Sadbhavna Enterprise Vs ITO (ITAT Surat)
Search Intelligence Cannot Turn an Old Loan into a New Purchase—Addition Fails When the Transaction Itself Never Existed
The Surat Bench of the ITAT has held that information emerging from a search concerning alleged accommodation entries cannot justify an addition when the AO fails to verify the actual nature of the transaction recorded in the assessee’s books. Where the alleged party was not a supplier or trade creditor but an unsecured loan creditor appearing from earlier years, and the loan, interest, TDS & repayment were supported by banking and ledger records, the additions were unsustainable.
The assessee, Sadbhavna Enterprise, filed its return for AY 2019-20 on 29.12.2019, declaring a total income of ₹8,33,700.
A search and seizure and survey action was conducted on 15.02.2022 in the cases of Shri Ramesh Chaurasia, Shri Achal Chaurasia and the ARC Group. The group was allegedly involved in illegal online betting and gambling activities. According to the Department, cash generated through these activities was routed into the bank accounts of more than 35 group concerns through various forms of accommodation entries obtained against cash.
The seized material allegedly indicated that CA Sanjay Shah was one of the intermediaries who sourced and provided accommodation entries. On the basis of this information, the Department inferred that Sadbhavna Enterprise had entered into substantial financial transactions whose nature and quantum had not been properly disclosed in its return.
The assessee’s assessment was reopened u/s 147. An order u/s 148A(d) and notice u/s 148 were issued on 06.04.2023. During reassessment, the AO treated an amount of ₹1,35,000 as a variation in business income, apparently proceeding on the footing that it related to an accommodation entry involving M/s VRB Capital Services India Private Limited.
The CIT(A) confirmed the addition.
Before the ITAT, the assessee explained that the basic factual premise adopted by the lower authorities was incorrect. There was no purchase transaction, purchase credit, debit note or trade transaction in the assessee’s books involving VRB Capital Services India Private Limited.
The company appeared only as an unsecured loan creditor, and the loan had been brought forward from earlier years. It was not a trade creditor arising from an undisclosed or fictitious purchase during AY 2019-20.
The assessee furnished its bank statement and the lender’s confirmation. The confirmation showed an unsecured loan balance of ₹11,54,687 and interest of ₹1,15,469, on which TDS had also been accounted for. These documents demonstrated that the transaction was in the nature of a financing arrangement and not an undisclosed purchase or unrecorded business transaction.
The Revenue relied upon the search information and argued that it specifically indicated an accommodation entry through which unaccounted cash had been generated.
The ITAT observed that neither the AO nor the CIT(A) had examined the fundamental factual distinction. The AO could not identify any purchase made by the assessee from VRB Capital Services India Private Limited. The company was reflected in the books as a loan creditor from a prior year, and the corresponding bank statement, confirmation and interest particulars were available.
The mere presence of a party’s name in search-related information could not eliminate the need to examine how that party actually appeared in the assessee’s books. Before making an addition, the AO had to establish the precise transaction alleged against the assessee and connect it with the seized material.
Since the factual basis of the addition was not borne out by the records, the Tribunal deleted the addition for AY 2019-20 and allowed the assessee’s appeal.
For AY 2020-21, the assessment had been completed ex parte u/s 147 r.w.s. 144 & 144B on 04.02.2025, making an addition of ₹12,38,393 on account of disallowance of interest.
The ITAT found the facts to be identical. The loan and accumulated interest had been carried forward from earlier years, including FY 2016-17, and the assessee had made repayments aggregating up to ₹85 lakh in AY 2021-22. The loan details were supported by a ledger confirmation from VRB Capital Services India Private Limited placed in the paper book.
Accordingly, the Tribunal found no basis for sustaining the interest disallowance and allowed the appeal for AY 2020-21 as well. Both appeals of the assessee were allowed outright.
The Tribunal did not adjudicate the broader legality of reopening u/s 147. The relief was granted on the factual merits of the additions because the Revenue had misunderstood or failed to verify the true character of the ledger account and its supporting documents.
Author’s Comments
The ruling demonstrates the danger of converting search information into an addition without completing the factual bridge. Intelligence received from an Investigation Wing may justify scrutiny or reopening, but it does not prove that every transaction with a named person is an accommodation entry.
The first task of the AO was elementary but decisive: identify the exact entry in the assessee’s books. Was it a purchase, unsecured loan, interest provision, repayment or year-end balance? Here, the Department apparently proceeded as though VRB Capital Services was connected with an undisclosed purchase, whereas the books reflected an old unsecured loan.
The year of the original credit is equally important. If the loan was received and credited in an earlier year, its carried-forward balance cannot ordinarily be treated as a fresh credit in AY 2019-20 or AY 2020-21. Section 68 operates in the year in which the sum is found credited, subject to the factual and legal circumstances of that year.
The lender’s confirmation, bank trail, interest accounting, TDS and subsequent repayment collectively supported the assessee’s explanation. Repayment up to ₹85 lakh in AY 2021-22 was particularly relevant because it demonstrated continuing operation and settlement of the loan account.
Nevertheless, subsequent repayment does not automatically prove every loan genuine. In a properly investigated accommodation-entry case, the Revenue may still examine the lender’s identity, creditworthiness, source of funds, bank layering and surrounding evidence. What it cannot do is rely upon a general search allegation while ignoring the assessee’s specific books and banking records.
The interest disallowance also required an examination of the underlying borrowing, accrual and business purpose. Once the recorded loan transaction was accepted and the ledger confirmation remained unrebutted, the interest could not be disallowed merely by attaching an accommodation-entry label.
The enduring principle is straightforward: search material may name a party, but taxation must identify the transaction. A loan cannot become a purchase, and an opening balance cannot become current-year income, merely because an investigation report uses the words “accommodation entry.”
FULL TEXT OF THE ORDER OF ITAT SURAT
