Case Law Details
Neelkhanth Township Pvt. Ltd. Vs DCIT (ITAT Delhi)
Share Capital Addition Deleted Because Revenue Relied Only on Retracted Third-Party Statements; ITAT Rejects Contradictory Approach Where Loan Accepted Genuine but Share Capital Treated as Accommodation Entry; No Addition Under Section 68 Without Evidence of Cash Rotation; ITAT Deletes Share Capital Addition Because Assessee Proved Identity, Creditworthiness, and Genuineness.
The Income Tax Appellate Tribunal (ITAT), Delhi, decided cross appeals filed by the assessee and the Revenue against the order dated 16.09.2025 passed by the Commissioner of Income Tax (Appeals) arising from an assessment completed under Sections 153A and 143(3) of the Income Tax Act for Assessment Year 2017-18.
The Revenue challenged deletion of an addition of Rs.54.50 lakh made under Section 68 in respect of unsecured loans received from M/s Vagmi Financials Pvt. Ltd., alleging that the lender was a paper entity engaged in providing accommodation entries. The assessee, on the other hand, challenged the jurisdiction assumed under Section 153A, the addition of Rs.49.50 lakh towards share capital under Section 68, reliance on third-party statements without cross-examination, and application of Section 115BBE.
The assessee also raised additional legal grounds before the Tribunal contending that the Assessing Officer failed to conduct independent enquiry regarding genuineness of the transactions, relied on statements recorded under Section 131 after the search and not under Section 132(4), denied opportunity for cross-examination, and adopted contradictory reasoning in treating unsecured loans and share capital differently despite both originating from the same entity.
The Tribunal admitted the additional grounds holding that they were legal in nature, arose from facts already on record, and required no fresh investigation. Reliance was placed on the Supreme Court judgments in National Thermal Power Co. Ltd. v. CIT and Jute Corporation of India Ltd. v. CIT.
The assessee company was engaged in the business of real estate and had filed its return declaring nil income. A search under Section 132 was conducted on 23.03.2018 in the Lav Kush Group cases. Proceedings under Section 153A were initiated against the assessee on the ground that it formed part of the same group and was covered under the search action.
The assessee objected to the jurisdiction under Section 153A, contending that no search warrant had been issued in its name and its name did not appear in the panchnama prepared during the search. The assessee also sought details of incriminating material allegedly found during search. However, the Assessing Officer rejected the objections and completed the assessment under Section 153A.
The Assessing Officer made additions of Rs.49.50 lakh towards share capital and Rs.54.50 lakh towards unsecured loans received from M/s Vagmi Financial Pvt. Ltd., alleging that the company was controlled by entry operators providing accommodation entries. The additions were primarily based on statements recorded under Section 131 from Shri Praveen Kumar Agarwal and Shri Mahender Sethia.
The Tribunal examined the panchnama and noted that the search warrant was issued in the name of “M/s Seetal Impex Pvt. Ltd. & Ors.” at premises which also constituted the registered office of the assessee company. Although the assessee’s specific name did not appear in the panchnama, the Tribunal held that the expression “& Ors.” included the assessee company and therefore jurisdiction under Section 153A had been validly assumed.
The Tribunal also rejected the argument that additions could not be made without incriminating material. It observed that the search took place on 23.03.2018 and the assessment year involved was AY 2017-18, for which the time limit for issuance of notice under Section 143(2) had not expired. Accordingly, the assessment year was treated as an “abated year”, and therefore the assessment was not confined only to incriminating material found during search.
On merits, the Tribunal noted that the assessee had received a total of Rs.1.04 crore from M/s Vagmi Financial Pvt. Ltd., consisting of Rs.49.50 lakh as share capital and Rs.54.50 lakh as unsecured loans. The CIT(A) had deleted the addition relating to unsecured loans after accepting the genuineness and repayment of the loans through banking channels, but had sustained the addition relating to share capital from the same entity.
The Tribunal found this dual approach contradictory. It observed that if the lender company’s creditworthiness and genuineness were accepted in relation to unsecured loans, the same company could not simultaneously be treated as providing accommodation entries for share capital on identical facts.
The Tribunal further noted that the assessee had furnished substantial documentary evidence including confirmed account statements, bank statements, audited financial statements, income tax returns of the lender company, and share allotment records filed before the Registrar of Companies. The assessee had also demonstrated the source of source of funds in the hands of the lender company.
