Paper Trail Beats Entry-Operator Tale: Mumbai ITAT Deletes ₹60-Lakh Addition u/s 68

Zippy Finance Private Limited Vs ITO (ITAT, Mumbai)

Paper Trail Beats Entry-Operator Tale: Mumbai ITAT Deletes ₹60-Lakh Addition u/s 68

Summary:

Relevant Facts

In Zippy Finance Pvt. Ltd. v. ITO, the Mumbai ITAT examined a ₹60 lakh addition u/s 68 for AY 2010–11. The assessee had received share-application money of ₹30 lakh each from Alka Diamond Industries Ltd. & Kush Hindustan Entertainment Ltd. through banking channels. The amounts were recorded in its books & balance sheet.

Based on Investigation Wing information arising from a search on Pravin Kumar Jain, described as an accommodation-entry operator, the AO reopened the assessment u/s 147/148. Statements of Jain & connected persons allegedly revealed a network of shell companies supplying bogus share capital, loans & sales entries through dummy directors. Treating both investors as part of that network, the AO added ₹60 lakh as unexplained cash credit.

The CIT(A) relied on Jain’s statement u/s 132(4), a dummy director’s admission, low balances before issuing cheques, lack of operations & seized digital material. PAN, ITRs & audited accounts could not overcome the test of human probabilities. Jain’s retraction was considered belated & unsupported.

Issues Before the Tribunal

The issue was whether the assessee proved the identity, creditworthiness & genuineness of the applicants. Could an addition rest on general investigation material & third-party statements without independent enquiry, cash trail or cross-examination?

The assessee separately challenged reopening, non-consideration of returned loss & denial of a virtual hearing. However, these grounds became academic once the addition was examined on merits.

Assessee’s Submissions

The assessee submitted extensive documentation, including investor confirmations, directors’ affidavits, PAN details, ITR acknowledgements, audited financial statements, bank statements, share-application forms & board resolutions. Both applicants were incorporated, tax-assessed companies, reportedly listed on recognised stock exchanges & continuing on Registrar of Companies records. Their accounts disclosed sufficient funds to make investments at face value.

Transactions occurred through cheques or RTGS & remained recorded as share-application money. Neither Jain’s statement nor the investigation report established that this ₹60 lakh represented recycled cash. Jain retracted his admission, while cross-examination was denied. Reliance on such statements violated natural justice.

The AO conducted no independent verification & identified no defect. The assessee cited coordinate-bench rulings where additions involving the same share applicants & similar Jain material were deleted. These decisions were neither considered nor distinguished.

Revenue’s Contentions

Revenue supported the lower orders, contending that formal corporate documents were insufficient where investigation exposed a structured accommodation-entry racket. Investor bank accounts allegedly displayed deposits immediately before outward transfers, while dummy directors lacked genuine control. Applying Durga Prasad More, Sumati Dayal, Nova Promoters & Major Metals, Revenue argued that the apparent documentation must yield to real surrounding circumstances.

ITAT’s Findings & Legal Reasoning

The Tribunal found that the assessee had furnished comprehensive evidence establishing investor identity. Bank statements, financials & balance sheets also indicated sufficient funds at the investors’ disposal. Section 68 does not require an investor to demonstrate equivalent current-year profits; availability of funds capable of supporting the investment is material. Since the shares were issued at face value, no unexplained premium issue arose.

Amounts travelled through banking channels & confirmations were furnished. The AO exposed no falsity, traced no assessee cash & undertook no independent enquiry. He merely adopted the investigation report & Jain’s statement, while denying cross-examination.

The ITAT held that suspicion, however strong, cannot replace evidence. Once the assessee provides a probable explanation with primary proof, the onus shifts to Revenue. An AO rejecting that explanation must form an objective opinion founded on proper appreciation of material, as explained in P. Mohanakala. Here, the assessment did not discuss why the voluminous evidence was unreliable.

The Bench also relied on jurisdictional Bombay High Court’s Gagandeep Infrastructure & the Supreme Court’s Lovely Exports. Multiple Mumbai Tribunal rulings had already accepted the same investor companies in materially identical cases. Revenue produced nothing showing that the assessee participated in manipulation, introduced cash or derived any direct or indirect benefit from a circular transaction.

Accordingly, the Tribunal held that the assessee had fully discharged its primary section 68 burden. With no independent rebuttal from Revenue, the addition rested on presumption rather than legally sustainable evidence. The AO was directed to delete the entire ₹60 lakh addition, while remaining grounds were left open as academic. The appeal was allowed.

