Gujarat High Court Affirms Deletion of Rs. 11.69 Crore Unsecured Loan Addition Under Section 68

1. Background of the Appeal under Section 260A

The Gujarat High Court in PCIT Vs Hareshkumar Manilal Somaiya (Gujarat High Court) examined an appeal filed by the Revenue under Section 260A of the Income Tax Act 1961 against an order of the Income Tax Appellate Tribunal, Rajkot Bench. The dispute pertained to the deletion of an addition made under Section 68 in respect of unsecured loans aggregating to Rs. 11,69,50,000/-.

The assessee was carrying on business as a sole proprietor of M/s. Rohit Trading Co., which was engaged in the business of trading grains and other food products. For the assessment year 2012-13, the assessee filed a return of income on 29.09.2012, declaring total income of Rs. 7,05,650/-.

The case was picked up for scrutiny and:

  • A notice under Section 143(2) was issued on 22.08.2013
  • Subsequently, a notice under Section 142(1) was also issued

According to the department, the assessee did not produce books of account in response to these notices. As a result, the Assessing Officer completed the assessment on 17.03.2015 under Section 143(3) read with Section 144, determining the total income at **Rs. 23,01,11,530/-`.

2. Proceedings Before the CIT(A)

The assessee challenged the assessment order before the Commissioner of Income Tax (Appeals). By order dated 28.03.2017, the Commissioner of Income Tax (Appeals) partly allowed the appeal. Two major components of the assessment were specifically dealt with:

  1. Addition under Section 68

    • Total addition made by the Assessing Officer: Rs. 11,74,50,000/-
    • Out of this, the Commissioner of Income Tax (Appeals) deleted Rs. 11,69,50,000/-
    • The balance of Rs. 5,00,000/- was confirmed

  2. Disallowance of Purchases

    • Disallowance made by the Assessing Officer: Rs. 9,56,33,843/-
    • The Commissioner of Income Tax (Appeals) deleted Rs. 9,55,33,843/-
    • A token addition of Rs. 1,00,000/- was sustained

The focus of the Revenue’s further challenge was on the unsecured loan addition under Section 68.

3. Appeal Before the Income Tax Appellate Tribunal

The Revenue carried the matter in appeal before the Income Tax Appellate Tribunal, Rajkot. The Tribunal dismissed the Revenue’s appeal and upheld the decision of the Commissioner of Income Tax (Appeals).

The Tribunal took note of:

  • The remand proceedings carried out by the Assessing Officer
  • The evidence placed on record by the assessee during those proceedings
  • The fact that primary documents such as PAN details, confirmations, ledger accounts, bank statements, and audited books of account had been made available to the Assessing Officer

The Tribunal observed that despite these materials being on record, the Assessing Officer did not point out any specific deficiency in these documents while concluding that the assessee had not proved the identity of creditors, the genuineness of transactions, or the creditworthiness of lenders.

4. Substantial Questions Proposed Before the High Court

Aggrieved by the Tribunal’s order dated 16.11.2022 passed in Tax Appeal No. 191 of 2017 for AY 2012-13, the Revenue approached the Gujarat High Court under Section 260A.

The following substantial questions of law were proposed by the Revenue: