ITAT Bangalore sends Section 68 cash credit additions back to Assessing Officer for re-examination

Background of the dispute

In Jayapal Deepak Gowda Vs ITO (ITAT Bangalore), the Bangalore Bench of the Income Tax Appellate Tribunal examined additions made under Section 68 of the Income Tax Act 1961 for unsecured loans and cash deposits in the course of scrutiny assessment for Assessment Year 2018-19.

The assessee, an individual engaged in business as a distributor of ITC products, had filed a regular return of income. The case was picked up for limited scrutiny, specifically to verify:

  • Cash deposits in bank accounts, and
  • Unsecured loans reflected in the books.

During assessment and appellate proceedings, the Revenue authorities treated these credits as unexplained cash credits under Section 68 on the ground that the creditworthiness of lenders and debtors was not proved. The Tribunal ultimately set aside these findings and remanded the matter to the Jurisdictional Assessing Officer (JAO) for a fresh, detailed examination in light of the documents that were already on record but not properly evaluated.

Procedural history

Assessment proceedings

  1. The Assessing Officer (AO) issued notices under Section 142(1) calling for details on:

    • Parties who advanced unsecured loans, and
    • Sources of cash deposits.

  2. The assessee furnished various details, including:

    • Information and documentation regarding the lenders of unsecured loans; and
    • Explanations and supporting records for cash deposits claimed to be linked to business collections.

  3. Despite submissions, the AO concluded that:

    • The assessee failed to establish creditworthiness of the unsecured loan creditors; and
    • The assessee also failed to establish creditworthiness / source in respect of the persons from whom cash had been received (customers/debtors).

  4. On this basis, the AO treated:

    • The unsecured loans, and
    • The cash deposits
      as unexplained cash credits and made additions under Section 68 of the Income Tax Act 1961.

First appeal before NFAC / CIT(A)

The assessee challenged the assessment order before the National Faceless Appeal Centre (NFAC), acting through the Ld. CIT(A).

During the appellate proceedings:

  • The assessee filed:

    • An appeal memo,
    • Additional grounds, and
    • Detailed written submissions.

  • The additional grounds included a legal challenge that the assessment order was invalid for non-issuance of notice under Section 143(2).

  • The assessee also placed on record:

    • Lists of persons from whom unsecured loans were received,
    • Details of persons from whom cash was collected,
    • Supporting documents aimed at demonstrating identity, genuineness and creditworthiness.

Despite these submissions, the Ld. CIT(A):

  • Confirmed the additions made by the AO under Section 68; and
  • Held that the assessee had not proved the creditworthiness of lenders and debtors;
  • Did not adjudicate the legal ground concerning non-issuance of notice under Section 143(2).

Appeal before ITAT Bangalore

Aggrieved by the order of the Ld. CIT(A), the assessee filed a further appeal before the ITAT Bangalore Bench.

At the time of hearing, both sides presented their contentions, and the Tribunal examined the material already available in the appellate record and the paper book.

Arguments before the Tribunal

Submissions on behalf of the assessee

The Ld. Authorised Representative (Ld. AR) for the assessee put forth the following key contentions: