Section 68 Addition Not Justified for Loan Before Business Commencement: ITAT Jaipur

J K V Stonex Vs ITO (ITAT Jaipur)

Addition u/s. 68 not sustained as revenue activity not yet started and loan received through cheques

ITAT Jaipur held that addition u/s. 68 of the Income Tax Act is not justifiable since assessee firm has not commenced any business activity and hence it is not justified to say that the assessee has camouflaged earned this income. Further, loans are received through account payee cheques and parties are relatives of partners.

Facts- The present appeal has been filed by the assessee mainly contesting that CIT(A) has erred in confirming the addition u/s 68 to the extent of Rs.46,79,121/- out of total addition of Rs.1,40,89,951/- by holding that the assessee could not prove the credit worthiness of Shri Gaurav Agarwal (Loan amount of Rs.7,74,700/-), Smt. Pista Devi (Loan amount of Rs.11,92.025), Smt. Saroj Agarwal (Loan amount of Rs.5,88,276) Shri Mohan Singh (Loan amount of Rs.8,64,370) , Smt. Preeti Agarwal (Loan amount of Rs.12,59,750/-).

Conclusion- All the parties in respect of which addition is sustained are filing their returns of income except Pista Devi who is mother of the partners of the assessee. Entire money has been received through account payee cheques. The assessee firm has not commenced any business activity and therefore, it is not justified to say that the assessee has camouflaged earned this income in view of Delhi High Court Judgement in the case of Alankar Promoters LLP Vs. ITΟ 167 taxmann.com 594.

Looking at the facts of the case where revenue activity has not started, loans are received through account payee cheques and the parties are relatives of partners and confirmed the loans. Thus, the addition made by applying the provisions of section 68 is not justified. We hold accordingly.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

This appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax, National Faceless Appeal Centre, Delhi[ for short CIT(A)] dated 05.03.2025 for the assessment year 2012-13 raising therein following grounds of appeal.

”1. Under the facts and circumstances of the case, the order dated 26-12­2019 passed u/s 147 r.w.s. 143(3) by the AO is bad in law and deserves to be quashed.

2. Under the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the addition u/s 68 to the extent of Rs.46,79,121/- out of total addition of Rs.1,40,89,951/- by holding that the assessee could not prove the credit worthiness of Shri Gaurav Agarwal (Loan amount of Rs.7,74,700/-), Smt. Pista Devi (Loan amount of Rs.11,92.025), Smt. Saroj Agarwal (Loan amount of Rs.5,88,276) Shri Mohan Singh (Loan amount of Rs.8,64,370) , Smt. Preeti Agarwal (Loan amount of Rs.12,59,750/-‘’

2.1 Apropos to the grounds of appeal of the assessee, it is noticed that ld. CIT(A) has partly allowed the appeal of the assessee by confirming the addition of Rs.46,79,121/- u/s 68 of the Act. The observations made by the ld.CIT(A) from para5.1 to para 7 of his order is reproduced as under:-

5.1 Considering the submission filed by the appellant, the grounds of appeal raised by the appellant are adjudicated as per the subsequent paras.

6. Ground No.1:- In this ground the appellant has contested the reopening of the assessment u/s 147 of the Act.

6.1 The submission uploaded by the appellant is reproduced in para 5 above.

6.2 I have perused the reassessment order, grounds of appeal and submission filed by the appellant carefully. I find that AO was having the tangible material in the form of specific information received during assessment proceedings for AY 2016-17 that as per the balance sheet as on 31/03/2012, the appellant had obtained unsecured loans of Rs.1,40,89,951/- were appearing but the appellant had never filed the return of for AY 2012-13 or earlier years. On the basis of the said additional material available on hand, a reasonable belief was formed by the AO that income of the assessee of Rs. 1,40.89.951/- has escaped assessment. Therefore, once the reasonable belief is formulated by the AO on the basis of cogent tangible material, the AO is not expected to conclude at this stage the issue finally or to ascertain the fact by evidence or conclusion. Function of the Assessing Officer at this stage is to administer the statute. What is required at this stage is a reason to believe and not establish fact of escapement of income and therefore. lookingto the scope of section 147 as also sections 148 to 152, even if scrutiny assessment has been undertaken, if substantial new material is found in the form of information on the basis of which the Assessing Officer can form a belief that the income of the assessee has escaped assessment. In the present case, there is independent application of mind by the AO in arriving at the conclusion that income had escaped assessment and therefore, the contentions raised by the assessee are devoid of merits.

