ITAT Delhi Quashes Section 68 Share Capital Addition: Rejects Revenue's Contradictory Stance on Lender Genuineness in Search Assessments

In a significant judicial pronouncement, the Income Tax Appellate Tribunal (ITAT), Delhi, in the case of Neelkhanth Township Pvt. Ltd. Vs DCIT, has delivered a comprehensive ruling on the parameters of additions made under Section 68 of the Income Tax Act 1961 during search and seizure assessments. The Tribunal dismantled the contradictory approach adopted by the lower appellate authorities, wherein a singular lending entity was treated as genuine for the purpose of unsecured loans but simultaneously branded as a paper entity for share capital investments.

This detailed summary explores the factual matrix, the jurisdictional challenges under Section 153A, the evidentiary value of retracted third-party statements, and the rigorous discharge of the burden of proof required by an assessee to establish the identity, creditworthiness, and genuineness of corporate transactions.

Factual Matrix of the Dispute

The assessee, a corporate entity incorporated under the Companies Act and engaged in the real estate sector, filed its original return of income on 23.10.2017, declaring a nil income for the Assessment Year (AY) 2017-18.

The genesis of the dispute traces back to a search and seizure operation conducted under Section 132 of the Income Tax Act 1961 on 23.03.2018, targeting the Lav Kush Group of cases. The Revenue Department initiated proceedings against the assessee under Section 153A, presuming it to be an integral part of the searched group. Following the centralization of the case via an order under Section 127, the Assessing Officer (AO) issued a notice under Section 153A on 14.11.2019. The assessee complied by filing a nil return on 07.11.2019, which was subsequently followed by statutory notices under Section 143(2) on 11.11.2019 and Section 142(1) on 28.11.2019.

During the assessment proceedings, the AO scrutinized financial transactions involving M/s Vagmi Financial Pvt. Ltd. (formerly known as M/s Fitworth Constructions Pvt. Ltd.). The assessee had received a total influx of Rs. 1.04 crore from this entity. This amount was bifurcated into:

  • Rs. 49.50 lakh received towards the issuance of 4,95,000 equity shares at a face value of Rs. 10 each.
  • Rs. 54.50 lakh received as unsecured loans.

Relying heavily on post-search statements recorded under Section 131 from two individuals, Shri Praveen Kumar Agarwal and Shri Mahender Sethia, the AO concluded that the investing company was a shell entity operated by entry providers. Consequently, the AO invoked Section 68 read with Section 115BBE, adding the entire Rs. 1.04 crore to the assessee's income as unexplained cash credits, alongside initiating penalty proceedings under Section 271AAC and levying interest under Section 234B and Section 234C.

The Contradictory Appellate Order by CIT(A)

Aggrieved by the assessment order dated 29.12.2019, the assessee escalated the matter to the Commissioner of Income Tax (Appeals) [CIT(A)]. The appellate authority's order, dated 16.09.2025, presented a paradoxical conclusion.

The CIT(A) acknowledged that the unsecured loan of Rs. 54.50 lakh was completely repaid by the assessee through legitimate banking channels within the same financial year. Based on this verifiable repayment, the CIT(A) deleted the addition pertaining to the unsecured loan, implicitly accepting the genuineness and creditworthiness of M/s Vagmi Financial Pvt. Ltd.