Practical Implications

The ruling confirms that an Investigation Wing alert is a starting point for enquiry, not automatic proof of an assessee’s undisclosed income. Companies receiving share capital should preserve confirmations, bank trails, financial statements, board approvals, ROC records & proof of allotment. Revenue may pierce documents when contrary evidence exists, but must conduct a taxpayer-specific investigation, confront adverse material & permit cross-examination. A general statement naming an entry network cannot substitute for proof connecting the assessee’s own money to the credited sum. Equally, taxpayers should not rely solely on PAN or bank transfers; a coherent financial record demonstrating all three section 68 ingredients remains essential.

Cases Discussed

• Kishanchand Chellaram v. CIT (125 ITR 713 SC)
• H.R. Mehta v. ACIT (Bombay High Court, 2016)
• Major Metals Ltd. v. Union of India (2012) 19 taxmann.com 176 (Bom.)
• Nova Promoters & Finlease Pvt. Ltd. v. CIT (342 ITR 169 Del.)
• CIT v. Durga Prasad More (82 ITR 540 SC)
• Sumati Dayal v. CIT (214 ITR 801 SC)
• Shri Charan Singh v. Chandra Bhan Singh (AIR 1988 SC 6370)
• McDowell & Co. Ltd. (1985) 154 ITR 148
• NDR Promoters Ltd. (410 ITR 379 Del.)
• Raj Kumar B Aggarwal v. DCIT (ITAT Pune)
• Roshan Di Hatti v. CIT (107 ITR 938 SC)
• Kale Khan Mohammad Hanif v. CIT (50 ITR 1 SC)
• Omar Salay Mohamed Sait v. CIT (37 ITR 151 SC)
• Commissioner of Income Tax v. Gagandeep Infrastructure (P.) Ltd. (2017) 80 Taxmann 272
• Commissioner of Income Tax v. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 (SC)
• CIT v. P. Mohanakala [2007] 291 ITR 278/161 Taxman 169
• Sandesh Projects Pvt. Ltd. v. ITO, ITA No. 1734/M/2024
• M/s. Sharda Labs Pvt. Ltd. v. ITO, ITA No. 1680/M/2020
• Diwali Capital & Finance Pvt. Ltd. v. DCIT, ITA No. 2091/Mum/2018
• Sahakar Global Ltd., ITA No. 5125/Mum/2017
• Khushboo Exports P. Ltd., ITA No. 3647/Mum/2017
• VHM Apparels P. Ltd., ITA No. 3078/Mum/2017
• Pyramid Realty P. Ltd., ITA No. 3579/Mum/2017
• CIT v. Roman & Co. (1968) 67 ITR 11 (SC)
• CIT v. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC)

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI

The present appeal emanating from the appellate order dated 29.08.2025 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to the assessment order passed u/s. 143(3) r.w.s 147 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 15.12.2017 for the Assessment Year [A.Y.] 2010-11.

2. The grounds of appeal are as under:

1. On the facts and circumstances of the case and in law, the learned CIT(A)-NFAC erred in confirming that the provisions of S.147/148 have been complied with. However, the appellant submit that the provisions of S.147 have not fully been complied and hence, the re-opening of the assessment itself is bad in law.

2 a) On the facts and circumstances of the case and in law, the learned CIT(A)-NFAC erred in confirming the addition of Rs.60,00,000 under Section 68 of the Act without going into the details and the total additions in respect of Unexplained Cash Credit amounting to Rs.60,00,000 were confirmed by way of surmise and conjecture.

b) The CIT(A)-NFAC wrongly confirmed the additions of Rs.60,00,000 made under Section 68 of the Act.

c) The CIT(A)-NFAC erred in not considering the detailed submissions filed though the same was incorporated in the CIT(A)’s order. The AO has not verified the details and has purely relied upon the report of Investigation without going in to detail aspect of the same.

d) On the facts and circumstances of the case and in law, the learned CIT(A)-NFAC ignored the details filed though the appellant has proved the capacity, identity and genuineness of the transactions with the lenders.

3. The order of the CIT(A)-NFAC is not a speaking order and has been passed without considering the total facts filed during the hearing. The order is bad in law.

4 The AO as well as Learned CIT(A) erred in not considering the loss incurred and declared in the return of income of Rs.77,032 during the year without discussing and erred in not allowing the same.

5. The appellant was not provided an opportunity by way of VIRTUAL HEARING though the same was sought during the hearing. Therefore, the order passed by the Learned CIT(A) NFAC is bad in law.

3. Briefly stated facts of the case are that the return of income was filed by the assessee disclosing Nil income. Information was received by the AO from the Investigation Wing of the Department that the assessee had received accommodation entries in the garb of share application money from Alka Diamonds Ltd and Khush Hindustan Entertainment Ltd of Rs 30 lakh each. The AO initiated reassessment proceedings u/s 148 of the Act, based on the said report in the case of one Sri Pravin Kumar Jain stated to be an accommodation entry supplier who was searched by the Department admitted indulging in such activity. The AO has reproduced the statements of Sri Jain and other related persons in the assessment order. He finally concluded that the alleged share application money was merely an accommodation entry which were added as Unexplained credit u/s 68 of the Act.

4. Before the ld.CIT(A) in the subsequent appeal filed, the assessee contended that during the year, it had received share application money of Rs. 30,00,000/- each from two companies namely (i) M/s. Alka Diamond Industries Ltd. and (ii) M/s. Kush Hindustan Entertainment Ltd. According to it, these amounts were received through banking channels by way of cheques/RTGS transfers and were duly recorded in its books of accounts and reflected in its Balance Sheet. The assessee further emphasized that both the investor companies were incorporated companies, assessed to tax, having valid PAN, and were listed on recognized stock exchanges. It was argued that complete supporting documents were furnished before the Assessing Officer, including confirmations of accounts, affidavits of directors, copies of ITR acknowledgments, audited financial statements, share application forms, and Board resolutions of the investor companies. It is also claimed that the financial position of both the companies was sound and capable of making the investments. The assessee, thus, argued that the identity of the investors, their creditworthiness, and genuineness of the transactions stood duly proved and consequently, no addition under section 68 of the Act was warranted.

4.1 It also submitted that the AO erred in relying solely upon the general statement of Shri Praveen Kumar Jain recorded during the course of search by the Investigation Wing. It was argued that no specific reference to the assessee company was made in the said statement and also Shri Jain had subsequently retracted his earlier admission. The assessee pleaded that no opportunity of cross-examination of Shri Jain or his alleged associates was given, thereby violating the principles of natural justice. It relied upon various judicial pronouncements including Kishanchand Chellaram v. CIT (125 ITR 713 SC), H.R. Mehta v. ACIT (Bom HC, 2016), and others, to stress that additions could not be sustained merely on third-party statements without granting cross-examination. According to it, since the funds were received through banking channels and remained invested as share application money on the closing date, there was no element of unaccounted income.

5. The ld.CIT(A), however, found no merit in its contentions. He observed that on going through the assessment order, it was evident that the Assessing Officer had relied upon extensive investigation carried out in the case of Shri Praveen Kumar Jain and his group entities. The Investigation Wing unearthed a well-organized racket of providing accommodation entries in the nature of bogus share capital, loans, and sales. During search action, Shri Praveen Kumar Jain, in his statement u/s 132(4), candidly admitted that he was in the business of giving accommodation entries through a network of shell companies controlled and operated by him with dummy directors. One of such dummy directors, Shri Nilesh Parmar, specifically admitted on oath that he was only an employee of Shri Jain and was made director in multiple companies including M/s. Alka Diamond Industries Ltd. and M/s. Kush Hindustan Entertainment Ltd, which were controlled entirely by Shri Jain and used for providing accommodation entries.

5.1 Further, on examination of the bank statements of the said investor companies it was noticed that they did not have sufficient balances in advance to support such large investments. On the contrary, the pattern of entries clearly showed that funds were deposited into their accounts immediately prior to issuance of cheques to the assessee. This clearly indicated that the companies were merely conduits to rotate unaccounted cash back into the appellant’s books in the guise of share application money. The surrounding circumstances, such as non-existence of any real business operations in these entities, dummy nature of directors, and the identical modus operandi adopted in numerous cases unearthed during the search, strongly corroborate the AO’s conclusion that the alleged share application money of Rs. 60,00,000/- was nothing but unexplained cash credit.

5.2 He further noted that reliance on the retraction of Shri Jain’s statement was also misplaced. Retraction made belatedly by way of an affidavit without cogent supporting evidence could not nullify an admission made on oath during search proceedings. Courts have consistently held that a bald retraction does not carry evidentiary value unless accompanied with valid justification or contrary material. Moreover, the retraction does not erase the corroborative material found during search such as seized books of accounts, pen drives, and statements of brokers and dummy directors, all of which independently confirm the accommodation entry business.

