ITAT Mumbai: Section 68 Addition of ₹5 Crore Quashed for Lack of Direct Evidence

Overview

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of DCIT Vs Vilpaben Pranavbhai Vora, affirmed the deletion of an addition of ₹5 crore made under Section 68 of the Income Tax Act 1961. The Tribunal held that broad allegations based on investigations and search results in third-party cases are not sufficient to justify an addition when the assessee has placed complete supporting evidence on record and no specific incriminating material has been brought against her.

The ruling reiterates the settled principle that once an assessee demonstrates the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the lender, the onus shifts to the Assessing Officer (AO). Mere branding of a lender as a “shell entity” in some other proceedings, without tying that material specifically to the assessee’s transaction, cannot sustain an addition under Section 68.

Background and Assessment Proceedings

Basic Facts

  • The assessee filed a return of income on 25.09.2019 declaring total income of ₹4,23,350 for A.Y. 2019-20.
  • Subsequently, reassessment proceedings were initiated under Section 147 read with Section 143(3) based on information received from the Investigation Wing.
  • The trigger for reopening was search and survey actions under Section 132/133A in several cases, including Vibgyor Capital Holding Pvt. Ltd. and other connected persons, concerning alleged front-running activities.

During the course of such investigations, certain financial transactions were allegedly linked to the assessee. According to the AO, the assessee was stated to have received unsecured loans totaling ₹6,70,00,000, comprising:

  • ₹5,00,00,000 from Ganak Conglomerate Pvt. Ltd.
  • ₹1,70,00,000 from Nanuan Finance Pvt. Ltd.

The AO noted that Ganak Conglomerate Pvt. Ltd. had been identified during search in other connected cases as a shell entity controlled by entry operators and allegedly engaged in providing accommodation entries.

On this basis, the AO formed a belief that income chargeable to tax had escaped assessment and issued a notice under Section 148 on 31.03.2023 after obtaining the prescribed approval.

Assessee’s Explanation Before the AO

In response to notices under Section 143(2) and Section 142(1), the assessee complied and furnished extensive details. In particular, with respect to the loans received, the assessee contended that:

  • The funds were raised as unsecured loans for a proposed property transaction.
  • All receipts and repayments were routed entirely through normal banking channels.
  • The transactions were properly recorded in the books of account.
  • Complete documentary evidence was provided, including:
    • Confirmation letters from the lenders
    • PAN details
    • Bank statements of the lenders and the assessee
    • Income-tax returns and audited financials of the lender entities
  • The proposed real estate transaction did not ultimately materialise, and therefore the entire sums were later repaid through banking channels.

AO’s Findings and Addition Under Section 68

Despite the above evidences, the AO rejected the assessee’s explanation insofar as the loan from Ganak Conglomerate Pvt. Ltd. was concerned. The AO’s reasoning included:

  • Ganak Conglomerate Pvt. Ltd. purportedly had no genuine business activity.
  • According to the AO, the lender did not have the financial capacity to extend a loan of ₹5,00,00,000.
  • The AO treated the loan as a mere accommodation entry, allegedly used to introduce the assessee’s own unaccounted funds.

On this basis, the AO:

  • Treated the sum of ₹5,00,00,000 received from Ganak Conglomerate Pvt. Ltd. as unexplained cash credit under Section 68.
  • Notably, however, the AO accepted the genuineness of the loan of ₹1,70,00,000 from Nanuan Finance Pvt. Ltd..
  • Assessed total income at ₹5,04,23,350.
  • Initiated penalty proceedings under Section 271AAC.

Appeal Before CIT(A)

Assessee’s Submissions

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals)-49, Mumbai [CIT(A)]. Before the CIT(A), the assessee reiterated that:

  • The impugned loan was part of a bona fide funding arrangement for a joint property acquisition involving one Mr. Mukesh Shah.
  • The real estate deal failed to materialise, leading to cancellation and subsequent repayment of the entire amount.
  • The assessee had submitted:
    • Confirmation from Ganak Conglomerate Pvt. Ltd.
    • Bank statements of both the assessee and the lender reflecting the flow of funds, onward payment to Mr. Mukesh Shah, and repayments.
    • Financial statements of **Ganak Conglomerate Pvt.