Addition under Section 68 on share premium is unsustainable post-revision, and loan verification is remanded.

By | October 28, 2026
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Addition under Section 68 on share premium is unsustainable post-revision, and loan verification is remanded.

Issue

  • Whether an addition under Section 68 towards share premium in a consequential assessment order is sustainable when the PCIT, in the Section 263 revision order, did not record any finding that the share allotment consideration was fictitious or represented unexplained money of the assessee.
  • Whether the matter regarding unsecured loans treated as unexplained cash credit under Section 68 should be remanded to the Assessing Officer for detailed factual verification when substantial documentary evidence (confirmations, bank statements, ITRs) submitted by the assessee was ignored by the Commissioner (Appeals).
  • Whether the substituted first proviso to Section 68 (requiring proof of the “source of source”) can be retrospectively applied to Assessment Year 2014-15 to saddle the assessee with an additional statutory burden.

Facts

  • Share Premium Issue:
    • For A.Y. 2014-15, the PCIT passed a revision order under Section 263 regarding share premium, observing that the Assessing Officer (AO) failed to examine share valuation under the Discounted Cash Flow (DCF) method, especially given substantial projected domestic sales increases.
    • In the Section 263 order, the PCIT did not hold or find that the consideration received for share allotment was fictitious or that the share premium represented the assessee’s own unexplained funds.
    • In the consequential assessment proceedings under Section 142(1), the AO treated the share premium received as unexplained cash credit under Section 68.
  • Unsecured Loans Issue:
    • The AO treated part of the loans received by the assessee from 52 lenders as unexplained cash credits under Section 68, which was upheld by the CIT(A).
    • Before the CIT(A), the assessee submitted extensive documentary evidence including loan confirmations, copies of returns of income, bank statements, ledger accounts, TDS details, and repayment records of the 52 lenders.
    • The CIT(A) dismissed the appeal without examining or referring to a single document furnished for any of the lenders.
    • The Revenue sought to apply the higher burden of proving the “source of source” under the substituted first proviso to Section 68 for A.Y. 2014-15.

Decision

  • Share Premium Addition Invalid: Since the PCIT in the Section 263 order did not record any finding that the share allotment consideration was fictitious or constituted unexplained money, the addition made by the AO under Section 68 in consequential assessment was not sustainable and decided in favor of the assessee.
  • Inapplicability of Substituted Proviso to Sec. 68: The substituted first proviso to Section 68 was not applicable during A.Y. 2014-15; hence, the assessee cannot be saddled with an additional statutory burden to prove the “source of source” for that assessment year.
  • Remand for Loan Verification: The issue regarding unsecured loans from 52 lenders was remanded to the file of the Assessing Officer for the limited purpose of carrying out detailed factual verification of individual confirmations, bank statements, ledger accounts, ITR details, and repayment transactions in accordance with the law applicable to A.Y. 2014-15.

Key Takeaways

  • Consequential Assessment Limits: In reassessment or revision proceedings following a Section 263 order, the Assessing Officer cannot exceed the scope of the PCIT’s order or make additions under Section 68 without a specific finding by the PCIT that the funds were fictitious or unexplained.
  • Prospective Application of Statutory Burden: Taxpayers cannot be subjected to additional statutory requirements (such as establishing the “source of source” of lenders under the substituted proviso to Section 68) retrospectively for assessment years prior to its enactment.
  • Duty of Fact-Finding Authorities: Appellate authorities cannot summarily reject or ignore documentary evidence (bank statements, confirmations, ITRs) supporting loan transactions; detailed verification of each lender’s credentials must be conducted before making additions under Section 68.
IN THE ITAT HYDERABAD BENCH ‘B’
Samriddhi Petro Products (P.) ltd.
v.
ACIT
Ravish Sood, Judicial Member
and MADHUSUDAN SAWDIA, Accountant Member
IT Appeal No. 101 (HYD) of 2026
[Assessment year 2014-15]
SEPTEMBER  23, 2026
GVN Hari for the Appellant. Gaurav Sharma, CIT-DR for the Respondent.