The Tribunal observed that the Assessing Officer failed to conduct any independent enquiry regarding the documents submitted by the assessee and instead relied solely on retracted statements of alleged entry operators. It held that no incriminating material had been brought on record to establish that the transactions were non-genuine or that cash had been routed back to the assessee.
The Tribunal reiterated that suspicion, however strong, cannot replace evidence. Reliance was placed on decisions including Daulatram Rawatmull, Creations (P.) Ltd., Vrindavan Farms Pvt. Ltd., Ojas Tarmake Pvt. Ltd., and Umacharan Shaw & Bros.
The Tribunal also held that denial of cross-examination of persons whose statements were relied upon violated principles of natural justice. Referring to the Supreme Court judgment in Andaman Timber Industries v. CCE, the Tribunal observed that such denial went to the root of the matter and rendered the assessment unsustainable.
The Tribunal concluded that the assessee had discharged the burden cast under Section 68 by proving identity, creditworthiness, and genuineness of the transactions through documentary evidence and banking records. Since the Revenue failed to bring any contrary evidence on record, the addition of Rs.49.50 lakh towards share capital was deleted.
Accordingly, the Tribunal allowed the assessee’s appeal, deleted the addition relating to share capital, upheld deletion of the unsecured loan addition, and dismissed the Revenue’s appeal.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned cross appeals are filed by the Assessee and the Revenue against the order of Learned Commissioner of Income Tax (Appeals)-29, New Delhi [CIT(A) in short], dated 16.09.2025 arising out of the assessment order passed u/s 153A r.w.s. 143(3) of the Income Tax Act, 1961 (the Act, in short) dated 29.12.2019.
2. The Revenue has taken following grounds of appeals:
“1. The Ld. CIT(A) has erred in deleting the addition of Rs.54,50,000/- made u/s 68 of the Income-tax Act, 1961, without appreciating that the lender company (M/s Vagmi Financials Pvt. Ltd.) is a paper entity identified by the Investigation Wing as an accommodation entry provider. The assessee failed to establish the lender’s creditworthiness and the genuineness of the transaction.
2. That the order of the CIT (A) is erroneous and is not tenable on facts and in law.
3. That the grounds of appeal are without prejudice to each other.
4. That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”
2. The assessee has taken following grounds of appeal:
“1. That the order of Ld. CIT (A) is against the law, facts, principles of natural justice and all other principles and rules of law and therefore liable to be set aside.
2. That the order of Ld. CIT(A) is arbitrary and bad in law in so far as it failed to consider that the notice u/s. 153 A of the Income Tax Act 1961 issued by Ld. AO is misconceived and illegal being without jurisdiction, contrary to facts and provision of law. As such the order passed by Hon’ble CIT(A) is liable to be quashed/set aside.
3. That the Ld. CIT(A) has erred in law in confirming the action of Ld AO in holding that search was carried out on appellant which is contrary to facts and provision of law. As such the order passed by Hon’ble CIT(A) is liable to be quashed/set aside.
4. That the Ld. CIT(A) has erred in law in confirming the action of Ld AO in relying on various information received from Investigation Wings as well as statement of alleged Mahender Lal Sethia recorded by Investigation Wing collected behind the back of the appellant and used the same against the appellant without confronting the same to the appellant and without providing an opportunity of cross examination of deponent which is against the principles of natural justice and provisions of law. As such rejecting opportunity of cross examination of Mahender Lal Sethia by Ld. CIT(A) is liable to be done and addition so confirmed of Rs. 49,50,000 is liable to be deleted
5. That the order of Ld. CIT(A) is arbitrary and bad in law in so far as it failed to consider that the Ld. AO has erred in law in making an addition of Rs. 49,50,000 by treating share capital received from Vagmi Financial Private Limited as unexplained cash credit U/s 68 of the Income Tax Act 1961 which is contrary to facts borne on record and not supported by any tangible evidence, based on surmises and conjectures, provision of law and against the principles of natural justice. As such the addition of Rs. 49,50,000 so confirmed by Ld. CIT(A) needs to be deleted.
6. That Ld. AO is not justified in invoking the provisions of Sec 115BBE of the Income Tax Act, 1961 for computation of tax on addition of Rs. 49,50,000 made U/s 68 which is contrary to facts borne on record and provisions of law. As such the action of Ld AO needs to be undone and tax computed by the appellant as per returned income should be accepted.
