ITAT Jaipur Upholds Bogus Loan Additions, Slams Assessee’s Counsel for Misconduct

ITAT Jaipur in ITO Vs Bagaria Trade Impex  Deprecates Assessee’s counsel for unprofessional behavior, cites intentional omission confirms Sec. 68 addition

Summary: The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, in the case of Income Tax Officer, Ward-01, Jhunjhunu v. Bagaria Trade Impex, ruled in favor of the Revenue, upholding additions made under Section 68 of the Income Tax Act for unexplained cash credits (unsecured loans) in Assessment Years 2013-14 and 2014-15. The assessee, a wholesale grocery and commodity trader, had shown substantial unsecured loans and repayments, which the Assessing Officer (AO) deemed accommodation entries based on investigation reports related to a network providing such entries. The AO’s factual inquiries, including non-genuine creditor addresses, unserved notices, and denials from alleged lenders, strongly indicated the transactions were not genuine. The ITAT emphasized that the assessee failed to discharge the mandatory burden under Section 68 to prove the identity, genuineness, and creditworthiness of the creditors, noting that even loans repaid in the same year must meet this test. The Tribunal held that the Commissioner of Income Tax (Appeals) erred by quashing the assessments or notices on mere technical or jurisdictional grounds without addressing the factual material and merits presented by the AO. Citing Supreme Court precedents, the ITAT set aside the CIT(A)’s technical relief, thereby sustaining the AO’s additions based on substantive evidence of bogus credits.

Facts:

• M/s Bagaria Trade Impex (assessee) is in wholesale trading of grocery items and commodity trading (MCX/NCDEX). For AY 2013–14 assessee filed a return on 09.2013 declaring total income of Rs. 18,49,16,450/-. For AY 2014–15 returns were also filed and scrutinised.
• The assessee’s case was selected for The AO examined loans/credits appearing in books. The Revenue relied on third-party information from investigation units for reopening/reassessment in connected years.
• During the assessment, AO noticed multiple unsecured loans/credits shown in the balance sheet and repayments within the year. The AO prepared a detailed table of creditors and amounts (principal + interest).
• Notices under section 133(6) were issued to several creditor entities; many replies denied the transactions, or the letters were returned unserved.
• Field enquiries/inspector reports revealed some addresses to be non-genuine or residential and that no business existed at the stated addresses. The AO relied on such enquiries and material seized in investigations (related to the so-called “Jain brothers” network that provided accommodation entries).
• For AY 2013-14/2014-15, the AO treated the credits as unexplained / accommodation entries and made additions under section 68 (and consequential additions under other sections such as 69C in some years).
• In one branch of the record (connected to the investigation of the Jain brothers), reassessment notices under section 148 were issued (dates and sequence are recorded in the order). The AO relied on investigation reports, statements and seized material to frame additions.
• The CIT(A) set aside/quashed assessments or allowed appeals on technical/jurisdictional grounds in various permutations — in at least one instance quashing the section 143(2) notice or deciding on procedural points without going into the merits. This produced multiple departmental appeals to the Tribunal.
• Revenue challenged the CIT(A)’s quashing/relief — contending that AO’s factual enquiries and evidentiary material justified additions and the CIT(A) erred by deciding on technical grounds without addressing merits. The matters were heard together before the Jaipur Bench.

Issues:

• Whether the CIT(A) was justified in quashing the assessment/notice and thereby closing out merits without examining the factual material.
• Whether the CIT(A) was justified in quashing the assessment/notice and thereby closing out the merits without examining the factual material.
• Whether reassessment under section 147/148 (based on information from investigation units and searches related to “Jain brothers”) was valid, and whether the AO had sufficient material to reopen/reassess.
• Whether CBDT Instruction No.7/2014is applicable so as to limit the AO’s enquiry.
• Whether the assessee’s attempts to rely on technicalities and auxiliary case law were sufficient to discharge the burden placed on it under section 68.