ORDER
Ravish Sood, Judicial Member.- The present appeal filed by the assessee company is directed against the order passed by the CIT(Appeals), dated 12.11.2025, for the assessment year 2014-15, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under Section 143(3) r.w.s 263 of the Income Tax Act, 1961 (for short, “Act”) dated 28.02.2024. The assessee company has assailed the impugned order on the following grounds of appeal before us:
“1. The order of learned Commissioner of Income Tax (Appeals) is contrary to the facts and also the law applicable to the facts of the case.
2. The learned Commissioner of Income Tax (Appeals) is not justified in sustaining the addition of Rs.4,08,89,926 made by the assessing officer u/s 68 of the Act towards unexplained unsecured loans.
3. The learned Commissioner of Income Tax (Appeals) is not justified in sustaining the addition of Rs.74,50,000 made by the assessing officer u/s 68 of the Act towards unexplained share premium.
4. Any other ground that may be urged at the time of appeal hearing.”
2. Succinctly stated, the assessee company, which is engaged in the business of wholesale and retail trade of Auto LPG Gas, had filed its return of income for AY 2014-15 on 22.11.2014, declaring an income of Rs. Nil. The assessment was originally completed under Section 143(3) of the Act vide order dated 12.09.2016, wherein certain additions/disallowances were made towards travel and sales promotion expenses, penalty charges and petty cash expenses and the income of the assessee company was determined at Rs. 2,16,571/-, which, after allowing setoff of brought-forward losses, resulted in assessed income at Rs. Nil.
3. Subsequently, the PCIT-3, Hyderabad, on examination of the assessment record, observed that certain issues had not been properly examined by the AO, viz. (i) valuation of shares under the DCF method in the backdrop of estimated domestic sales with an exorbitant increase from year to year; (iii) loans received from shareholders and other parties and the identity, genuineness and creditworthiness thereof; (iv) acceptance and repayment of loans/advances totaling to Rs. 2,38,82,326/- from shareholders and other parties the genuineness and creditworthiness of which is required to be verified; and (iii). the assessee company had accepted loans/advances in cash in violation of Section 269SS and has repaid loans/advances in violation of provisions of Section 269T of the Act, thus held the order passed by him as erroneous and prejudicial to the interest of the revenue, and set aside the same with a direction to redo the assessment in accordance with law after allowing an opportunity of being heard to the assessee company.
4. The AO, pursuant to the order passed by the PCIT under Section 263 of the Act, dated 06.12.2018, passed an order under Section 143(3) r.w Section 263 of the Act, dated 31.12.2019, determining the income at Rs. 4,84,97,326/-, after making certain additions, viz. (i) addition towards share premium under Section 68 of the Act: Rs. 74,50,000; and (ii) addition of the unsecured loans received by the assessee company by treating the same as unexplained credits under Section 68 of the Act: Rs. 4,10,47,326/-.
5. Aggrieved, the assessee company assailed the aforesaid order passed under Section 263 of the Act, dated 06.12.2018 before the Tribunal. The Tribunal, vide its order passed in Samriddhi Petro Products (P) Ltd v. Dy. CIT [IT Appeal No. 87 (Hyd) of 2020, dated 29-6-2021], observed that the assessee company had not participated in the proceedings before the PCIT and, accordingly, restored the matter to the file of the PCIT for fresh adjudication on merits, after providing one more opportunity to the assessee company.
6. As is discernible from the record, the PCIT, in the fresh proceedings, issued notice under Section 263 of the Act dated 16.01.2023. The assessee company participated in the proceedings and furnished its submissions in respect of the issues raised by the PCIT.
7. The PCIT thereafter passed an order under Section 263 of the Act dated 31.03.2023, setting aside the assessment and directing the AO to carry out necessary verification in respect of the issues referred to therein and to pass a speaking order in accordance with law.