I further find that the Hon’ble Supreme Court of India in its decision dated 23/05/2007 in the case of Assistant Commissioner Of Income Rajesh Jhaveri Stock Brokers Pvt. in Civil Appeal No 2830 of 2007 held thatif the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. The relevant portion of the above decision is reproduced as under:-

16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO (1991 (191) (TR 662], for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant maternal on which a reasonable person could have formed a requisite belief Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. (1996 (217) ITR 597 (SC)). Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC))

17. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (1) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have junsdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment it is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147 The case at hand is covered by the main provision and not the proviso

18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initate reassessment proceedings even when intimation under section 143(1) had been issued

In the case of Raymond Woolen Mills 236 ITR 34 (SC), Hon’ble Supreme Court Of India held that it is only to be seen whether there was a prima facie case for reopening or not, sufficiency of reasons not to be seen.

I find that the facts of the case laws relied upon by the appellant are not identical to the facts of the present case, hence the case laws relied upon by the appellant are not applicable to the present case since the same are distinguishable on facts.

In view of the above, the contention of the appellant challenging the validity of re­opening the case u/s. 147 of the Act and issuing of notice u/s. 148 of the Act is hereby rejected. Hence, ground Nos. 1 raised by the appellant is dismissed

7. Ground No.2: – In these grounds the appellant has contested the addition of Rs. 1,40,89,951/- made by the AO u/s 68 of the Act.

7.1 The submission uploaded by the appellant is reproduced in para 5 above.

7.2 I have perused the assessment order, grounds of appeal, and submission filed by the appellant carefully. I find from the assessment order that the appellant has contended before the AO that the unsecured loans are old and they are having source of income. The appellant submitted copies of accounts, bank statements and confirmation letters were before the AO but the same was rejected by the AO and addition of Rs. 1,40,89,951/-was made.

During the course of appellate proceedings, the appellant has reiterated his submission filed before AO and submitted the detailed explanation which has already been reproduced in para 5 above. The appellant submitted the identity, genuineness and creditworthiness of the unsecured loan transactions is already proved, hence requested to delete the addition.

I find from the submission that the unsecured loans of Rs.92,10,830/- were obtained during the period prior to FY 2011-12 through banking channel. Thus, I find that the same cannot be added us 68 of the Act in AY 2012-13. Regarding the remaining loans of Rs.48,79,121/-, it is submitted that the same was obtained from 6 friends and relatives. The appellant had produced confirmation letters and copies of ITRs and submitted that the genuineness of the unsecured is proved. However, on perusal of the copies ITRs, I find that the income disclosed in the ITR for AY 2012-13 is not commensurate with the loans provided to the appellant by the concerned parties. The details of the income shown in the ITRs are as under:-

From the above details, I find that except, Ravi Agarwal HUF, no other person was having capacity to provide the substantial amount of loan considering the income disclosed in ITR and the appellant has not produced any other evidence to prove the creditworthiness of the unsecured loans of Rs.46,79,121/- obtained from the remaining 5 persons excluding Ravi Agarwal, HUF. Thus, I find that the appellant has failed to prove the creditworthiness of unsecured loans of Rs. 46,79,121/-. Therefore, the addition of Rs.46,79,121/- is confirmed and addition of Rs.2,00,000/- is deleted since creditworthiness is proved. Thus, the ground of appeal raised by the appellant is partly allowed.”

2.2 During the course of hearing, the ld. AR of the prayed that ld.CIT(A) is not justified in partly allowing the appeal of the assessee as the assessee submitted the detailed written submission before the AO for consideration of his case. To counter the orders of the lower authorities, the ld AR of the assessee has filed the following written submission.

‘’Ground 1

Under the facts and circumstances of the case, the order dated 26.12.2019 passed u/s 147 r.w.s. 143(3) by ld. AO is bad in law and deserves to be quashed.

