Unexplained loan addition remanded for de novo verification as AO failed to evaluate banking trail and interest payments.

By | June 2, 2026
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Unexplained loan addition remanded for de novo verification as AO failed to evaluate banking trail and interest payments.

Issue

Whether the revenue was justified in confirming the addition of Rs. 1.25 crore as unexplained cash credit under section 68 when the assessee provided extensive documentary evidence of a banking-channel loan and its subsequent repayment with interest, but the Assessing Officer failed to conduct an independent verification of these transaction details.

Facts

  • The assessee-company received an unsecured loan of Rs. 1.25 crore from a corporate entity named MBPL during the relevant previous years.

  • The Assessing Officer (AO), acting on input from the Investigation Wing, labeled the lender as a shell company and added the entire loan amount to the assessee’s taxable income under section 68 as an unexplained cash credit.

  • The Commissioner (Appeals) deleted this addition after noting that the assessee had furnished robust supporting documentation. This included loan confirmations, bank statements, audited financial statements, Income Tax Returns (ITRs), an affidavit from the lender’s director, and evidence that the loan was repaid with interest after appropriate Tax Deducted at Source (TDS).

  • The appellate authority also found that the lender possessed substantial financial reserves and did not show any suspicious cash deposits before routing the funds to the assessee.

  • The revenue challenged this deletion, pointing out that notices issued to certain connected entities returned unserved, and that the lender reported very meagre profits and held zero fixed assets, casting doubt on its commercial substance.

  • The record revealed that the AO had entirely omitted a detailed, independent verification of the crucial repayment trail and the accompanying interest payments made through regular banking channels.

Decision

  • Held, yes; since the assessee had produced substantial documentary evidence, the complete lack of independent verification by the AO on the critical aspects of loan repayment and interest servicing meant the issue required a deeper factual analysis.

  • Held, yes; because both sides raised competing and valid factual points regarding the lender’s financial strength versus the documented banking trail, the matter could not be decided on incomplete assessments.

  • Consequently, the order was set aside and the entire matter was restored and remanded back to the file of the Assessing Officer for a fresh, de novo adjudication in accordance with the law.

Key Takeaways

  • Duty of Independent Verification: The Assessing Officer cannot rely solely on generic Investigation Wing reports to make an addition under section 68; the AO must actively verify the specific transaction evidence, such as banking channels and tax deductions, submitted by the assessee.

  • Significance of Repayment Evidence: The repayment of a loan along with interest through banking channels after deducting TDS serves as strong, primary evidence of a genuine credit transaction, and the revenue cannot ignore this trail during assessment.

  • Remand as a Balanced Remedy: Where an assessee discharges their initial onus with documentary proof, but the revenue points out structural anomalies in the lender (like zero fixed assets and unserved notices), the court will remand the case to ensure neither party is prejudiced by an incomplete factual inquiry.

