ITAT Delhi Dismisses Revenue Appeal: Section 68 Addition of ₹14.20 Crore Deleted Where Assessee Established Identity, Creditworthiness and Genuineness of Loan Transactions

Case Details

Case: ACIT Vs Kind Building Solutions Private Limited
Forum: Income Tax Appellate Tribunal, Delhi
Assessment Year: 2015-16
Core Issue: Validity of addition under Section 68 of the Income Tax Act, 1961 on account of alleged unexplained cash credits amounting to ₹14.20 crore

Background and Facts of the Case

Kind Building Solutions Private Limited, a company engaged in real estate development, filed its return of income for Assessment Year 2015-16 declaring a loss of ₹1,57,97,650. The return was initially processed under Section 143(1) of the Income Tax Act, 1961. The case was subsequently flagged for limited scrutiny through the Computer Assisted Scrutiny Selection (CASS) system on account of several concerns, including:

  • Significant squared-up loans during the year as reported in Form 3CD
  • Real estate operations reflecting high closing stock, with a question on whether the percentage completion method had been adopted
  • Mismatch between amounts paid to related persons under Section 40A(2)(b) as reported in the audit report versus the ITR
  • Property sale and purchase transactions reported in Form 26QB

Notices under Section 143(2) and Section 142(1) along with detailed questionnaires were duly issued and served upon the assessee at various stages of the proceedings.

The Additions Made by the Assessing Officer

In the course of assessment proceedings, the Assessing Officer (AO) identified that the assessee had received unsecured loans from two entities during the year under consideration — M/s Mekaster Finlease Ltd. (₹11 crore) and M/s RKG Finvest Ltd. (₹3.20 crore) — both of which were fully repaid within the same financial year.

The AO took note of the fact that search and seizure operations had been conducted approximately five years prior, in Financial Year 2010-11, against parties connected to these two lending entities. Based on this historical search action, the AO concluded that both companies were allegedly involved in the business of providing accommodation entries.

The AO further observed:

  • That the mere possession of a PAN, filing of income tax returns, and holding NBFC registration were insufficient to validate the genuineness of transactions
  • That the high net worth of the lending companies did not establish creditworthiness, since their assets primarily comprised loans and advances — which themselves were alleged to be routed accommodation entries
  • That the repayment of the loans was irrelevant for the purpose of invoking Section 68, since the provision deals with unexplained credits and the subsequent fate of such credits is immaterial

On this basis, the AO aggregated both loan amounts and treated the entire sum of ₹14.20 crore as unexplained cash credits under Section 68 of the Income Tax Act, 1961, making the corresponding addition.

Assessee's Submissions

The assessee contested the addition vigorously, presenting a comprehensive documentary record before the AO: