ITAT Ahmedabad Deletes Section 68 Additions: Unsecured Loan and Opening Creditor Balance Cannot Be Treated as Unexplained Income
Overview of the Case
The Income Tax Appellate Tribunal, Ahmedabad Bench, adjudicated an appeal filed by Dharmanandan Developers against the order dated 06.11.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, pertaining to Assessment Year 2018-19. The Tribunal examined two distinct additions made by the Assessing Officer under Section 68 of the Income Tax Act, 1961 — one relating to an unsecured loan of Rs. 25,00,000/- received from Shri Sanjivkumar Kiritkumar Patel, and the other concerning a sundry creditor balance of Rs. 29,87,770/- pertaining to M/s Sai Trading Company. The Tribunal allowed both grounds of appeal and directed deletion of both additions in their entirety.
Background: What is Section 68 of the Income Tax Act, 1961?
Section 68 of the Income Tax Act, 1961 empowers an Assessing Officer to treat any unexplained credit found in the books of an assessee as income chargeable to tax for that relevant previous year. The burden ordinarily rests on the assessee to satisfactorily explain:
- Identity of the creditor
- Genuineness of the transaction
- Creditworthiness of the party advancing the amount
Failure to establish any one of these three elements typically results in the addition being sustained. However, as this case illustrates, mechanical application of Section 68 without considering evidence actually on record can render such additions legally unsustainable.
Grounds of Appeal Filed by Dharmanandan Developers
The assessee raised the following grounds before the Tribunal:
- The CIT(A)'s order dated 06.11.2024 passed under Section 250 of the Income Tax Act, 1961, sustaining additions of Rs. 25,00,000/- in respect of Shri Sanjivkumar Kiritkumar Patel and Rs. 29,87,775/- in respect of M/s Sai Trading Company, was alleged to be wholly illegal, unlawful, and contrary to principles of natural justice.
- The CIT(A) erred in not appreciating that the remand report explicitly recorded that Shri Sanjivkumar Kiritkumar Patel had duly submitted all details called for under the
Section 133(6)notice — evidence that the Assessing Officer had failed to consider while finalizing the assessment. - The upholding of the addition pertaining to M/s Sai Trading Company was similarly challenged, given that the relevant documentary support had already been placed on record before the lower authorities.
Ground No. 1: Addition of Rs. 25,00,000/- — Unsecured Loan from Shri Sanjivkumar Kiritkumar Patel
Facts and Assessment History
During the course of assessment proceedings for A.Y. 2018-19, the Assessing Officer found that the assessee had availed unsecured loans aggregating to Rs. 3,66,89,137/- from multiple parties. In the specific case of Shri Sanjivkumar Kiritkumar Patel, a loan of Rs. 25,00,000/- had been advanced to the assessee. The Assessing Officer recorded that no response had been received to the notice issued under Section 133(6) of the Income Tax Act, 1961, and on that basis concluded that the assessee had failed to discharge the onus of proving the genuineness of the transaction and the creditworthiness of the lender. Accordingly, the sum of Rs. 25,00,000/- was added to the income of the assessee under Section 68.
CIT(A) Order
The CIT(A), while acknowledging that the identity and genuineness of the creditor had been established, nevertheless sustained the addition on the ground that creditworthiness of the lender remained unproved. The relevant observations of the CIT(A) read as follows:
"With regard to addition of Rs.2500000 being unexplained unsecured loan from Shri Sanjivkumar Kiritkumar Patel, while identity and genuineness of the creditor have been substantiated, the third element of creditworthiness of the loan creditor could not be established in the absence of any evidence."