An addition under Section 68 is invalid if based on mere unsubstantiated doubt.

By | October 8, 2025
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An addition under Section 68 is invalid if based on mere unsubstantiated doubt.

Issue

Can an Assessing Officer make an addition under Section 68 of the Income-tax Act, 1961, by treating the sale proceeds of a share transaction as an unexplained cash credit, based on mere doubt and without bringing any adverse material on record, especially when the taxpayer provides evidence of the purchaser’s financial capacity?

Facts

  • The assessee sold its shares in a company to three different entities and declared a short-term capital loss on the sale.
  • The Assessing Officer (AO) simply doubted the genuineness of these transactions. Based on this doubt alone, the AO treated the entire sale consideration received by the assessee as unexplained cash credit and made an addition to their income under Section 68.
  • The Income Tax Appellate Tribunal (ITAT), however, reviewed the case and deleted this addition.
  • The Tribunal examined the bank statements and the net worth of the three purchaser companies and found that they had sufficient funds of their own to make the investment.
  • Most importantly, the Tribunal made a crucial factual finding: the AO, in the assessment order, had not actually questioned the three key ingredients of a genuine transaction—the identity of the purchasers, their creditworthiness (capacity to pay), or the genuineness of the transaction—with any concrete counter-evidence.

Decision

The High Court ruled in favour of the assessee, dismissing the revenue department’s appeal.

  • It held that the findings of the Tribunal were purely factual and were properly based on the documents and evidence available on the record.
  • Since the AO had failed to bring any adverse material on record to challenge the assessee’s explanation, and the Tribunal’s factual findings were not perverse, no substantial question of law arose from the Tribunal’s order that would require the High Court’s interference.