7. That Ld. AO is not justified in charging interest U/s 234B, 234C of the Income Tax Act which is contrary to facts borne on record and provisions of law. As such interest levied by Ld. AO U/s 234B, 234C needs to be deleted
8. That on the facts and circumstances the Ld. AO has erred in initiating penalty proceedings u/s 271AAC of the Income Tax Act 1961 which is misconceived on facts and in law and liable to be filed.
9. That the appellant craves right to amend, add, delete or withdraw any of the ground of appeal either before or at the time of hearing of this appeal.”
4. During the course of hearing assessee has taken following additional grounds of appeal:
“1. That the Ld. CIT(A) has erred in law and on facts in upholding the addition of Rs. 49,50,000/- u/s 68 of the Act on account of share capital received from M/s Vagmi Financials Pvt. Ltd. without appreciating that the Ld. Assessing Officer failed to conduct any independent enquiry or verification under Section 142 of the Income Tax Act, 1961, to examine the genuineness of the transaction. The failure to conduct such an independent enquiry renders the assessment order and the additions made therein as unsustainable in law.
2. That the Ld. CIT(A) has erred in law and on facts in sustaining the addition of Rs. 49,50,000/-by placing reliance on the statements of Shri Praveen Kumar Agarwal recorded u/s 131 of the Act dated 17.07.2018 and Shri Mahendra Sethia recorded u/s 131 of the Act dated 20.06.2018, which were recorded after the conclusion of the search operations and were recorded under Section 131 and not under Section 132(4) of the Act, and therefore cannot constitute material found ‘during the course of search for the purposes of Section 153A of the Act.
3. That the Ld. CIT(A), has erroneously held that the right to cross-examination “is not absolute or natural right of appellant” which is contrary to the ratio laid down by the Hon’ble Supreme Court in Andaman Timber Industries vs. CCE (Civil Appeal No. 4228 of 2006) wherein it was held that failure to give the assessee the right to cross-examine witnesses whose statements are relied upon results in breach of
principles of natural justice and is a serious flaw which renders the order a nullity.
4. That the Ld. CIT(A) has adopted an inherently inconsistent and contradictory approach in dealing with the two additions made by the Ld. AO, both arising from transactions with the same entity, namely M/s Vagmi Financials Pvt. Ltd. (earlier known as M/s Fitworth Construction Pvt. Ltd.), particularly comparing the findings wrt share capital with those pertaining to unsecured loan.”
5. Before us the learned A/R for the assessee, in support of the additional grounds of appeal submits they are purely legal in nature and go to the very root of the matter. The same arise from the facts already on record and do not require investigation of any new or fresh facts. For this reliance is placed on the judgement of Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT reported in [1998] 229 ITR 383 (SC) wherein the hon’ble Apex court has held that the Tribunal has wide powers to allow additional grounds to be raised if it is satisfied that the grounds raised are bona fide and that the same could not have been raised earlier for good reasons. The Tribunal may allow a new ground to be raised if it is necessary for correctly assessing the tax liability of the assessee. Further, reliance is placed on the judgement of hon’ble Supreme court in the case of Jute Corporation of India Ltd. vs. CIT [1991] 187 ITR 688 (SC) and requested for the admission of additional grounds of appeal.
6. On the other hand, learned CIT DR submits that these grounds of appeal require verification on the part of the therefore they should not be admitted at this stage.
7. Heard the parties and perused the additional grounds of appeal taken. It is observed that the additional grounds of appeal are with respect to the confirmation of addition of Rs. 49,50,000/- made by AO without providing the opportunity of cross examination the persons whose statements were relied upon. It is further challenged that when such statements were recorded u/s 131 of the Act and not u/s 132(4) of the Act, therefore the same cannot constitute material found during the course of search for the purpose of section 153A of the Act. Since these grounds are borne out from the assessment order and requires no verification of the facts and are legal in nature, therefore, by respectfully following the judicial pronouncements relied upon by the assessee of the Hon’ble Supreme Court as stated above, the additional grounds of appeal raised by the assessee are admitted for adjudication
8. In grounds of appeal 1 to 3 assessee has challenged the initiation of proceedings u/s 153A of the Income Tax Act, 1961 and completion of assessment without referring to any incriminating material.
