ITAT Delhi Rules: No Addition u/s 69A for Cash Balances Duly Recorded in Books; Deletes Section 68 Additions on NBFC Loans

In a significant ruling concerning search and seizure assessments, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has delivered a favorable verdict for the assessee in the case of DCIT Vs Ace Infracity Developers Pvt. Ltd. The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to delete substantial additions made by the Assessing Officer (AO) under Section 68 and Section 69A of the Income Tax Act, 1961.

The core of the dispute revolved around the treatment of cash balances found during search operations and the genuineness of unsecured loans obtained from Non-Banking Financial Companies (NBFCs). The Tribunal firmly established that cash balances that are duly reconciled and recorded in the books of accounts cannot be treated as unexplained money. Furthermore, it reiterated that additions under Section 68 cannot be sustained merely on the basis of third-party statements without corroborative evidence, especially when the assessee has discharged the primary onus of proving identity, genuineness, and creditworthiness.

Background of the Case

The case originated from a search and seizure operation conducted under Section 132 of the Income Tax Act, 1961. The operation targeted the ACE and Kurle Group on July 28, 2021, followed by a subsequent action on the Ace & Rudra Group on January 4, 2022. The search warrant specifically named M/s. ACE Infracity Developers Pvt. Ltd.

Following the search, the assessee company filed its return of income under Section 139(1) of the Act on November 4, 2022, declaring a total income of INR 21,25,86,720/-. The assessment proceedings were subsequently initiated via a notice under Section 143(2) issued on February 27, 2023.

The Assessing Officer, in an order dated March 28, 2024, passed under Section 143(3), assessed the total income at INR 22,94,83,823/-. This upward revision was the result of three specific additions/disallowances:

  1. Section 68 read with Section 115BBE: An addition of Rs. 40,00,000/- regarding a loan taken from M/s Hallow Securities Pvt. Ltd., treated as unexplained cash credit.
  2. Section 69A read with Section 115BBE: An addition of INR 87,25,098/- representing cash balance treated as unexplained money.
  3. Section 37: A disallowance of INR 41,72,005/- towards various expenses.

The CIT(A) allowed the appeal of the assessee, deleting all additions. Consequently, the Revenue approached the ITAT challenging the CIT(A)'s order.

Issue 1: Unexplained Cash Credit under Section 68 (NBFC Loan)

The Revenue contested the deletion of the Rs. 40,00,000/- addition, arguing that the lender, M/s Hallow Securities Pvt. Ltd., was a shell company engaged in providing accommodation entries. The AO had relied heavily on statements recorded during search operations and a Ministry of Finance press release from 2018 regarding shell companies.

The Assessee's Defense

The assessee maintained that the transaction was genuine and supported by robust documentary evidence. To substantiate the creditworthiness and genuineness of the transaction, the assessee submitted:

  • Confirmed copy of the account statement.
  • Bank statements of the lender company showing sufficient funds.
  • Audited financial statements of the lender.
  • Income Tax Return acknowledgments of the lender.