5.3 In respect of the evidences submitted by the assessee, he observed that the assessee had sought to emphasize that mere filing of PAN, ITRs, and audited accounts by the share applicants established their identity and creditworthiness. However, the judicial position laid down by the Hon’ble Bombay High Court in Major Metals Ltd. v. Union of India (2012) 19 taxmann.com 176 (Bom.) and by the Hon’ble Delhi High Court in Nova Promoters & Finlease Pvt. Ltd. v. CIT (342 ITR 169 Del.)clarifies that such documents were not sacrosanct and could not by themselves establish genuineness or creditworthiness when overwhelming evidence indicated that the companies are paper entities engaged in providing accommodation entries. Similarly, the Hon’ble Supreme Court in CIT v. Durga Prasad More (82 ITR 540) and Sumati Dayal v. CIT (214 ITR 801) has laid down the principle that taxing authorities are entitled to look beyond the apparent and consider the surrounding circumstances and test of human probabilities. In the instant case, it was against all human probabilities that genuine investors would place Rs. 60,00,000/- in a little-known finance company without any commensurate commercial benefit or rationale, especially when their own bank accounts showed no regular independent financial strength.

5.4 The ld.CIT(A) also placed reliance on the judgment in the case of Shri Charan Singh vs. Chandra Bhan Singh (AIR 1988 SC 6370) the Hon’ble Apex Court, Sumati Dayal vs. CIT (1995) 214 ITR 801 and McDowell & Co. Ltd (1985) 154 ITR 148 as also placed on judgement of Hon’ble Delhi High Court in NDR Promotors Ltd. reported in 410 ITR 379 (Del) and placed on judgment of ITAT Pune in case of Raj Kumar B Aggarwal vs. DCIT for AY 2004-05 to AY 2006-07 vide order dated 02.02.2019. He also relied on cases of Roshan Di Hatti vs. CIT [1977] 107 ITR 938, and Kale Khan Mohammad Hanif vs. CIT [1963] 50 ITR1.

5.5 Thus, considering the totality of evidences gathered during search, the incriminating statements of Shri Jain and his associates, the dummy nature of directors, the dubious pattern of bank transactions, and the lack of any real creditworthiness or genuine business motive of the investing companies, it was held by him that the onus cast upon the appellant under section 68 stands clearly unfulfilled. The assessee had failed to prove the genuineness of the transaction or the creditworthiness of the alleged investors. The addition of Rs. 60,00,000/- made by the AO u/s 68 of the Act was, therefore, fully justified and therefore, confirmed.

6. Before us, the ld.AR has vehemently contested the addition and the appellate order in this regard claiming that all necessary evidences were duly furnished in support of the identity, creditworthiness and genuineness of the impugned share application money. It is stated that the AO himself has admitted that the investor companies were still active. It is further submitted that the AO has merely relied on the report but did not make any independent enquiry in the matter. A Paper Book containing 262 pages has also been submitted wherein the relevant relies and details filed before the lower authorities have been annexed as also certain decisions where the coordinate benches of ITAT had deleted similar additions in respect of the same share applicants. Attention has been drawn to Sahakar Global Ltd., ITA No.5125/Mum/2017 dated 26.3.2021, Khushboo Exports P.Ltd. in ITA No.3647/Mum/2017, VHM Apparels P.Ltd.in ITA Npo.3078/Mum/2017 and Diwali Capital and Finance P. Ltd in ITA NO.2019/Mum/2018,Pyramid Realty P.Ltd, Mumbai on 6 December, 2017 in I.T.A. No. 3579/Mum/2017and several other decisions. It is submitted that all such orders were quoted by the assessee but were neither considered nor distinguished in any manner by the lower authorities.

7. The ld.DR on the other hand placed reliance on the orders of the authorities below.

8. We have carefully considered all the relevant facts. From the submissions made before us, we observe that the assessee had issued share application money and submitted PAN, Board resolutions, bank statements and confirmations etc. from the above said parties. Thus, the assessee had submitted all the relevant documentations substantiating the identity.

8.1 With regard to creditworthiness of the companies, assessee had submitted bank statements and other financial statements of the investors including the companies having relationship with Mr. Pravin Kumar Jain and other investors which showed that they had a capacity to invest in the assessee company. From the analysis made, it is clear that the above said companies were having sufficient turnover and margins. It was brought to our notice by the ld. AR that these companies were still in existence in the records of Registrar of Companies. From the Balance Sheet, it is noticed that available of funds in the business clearly suggest that investors had the capacity to make the investments in shares issued by the assessee. It is not necessary that the investors should have earning capacity to substantiate the investments in the other companies. It is enough that if they have enough funds at their disposal to make the investments. In this case, the investments were made only to the extent of face value. As regard the genuineness of the transactions, the assessee submitted the confirmations from them. It is also evident from the records that no cross examination was allowed to the assessee in respect of statement of Sri Pravin Jain which have been heavily relied upon by the AO. Moreover, there is not an iota of any independent enquiry made by the AO. He failed to point out any infirmity in the voluminous evidences submitted by the assessee to demonstrate the identity, creditworthiness of the share applicants and the genuineness of the transactions. Therefore, we are of the considered view that the asssessee has fully discharged its primary onus to establish that the amounts was received by the assessee from the share applicants as share application money were genuine transactions.

8.2 We also find that case of the assessee is covered by the judgment of the Division Bench of hon’ble jurisdictional Bombay High Court in case of Commissioner of Income Tax vs. Gagandeep Infrastructure (P.) Ltd.[2017] 80 Taxmann 272 as also the order of the Apex Court in case of Commissioner of Income Tax vs. Lovely Exports (P.) Ltd., reported in [2008] 216 CTR 195 (SC),apart from the cited decisions of Mumbai ITAT in a plethora of orders wherein the very same share applicants were found to be genuine and no adverse inference was drawn in deleting similar additions. Moreover, nothing is brought on record by the tax authorities that assessee was involved in any manipulation transaction or cash transactions which suggest that assessee had derived any directly or indirect benefit out of this transaction.

8.3 In the instant case, the AO has not brought forth any evidence but has based his conclusions on suspicion. It is trite law that on suspicion of the highest degree cannot take place of evidence. There must be some material on record as evidence for addition. Addition made on the basis of presumption cannot be sustained in law. This position is strongly supported by the decisions in CIT V Roman & Co (1968) 67 ITR 11 (SC), CIT v Calcutta Discount Co Ltd (1973) 91 ITR 8 (SC) and OmarSalayMohamedSaitvsCIT195937ITR151 (SC).

8.4 The expression “nature and source” in section 68 of the Act has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. The law on the subject has been illustrated in a number of decisions. The Hon. Supreme Court, in case of Kale Khan Mohd. Man if Vs. CIT (supra), pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. The law under section 68 is no different. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue. In this case, the assessee had shown the impugned amount as share application. The evidences were not disputed by the AO. Thus, prima facie, the explanation is probable. The AO has not shown anything that could dispute the fact of share application into assessee’s books, from an identifiable source, through banking channels. The Hon’ble Supreme Court in case of P. Mohanakala [2007] 291 ITR 278/161 Taxman 169 held that the expression “assessee offers no explanation” means where the assessee offers no proper, reasonable and acceptable explanation as regards the sum found credited in the books maintained by the assessee. It further held 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 AO 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. In the instant case, the assessee filed all reasonable and acceptable explanation and the AO has not even mentioned them or explained why he had rejected them.

8.5 Admittedly, there are various judgments of the Hon’ble Co-ordinate Benches of the Tribunal including in the cases of Sandesh Projects Pvt. Ltd. vs. ITO in ITA no.1734/M/2024 decided on 14.10.2024 and M/s. Sharda Labs Pvt. Ltd. vs. ITO (ITA no.1680/M/2020 decided on 10.02.2022), Diwali Capital & Finance Pvt Ltd vs DCIT ITA No.2091/Mum/2018, dt of order 10/01/2019wherein the Co-ordinate Benches of the Tribunal had occasion to deal with the identical addition on the basis of transactions with Alka Diamonds Ltd and Khush Hindustan Entertainment Ltd., statement of Mr. Praveen Kumar Jain and on consideration of identical facts and circumstances as involved in this case, deleted the addition on merit as well.

8.6 Considering the above discussion, in our considered opinion, the assessee has duly discharged the onus cast upon him under Section 68 of the Act by submitting all relevant documentary evidence, which has neither been discredited nor rejected by the revenue. The AO, instead of conducting any independent enquiry or verification, merely relied upon the report of the Investigation wing and the statement of Shri Praveen Kumar Jain, which was subsequently retracted. No opportunity for cross-examination was granted to the assessee, and such adverse material was used without adhering to the principles of natural justice. The ld. DR has also not brought any material on record to controvert the submissions made by him the ld.AR.

9. In view of the above discussion, we find no merits in the orders of the authorities below. Accordingly, allowing the grounds pertaining to merits of the case as per ground no. 2, we allow it with a direction to the AO delete the impugned addition.

10. Since we have already directed to delete the addition, we find no reason to adjudicate other grounds of appeal which have become academic only and are therefore, left open.

11. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 31/08/2026.