreme Court)
- Gujarat State Fertilizers & Chemicals Ltd. (283 ITR 149) (Gujarat High Court)
- CIT vs. Ayachi Chandrashekhar Narsangji (Gujarat High Court)
- Ojas Tarmake (P.) Ltd., [2023] 156 taxmann.com 75 (Gujarat High Court)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT RAJKOT
Captioned appeal filed by the assessee, pertaining to Assessment Year 2012- 13, is directed against the order passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi, dated 31.07.2023, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143 r.w.s. 147 of the Act, on 26.12.2017.
2. The grounds of appeal raised by the assessee are as follows:
“1. On facts and in law, the order passed by the Ld. Commissioner of Income-tax (Appeals) (hereinafter referred to as ‘Ld. CIT(A)’] dated 31/07/2023 is erroneous, bad in law, and contrary to the facts and circumstances of the case and deserves to be quashed.
2. On facts and in law, the Ld. CIT(A) has erred in confirming the addition of Rs.40,00,000/- made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, on account of an unsecured loan received from M/s. Malhar Exports.
3. On facts and in law, the Ld. CIT(A) has erred in confirming the disallowance of interest expenditure of Rs.2,04, 164/- paid on the aforesaid unsecured loan.
4. The Assessee craves leave to add, alter, amend, substitute, or withdraw all or any of the grounds of appeal at or before the time of the hearing of the appeal”.
3. The appeal filed by the assessee for Assessment Year 2012-13, is barred by limitation by 917 days. The assessee has moved a petition requesting the Bench to condone the delay. Learned Counsel for the assessee, explained the reasons for delay stating that assessee is a partnership- firm and there was severe dispute among the partners and eventually the partnership- firm closed its business with effect from assessment year 2016–17, and there was no active partner to handle taxation matters. Besides, the tax consultant appointed by the assessee-firm did not inform about the status of passing the order by the Ld. CIT(A) and did not handle the taxation matters properly. Therefore, because of the mistake of the tax consultant, the assessee-firm should not be penalised. On the other hand, Ld. DR for the revenue submitted that in this case no “sufficient cause” was shown by the assessee to explain the unreasonable delay in filing of appeal. Rather, this is a clear case of deliberate inaction or negligence on the part of the assessee, therefore, delay should not be condoned.
4. I have heard, both the parties on this preliminary issue. I note that main reason for delay in filing the appeal, was severe dispute among the partners and eventually the partnership- firm closed its business with effect from assessment year 2016–17. There was no active partner to handle taxation matters. Besides, the tax consultant appointed by the assessee-firm did not inform about the status of passing the order by the learned CIT(A) and did not handle the taxation matters properly. Therefore, I am of the view that because of the mistake of the tax consultant, the assessee-firm should not be penalised, for this reliance is placed on the decision of I.T.A.T., ‘C’ Bench, Kolkata in the case of M/s. Garg Bros. Pvt. Ltd. & Others vs. DCIT [ITA Nos.2519 to 2521/Kol/2017, order dated 18.04.2018], wherein under similar set of facts and reasons, the Hon’ble Tribunal was pleased to condone the delay of 211 days by holding as under:
“3. We have heard both the parties on this preliminary issue. Having regard to the reasons given in the application for condonation of delay, we are of the considered opinion that assessee was under a bona fide belief that the impugned order of Pr. CIT was not appealable before this Tribunal since they were not advised by their Tax Consultants about this legal right. Later on, when a Senior Lawyer advised them to file an appeal, the assessees immediately took steps to file the appeals. Therefore, the delay caused. We note that delay was occurred because of the wrong advice of the Tax Professional for which assessees cannot be penalized. For the ends of justice, we condone the delay and admit the appeal for hearing”.
5. On professional advice, I note that the Courts and Tribunals have consistently held that in the matter of condonation of delay, pragmatic and liberal approach should be taken. The Hon’ble Supreme Court also held the same in case of Investment Trust v. Ujagarsingh observing that unless mala fide or negligence writ large, delay should be condoned and appeals should not be rejected on technical ground of delay and they should be ordinarily decided on merits. The Hon’ble Gujarat High Court has also considered this aspect of condonation of delay in case of Gujarat State Fertilizers & Chemicals Ltd. (283 ITR 149) and held that…
“The position in law is well settled that an assessee should be granted due relief where it is due without standing on technicalities and the revenue must bear the established legal position in mind while dealing with applications seeking condonation of delay. It is necessary that liberal approach is adopted in such a matter so as to ensure that substantive rights are not defeated on the basis of technicalities or limitation. “
6. I note that the reasons given in the affidavit for condonation of delay were convincing and these reasons would constitute reasonable and sufficient cause for the delay in filing this appeal. Having heard both the parties and after having gone through the affidavit as well the delay condonation, application, I am of the considered opinion that in the interest of justice, the delay deserves to be condoned. I, accordingly, I condone the delay.