8. Ostensibly, the assessee company again challenged the order passed under Section 263 of the Act, dated 31.03.2023, before the Tribunal. The Tribunal, vide its order passed in Samriddhi Petroproducts (P) Ltd v. ITO [IT Appeal No. 211 (Hyd) of 2023, dated 31-7-2023], upheld the order of the PCIT and dismissed the appeal of the assessee company.
9. Thereafter, the AO, pursuant to the aforesaid order, issued notices under Section 142(1) of the Act dated 11.04.2023 and 19.12.2023. In response, the assessee company furnished its replies on 25.12.2023 and 03.01.2024. The AO observed that, as per the unsecured loans group summary for the financial year 2013-14, there were substantial receipts and repayments of unsecured loans and that the assessee company had furnished confirmations and other documents in respect of the lenders. However, observing that the assessee company had not furnished bank statements and income-tax returns of several lenders, the AO accepted loans aggregating to Rs. 85,00,000/-, but treated the balance amount of Rs. 4,08,89,926/- as unexplained credits under Section 68 of the Act.
10. Apropos the share premium, the AO treated the amount of Rs. 74,50,000/-as unexplained cash credit under Section 68 of the Act.
11. The AO thereafter completed the assessment by his order passed under Section 143(3) r.w. Section 263 of the Act, dated 28.02.2024, determining the assessed income at Rs. 4,83,39,926/-.
12. Aggrieved, the assessee company carried the matter in appeal before the CIT(Appeals), but without success.
13. The assessee company, being aggrieved with the order of the CIT(Appeals), has carried the matter in appeal before us.
14. We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by them.
15. Before proceeding further, we deem it appropriate to delineate the scope of the present proceedings. As observed hereinabove, the order passed by the PCIT under Section 263 of the Act dated 31.03.2023, whereby the original assessment was set aside for carrying out factual verification in respect of the share valuation and the unsecured loans, has already been upheld by the Tribunal vide its order passed in ITA No. 211/Hyd/2023, dated 31.07.2023. We are, therefore, not examining the validity of the exercise of jurisdiction under Section 263 of the Act. Rather, the issue before us is confined to examining whether the additions made by the AO in the consequential assessment are sustainable in law and, insofar as the addition of unsecured loans under Section 68 is concerned, whether the same has been made after properly examining the material furnished by the assessee company and in accordance with the law applicable to the assessment year under consideration.
16. We shall first deal with the addition made by the AO towards share premium and thereafter examine the addition of the unsecured loans made under Section 68 of the Act.
17. As discernible from the record, the PCIT, while passing his order under Section 263 of the Act dated 31.03.2023, in respect of the share premium, had specifically observed that the AO had failed to examine the valuation of shares under the DCF method, particularly in view of the substantial increase in the projected domestic sales. In response, the assessee company, during the proceedings under Section 263 of the Act, had contended that it was entitled to adopt the DCF method and the Revenue could not substitute another method merely because it did not agree with the valuation. Accordingly, the PCIT had directed the AO to carry out necessary verification in this regard.
18. On a careful consideration of the order passed by the PCIT, we find that the issue which was required to be examined by the AO was the correctness of the valuation of the shares and the basis of the projections adopted under the DCF method. The PCIT had directed the AO to carry out necessary verification in this regard. The PCIT had not recorded any finding that the consideration received by the assessee company towards allotment of shares was fictitious or that the receipt of the share premium itself represented unexplained money belonging to the assessee company.