Observations:

• The Tribunal restated the settled legal position: when any sum is credited in the books and the assessee offers an explanation that is not satisfactory, the sum may be taxed under section 68. The assesse must establish: (a) Identity of creditors, (b) Genuineness of transactions, and (c) Creditworthiness / capacity of creditors. The order cites leading precedents (Kale Khan Mohammad Hanif; Roshan Di Hatti; PCIT v. NRA Iron & Steel) to reinforce this legal triad.
• The Tribunal emphatically held that a loan which is repaid or squared up in the same financial year does not per se escape scrutiny. The statutory test under section 68 applies irrespective of whether the loan remained outstanding at year-end. Transactions squared up in the same year can still be accommodation entries and fall foul of section 68 if the assessee cannot prove the three elements. The bench relied on factual indicators (low returned incomes, refunds claimed by purported lenders, inspector reports, unserved notices and denials) to treat the entries as suspect.
• AO’s enquiries and inspection returned evidence that many creditor addresses were non-genuine or residential; some alleged creditor companies were not traceable at the given addresses. Several notices under section 133(6) either came back unserved or elicited denials. The Tribunal regarded these negative returns and denials as strongly corroborative of AO’s view that the transactions were accommodation entries. The assessee’s new explanation introducing a mediator (one Naveen Agarwal) lacked corroborative documentary and was thus rejected.
• The order records that investigation and search material indicated a network (the Jain brothers) operating paper companies to provide accommodation entries through unsecured loans routed via shell entities. The AO relied on these investigation findings and the Tribunal accepted that they constituted sufficient prima facie material to treat credits as accommodation entries and to reopen/assess where appropriate.
• The Tribunal explained that CBDT Instruction No.7/2014 restricts the scope of enquiry only where selection was explicitly on AIR/CIB/26AS mismatch and the case is flagged as a CASS/AIR case. Here, the assessee’s matter was selected as full scrutiny, not a limited AIR/CASS case; therefore the instruction did not curtail AO’s power to probe beyond the limited points. The bench cited precedent (Parivel Rathnaswamy, etc.) to hold Instruction 7/2014 inapplicable as a bar to detailed examination where the case is full scrutiny.

• The Tribunal found that the CIT(A) had quashed assessment or allowed appeals on technical / jurisdictional grounds in at least one instance without addressing or analysing the substantive factual material amassed by the AO (inspector reports, returned notices, ITRs of creditors showing meagre incomes). The ITAT held such an approach was perverse because the CIT(A) ignored binding Supreme Court precedent (Kalinga Institute of Industrial Technology) which limits the scope for jurisdictional challenge where the assessee participated in proceedings without timely objection. The Tribunal therefore set aside the CIT(A)’s order.
• The bench referred to several Supreme Court and High Court pronouncements supporting AO’s approach:

• 1. Kale Khan Mohammad Hanif and Roshan Di Hatti– on assessee’s burden to explain credits;
  2. PCIT v. NRA Iron & Steel– identity/creditworthiness/genuineness tests;
  3. Cases on search-related inquiries and admissibility of investigation reports;
  4. Kalinga Institute of Industrial Technology – on limits to jurisdictional challenge where assessee had participated. The Tribunal applied these authorities to uphold the AO’s factual conclusions and to reject the assessee’s technical pleas.

• The AO refused requests for cross-examination of certain witnesses/statements (relied on precedent permitting that refusal in particular circumstances). The Tribunal considered the AO’s refusal permissible given the nature of the evidence and the investigation record. The assessee’s failure to produce bank statements/balance sheets of creditor entities on repeated requests further undermined its position.

In ITA No. 705/JPR/2025 for AY 2013–14, the Tribunal allowed the Revenue’s appeal, setting aside the CIT(A)’s order that had quashed the assessment on the ground of an invalid notice under section 143(2), and sustained the Assessing Officer’s order on merits with respect to the disputed additions. Similarly, in ITA Nos. 696/JPR/2025 and 697/JPR/2025, the Tribunal allowed the Revenue’s appeals on issues relating to unsecured loans and accommodation entries, holding that the Assessing Officer’s findings—supported by inspection reports, unserved notices, and investigation material—were valid and well-reasoned, while the CIT(A)’s contrary technical findings were unsustainable. The net effect of these decisions is that the Tribunal held the CIT(A)’s orders quashing or deleting additions on technical grounds to be unjustified, thereby restoring and sustaining the additions made by the Assessing Officer under section 68 and related provisions. It emphasised that substantive factual findings on bogus credits cannot be nullified on procedural or jurisdictional technicalities, particularly when the assessee fails to discharge the onus cast upon it under section 68 of the Act.