Ground 2

Under the facts & circumstances of the case the ld. CIT (A)-NFAC, has erred in confirming the addition u/s 68 to the extent of Rs. 46,79,121/-, out of total addition of Rs. 1,40,89,951/-, by holding that the asessee could not prove the credit worthiness of Sh. Gaurav Agarwal (Loan Amount of Rs. 7,74,700/-), Smt Pista Devi (Loan amount of Rs. 11,92,025/-) Smt. Saroj Agarwal (Loan amount of Rs. 5,88,276/-), Sh. Mohan Singh (Loan Amount of Rs. 8,64,370/-), Smt. Peeti Agarwal (Loan amount of Rs. 12,59,750/-).

Ground 3

The assessee craves right to add, alter or amend any of the grounds of appeal.

Brief Facts

1. The assessee is a Partnership Firm started with an object of carry on business of dealing and manufacturing in marble and granite slabs, Tiles, Chips, Powder, Blocks and luffers. During the year under consideration, the assessee has not undertaken any revenue activity of sale/purchase etc. and there were neither any expenditure nor revenue. Copy of Financial Statements is enclosed are hereby enclosed at Page 01 to 02 of paper book. The assessee was under bonafide impression that since no income has been earned by it in absence of any business activity during the year under consideration, therefore, the assessee firm had not filed return of income u/s 139(1) of the IT Act, 1961.

2. The case of assesse was selected for limited scrutiny for AY 2016-17 to examine source of capital contribution by partners in assesse firm. It was noticed by ld. AO that assessee firm has shown partners’ capital of Rs. 4,40,83,752/-. Accordingly, assesse was asked to explain the source of capital contribution by partners in assesse firm.

With respect of source of capital, the assessee submitted that this capital was introduced in earlier year and also filed balance sheet as on 31st March 2012 during the course of assessment proceedings for the AY 2016-17.

On perusal of balance sheet, the ld. AO observed that that assessee firm had shown a capital of Rs. 2,34,57,494/- including fresh capital of Rs. 34,15,304/-and Rs. 16,68,116/-, introduced by Sh. Jai Narayan Agarwal and Sh. Krishan Murari Agarwal respectively during the year under consideration and also observed that unsecured loan of Rs.1,40,89,951/- was also obtained during the year under consideration. The ld. AO alleged that as the assessee failed to file the return of income for any assessment year including the year under consideration, therefore, the capital introduced by the partners and unsecured loan of remained unexplained.

3. Accordingly, the case was reopened u/s 147 and notice u/s 148 has been issued on 29.03.2019. In response to the notice, the assessee had filed return of income of Rs. Nil on 08.07.2019. Copy of Income tax return and computation of income is enclosed at 03 to 04 of paper book.

4. During the course of reassessment proceeding, following notices u/s 142(1) were issued :

4. The ld. AO has not considered confirmation sought in respect of unsecured loan and passed assessment order on 26.12.2019. The ld. AO has raised his point of creditworthiness of lenders at the time of passing assessment order only whereas in notices issued u/s 142(1), he sought for account confirmation only which the assessee has duly provided and no discrepancy has been pointed out by the ld. AO while passing the assessment order.

Submission for Ground no. 1

As regard reason recorded by ld. AO, we may submit as under:

2. No business activity has commenced during the year under consideration, therefore, no addition is warranted u/s 68 in respect of unexplained cash credit

3. Assessee has fulfilled its responsibility by furnishing account confirmation of lenders, return of income and bank account of firm

In this we may submit that the assessee duly submitted account confirmation of lenders, return of income of lenders and bank account of firm to show that loan has been received via banking channel. It is also undisputed fact that unsecured loan has been given by identifiable person. Unless anything contrary evidence produced by assessing officer, the assessee is only to explain that the investment has been made by the particular individual/person and it is the responsibility of that individual/person to account for the investment made by him. If that person owns an entry, the burden of the assesse is discharged. It is open for the Assessing Officer to undertake further investigation with regard to that individual who has given this amount. In such a case, the onus of the assessee is duly casted.

Reliance is placed on following judgment(s):

• • Hon’ble High Court of Madhya Pradesh in case of CIT vs. Metachem Industries [2001] 116 Taxman 572 held that Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment, whether the money invested is properly taxed or not. The assessee is only to explain that the investment has been made by the particular individual and it is the responsibility of that individual to account for the investment made by him. If that person owns that entry, then the burden of the assessee-firm is discharged. It is open for the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount.

So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he had brought this money, is not the responsibility of the firm. The moment the firm has given a satisfactory explanation and produced the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open for the Assessing Officer to take appropriate action under section 69 against the person who has not been able to explain the investment.