19. We are of the view that, in the backdrop of the aforesaid facts, if upon verification it was found that the shares had been issued by the assessee company at a value exceeding their fair market value (FMV), the appropriate statutory provision governing such excess, subject to its applicability and satisfaction of the statutory conditions, was Section 56(2)(viib) of the Act. We say so because the PCIT had never directed the AO to treat the share premium as an unexplained cash credit under Section 68 of the Act. However, the AO, by treating the entire amount of Rs. 74,50,000/- received towards share premium as unexplained cash credit under Section 68 of the Act, has therefore gone beyond the specific issue restored by the PCIT under Section 263 of the Act. We are of the firm conviction that the addition under Section 68 of the Act does not flow from the directions contained in the order passed by the PCIT under Section 263 of the Act. Accordingly, we are unable to persuade ourselves to subscribe to the addition of Rs. 74,50,000/- made by the AO under Section 68 of the Act, as the same does not arise from the directions given by the PCIT in the order passed by him under Section 263 of the Act, dated 31.03.2023. We, thus, in terms of our aforesaid observations, vacate the addition of Rs. 74,50,000/- made under Section 68 of the Act by the AO. The Ground of appeal No. 3 is allowed.
20. We shall now deal with the addition of Rs. 4,08,89,926/- made by the AO by treating the unsecured loans as unexplained cash credits under Section 68 of the Act.
21. As observed hereinabove, the PCIT, while exercising jurisdiction under Section 263 of the Act, had observed that the AO had failed to inquire into loans aggregating to Rs. 2,38,26,000/- received by the assessee company from shareholders and other parties and had not properly examined their identity, genuineness and creditworthiness. The PCIT had also observed specific deficiencies in the lenders’ details, including the absence of PAN particulars for certain persons and a discrepancy in the amount stated to have been received from Shri P. Sarath Chandra. Apart from that, the PCIT had further observed discrepancies in the aggregate loan figures. The PCIT had observed that the assessee company had filed a letter before the AO on 20.11.2019, wherein it was stated that the loans received during the year amounted to Rs. 4,10,47,326/- (as mentioned in the 3CD report), whereas the balance sheet reflected the same at Rs. 3,94,09,083/- under Current Liabilities/Short-term Borrowings and another figure was noticed in “Note No. 6”. The PCIT, therefore, directed the AO to verify the correct amount of loans received during the year and the identity, genuineness and creditworthiness of the respective creditors.
22. We find that the AO, in the course of the consequential assessment, while giving effect to the order passed by the PCIT under Section 263 of the Act, had considered unsecured loans aggregating to Rs. 4,93,89,926/-, and thereafter accepted loans aggregating to Rs. 85,00,000/- and treated the balance amount of Rs. 4,08,89,926/- as unexplained under Section 68 of the Act.
23. Before the CIT(Appeals), the assessee company submitted that the aggregate unsecured loans of Rs. 4,93,89,926/- comprised, viz.: (i) loans from shareholders: Rs. 3,18,59,926/-; (ii) loans from directors: Rs. 79,90,000/-; and (iii) loans from business associates: Rs. 95,40,000/-.
24. We further find that the assessee company, in order to substantiate the genuineness of the loans claimed to have been received from the 52 lenders during the year under consideration, had filed before the CIT(Appeals) documentary evidence substantiating the veracity of the subject loan transactions, which comprised, viz. confirmation letters, income-tax particulars, bank statements, ledger accounts, details of interest paid and TDS deducted, as well as evidence regarding receipt and, in several cases, repayment of the loans through banking channels. However, we find that the nature and extent of the documentary evidence furnished regarding the loans received from the 52 lenders during the subject year varied from lender to lender.
25. We find that the issue before us is whether, in the backdrop of the facts of the present case, read along with the material and documentary evidence filed by the assessee company in the course of the proceedings before the authorities below, the addition of Rs. 4,08,89,926/- can be sustained on the ground that the assessee company had failed to discharge the onus cast upon it as required under the mandate of Section 68 of the Act and had failed to satisfactorily establish the source of the amounts received by it?
