ITAT Delhi Deletes Additions Under Section 68 and Section 69C: Shell Company Allegations Rejected on Grounds of Mere Suspicion

Background and Overview of the Dispute

In a significant ruling emanating from ITAT Delhi, the Tribunal adjudicated cross-appeals filed by both the assessee and the Revenue in the matter of DCIT Vs ACE Infracity Developers Pvt. Ltd., arising from assessments conducted following search and seizure operations under Section 132 of the Income Tax Act, 1961. The searches were carried out on 28.07.2021 and 04.01.2022 on premises associated with the ACE and Kurle Group and ACE and Rudra Group respectively.

The assessments in question were framed under Section 147 read with Section 143(3) and Section 143(3) standalone, covering Assessment Years 2019-20, 2020-21, and 2021-22. The core controversy revolved around unsecured loans received by the assessee from a set of lender entities. The Assessing Officer (AO), dissatisfied with the explanations furnished regarding these loans, treated them as accommodation entries and made additions under Section 68 and Section 69C of the Income Tax Act, 1961.

The Commissioner of Income Tax (Appeals) partly ruled in favour of the assessee by deleting certain additions while sustaining others, which prompted both sides to file further appeals before the Tribunal.

The Tribunal examined the genuineness of transactions with each lender individually and rendered specific findings on the basis of documentary evidence and applicable legal principles.

Section 68 of the Income Tax Act, 1961 places the initial burden on the assessee to explain the nature and source of any credit appearing in the books of accounts. Once the assessee establishes the identity of the creditor, the creditworthiness of the lender, and the genuineness of the transaction, the burden shifts to the Revenue to rebut such evidence with specific material.

The Tribunal consistently applied this three-pronged test throughout its analysis of each lender and emphasized that:

  • Mere suspicion or conjecture cannot substitute for concrete evidence
  • Statements recorded during search proceedings, without corroborating incriminating material, are insufficient to sustain additions
  • The assessee bears no obligation to establish the "source of source" of funds received from a lender
  • Regularity of lending by NBFCs as part of their core business activity lends credibility to such transactions

Lender-Wise Analysis: Assessee's Appeals

Sundram Consultants Pvt. Ltd. — Loan of ₹30,00,000 (AY 2019-20)

The assessee had received an unsecured loan of ₹30,00,000 from Sundram Consultants Pvt. Ltd. in AY 2019-20 and made interest payments of ₹5,09,580/- and ₹4,10,753/- in AY 2019-20 and AY 2020-21 respectively. The AO treated these as accommodation entries and the CIT(A) sustained the additions.

Allegations by the AO:

  • The lender was characterised as a shell company with dummy directors
  • The email address of the lender was allegedly linked to an entry provider
  • Complete bank statements were not furnished
  • No commercial expediency was demonstrated

Tribunal's Findings:

The Tribunal found the AO's allegations to be without merit for the following reasons: