Unsubstantiated Additions Under Sections 68 and 69C for Repaid

Unsubstantiated Additions Under Sections 68 and 69C for Repaid Unsecured Loans Deleted

Issue

Whether additions made towards unexplained cash credits under Section 68 and alleged commission expenses under Section 69C can be sustained when the unsecured loans were received via banking channels, bore interest subject to TDS, were fully repaid, and were treated as accommodation entries without specific incriminating evidence against the assessee.

Facts

Reopening Based on Investigation Wing Report: For Assessment Year 2013–14, the Assessing Officer (AO) received information from the Investigation Wing alleging that the assessee had obtained accommodation entries in the guise of unsecured loans from two companies.
Additions Made by AO: The AO held that the assessee failed to establish the identity, creditworthiness, and genuineness of the transactions, adding the loan amount as unexplained cash credits under Section 68 alongside an addition under Section 69C for alleged commission paid to obtain accommodation entries.
Vague Third-Party Statement: The statement of the director of one lender company related primarily to another entity and diamond trade accommodation entries, without specifically naming the assessee or identifying the loan in question as bogus.
No Incriminating Evidence: The Revenue brought no documentary evidence or material on record to prove that the loan amount was the assessee’s own unaccounted money routed back through accommodation entries.
Banking Channel & Repayment: The loan was received through normal banking channels, carried a 12% interest rate with proper Tax Deducted at Source (TDS), and was subsequently repaid in full along with interest.
No Circular Flow Proven: The Revenue failed to demonstrate that the funds repaid to the lender ever returned to the assessee or were part of a circular transaction scheme.

Decision

Addition Under Section 68 Deleted: The Tribunal/Court held that since the loan was received through proper banking channels, interest was paid after TDS, the loan was fully repaid, and no specific incriminating evidence was produced, the addition under Section 68 could not stand.
Consequential Section 69C Addition Deleted: Since the addition for commission expenses under Section 69C was purely consequential to the primary Section 68 addition, it was also deleted, deciding the matter in favor of the assessee.

Key Takeaways

Repayment and Banking Records Prove Genuineness: Unsecured loans received through banking channels, serviced with interest subject to TDS, and subsequently repaid in full cannot be arbitrarily classified as unexplained cash credits under Section 68.
General Third-Party Statements Inadmissible: Generic statements from third parties regarding accommodation entry networks cannot form the basis of a Section 68 addition unless they specifically identify and implicate the assessee’s exact transaction.
Deletion of Consequential Additions: Additions toward commission expenses under Section 69C automatically fail once the underlying addition for unexplained cash credits under Section 68 is set aside.

IN THE ITAT MUMBAI BENCH ‘K’

Harichandana Developers (P.) Ltd.

Income-tax Officer

Siddhartha Nautiyal, Judicial Member
and Vikram Singh Yadav, Accountant Member

IT Appeal No. 3022 (Mum.) of 2026
[Assessment year 2013-2014]

JULY 23, 2026

Ms. Sailee V. Gujarathi for the Appellant. Ajay Uke, Sr. AR for the Respondent.

ORDER

Siddhartha Nautiyal, Judicial Member. – This appeal is filed by the Assessee against the order of Ld. Commissioner of Income Tax (Appeals), NFAC vide DIN: ITBA/NFAC/S/250/2025-26/1084666659(1) dated 12-Jan-2026 for the Assessment Year 2013-2014. The Assessee has raised the following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, honourable Commissioner of Income Tax (Appeals) (hereinafter referred to as CIT(A)) has erred in passing an order under section 250 of the Income Tax Act, 1961 (the Act) without appreciating the facts of the case.

2. On the facts and in the circumstances of the case and in law, the Honourable CIT(A) failed to appreciate that the AO had issued notice dated 3 December 2021 under section 142(1) of the Act and proceeded with the assessment even before disposing the objections of the Appellant filed on 14 July 2021. Therefore, the reopening of the assessment is bad in law and the assessment order dated 29 March 2022 is liable to be quashed and set aside.

