ITAT Mumbai: Section 68 Addition Remanded Where Loan Increase May Be Mere Reclassification

Background of the Dispute

The case of Lords Freight (India) Private Limited Vs ACIT (ITAT Mumbai) deals with an important issue under Section 68 of the Income Tax Act 1961—whether an apparent increase in unsecured loans from related parties automatically warrants addition as unexplained cash credit, or whether it can be treated as a mere reclassification of an existing liability.

The assessee, a company in the business of freight services and clearing and forwarding operations, had filed its return of income for Assessment Year 2017-18 declaring:

  • Nil income under normal provisions; and
  • Book profit of ₹1,47,62,744/- under Section 115JB.

The case was selected for scrutiny, leading to a detailed examination of its unsecured loan disclosures.

Assessment Proceedings and Addition under Section 68

AO’s Analysis of Unsecured Loans

During scrutiny, the Assessing Officer (AO) compared unsecured loans from related parties as per the balance sheet:

  • Unsecured loans from related parties in the preceding year: ₹33,50,000/-
  • Unsecured loans from related parties in the relevant year: ₹56,50,000/-

The difference of ₹23,00,000/- was viewed by the AO as fresh borrowing from related parties during the year.

The AO called upon the assessee to:

  • Furnish confirmations of unsecured loans
  • Establish identity of lenders
  • Demonstrate creditworthiness of lenders
  • Prove genuineness of the transactions

Despite issue of notice under Section 142(1), the AO recorded that no satisfactory response or confirmations were submitted during the assessment stage.

Addition Made by AO

In the absence of confirmations and supporting evidence, the AO framed the assessment under Section 143(3) and:

  • Treated the ₹23,00,000/- difference as unexplained cash credit
  • Invoked Section 68 read with Section 115BBE
  • Added the amount to the assessee’s income as unexplained credits

First Appeal before CIT(A)

The assessee challenged the AO’s action before the National Faceless Appeal Centre (NFAC). The ld. CIT(A):

  • Upheld the addition of ₹23,00,000/- under Section 68
  • Accepted the AO’s finding that the assessee failed to justify the increase in loans from related parties
  • Refused to interfere with the assessment order

Dissatisfied with this outcome, the assessee carried the matter in appeal to the Income Tax Appellate Tribunal, Mumbai.

Grounds Raised Before ITAT

The assessee raised two main grounds before the Tribunal:

  1. Substantive ground:
    The assessee argued that the CIT(A) erred in confirming the addition of ₹23,00,000/- under Section 68 read with Section 115BBE, as no fresh unsecured loan was actually taken during the year. According to the assessee, the increase in related party loans was only on account of reclassification of an existing loan from “other parties” to “related parties”.

  2. Legal ground:
    The assessee also challenged the validity of notice under Section 143(2) alleging non-compliance with CBDT Instruction F.No.225/157/2017/ITA-II dated 23.06.2017.