IN THE ITAT AHMEDABAD BENCH ‘D’
Income-tax Officer
v.
Aashna Developers (P.) Ltd.*
DR. BRR KUMAR, Vice President
and Siddhartha Nautiyal, Judicial Member
IT Appeal Nos.1504 and 1505 (Ahd) of 2024
[Assessment years 2018-19 and 2022-23]
MAY  26, 2026
Bandish Soparkar, AR for the Appellant. Rameshwar P. Meena, Sr. DR for the Respondent.
ORDER
Siddhartha Nautiyal, Judicial Member.- Both appeals have been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 26.06.2024 passed for A.Ys. 2018-19 & 2022-23.
2. The Department has raised the following grounds of appeal:
ITA No. 1504/Ahd/2024 (A. Y. 2018-19)
“1 . Whether on facts and circumstances and in law, the Ld. CIT(A) has erred in deleting addition of Rs. 1,25,00,000/- u/s 68 of the Act as unexplained cash credits, without appreciating the facts of the case.
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in ignoring the fact that the assessee has transacted with Madhudhan Barter Pvt. Ltd. which is a shell company managed and controlled by renowned entry operator of Kolkata- Shri Manohar Lal Nangalis?
3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Office be restored. “
ITA No. 1505/Ahd/2024 (A. Y. 2022-23)
“1 . Whether on facts and circumstances and in law, the Ld. CIT(A) has erred in deleting addition of Rs. 3,30,00,333/- u/s 68 of the Act as unexplained cash credit and interest of Rs.30,54,619/- thereto, without appreciating the facts of the case.
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in ignoring the fact that the assessee has transacted with M/s. Cosmos Tradelink Private Limited which is a shell company managed and controlled by renowned entry operator of Kolkata- Shri Mukesh Banka?
3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. “
ITA Nos. 1504 & 1505/Ahd/2024 (A.Ys. 2018-19 & 2022-23)
3. The brief facts of the case are that the assessee company filed its return of income for Assessment Year 2018-19 declaring total income of Rs.10,93,100/- on 28.09.2018, which was subsequently revised on 22.02.2019. Initially, the assessment was completed under section 143(3) read with section 144B of the Income-tax Act, 1961 (“the Act”), wherein the Assessing Officer had made an addition of Rs.6,74,81,741/- under section 68 of the Act on account of alleged unexplained cash credits relating to unsecured loans. However, the said addition was deleted by the Commissioner of Income-tax (Appeals) vide order dated 20.09.2022 after considering various evidences furnished by the assessee including confirmation letters, bank statements, income-tax returns, audited financial statements, repayment details of loans, interest payments along with TDS deductions, affidavits of directors of lender companies and verification of the active status of the lender entities from the Ministry of Corporate Affairs portal.
4. Subsequently, the assessment for the impugned year was reopened under section 147 of the Act pursuant to information received through the Insight Portal relating to alleged accommodation entries. The Assessing Officer issued notice under section 148A(b) alleging that the assessee had received accommodation entry in the nature of bogus unsecured loan amounting to Rs.1,25,00,000/- from M/s. Madhudhan Barter Pvt. Ltd.
5. During reassessment proceedings, the assessee furnished evidences to establish the identity, genuineness and creditworthiness of the lender company. The assessee submitted ledger accounts, contra confirmations, bank statements, audited financial statements, income-tax returns, affidavits of the director of M/s. Madhudhan Barter Pvt. Ltd. and details of repayment of the loan in the subsequent year along with payment of interest after deduction of tax at source. The assessee also submitted that that the loan transactions were carried out entirely through banking channels and that the lender company possessed sufficient financial capacity to advance the funds. The assessee submitted that that the loan had been repaid in the subsequent year through RTGS and therefore the transaction could not be characterized as an accommodation entry.
6. However, the Assessing Officer was not satisfied with the explanation furnished by the assessee. The Assessing Officer relied primarily upon investigation wing information alleging that M/s. Madhudhan Barter Pvt. Ltd. was a shell entity controlled by alleged entry operators and concluded that the lender company lacked genuine financial credibility. According to the Assessing Officer, the assessee failed to satisfactorily establish the true source of funds available with the lender company and therefore the amount of Rs.1,25,00,000/- received from the said entity represented unexplained cash credit under section 68 of the Act. The Assessing Officer accordingly completed reassessment under section 147 read with section 144B at a total income of Rs.1,35,93,480/- after making addition of Rs.1,25,00,000/-.
7. Aggrieved by the reassessment order, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). During appellate proceedings, the assessee contended that complete documentary evidences establishing the identity, genuineness and creditworthiness of the lender had been furnished both during assessment proceedings as well as during appellate proceedings. The assessee once again furnished copies of income-tax returns of the lender company, loan confirmations, bank statements evidencing movement of funds through banking channels, audited financial statements and affidavit of the director of the lender company confirming the genuineness of the transactions.
8. The CIT(Appeals), after examining the assessment records and documentary evidences furnished by the assessee, recorded detailed findings in favour of the assessee. The CIT(Appeals) observed that the Assessing Officer had treated the loan as bogus merely on the basis of investigation wing information alleging that the lender company was controlled by accommodation entry providers, without properly appreciating the documentary evidences produced by the assessee. The CIT(Appeals) specifically noted that the assessee had furnished complete details to establish the three essential ingredients required under section 68 of the Act, namely identity of the creditor, genuineness of the transaction and creditworthiness of the lender.