3. On the facts and in the circumstances of the case and in law, the Honourable CIT(A) has erred in passing an order under section 250 of the Act without appreciating the fact that the notice issued under section 148 was illegal on below counts 3.1 That the notice was issued merely based on assumptions, presumptions and surmises 3.2 That the learned AO has issued notice based on borrowed satisfaction, without there being any new tangible material OR valid reason to believe that income chargeable to tax had escaped assessment 3.3 That the learned AO failed to make independent enquiry 3.4 That reasons recorded u/s 148 of the Act do not meet the requirement of law and was completely vague, scant, incomplete and untenable Therefore, the reassessment proceedings are bad in law and liable to be quashed.

4. On the facts and in the circumstances of the Case and in Law, the reassessment order passed is invalid and illegal, as the learned Assessing officer has violated the principle of natural justice by not passing a speaking order on the objections raised by the Appellant, against the invalid reopening under sec. 148 read with Sec. 147, 149 and 151 of the Act.

5. That on the facts and in the circumstances of the case and in law, the Reassessment order passed is invalid and illegal as the same is without proper approval as required under sec. 151 of the Act. The Assessment order passed is without jurisdiction in as much as the approval given is mechanical and without application of mind.

6. On the facts and in the circumstances of the case and in law, the Honourable CIT(A) erred in not appreciating the fact that assessee has discharged its onus u/s 68 and 69C of the Act by submitting direct documentary evidences proving the creditworthiness, identity and genuineness of the loan. Further, the fact that the loan has been repaid through banking channels in subsequent years is ignored by the Honourable CIT(A). Hence, the appellant requests to delete addition made under section 68 and 69C of the Act.

7. On the facts and in the circumstances of the case and in law, the Honourable CIT(A) erred in not appreciating the fact that assessee has discharged its onus u/s 68 and 69C of the Act by submitting direct documentary evidences proving the creditworthiness, identity and genuineness of the loan. Hence, the appellant requests to delete addition made under section 68 and 69C of the Act.

8. On the facts and circumstances of the case, the Ld. Assessing Officer erred in making addition by merely and mechanically relying upon third party statement (Mr. Mohit Mangal Chand Jain (Kothari)) on basis of suspicion and surmises, without establishing any connection of the appellant with the said third party and in absence of any incriminating documents OR corroborating evidence. Hence, the appellant requests to delete addition made under section 68 and 69C of the Act.

9. On the facts and in the circumstances of the case and in law, honourable CIT(A) has erred in passing an order under section 250 of the Act without appreciating the fact that the reassessment order was passed without affording the appellant an opportunity to cross-examine the alleged entry operators, despite specific requests made in this regard. The reassessment order therefore is bad, invalid, illegal and in gross violation of the principal of natural justice.

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10. On the facts and in the circumstances of the case and in law, honourable CIT(A) has erred in passing an order under section 250 of the Act without appreciating that mere non response of a third party to a notice under section 133(6) of the Act cannot negate the transaction when identity of the creditor, genuineness of the transaction is established through documentary evidences. Hence, the appellant requests to delete addition made under section 68 of the Act.

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11. On the facts and circumstances of the case, the Ld. CIT(A) erred in passing the order without providing the opportunity of virtual hearing despite the assessee specifically seeking the same, thereby violating the principles of natural justice and provisions of Section 250(6) of the Income Tax Act, 1961.

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12. On the facts and in the circumstances of the case and in law, Honourable CIT(A) has erred in passing an order under section 250 of the Act without appreciating the fact that the loan in respect of which the interest expenditure was claimed is genuine, and consequently, the disallowance of interest on such loan is unjustified and liable to be deleted.

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13. On the facts and in the circumstances of the case and in law, the learned AO has erred in levying interest under section 234A and 234B of the Act. 14. The appellant hereby reserves the right to add, alter, amend, withdraw OR delete any Ground/s of Appeal.

2. The brief facts of the case are that the assessee is a private limited company which filed its return of income for the Assessment Year 2013-14. Subsequently, the Assessing Officer received information from the ADIT (Investigation), Surat that the assessee had received accommodation entries as unsecured loans from M/s Sanyam Gems Pvt. Ltd. and M/s Sejal Gems Pvt. Ltd. On the basis of this information, the Assessing Officer formed a “reason to believe” that income chargeable to tax had escaped assessment. During the course of re-assessment proceedings, the Assessing Officer analyzed the unsecured loans received by the assessee from the aforesaid two companies. The Assessing Officer held that the assessee had failed to establish the identity, creditworthiness and genuineness of the loan transactions. The Assessing Officer treated unsecured loans of ₹25,00,000/- as unexplained cash credits under section 68 of the Act. The Assessing Officer further held that in light of these facts, the assessee would have paid commission for taking these accommodation entries and accordingly the Assessing Officer made an addition of ₹1,43,012/- under section 69C towards unexplained expenditure.