9. Brief facts of the case are that the assessee is a company incorporated under the Companies Act and engaged in the business of Real Estate. The return of income was e-filed on 23.10.2017 declaring total income at Nil. A search and seizure action u/s 132 of the act was carried on 23.03.2018 on Luv Kush Group of cases. The proceedings in the case of the assessee were also initiated u/s 153A of the Act by observing that the assessee was part of the same group and it was also covered u/s 132 of the Act. Thereafter the case of the assessee was centralized with DCIT, Central Circle-26, New Delhi in terms of the order passed u/s 127 of the Act and notice u/s 153A of the Act was issued on 14.11.2019. In response, assessee filed return of income declaring total income at Rs. Nil on 07.11.2019. The AO issued statutory notice u/s 143(2) on 11.11.2019 followed by notice u/s 142(1) along with questionnaire dated 28.11.2019. Since beginning to the proceedings vide replies dated 05.11.2019 and further vide reply dated 20.11.2019, assessee objected the assumption of by the AO u/s 153A of the Act by contending that since no search was carried out at the business premises of the assessee which could be seen from the copies of the panchnama prepared at the time of search and, therefore, no proceedings could be initiated under section 153A of the Act. However, the AO has not accepted the contentions of the assessee and proceeded to complete the assessment u/s 153A of the Act. The AO based on the statements recorded by various persons during post search investigation alleged that assessee has received accommodation entries in the shape of share capital and unsecured loans from the company managed and controlled by the entry operators, though no material was found as a result of search or referred in the assessment order. The AO thus, made the addition of Rs. 49,50,000/- u/s 68 of the Act by holding the share capital received from M/s Vagmi Financial Pvt. Ltd. (earlier known as M/s Fitworth Constructions Pvt. Ltd.) as unexplained. The AO further made addition of Rs. 54,50,000/- u/s 68 of the Act towards the unsecured loans from the same party by holding same as unexplained credit.
10. Against the said order, assessee preferred appeal before the Ld. CIT(A) who partly allowed the appeal of the assessee and confirmed the addition made u/s 68 of the Act of Rs. 49,50,000/- towards share capital holding the same as unexplained.
11. As observed above, during the year under appeal, assessee has issued 4,95,000 equity shares of Rs. 10/- each to M/s Vagmi Financial Pvt. Ltd. and thus received total share capital of Rs .49,50,000/-. While making the addition u/s 68 of the Act on account of share capital, AO observed that statements of two persons namely Shri Praveen Kumar Agarwal and Mahender Sethia were recorded u/s 131 of the Act wherein they had admitted engaged in providing accommodation entries by managing and operating various companies and M/s Vagmi Financial Pvt. Ltd is one of them.
12. Before us, Ld. AR for the assessee in support of grounds of appeal No. 1 to 3 drew our attention to page no. 104 of the PB which copy of the panchnama prepared during the search on 24.03.2018. As per item No.1 of the panchnama, search warrant was issued in the name of M/s Seetal Impex Pvt. Ltd. & Ors. And nowhere in panchnama name of the assessee was appearing. The Ld. AR further drew our attention to page 110 of the PB which is letter dated 05.11.2019 filed by the assessee before the AO stating that no search warrant was issued in the name of assessee, therefore, jurisdiction assumed u/s 153A is not correct and thus the proceedings initiated by issue of notice u/s 153A be dropped. Further vide letter dated 20.11.2019, assessee reiterated the same facts and further requested for the supply of the incriminating material, if any, found and seized during the course of search in the case of assessee company. Copy of the said letter is placed at pages 113 and 114 of the PB. As per ld. AR, despite of the repeated objections taken by the assessee, the AO has not even discussed the preliminary objection raised by the assessee and passed the assessment order u/s 153A of the Act, wherein additions have been made solely based on the so called statements of two persons who are totally unrelated party.
13. Ld. AR further submits that no incriminating material whatsoever was referred or brought on record found as a result of search from the possession of assessee company., which fact could be verified from the perusal of assessment order. Ld. AR thus, submits that the Hon’ble Supreme Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd. reported in [2023] 149 taxman.com399 (SC) has held that “no addition could be made dehorse the incriminating material in the assessment order passed u/s 153A of the Act as a result of search”. The Ld. AR further submits that the statement relied upon by the AO were recorded u/s 131 of the Act on 20.06.2018 of Sh. Mahender Setia and on 17.07.2018 statements of Shri Praveen Kumar Agarwal and not u/s 132(4) of the Act. Ld. AR further stated that both these persons have retracted from their statements and thus cannot be made the sole basis for making the addition. Further no opportunity to cross examine these persons was allowed to the assessee. He submits that these statements cannot be used against the assessee in the order passed u/s 153A dehors incriminating material found and seized as a result of search. Ld. AR thus submits that the order passed u/s 153A deserves to be hold bad in law and be quashed.