9. The CIT(Appeals) observed that the lender company, namely M/s. Madhudhan Barter Pvt. Ltd., was regularly assessed to tax and had furnished its audited financial statements and income-tax returns. On examination of the balance sheet of the lender company, the CIT(Appeals) noticed that the lender possessed substantial reserves and surplus arising from securities premium which existed as opening balances and were not generated during the relevant assessment year. The CIT(Appeals) further observed that the lender company had utilized such funds for granting short-term advances to various parties including the assessee. Upon examination of the bank statements of the lender company, the CIT(Appeals) found that there were regular banking transactions and remittances received from various parties and that there was no evidence of cash deposits preceding the advancement of funds to the assessee. The CIT(Appeals) therefore held that the lender company had sufficient financial capacity to advance the impugned loan.
10. The CIT(Appeals) also recorded a finding that M/s. Madhudhan Barter Pvt. Ltd. was not merely a paper entity but was an operational company carrying on business activities and incurring substantial employee expenditure. Another factor considered by the CIT(Appeals) was that the assessee had repaid the entire loan amount in the subsequent financial year through banking channels along with interest after deduction of TDS. According to the CIT(Appeals), such conduct strongly supported the genuineness of the transaction and negated the allegation that the loan represented mere accommodation entry.
11. While granting relief, the CIT(Appeals) placed reliance upon several judicial precedents including the decision of the Delhi Tribunal in Nimbus (India) Ltd. v. DCIT, wherein it was held that once PAN details, bank statements, audited financial statements and income-tax acknowledgements are furnished, the assessee discharges its initial burden under section 68 and the onus shifts upon the Assessing Officer to disprove the evidences. Reliance was also placed upon the decision of the Calcutta High Court in Shankar Industries v. CIT [1978] 114 ITR 689 (Cal) for the proposition that the assessee is required to establish only the identity of the creditor, the capacity of the creditor and the genuineness of the transaction. Further CIT(Appeals) placed reliance on the decisions in CIT v. Metachem Industries [2000] 245 ITR 160 (M.P.) andCIT v. Kapoor Chand Mangesh Chand (Mag.) (All), wherein it was held that where sufficient funds are available with the lender and loans are advanced and repaid through banking channels, addition under section 68 of the Act cannot be sustained.
12. After detailed examination of facts and evidences, the CIT(Appeals) held that the assessee had successfully established the identity and creditworthiness of the lender as well as the genuineness of the transaction. The CIT(Appeals) further observed that once the nature of the transaction stood explained and the loan had been repaid through banking channels, the provisions of section 68 could not be invoked merely on suspicion or generalized investigation reports. Accordingly, the CIT(Appeals) deleted the addition of Rs.1,25,00,000/- made by the Assessing Officer under section 68 of the Act and consequently held that levy of consequential interest also became infructuous.
13. The Department is in appeal before us against the order passed by CIT(Appeals) allowing the appeal of the assessee.
14. The ld. DR strongly relied upon the findings recorded by the Assessing Officer and submitted that the assessee was a beneficiary of accommodation entry in the garb of unsecured loan received from M/s. Madhudhan Barter Pvt. Ltd., which according to the Investigation Wing formed part of a network of shell entities controlled by alleged entry operator Shri Manohar Lal Nangalia. It was submitted that though the assessee had furnished documentary evidences such as confirmations, bank statements and financial statements, the surrounding circumstances clearly established that the lender company lacked genuine financial capacity and commercial substance. The ld. DR pointed out that enquiries conducted by the Department revealed that the source of funds advanced by M/s. Madhudhan Barter Pvt. Ltd. was allegedly generated through sale of unlisted shares, however despite specific notice issued by the Department, the lender company failed to furnish valuation workings or credible supporting material establishing the genuineness and valuation of such unlisted share transactions. It was further submitted that notices issued under section 131 to connected entities such as M/s. Merrygold Mercantiles Pvt. Ltd. returned unserved as the addresses could not be located and field enquiries conducted through the Verification Unit also failed to establish genuine business existence of the entities concerned. The ld. DR further emphasized that the lender company had disclosed only meagre profit of Rs.5,447/- during the relevant year and possessed no fixed assets whatsoever, thereby demonstrating absence of any real business infrastructure or financial strength to justify advancement of loans of Rs. 1.25 crores. According to the ld. DR, the directors of such entities were merely dummy directors and the entire arrangement represented structured accommodation entries routed through shell companies. It was therefore argued that the assessee failed to establish the real creditworthiness and genuine source of funds of the lender company and accordingly the Assessing Officer was justified in treating the amount of Rs.1,25,00,000/- as unexplained cash credit under section 68 of the Act.
15. In response, the ld. counsel for the assessee placed reliance on the observations made by CIT(Appeals) in the appellate order.
16. We have heard the rival submissions and perused the material available on record.
17. The controversy involved in the present appeal relates to the addition of Rs.1,25,00,000/- made by the Assessing Officer under section 68 of the Act in respect of unsecured loan received by the assessee from M/s. Madhudhan Barter Pvt. Ltd., which according to the Department represented an accommodation entry routed through alleged shell entities controlled by entry operator Shri Manohar Lal Nangalia. The Assessing Officer proceeded mainly on the basis of investigation wing information, alleged deficiencies in the financial credentials of the lender company, non-service of notices upon connected concerns and the allegation that the lender company had generated funds through sale of unlisted shares without substantiating the valuation thereof.