Key Takeways

  1. Suspicion Cannot Replace Proof: An Assessing Officer cannot make an addition based on their personal suspicion or doubt. There must be some positive, credible evidence on the record to show that a transaction is not genuine. A hunch isn’t enough.
  2. The Three Pillars of Section 68: To successfully make an addition for an unexplained credit, the AO must successfully challenge at least one of the three pillars: the identity of the creditor/investor, their creditworthiness (financial capacity), and the genuineness of the transaction. If the AO fails to address these, the addition will likely be deleted.
  3. The Tribunal is the Final Fact-Finding Authority: The ITAT is the highest fact-finding body in the tax judicial hierarchy. High Courts generally do not interfere with the factual findings of the Tribunal unless those findings are shown to be completely perverse or based on no evidence at all.
  4. The Burden of Proof Shifts: While the initial responsibility (onus) is on the assessee to provide the basic details of the transaction, once they have done so with primary evidence, the burden shifts to the Assessing Officer to disprove the assessee’s claims with their own evidence.
HIGH COURT OF KARNATAKA
Principal Commissioner of Income-tax
v.
Hamlet
K. V. Aravind and S.G. Pandit, JJ.
IT APPEAL No. 193 OF 2024
SEPTEMBER  2, 2025
Y.V. Raviraj, Sr. Standing Counsel for the Appellant. A. Shankar, Sr. Adv. and Shreehari Kutsa, Adv. for the Respondent.
JUDGMENT
K.V. Aravind, J. – The Revenue is in appeal, assailing the order passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’) in ITA No.70/Bang/2023 dated 16.11.2023, pertaining to the Assessment Year 2012-2013.
2. The following substantial questions of law are raised for consideration of this Court:
“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law by allowing fresh evidence being filed for the first time before it which has not remanded or scrutinized by the revenue for examining the veracity of such evidence”?
2.Whether on the facts and in the circumstances of the case, the Tribunal is right in law deleting addition of Rs.7,00,00,000/-brought to tax under section 68 of the act when the purchasers of the preference shares had not established their credit worthiness or the genuineness of the transaction before the AO”?
3.“Whether in the facts and circumstances of the case, the decision of the ITAT is devoid of principle of natural justice and matter ought to be remanded back to Assessing Officer as the details regarding acquisition of alleged preferred shares or the alleged sale transaction regarding transfer of land were never produced during assessment proceedings?”
3. The assessee filed its return of income, declaring a short-term capital loss on the sale of shares held in M/s. Kemwell Biopharma Private Limited to three entities, namely, M/s. Newedge Realtors Private Limited, M/s. Swift Residency Private Limited, and M/s. Rootstar Builders Private Limited (hereinafter referred to as the ‘purchasers’). The Assessing Officer, having doubted the genuineness of the transactions, held that the sum of Rs.7 Crores received on account of the sale of shares is taxable under Section 68 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
4. On appeal, the CIT(A) upheld the order of the Assessing Officer by order dated 27.12.2022. Thereafter, the assessee preferred an appeal before the Tribunal. The Tribunal, by the impugned order dated 16.11.2023, deleted the addition of Rs. 7 Crores made under Section 68 of the Act, holding that the transaction entered into by the assessee was genuine.
5. Sri Y.V. Raviraj, learned Senior Standing Counsel appearing for the appellant-Revenue, submits that the assessee has failed to substantiate the identity, genuineness, and creditworthiness of the purchasers; hence, the addition was rightly made under Section 68 of the Act. It is further submitted that the Tribunal, having considered additional evidence produced for the first time, recorded a finding in favour of the assessee. Learned counsel contends that, upon acceptance of such additional evidence, the Tribunal ought to have remanded the matter to the Assessing Officer for fresh consideration.
6. Per contra, Sri A. Shankar, learned Senior Counsel appearing on behalf of Sri Shreehari Kutsa, learned counsel for the respondent-assessee, submits that the Tribunal has not relied on any additional evidence, contrary to the contentions of the Revenue. It is submitted that the Tribunal, upon examination of the documents produced before the Assessing Officer, namely, the Bank Statements and other Books of Accounts, held that the purchaser companies were genuine and possessed sufficient funds at their disposal. Learned Senior Counsel further submits that, as the alleged credit of Rs.7 Crores has been satisfactorily explained by the assessee, Section 68 of the Act is not attracted. It is contended that the finding recorded by the Tribunal is a finding of fact and, therefore, no substantial question of law arises for consideration by this Court. In view of the above submissions, learned Senior Counsel prays for dismissal of the appeal.
7. We have considered the submissions advanced by the learned counsels for the parties and carefully perused the papers on record.
8. The Assessing Officer doubted the transaction of sale of shares by the assessee held in M/s. Kemwell Biopharma Private Limited to three entities, namely, M/s. Newedge Realtors Private Limited, M/s. Swift Residency Private Limited, and M/s. Rootstar Builders Private Limited. Disagreeing with the explanation offered by the assessee, the Assessing Officer held that the sum of Rs.7 Crores is taxable in the hands of the assessee under Section 68 of the Act. The CIT(A) confirmed the finding recorded by the Assessing Officer. However, the Tribunal examined the Bank Statements and other evidence on record to determine the genuineness of the transaction as well as the identity and creditworthiness of the purchasers. After referring to the Bank Statements of the three purchaser companies, the Tribunal held that the purchasers had sufficient funds at their disposal for the acquisition of the shares. The Tribunal further noted the net worth of these companies, which is as under:
NAME OF THE COMPANYSHAREHOLDERS FUNDS(SHARE CAPITAL + RESERVES & SURPLUS)RELEVANT PAGE No. OF PAPER BOOK FILED
1. NEWEDGE REALTORS PVT. LTD.29,97,00,604/-128
2. ROOTSTAR BUILDERS PRIVATE LIMITED21,83,01,898/-142
3. SWIFT RESIDENCY PRIVATE LIMITED9,45,00,930/-155

 

9. The Tribunal further recorded a finding that the Assessing Officer did not question the creditworthiness, genuineness of the transaction, or the identity of the purchasers. In fact, the Tribunal observed that the purchasers had responded to the notices issued by the Assessing Officer under Section 133(6) of the Act. Apart from doubting the transaction, no other material was brought on record by the Assessing Officer to discredit the explanation offered by the assessee.
10. We have perused the findings recorded by the Tribunal. Such findings are purely factual and based on the documents available on record. It is a settled position that a finding of fact, unless shown to be perverse, does not give rise to any substantial question of law. The findings recorded by the Tribunal are, therefore, findings of fact. We find no substantial question of law warranting interference with the order of the Tribunal. Accordingly, the appeal filed by the Revenue is dismissed.