26. At this stage, we may herein observe that under Section 68 of the Act, the initial burden is upon the assessee company to establish the identity of the lender, the genuineness of the transaction and the creditworthiness of the lender. However, once the assessee company places primary documentary evidence in support of the credit, the AO is required to examine such evidence objectively and, where circumstances warrant, conduct appropriate inquiry. We are of the firm conviction that the discretion vested in the AO under Section 68 to regard an explanation as unsatisfactory is not an arbitrary discretion and cannot be exercised merely on the basis of suspicion or conjectures. Our aforesaid view is supported by the judgment of the Hon’ble Supreme Court in CIT v. Orissa Corpn, (P.) Ltd. 159 ITR 78 (SC), wherein it was held that where the assessee had furnished the names and addresses of the creditors and the Revenue had not pursued the matter further, the addition could not be sustained merely because the creditors were not produced. Further, we find that the Hon’ble High Court of Gauhati in Nemi Chand Kothari v. CIT  [2003] 264 ITR 254 (Gauhati), has explained that the burden cast upon the assessee under Section 68 cannot be stretched to an unreasonable extent and that, once the assessee establishes the identity of the creditor, the genuineness of the transaction and places prima facie material indicating the financial capacity of the creditor, the assessee cannot ordinarily be called upon to prove the source from which the creditor himself obtained the money. Also, we find that the Hon’ble High Court of Bombay in Gaurav Triyugi Singh v. ITO 423 ITR 531 (Bom), has reiterated the requirement of examining the primary documentary evidence furnished by the assessee and held that the Revenue could not reject the explanation without making appropriate inquiry.
27. However, we find that there is an additional statutory aspect which is relevant in the present case, i.e., the “first proviso” to Section 68 of the Act, as was applicable during the year under consideration, did not contain the present “first proviso” specifically dealing with loans or borrowings and requiring the person in whose name the credit was recorded to explain the nature and source of the sum credited. We say so because it was only by the Finance Act, 2022 that the “first proviso” to Section 68 was substituted, with effect from 01.04.2023. We find that the substituted “first proviso” specifically provides that where the sum credited consists of a loan or borrowing or any such amount, the explanation offered by the assessee shall be deemed to be not satisfactory unless the person in whose name such credit is recorded also offers an explanation regarding the nature and source of such sum and such explanation is found satisfactory by the AO. However, as the assessment year before us is AY 2014-15, the said substituted “first proviso” to Section 68 was not applicable during the year under consideration. As per the unamended Section 68 of the Act, while the AO was certainly entitled to examine the creditworthiness of the lender and to make appropriate inquiry regarding the financial capacity of the creditor, the assessee company could not, for AY 2014-15, be saddled with an additional statutory burden of establishing the source of the source merely by invoking the subsequently substituted “first proviso” to Section 68 of the Act. We, thus, are of the view that the observation of the AO that the bank statements of certain lenders did not establish the source of the amounts advanced by them, to the said extent, the addition is founded merely upon the proposition that the assessee company was required to establish the source of the loan, we are afraid, cannot be sustained for AY 2014-15. Although the assessee company continues to bear the initial burden of establishing the identity of the lender, the genuineness of the transaction, and the lender’s creditworthiness, but at the same time, it is impermissible to convert the aforesaid burden cast upon the assessee company into an obligation to establish, as a statutory condition under Section 68 applicable to AY 2014-15, the source from which the lender obtained the money.
28. We find on a perusal of the record that the assessee company has furnished substantial material/documentary evidence concerning 52 lenders and the AO has accepted loans aggregating to Rs. 85,00,000/-, while rejecting the balance of Rs. 4,08,89,926/-. Although we are conscious of the fact that, while considering the scope of Section 68 of the Act, an appellate remand should not ordinarily be made merely to provide the Revenue with another opportunity to fill up a lacuna in its investigation, but considering the totality of the facts involved in the present case, wherein there are 52 lenders and the amounts claimed by the assessee company to have been received from all the said 52 lenders have been summarily, or in fact most casually, held by the CIT(A) as unexplained credits under Section 68 of the Act, the case stands on a different factual footing.