18. At the same time, from the material available on record, it is observed that the assessee had furnished documentary evidences including confirmations, ledger accounts, bank statements, audited financial statements, income-tax returns, affidavit of the director of the lender company and details regarding repayment of the loan along with payment of interest after deduction of tax at source. The CIT(Appeals), after detailed examination of such evidences, deleted the addition by recording categorical findings that the assessee had established the identity of the creditor, genuineness of the transaction and creditworthiness of the lender. The CIT(Appeals) further observed that the lender company possessed substantial reserves and surplus, that no cash deposits were found preceding advancement of funds to the assessee and that the entire loan was repaid through banking channels in the subsequent financial year along with interest after deduction of TDS.
19. However, we also find substance in certain objections raised by the Department. The Department has specifically contended that though the lender company claimed to have generated funds through sale of unlisted shares, no proper valuation workings or supporting evidences establishing genuineness of such transactions were furnished before the Assessing Officer. It has also been pointed out that notices issued to certain connected concerns returned unserved, that the lender company disclosed only meagre profit of Rs.5,447/- during the relevant year and that it possessed no fixed assets whatsoever, thereby raising doubts regarding the actual financial strength and commercial substance of the lender company. The Department further relied upon investigation material alleging that connected entities were shell concerns operated by entry providers.
20. In our considered view, the issue requires deeper factual verification balancing both sets of circumstances emerging from the record. It is a settled position of law that addition under section 68 cannot be sustained merely on the basis of generalized investigation reports or suspicion once the assessee furnishes prima facie evidences establishing identity, genuineness and creditworthiness. At the same time, where surrounding circumstances raise legitimate doubts regarding the true source and financial capacity of the creditor, the matter requires proper verification by the Assessing Officer.
21. In this regard, reliance may be placed upon the judgment of the Hon’ble Gujarat High Court in the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360 (Guj), wherein the Hon’ble High Court held that once the assessee furnishes confirmations, PAN/GIR particulars and establishes that the amounts were received through account payee cheques, the primary onus cast upon the assessee stands discharged. The Hon’ble High Court observed as under:
“Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, it could not be said that the assessee had failed to establish the genuineness of the loans. “
22. Similarly, in the case of CIT v. Ranchhod Jivabhai Nakhava  (Guj), the Hon’ble Gujarat High Court held that once the assessee establishes identity of the creditors and genuineness of the transactions through account payee cheques and supporting documents, addition under section 68 cannot be sustained merely because the creditors could not satisfactorily explain the source of source. The Hon’ble High Court observed:
“Once the assessee had established identity of the creditors and genuineness of the transactions through account payee cheques and confirmations, no addition could be made merely because the creditors failed to explain satisfactorily the source of funds. “
23. At the same time, the Hon’ble Supreme Court in Pr. CIT (Central) v. NRA Iron & Steel (P.) Ltd. [2019] 412 ITR 161 (SC) has emphasized that mere furnishing of paper documents may not be sufficient where surrounding circumstances indicate lack of genuine creditworthiness and financial capacity of the creditor. In this case, Hon’ble Supreme Court held that where assessee received share capital/premium, however there was failure of assessee to establish creditworthiness of investor companies, Assessing Officer was justified in passing assessment order making additions under section 68 for share capital / premium received by assessee company. Therefore, proper factual verification assumes importance in cases involving alleged accommodation entries.
24. In the present case, one important factual aspect which goes to the root of the controversy is whether the impugned loan amount was actually repaid by the assessee through banking channels along with interest after deduction of tax at source. The CIT(Appeals) has recorded a finding that the loan was repaid in the subsequent year and interest was paid after deduction of TDS. In several judicial precedents, repayment of loan through banking channels coupled with payment of interest after deduction of TDS has been considered a strong indicator supporting genuineness of the transaction. However, the assessment order does not reflect any detailed independent verification by the Assessing Officer on this crucial aspect.
25. Considering the entirety of facts and circumstances and in the interest of substantial justice, we are of the considered view that the matter requires fresh examination at the level of the Assessing Officer. Accordingly, we restore the issue to the file of the Assessing Officer for de novo adjudication in accordance with law. The Assessing Officer shall specifically verify whether the impugned loan amount of Rs.1,25,00,000/- was actually repaid by the assessee through banking channels, whether interest thereon was paid after deduction of tax at source and whether such TDS was duly deposited with the Government account. The Assessing Officer shall further examine the source of funds available with the lender company including the transactions relating to sale of unlisted shares, valuation thereof and supporting evidences relating to the alleged financial capacity of the lender company. The Assessing Officer shall also consider all documentary evidences already placed on record by the assessee including confirmations, bank statements, audited financial statements, affidavits and income-tax returns and thereafter adjudicate the issue independently in accordance with law.
26. Needless to clarify, adequate opportunity of being heard shall be provided to the assessee and the assessee shall fully cooperate in the reassessment proceedings by furnishing all requisite evidences and explanations. Since the issue is being restored for fresh adjudication, we refrain from expressing any final opinion on the merits of the addition.
27. In the result, the appeal of the Department is allowed for statistical purposes.
28. Since common facts and issues for consideration are involved for both the years under consideration before us, the appeal of the Department is allowed for statistical purposes for assessment year 2022-23 as well.
29. In the combined result, both the appeals filed by the Department are allowed for statistical purposes.