Submissions on Ground No. 2

1. As stated in para 4 of facts of the case, during the course of assessment proceeding, the ld. AO has sought copy of account confirmation of 14 lenders in respect of unsecured loan of Rs. 1,40,89,951/- which the assessee has duly submitted. The assessee also reiterated during assessment proceeding that mostly unsecured loan are old which is also discernible from account confirmation of lenders. Apart from that, the assessee also submitted copy of ITR of lenders for the year under consideration and bank statement of assessee to establish that lenders are identifiable and loan has been received via banking channel. The ld. AO has not pointed out any discrepancy in account confirmation and bank statement.

2. During the course of first appeal proceeding, the assessee submitted the same documents, i.e. confirmation and return of income of all the lenders and the ld. CIT(A) has deleted addition of Rs.92,10,830/- which represents opening balance of unsecured loan and Rs. 2,00,000/- where the income in the return of income is higher than the amount of loan. The ld. CIT(A) has sustained addition of Rs.46,79,121/- in respect of remaining 5 lenders where the return of income for the year was less than the amount of loan for want of credit worthiness.

3. We may submit that for the only reason that the amount of return of income for the year under consideration is lower cannot be reason to consider that the creditworthiness of the parties is not proved. Out of total of 5 lenders of Rs.46,79,121/- for which the CIT(A) has sustained addition, 4 lenders for a total sum of Rs.38,14,751/- are family members of the partners of the assessee firm. For all of them, it’s a family business and the money saved by them over the years have been received in the firm i.e. new family business where funds are required for setting up. Fruther, the other 1 lender has also advanced out of the savings of past few years. Therefore, rejecting the credit worthiness only for the reason that the amount of income during the year under consideration is less than the amount of loan is not justified.

Also, we may also submit that since the assessee has not started the business activities, the money received cannot be considered as income of the assessee in view of the judgements quoted above earlier in these submissions.

4. Without prejudice, the assessee can submit all the records, i.e. return of income of the lenders for the previous years, their bank account statements and the sources of their funds in case an opportunity is provided. As the issue was of 14 lenders before the AO & CIT(A) out of which most of the lenders were carried through opening balances and the assessee was only asked for confirmation of the lenders, the assessee did not submit additional documents before the AO & CIT(A). It is requested to grant another opportunity to the assessee by way of setting aside the case to the Assessing Officer for verification of these 6 lenders. ‘’

It is pertinent to mention that the ld. AR of the assessee has relied on following case laws.

1. Sushila Choudhary vs ITO, NFAC, Delhi (ITA No. 638/JPR/2024 for the assessment year 2013-14 order dated 12-02-2025) on the issue of assessment proceedings u/s 148 of the Act and addition made u/s 69A of the Act where the appeal of the assessee was allowed.

2. Alankar Promoters LLP vs ITO [2024] 167 com 594 (Delhi ) wherein the appeal was allowed in favour of the assessee. The observation of the Hon’ble High Court is reproduced as under:-

‘’ 30. In the present case, the assessee had filed its return of income showing Nil return. The petitioner had also annexed his balance sheet showing unsecured loan of Rs. 500,000 The AO had initiated the reassessment proceedings solely on the basis that the petitioner’s balance sheet recorded an outstanding unsecured loan of Rs. 5,00,000 This is apparent from a plain reading of the reasons for reopening of the assessment an recorded by the AO. The relevant extract of the said reasons is set out below:

“In this case Company was incorporated 09.07.2011 and has authorized capital Rs. 1,00,000/-. It has not shown any sales/receipts or any other Income. But on perusal of Balance sheet noticed that it has unsecured loan Rs. 5,00,000/- from others. Since the assessee has not carried out any business activity during the year. Therefore, I have reason to believe that income Rs.5,00,000/- has escaped assessment for AY 2012-13. The assessment/reassessment proceedings in this case for AY 2012-13 pertain to period beyond four years but before the expiry of six years from the date of issue of notice

The assessment/reassessment proceedings in this case for AY 2012-13 pertain to period beyond four years but before the expiry of six years from the date of issue of notice. In view of the same, as no assessment has been made in this case for AY 2012-13, u’s 143(3) or u/s 147, the first proviso to section 147 is not applicable to the case.”