3. In appeal, the learned CIT(Appeals) observed that the director of M/s Sanyam Gems Pvt. Ltd. had admitted on oath that the company was engaged in providing bogus accommodation entries, whereas M/s Sejal Gems Pvt. Ltd. was not found at its registered address. Further its financial statements reflected that it had negligible infrastructure and had incurred negligible business expenses thought it had declared a very high turnover. The CIT(Appeals) observed that these facts demonstrate that there was an absence of genuine business activities and both companies did not have the financial capacity and creditworthiness to give unsecured loans to the assessee. Accordingly, CIT(Appeals) confirmed the order of Assessing Officer and upheld the addition of ₹25,00,000/- made by the Assessing Officer. The CIT(Appeals) also confirmed the consequential addition of ₹1,43,012/- towards commission paid by the assessee for taking the accommodation entries.

4. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee.

5. We have heard the rival contentions and perused the material available on record. On perusal of the “reasons for reopening” at page 25 of the Paper Book, it is seen that the Assessing Officer himself was not certain about the amount of loan advanced by M/s. Sanyam Gems Pvt. Ltd. to the assessee. The reasons recorded (at para 3) states that M/s. Sanyam Gems Pvt. Ltd. had received interest of ₹1,14,410/- from the assessee during the relevant previous year and, on the basis, the Assessing Officer assumed rate of interest of at least 6%, and the Assessing Officer computed the principal loan amount at ₹19,06,800/-. Therefore, it is evident the Assessing Officer is not sure of the amount of loan taken by the assessee from M/s. Sanyam Gems Pvt. Ltd. We are of the considered view that when the Assessing Officer himself is uncertain on the facts and quantum of loan has been computed / worked out on the basis of assumptions, the “reasons to believe” under section 147 of the Act have not been formed on the basis of tangible material. Further, the learned counsel submitted that the actual rate of interest charged on the loan transaction was 12% and not 6% as assumed by the Assessing Officer. The interest was duly subjected to tax deduction at source and forming part of Form 26AS as well. We are of the considered view that this error shows non-application of mind by the Assessing Officer while recording the reasons for reopening.

6. We further observe from the statement of Shri Mukesh Kothari, Director of M/s. Sanyam Gems Pvt. Ltd. that the statement primarily relates to the business transactions of M/s. Jitendra Diamonds Pvt. Ltd. and the accommodation entries in the diamond trade. The statement neither specifically refers to the assessee nor there is any mention of unsecured loan given to the assessee which was a bogus or accommodation entry. Further, the statement does not contain any categorical admission that the loan activity undertaken with the assessee was bogus. The Revenue has not brought any independent material to show that the assessee has taken any accommodation entry. In the absence of any direct nexus between the statement of the Director and the assessee’s transaction, we are of the considered view that Revenue cannot place reliance only on such statement, which by itself cannot constitute evidence against the assessee.

7. It is also an admitted position that no incriminating material or documentary evidence has been brought on record by Department to show that the loan received by the assessee was its own unaccounted money routed through accommodation entries. Except for the investigation report and the statement of the Director of the lender company, there is no material to show that the assessee received any accommodation entry from the said parties.

8. We also find merit in the contention that there is nothing to show that the loan transaction was a sham transaction. The loan was received through normal banking channels, interest was paid at the rate of 12%, tax was deducted at source on such interest, and the loan has subsequently been repaid along with interest. The Revenue has not brought any material to show that the funds repaid to the lender came back to the assessee or the above sequence of transactions were only circular entries undertaken by the assessee.

9. In view of the totality of the facts and circumstances of the case, we are of the considered opinion that the Revenue has failed to discharge the burden to show that the assessee had taken accommodation entries in the form of unsecured loan or the assessee had incurred any unexplained expenditure by way of commission to take the aforesaid accommodation entries.

10. Accordingly, we are of the considered view that the addition of ₹25,00,000/- made under section 68 of the Act is liable to be deleted. Since the addition under section 69C of the Act towards commission of ₹1,43,012/- is consequential to the addition under section 68 of the Act, the same is also deleted.

11. In the result, the appeal of the assessee is allowed.