14. On the other hand, the Ld. Sr. DR vehemently supported the order of the lower authorities and submits that the assessee has raised this issue before the Ld. CIT(A) and Ld. CIT(A) while deciding the relevant grounds of appeal No. 2 & 3 of the assessee held that the search was conducted u/s 132 of the Act on Lav Kush Group cases of company u/s 132 of the Act and since the assessee was also covered, therefore, proceedings have rightly been initiated u/s 153A of the Act. Regarding the additions made without referring to the incriminating material, ld. CIT DR submits that during the search, fact of receipt of loans and share capital was found and it was further found that the subscriber company is managed and controlled by the entry operators who further accepted this fact in their statements recorded in post search proceeding. Thus, such statements constitute incriminating material based on which addition could be made in the hands of assessee towards accommodation entries obtained in the shape of share capital and unsecured loans. She prayed accordingly.
15. Heard both the parties and perused the materials available on record. From the perusal of the assessment order, it is observed that AO at page 1 of the order observed that assessee company was also covered u/s 132 of the Act. At same time when we refer page 104 of PB, which is copy of panchnama prepared at the time of search at 4735/11, 2, Ground Floor, Prakash Deep, Ansari Road, Dariyaganj, New Delhi, i.e. the premises where search was commenced on 23.03.2018 at 3.PM and concluded on 24.03.2018 at 5 P.M. It is further observed that in the panchnama in Item at S. No. 1, in whose name warrant it is mentioned “M/s Seetal Impex Pvt. Ltd. & Ors” and the address mentioned is the same as stated herein above. It is further observed that assessee company is also having the same address. Once search is carried out at the premises which is registered office of the assessee company also, though in Panchnama, the name of the assessee has not specifically mentioned, however, it is observed that the warrant was issued in the name of “Seetal Impex Pvt. Ltd. and Ors.” therefore, it can be presumed that the word “other” includes the assessee also. Accordingly, we hold that the AO has rightly assumed the jurisdiction u/s 153A of the Act.
16. Regarding the other argument of the assessee that additions have been made without referring to any incriminating material found and seized as a result of search, it is observed that search u/s 132 of the Act was conducted on 20.03.2018 and the assessment year before us is Ay 2017-18 for which the time limit for issue of notice u/s 143(2) of the Act was not expired thus it is abated year and therefore, the assessment cannot be limited to the material found as a result of search and thus the assessee fails on tis score also. Accordingly, the grounds of appeal No. 1 to 3 of the assessee are dismissed.
17. All the Grounds of appeal taken by the revenue are with respect to the deletion of additions of Rs. 54,50,000/-made u/s 68 of the Act by ld. CIT(A) on account of unsecured loans taken by the assessee from M/s Vagmi Financial Pvt. Ltd. (earlier known as M/s Fitworth Constructions Pvt. Ltd.). IN Grounds of appeal No. 4 to 6 and additional ground of appeal No. 1 to 4, assessee has challenged the addition of Rs. 49,50,000/- made u/s 68 of the Act towards share capital received during the year and confirmed by ld. CIT(A) from the same company.
18. Since the issues raised by both the parties related to the funds received from one Company, where the ld. CIT(A) has accepted the creditworthiness and genuineness of the lender company however, at the same time ld. CIT(A) has doubted the share capital subscribed by the same company by treating the same as accommodation entry, therefore, the grounds raised by both the parties are taken together for consideration.
19. Before us, Ld.AR submits that during the course of search, no incriminating material whatsoever was found pertaining to the transactions carried out by the assessee for the year under appeal, based on which, it could be said that the assessee has obtained accommodation entries. Solely on suspicion, the AO has concluded that the loans taken and share capital issued were not genuine. The assessee discharged the onus lies upon it by filing all the relevant details as required to establish the genuineness of share capital and loans u/s 68 of the Act. He further submits that the loan taken were repaid in the year itself which facts is admitted by ld. CIT(A) while deleting the addition therefore, no addition could be made by holding the credit as unexplained. Ld. AR also stated that the additions have been made solely based on the statement recorded of the third party which were taken under exceptional circumstances and were retracted by the respective persons through affidavits filed before the AO, therefore, such statement deserves no credence. Ld. AR further submits that neither the share capital nor the loans were taken in cash, and it is not the case of the revenue that the cash was deposited in the bank accounts of the lender companies immediately before the funds given to the assessee. Ld. Also stated that the assessee has also established the source of source in the hands of the companies by submitting the assessment particulars and other documents subscriber company.