31. We are at loss to comprehend as to how availing of a loan by the assessee as reflected in its books of account could be a reason for the AO to believe that the assessee’s income had escaped assessment. There is no material to indicate that the AO had any ground to believe that the loan availed by the assessee (as reflected in the books of accounts) was chargeable to tax under the Act.

32. There is neither any allegation nor any material to even remotely suggest that the assessee had earned income chargeable to tax, which was camouflaged as an unsecured loan and reflected in its books of accounts, The AO had clearly no material on record to form any belief that the income of the assessee had escaped assessment

33. The impugned order does not reflect any ground for believing that the income of the assessee had escaped assessment in the relevant financial year. The AO had rightly rejected the contention that this is not a case of any change of opinion as an assessment had not been framed under Section 143(3) of the Act. However, the impugned order throws no light as to how an unsecured loan reflected in the assessee’s book was reason enough to believe that the income of the assessee had escaped assessment

34. The assessee had, in its letter dated 27.11.2012, explained that it had availed of the unsecured loan from its the then director Sh. Ashok Kumar Jain. It had also pointed out that the notes to the accounts for the financial year ended on 31.03.2012 and also disclosed that loan Rs. 5,00,000/- was received from Sh Ashok Kumar Jain, who was the Key Management Personnel. Notwithstanding the note, the AO has proceeded on the unfounded premise that the amount shown outstanding as unsecured loan in the balance sheet is unexplained and, thus chargeable to tax under Section 68 of the Act.

35. As explained in Lakhmani Mewal Das (supra), the assessment cannot be reopened only on account of ‘’reason to believe” and not ‘’reason to suspect”. In the present case, a fortiori, there is no reason to even suspect that the balance sheet of the assessee did not correctly reflect its state of affairs.

36 . In view of the above, the necessary condition for initiating reassessment u/s 147 of the Act is not satisfied. The impugned notice is thus, set aside.

Consequently, the impugned re-assessment order is also set aside.”

Further, to support his submissions, the ld. AR of the assessee has filed the following paper book.

2.3 During the course of hearing, the ld. DR supported the order of ld. CIT(A). The ld. DR also filed the letter dated 19-03-2019 issued by Shri Jethanand Bholchandani, ITO, Ward-1, Kishangarh with regard to reasons for reopening of the assessment in the case of JVK Stones. The detail of the letter is reproduced as under:-

–

2.4 We have heard the parties and perused the materials available on record. The facts as coming out of the records are that the assessee is in the course of setting up of the business and purchased an Industrial Land where no commercial activity has yet been started. During the course of assessment proceedings for AY 2016-17, the assessee furnished the Financial Statements for the year under consideration where the issue involved was source of the capital introduced by the partners. On the basis of the Balance Sheet so submitted, the AO found that unsecured loans of Rs. 1,40,89,951/- and partners capital account are outstanding as on 31.03.2012. Further, on this basis, the AO initiated the proceedings u/s 148 of the Act and thereafter made addition of the entire amount of unsecured loans despite the fact that the assessee furnished confirmations of the parties and also the relevant documents, copy of the books of accounts etc. to show that most of the unsecured loans were received in the earlier years. The ld. CTT(A), considering these facts, deleted the addition to the extent of Rs.92,10,830/- of the unsecured loans which were received in the preceding years. Out of the balance amount of addition of Rs 48,79,121/-he allowed relief of Rs.2,00,000/-in respect of one loan of Mr. Ravi Agrawal HUF and sustained addition of Rs 46,79,121/- in respect of 5 loans of the persons whose Income for the year under consideration was lower than the loan given. An analysis of facts and circumstances of the case suggests that the AO did not properly appreciate the facts and circumstances of the case. The Assessee submitted confirmations brought on record the fact that most of the unsecured loans were outstanding from previous year, still without properly verifying the facts, he just proceeded to make addition of entire amount of Rs.1,40,89,951/-unsecured loans outstanding as on the balance sheet date. The confirmation of all the parties is on record. All the parties in respect of which addition is sustained are filing their returns of income except Pista Devi who is mother of the partners of the assessee. Entire money has been received through account payee cheques. The assessee firm has not commenced any business activity and therefore, it is not justified to say that the assessee has camouflaged earned this income in view of Delhi High Court Judgement in the case of Alankar Promoters LLP Vs. ITΟ 167 taxmann.com 594. The ld. CIT(A) has also not appreciated the facts of the case properly and just compared the income of one year vis a vis the amount of loan given by the parties and gave relief where the return of income for the year is higher than the amount of loan received by the assessee. Looking at the facts of the case where revenue activity has not started, loans are received through account payee cheques and the parties are relatives of partners and confirmed the loans. Thus, the addition made by applying the provisions of section 68 is not justified. We hold accordingly.Further, the Id. AR also contended that the entire reassessment was initiated on the basis of details received during the course of assessment proceeding of AY 2016-17 in respect of capital contribution by partners and unsecured loan received by the assessee during AY 2012-13. In respect of capital contribution by partner Shri Krishna Murari Agarwal of Rs. 16,68,116/-, the AO recorded reason that creditworthiness of the partner Sh Krishna Murari Agarwal has not been proved as he has shown income of Rs. 4,31,400/- in his return of income.