29. As observed by us hereinabove, the material/documents as was made available on record of the authorities below by the assessee company comprises details concerning 52 lenders, with different categories of documentary evidence. We find that the CIT(Appeals) chose not to undertake a comprehensive lender wise examination of the material that was available on record and was filed by the assessee company and, based on generalized observations, has summarily upheld the view taken by the AO and held the loans received by the assessee company as unexplained credits under Section 68 of the Act. We find it difficult to fathom that though the assessee company had filed substantial documentary evidence before the CIT(Appeals) in the form of confirmations, copies of the returns of income, copies of the bank accounts of the lenders, copies of the ledger accounts of the lenders, etc., to substantiate the veracity of the subject loan transactions, not a single document had been referred to in the context of any of the lenders by the said first appellate authority.
30. We are of the considered view that, in the backdrop of the aforesaid circumstances, a detailed factual exercise in respect of each of the 52 lenders is required to be undertaken, viz. examining the individual confirmations, bank statements, ledger accounts, income-tax particulars, TDS details and repayment transactions. Considering the aforesaid facts, we, being the final fact-finding authority, in all fairness and in the interest of justice, deem it appropriate to direct the AO to undertake a detailed factual exercise in respect of each of the 52 lenders, examine the individual confirmations, bank statements, ledger accounts, income tax particulars, TDS particulars and repayment transactions, to the extent the same pertains to the addition of Rs. 4,08,89,926/- as had been sustained by the authorities below.
31. We, thus, in terms of our aforesaid observations, deem it apposite to set aside the matter in a limited manner, and not to provide the Revenue with an unrestricted second opportunity to improve its case. The AO shall examine the loans, lender-wise, with reference to the evidence furnished by the assessee company, in the backdrop of the settled position of law, as laid down by the Hon’ble High Courts and elucidated by us hereinabove. Also, the AO, while undertaking such examination, shall apply the provisions of Section 68 as they stood during AY 2014-15. The AO shall, in the course of examining the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the lenders, take due cognizance of the documentary evidence furnished by the assessee company to support its claim of having received genuine loans from the aforementioned parties. Also, the material fact that the loans had been repaid in the case of some of the lenders would also be considered by the AO in the course of the set-aside proceedings. We make it clear beyond any doubt that the aforesaid exercise shall be undertaken on a lender-wise basis, and the AO shall record specific reasons for accepting or rejecting the explanation furnished by the assessee company in respect of each disputed credit. Also, as a word of caution, we may herein observe that the explanation of the assessee company shall not be rejected merely on the basis of generalized observations, as had been so done in the impugned order by the CIT(Appeals), or solely on the ground that the assessee company has not established the source of source. Needless to say, the AO shall also consider the fact that, in respect of certain lenders, the assessee company has claimed to have furnished confirmations, bank statements, income-tax particulars, TDS statements and evidence of repayments through banking channels, which all material shall be considered cumulatively while determining the identity, genuineness and creditworthiness of the respective creditors.
32. We, therefore, restore the matter to the file of the AO for the limited purpose of carrying out the aforesaid factual verification and adjudication in accordance with law applicable to AY 2014-15. Accordingly, the addition of Rs. 4,08,89,926/- made under Section 68 of the Act is set aside to the file of the AO for fresh adjudication in terms of our aforesaid observations. Needless to say, the AO shall, in the course of the set-aside proceedings, afford a reasonable opportunity of being heard to the assessee company, which shall remain at liberty to substantiate its claim based on fresh documentary evidence, if any. The Ground of appeal No. 2 is allowed for statistical purposes in terms of our aforesaid observations.
33. The Grounds of appeal Nos. 1 & 4 being general are dismissed as not pressed.
34. In the result, the addition of Rs. 74,50,000/- made under Section 68 of the Act towards share premium is deleted, while the addition of Rs. 4,08,89,926/-made under Section 68 of the Act towards unsecured loans is set aside to the file of the AO for fresh adjudication in terms of our aforesaid observations.
35. Accordingly, the appeal of the assessee company is partly allowed/partly allowed for statistical purposes in terms of our aforesaid observations.