20. Ld. AR further submits that no opportunity of cross-examine the persons whose statements were relied upon was provided to the assessee more particularly when such statements were used against the assessee. Ld. AR further submits that both the persons whose statements are made the sole basis to allege that the assessee has received accommodation entry of share capital and unsecured loans were retracted by filing the affidavits. However, such retraction was rejected by observing that the same is after thought. The addition was made by the AO only on the basis of statements recorded of third party and no corroborative evidence/material has been brought on record by the AO. Ld. AR submits that Sec. 132(4) specifies word “used in evidence” not “Used as evidence” The usage of the word “used in evidence” signifies that if there are any other corroborative evidence or documentary evidence, in that case the statement can be used as one of the evidences. IN the instant case the statements relied upon were even not recorded u/s 132(4) of the Act and thus have least evidentiary value.
21. on the other hand, Ld. Sr. DR vehemently supported the orders of the AO and submits that the AO during the course of assessment proceedings has made detailed discussion about the modus operandi of the entry operators and it was found that the assessee had obtained accommodation entries in the shape of share capital and unsecured loan from the Shell company managed and operated by Shri Praveen Agarwal and Shri Mahendra Setia. He further submits that the AO has made detailed analysis of the financial statements and concluded with the subscriber company has large share capital which was routed through other dummy companies managed and controlled by the same persons. As per ld. Sr. DR, the AO further relied upon the statements of Shri Praveen Agarwal and Shri Mahendr Setia who admitted that subscriber company was used as conduit to provide accommodation entries to assessee. Ld. Sr. DR requested for the restoration of the additions made by the AO towards unsecured loan and further requested to confirm the addition made towards share capital u/s 68 r.w.s. 115BBE of the Act.
22. Heard both the parties and perused the material available on record. From the perusal of the order of Ld. CIT(A), it is observed that Ld. CIT(A) after considering the fact that the loan was repaid in the year itself and further by following the judicial pronouncements relied upon, deleted the additions made by the AO towards unsecured loan however, the share capital received from the same company is upheld.
23. The assessee received total amount of 1,04,00,000/- from M/s Vagmi Financial Pvt. Ltd. out which Rs. 49,50,000/- received towards share capital and Rs. 54,50,000/- were received tas unsecured loan. The AO observed that the company M/s Vagmi Financial Pvt. Ltd. is Shell company managed and controlled by Shri Parveen Agarwal and Mahendra Setia (alleged as entry operator) however, ld. CIT(A) has accepted the loan as genuine. It is surprising that when the creditworthiness of lender company is doubted and allegation has been made with respect to the lender company as Shell company as to what prevent the ld. CIT(A) to hold that the entire funds received were accommodation entry. It is also relevant to state that during the year itself, loan was repaid which fact was ignored by the AO however, ld. CIT(A) appreciated this fact while deleting the addition towards unsecured loan.
24. Before AO, the assessee submitted detailed reply to the show cause notice issued and further filed all the plausible documentary evidences to support that the loans taken were genuine which are placed in the paper book at pages 120-187. At this juncture, we first refer to the provision of section 68 of the Act.
Cash credits.
68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :
Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,—
(a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”
25. That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessee offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessee in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression “the assessee offer no explanation” means where the assessee offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.
26. Coming to the facts of the present case in the line of the above proposition of law, from the perusal of details filed by the assessee during the course of assessment proceedings as available in Paper Book at page 120 to 187, it is observed that the assessee has filed the following documentary evidences:-
(i) Confirmed Copy of account statement;
(ii) Bank statement of the lender companies;
(iii) Audited financial statement of the lender companies;
(iv) Copy of ITR acknowledgement of the lender companies; and
(v) Copy of share allotment return filed before the ROC
27. It is further seen that the assessee not only prove the source in the hands of the loan creditors but further prove the source of source of the funds advanced to the assessee company by filing the assessment particulars of the year when the lender/investor company has received share capital i.e.in AY 2016-17.
28. It is also relevant to state that an amendment is made vide Finance Act, 2022 wherein second proviso to section 68 is added so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or loan provider. However, this additional onus to prove satisfactorily the source in the hands of the creditor, would not apply if the creditor is a well-regulated entity, e., it is a Venture Capital Fund, Venture Capital Company registered with SEBI. This amendment has taken effect from 1stApril, 2023 and accordingly applies in relation to the assessment year 2023-24 and subsequent assessment years. The year before us is AY 2017-18 thus this amendment is not applicable, yet the assessee has been able to establish the same as stated above. Since onus to establish the source of source in the case of share capital is on the assessee, therefore, the assessee has discharged the burden by filing the details of the availability of the funds in the hands of the subscriber company.