7. The relevant material facts, as culled out from the material on record, are as follows. The assessee-firm filed return of income on 29.08.2012, declaring a total income of Rs. 36,79,520/-. The return of income was processed u/s. 143(1) of the Income Tax Act. Subsequently, assessment u/s 143(3) of the Act was completed in the case vide order dated 17.02.2015 by accepting the returned income. Further, information was received from the Investigation Wing that search carried out in Bhanwarlal Jain group of cases revealed that Malhar Export was a bogus concern of the group engaged in the activity of providing bogus accommodation entry in the form of unsecured loan. Since, the assessee was beneficiary of such loan from Malhar Exports to the tune of Rs. 41,83,748/-, therefore, the case of the assessee, was reopened by issue of notice u/s 148 of the Income Tax Act dated 26.10.2016 which was duly served upon the assessee. In response to the said notice, the assessee vide letter dated 28.10.2016 stated that the original return may be treated as return filed in response to notice u/s 148 of the Act. During the assessment proceedings, the assessing officer issued show cause notice to the assessee to explain the transaction and submit the relevant documents and evidences to prove the genuineness of the transaction.
8. In response to the notice of the assessing officer, the assessee submitted written submission along with documentary evidences before the assessing officer. The assessee submitted copy of Income Tax Return, Bank statement, Confirmations, and bank statement of third-party M/s Malhar Export. The assessee also submitted that transaction was through banking channel and loan was repaid in subsequent year.
9. However, assessing officer, rejected the contention of the assessee and made addition of Rs. 40,00,000/- u/s 68 of the Act, being unsecured loan taken from Malhar Exports and Rs. 2,04, 164/- being interest paid thereon.
10. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the Ld.CIT(A), who has confirmed the action of the assessing officer, therefore, assessee is in further appeal before this Tribunal.
11. I have heard, both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Learned Counsel for the assessee argued that during the course of assessment proceedings, the assessee submitted the Lender’s bank statement, Income Tax Return, Contra confirmation, Balance sheet, Profit and loss account, and detailed breakup of loans and advances wherein the assessee’s name was reflected. The assessee also deducted TDS at the rate of 10% on the interest payment. Besides, repayment of said loan was made in the subsequent year, for this assessee submitted bank statement confirming repayment of loan. Therefore, learned Counsel for the assessee, submitted that addition made by the assessing officer may be deleted. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which I have already noted in my earlier para and is not being repeated for the sake of brevity.
12. I have considered submissions of both the parties. I find that perusal of the bank statement and ledger account would reveal that the assessee has duly repaid the loans obtained from the said party. Since, the assessee has duly repaid the amount received by it from the lender party and there remains no outstanding amount taken from said party and once such repayment has been made then the loan taken by assessee cannot be subject matter of addition. Furthermore, it is pertinent to note on careful perusal of the ledger account, that the assessee has paid interest on the above loan and requisite TDS has also been deducted on payment of such interest. These facts further fortify the genuineness of the loans obtained by the assessee. For this, I rely on the following judgements:
(i) CIT vs. Ayachi Chandrashekhar Narsangji 42 tgaxmann.com 251 – (Guj. HC).
“Where, it was held that when the Department had accepted repayment of loan in subsequent year, no addition was to be made in current year on account of cash credit”
(ii) Ojas Tarmake (P.) Ltd , [2023] 156 taxmann.com 75 (Gujarat-HC)
“Section 68 of the Income-tax Act, 1961 – Cash credits(Unsecured loan) – Assessment year 2013-14 – During assessment proceedings it was noted that assessee had shown particulars of unsecured loan received during relevant assessment year – Assessing Officer issued letters under section 133(6) on creditors of unsecured loans – Thereafter, Assessing Officer made additions with respect to unsecured loan on ground that assessee failed to discharge onus of liability as laid down under section 68 – On appeal, Commissioner (Appeals) upheld additions on ground that assessee failed to produce any of creditors before Assessing Officer – Whether since Tribunal found on facts that amount of loan received by assessee was returned to loan party during year itself and all transactions were carried out through banking channels, no error of law was committed by Tribunal by deleting addition made under section 68 – Held, yes [Paras 3 and 4] [In favour of assessee]”.
13. Therefore, respectfully following the binding precedent of the jurisdictional Hon’ble High Court of Gujarat (supra), I delete the addition pertaining to loan and interest and allow the appeal of the assessee.
14. In the result, appeal filed by the assessee, is allowed.
Order is pronounced in the open Court on 21/10/2026.