2.4.1 In respect of unsecured loan of Rs. 1,40,89,951/- as on 31.03.2012, the AO recorded the reason that the assessee has not submitted any documents/evidence in respect of these unsecured loans. The amount taken by AO in statement of reason recorded in respect of unsecured loan represents closing balance, not loan taken during the year under consideration. In the statement of reason recorded, the AO has not referred to any tangible material except balance sheet which led to belief for AO that unsecured loan of Rs. 1,40,89,951/- appearing in balance sheet as on 31.03.2012 has escaped assessment. There is no reason even to suspect that the balance sheet of the assessee did not correctly reflect its state of affairs. Both the reasons recorded by AO are not reasons to believe but reasons to suspect which implies that basis of reassessment was to conduct roving enquiries which is against the fundamental basis of reopening of the case. The AO has not brought the fact in the statement of reasons that capital contribution by Shri Krishna Murari Agarwal and unsecured loan received from various parties were out of undisclosed sourcesof assessee’s income. Even otherwise, the AO had any doubt in respect of capital contribution and unsecured loan then he should have conducted enquiry on assessee as well as partner before initiation of reassessment proceeding and in case it is found that the capital contribution and unsecured loan were made out of assessee’s undisclosed sources then reassessment proceeding should have been initiated. Moreover, the amount mentioned in reason recorded in respect of unsecured loan is not correct and thereby reassessment proceeding is not valid without proper application of mind. Reliance is also placed on judgment of ITAT Jaipur Bench in case of Sushila Choudhary vs. ITO (ITA 638/JPR/2024, date of order 12.02.2025) in support of non-application of mind. In the judgment relied upon by the assessee, ITAT Jaipur Bench also supported its view by relying upon judgment passed by Hon’ble High Court of Bombey in case of TATA & Sons Ltd vs DCIT 137 tasmann.com 414 wherein it was held in para 6 & 7 as under:-

”6. If we consider the table reproduced above, the sale of shares of TCS Ltd. which according to Respondent No. 1 should be treated as ‘business income’ and not ‘profits arising out of sale of sale of investment’ is only Rs. 19,32,34,27,392/-(12,26,61,28,794 + 7,05,72,98,798) i.e. “Long terms capital gains:-‘’Tata Consultancy Services Limited”. Mr. Pinto though he made valiant attempt to defend the notice issued for re-opening, in fairness, as an offer of the Court, considering the reasons as recorded agreed that the only item which could have been stated to have escaped assessment would be the Long Term Capital gains in the sale of TCS Ltd shares amounting to Rs 19,32,34,27,592/-and Respondent No 1 was incorrect in stating that he had reason to believe that the sum of Rs 22,71,25,79,374/-has escaped assessment

”7. in our view, if the reasons for reopening the assessment is based on incorrect facts or conclusion, certainly the notice issued for reopening cannot be sustained. Moreover, if according to respondent No 1 only the sale of shares of TCS Ltd was ‘business income’ and not ‘profits arising of sale of investment’ to say that the amount of Rs 22,71,25,79,374- has escaped assessment, also indicates non application of mind.”

Apart from this, since the assessee has not started the business activity, therefore, in view of the Delhi High Court decision in the case of Alankar Promoters LLP VS. ITO (Supra), reassessment proceedings under section 68 cannot be justified in the case of the assessee firm. Hence, in view of the aforesaid discussion, we hold that the re-assessment proceedings are not justified in this case and the appeal of the assessee is allowed as indicated hereinabove.

3.0 In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 17/09/2025.