29. It is clear that the assessee has furnished source of source and if the AO has any doubts with respect to the source of source in the hands of the subscriber company, it could have made further enquiries which has not been carried out in the instant case and has relied upon the retracted statements of the so called entry operators.
30. As observed above, no incriminating material was brought on record pertaining to the year under appeal from which it could be held that the funds received by the assessee are not genuine. The Hon’ble Supreme Court in the case of CIT-III, Pune vs Singhad Education Society in Civil Appeal No.11080/2017 arising out of SLP (C) No.25257/2015 wherein the Hon’ble Apex Court has held as under:-
“The seized incriminating material have to pertain to the AY in question and have co-relation, document-wise, with the AY. This requirement u/s 153C is essential and becomes a jurisdictional fact. It is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in S.153A.”
31. Hon’ble Supreme Court in the case of CIT v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxman.com399 (SC) has also held that “no addition could be made dehorse the incriminating material”.
32. The Assessing Officer has not brought anything on record to establish that the source in the hands of subscriber company is non-genuine. Merely because some person accepted that they managed and controlled the lender / subscriber company which statements were retracted later, the funds received cannot be held to be accommodation entries. It is well-settled position of law that no matter how strong suspicion is, it cannot take place of the evidence. Therefore, in the absence of any evidence showing that in fact, appellant has given cash in lieu of funds received in the shape of share capital and unsecured loan, merely on the basis of suspicion, no addition can be made for which reliance is placed on decision of Hon’ble Supreme court in the case of Daulatram Rawatmull, (1964) 53 ITR 574.
33. Further on the issue of discharging of onus, the Hon’ble Jurisdictional High Court in the case of Creations (P.) Ltd. v. ITO reported in [2013] 354 ITR 282, has been held as under:
“It will have to be kept in mind that Section 68 of the I.T. Act only sets up a presumption against the Assessee whenever unexplained credits are found in the books of accounts of the Assessee. It cannot but be gainsaid that the presumption is rebuttable. In refuting the presumption raised, the initial burden is on the Assessee. This burden, which is placed on the Assessee, shifts as soon as the Assessee establishes the authenticity of transactions as executed between the Assessee and its creditors. It is no part of the Assessee’s burden to prove either the genuineness of the transactions executed between the creditors and the sub-creditors nor is it the burden of the Assessee to prove the creditworthiness of the sub-creditors.
34. It was further observed by the Hon’ble court as under:
14. With this material on record in our view as far as the Assessee was concerned, it had discharged initial onus placed on it. In the event the revenue still had a doubt with regard to the genuineness of the transactions in issue, or as regards the creditworthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the ASSESSING OFFICER that the credits were a circular route adopted by the Assessee to plough back its own undisclosed income into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The ITAT, in our view, without adverting to the aforementioned principle laid stress on the fact that despite opportunities, the Assessee and/or the creditors had not proved the genuineness of the transaction. Based on this the ITAT construed the intentions of the Assessee as being mala Ride. In our view the ITAT ought to have analyzed the material rather than be burdened by the fact that some of the creditors had chosen not to make a personal appearance before the A.O. If the A.0. had any doubt about the material placed on record, which was largely bank statements or the creditors and their income tax returns, it could gather the necessary information from the sources to which the said information was attributable to. No such exercise had been conducted by the A.O. In any event what both the A.O. and the ITAT lost track of was that it was dealing with the assessment of the company, i.e., the recipient of the loan and not that its directors and shareholders or that of the sub-creditors. If it had any doubts with regard to their credit worthiness, the revenue could always bring it to tax in the hands of the creditors and/or sub-creditors. [See CIT v. Divine Leasing & Finance Etd (20092-229-178.268 (Delhi) and CIT v. Lovely Exports (P.) Ltd. 2006) 215 CTR 495 (SC).*
35. The Hon’ble Delhi High Court in the case of CIT vs. Vrindavan Farms Pvt. Ltd. etc. in No.71 of 2015 dated 12thAugust, 2015 held as under :
“The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. lt was observed by the ITAT that the Assessing Officer had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon’ble High court.”
36. Regarding the additions made u/s 68 of the Act towards the unsecured loans though they were repaid subsequently, the Hon’ble Gujarat High Court in the case of PCIT vs Ojas Tarmake 150 com75 has observed as under:
“where the appellant showed unsecured loans received during the relevant AY and AO made addition on the ground that appellant failed to discharge onus of liability as laid down u/s 68 of the Act since amount of loan received by the appellant was returned to the loan period during the year itself and all the transactions were carried out through banking channel, impugned addition was to be deleted.”
37. In view of above facts and the circumstances of the case, we are of the considered view that the decision of the Ld. CIT(A) deleting the additions made for the unsecured loans is based on the appreciation of fact that all the relevant documentary evidences were produced by the Assessee to establish the identity and creditworthiness of the lender company and genuineness of the transactions. Further based on the legal precedents and the fact that the loan was received and repaid through banking channel had deleted the additions under consideration. We further observed that that Hon’ble Jurisdictional High Court in various cases has dealt with the fact that where assessee has discharged its burden by filing all the necessary evidences to prove the loans, provisions of section 68 cannot be invoked. Further Hon’ble Gujarat High Court in the case of PCIT Vs. Ojas Tarmake Pvt. Ltd. (supra) has held that where major portion of the credit has been repaid and also looking to the fact that in the instant case the AO had accepted the debit entries as genuine, the Hon’ble Court on the said facts ultimately affirmed the decision of the Tribunal in deleting the addition. Therefore we find no error in deleting the addition on account of unsecured loan of Rs. 54,50,5000/-. At the same time based on the same information, the addition made towards the share capital received from the same company is confirmed. This dual approach is not acceptable on same set of facts.
38. One more argument of the assessee was with regard to not providing the opportunity of cross examine the persons whose statements are relied upon the by Ao and ld. CIT(A) for confirming the addition towards share capital received. In case of Andaman Timber Industries Vs. CCE (SC) reported in 281 CTR 241(SC), the hon’ble Apex Court held that the Adjudicating Authority had not granted an opportunity to the assessee to cross examine the witnesses and the tribunal merely observed that the cross examination of the dealers in that case, could not have brought out any material which would not otherwise be in possession of the appellant-assessee. The Supreme Court set aside the impugned order and observed that it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross examination and make the remarks such as was done in that case.
39. Thus, the denial of opportunity to cross examine which goes to the root of the matter and strikes at the very foundation of the assessment and, therefore, renders the assessment order passed by the AO not sustainable. Thus, the additions made by the AO on the basis of such statement without any tangible material is not sustainable in law and liable to be deleted.
40. In view of the above discussion and further looking to the fact that when all the relevant details and documentary evidences produced by the assessee to establish the identity, creditworthiness and genuineness of the transactions, the said evidences cannot be rejected solely based on the retracted statements without any contrary documentary evidence. It is seen that transactions have been done through banking channels and when the funds were provided to the assessee, sufficient balance was available in the accounts of the company, which proves the creditworthiness and genuineness of the transactions. Further it is not case where cash was deposited in the bank account at the time of issuing cheques/RTGS in favour of the Assessee. Therefore, Appellant has duly discharged the burden casted upon it u/s 68 of the Act.
41. It is trite law that suspicion, howsoever strong, cannot take the place of proof as held in Umacharan Shaw & Bros. vs. CIT (1959) 37 ITR 271 (SC). The Hon’ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd v. Commissioner of Income Tax (1954) 26 ITR 775 (SC) has observed that powers given to the Revenue authority, howsoever, wide, do not entitle him to make the assessment on pure guess without reference to any evidence or material. The assessment cannot be framed only on bare suspicion. The assessment should rest on principles of law and one should avoid presumption of evasion in every matter. The assessee, in the instant case, has sufficiently demonstrated the genuineness of transaction and creditworthiness of the subscriber company. On a broader reckoning, the apprehension raised by the Revenue authorities militates against the tangible material and is thus extraneous. Accordingly, delete the addition of Rs. 49,50,000/- made and confirmed towards he share capital alleged as accommodation entry. Further the order of ld. CIT(A) deleting the addition made u/s 68 towards unsecured loan of Rs. 54,50,000/- received from the same company is hereby confirmed. Accordingly, all the grounds of appeal of the revenue are dismissed and grounds of appeal No. 4 to 6 and additional grounds of appeal No. 1 to 4 taken by the assessee are allowed.
42. In the result, appeal of the assessee in ITA No. 7604/Del/2025 is allowed and appeal of the Revenue in ITA No. 8880/Del/2025 is dismissed.
Order pronounced in the open Court on 30.04.2026.
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