ITAT Mumbai Overturns ₹15 Lakh Addition Under Section 68: Third-Party Statements Insufficient Without Independent AO Verification in Unsecured Loan Cases
Introduction
The Mumbai Bench of the Income Tax Appellate Tribunal has delivered a significant ruling in the matter of Ashish Girish Jain Vs ITO, granting partial relief to the assessee for Assessment Year 2010-11. While validating the reassessment proceedings initiated under Section 147, the Tribunal struck down an addition of ₹15,00,000 made under Section 68 concerning an unsecured loan obtained from Mani Prabha Impex Pvt. Ltd. This decision reinforces the principle that documentary evidence cannot be dismissed merely on the basis of third-party statements without conducting independent verification by the Assessing Officer.
Factual Matrix of the Case
Original Return and Reassessment Initiation
The assessee had originally filed his return of income on 29/07/2010 for AY 2010-11, declaring a total income of ₹2,92,150. This return was processed under Section 143(1) of the Income Tax Act, 1961. Subsequently, the Director General of Income Tax (Investigation), Mumbai, conducted search and seizure operations under Section 132 targeting the Rajendra Jain Group and Dharmichand Jain Group of cases.
Investigation Wing Findings
During these search operations, statements were recorded from Mr. Rajendra Jain, Mr. Dharmichand Jain, and several other associated individuals. The investigation revealed that these groups were allegedly involved in providing accommodation entries including bogus purchases, sales, unsecured loans, and share capital. The inquiry disclosed that the assessee had purportedly received an accommodation entry of ₹15,00,000 disguised as an unsecured loan during Financial Year 2009-10 from Mani Prabha Impex Pvt. Ltd., which was identified as a group concern of the Dharmichand Jain Group.
Notice Under Section 148
Based on information received from the DGIT (Inv.), Mumbai, the Assessing Officer developed a reason to believe that income amounting to ₹15,00,000 had escaped assessment. Consequently, a notice under Section 148 dated 20/03/2015 was issued to the assessee after recording detailed reasons for reopening the assessment under Section 147.
The reasons recorded highlighted that during search proceedings, statements were obtained wherein the persons involved admitted to the modus operandi of providing accommodation entries. It was established that no genuine commercial transactions were executed by these entities with their customers; instead, they merely provided accommodation entries in exchange for nominal commission.
Assessee's Response and Documents Submitted
Upon service of the notice under Section 148, the assessee responded vide letter dated 18/04/2015, requesting that the previously filed return be treated as the return in response to the reopening notice. Notably, the assessee did not file any formal objections challenging the reasons recorded for initiating reassessment proceedings.
During the reassessment process, the Assessing Officer observed that the balance sheet as on 31/03/2010 reflected an outstanding amount of ₹15,00,000 payable to Mani Prabha Impex. In response to the show cause notice, the assessee submitted comprehensive documentation vide reply dated 05/01/2016, including:
- Loan confirmation covering the relevant period
- Details of dates on which the loan principal and interest totaling ₹15,33,452 were repaid
- Bank statements evidencing the receipt and repayment transactions
- Audited balance sheet of M/s. Mani Prabha Impex Pvt. Ltd. as on 31/03/2010
- Income Tax Return acknowledgment of the lender company
Assessment Order and Addition Under Section 68
AO's Observations and Rejection of Documents
Despite the voluminous documentary evidence submitted by the assessee, the Assessing Officer rejected the same by primarily relying on the statements recorded from Mr. Dharmichand Jain during search proceedings. The AO concluded that the assessee had failed to establish the three critical elements required under Section 68—namely, identity, genuineness, and creditworthiness of the transaction.
The Assessing Officer placed substantial reliance on the statement of Mr. Dharmichand Jain recorded on oath during search operations under Section 132. Specifically, in response to Question No. 32 (recorded on 04/10/2013) and Question No. 6 (recorded on 13/01/2014), Mr. Dharmichand Jain had admitted that cheques were issued by group concerns to beneficiaries in return for cash received, and that interest received on such bogus loans was returned in cash after deducting commission at 0.5% per annum on the loan amount.
Criticism of Assessee's Evidence
The AO criticized the assessee for:
- Producing only loan confirmation and affidavit without corroborative evidence
- Failing to produce Mr. Dharmichand Jain before the Assessing Officer for examination, despite the fact that he had signed the confirmation and affidavit supporting the assessee's case
- Not adequately rebutting the specific statements recorded on oath during search proceedings
Consequently, the unsecured loan of ₹15,00,000 was treated as unexplained credit, and addition was made under Section 68 of the Act.
Proceedings Before CIT(A)
Appeal and Dismissal
Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The CIT(A), vide order dated 24/03/2025, rejected both the challenge to the validity of reassessment proceedings and confirmed the addition made on merits, thereby dismissing the appeal in its entirety.
CIT(A)'s Reasoning on Reassessment Validity
The CIT(A) held that:
- The assessee had not raised any ground challenging the reassessment proceedings in the original appeal
- The case was reopened within four years from the end of the relevant assessment year based on tangible information received from the Investigation Wing
- Proper reasons were recorded and prior approval was obtained before issuing notice under
Section 148 - The assessee had not filed any objections against the reasons recorded or the notice during reassessment proceedings, indicating acceptance of the proceedings' validity
CIT(A)'s Findings on Merits
On the merits of the Section 68 addition, the CIT(A) concluded that:
- The assessee failed to produce Mr. Dharmichand Jain before the Assessing Officer despite him being the assessee's witness
- Complete bank statements of the lender and comprehensive financial statements were not produced to prove creditworthiness
- The affidavit dated 14/07/2015 wherein Mr. Dharmichand Jain retracted his earlier statement did not hold merit unless he appeared personally to explain the change
- The assessee failed to discharge the initial onus to prove creditworthiness and genuineness
Appeal Before ITAT Mumbai
Grounds of Appeal
The assessee challenged the CIT(A)'s order before the ITAT Mumbai on the following grounds:
- Illegality of reopening under
Section 147by issuing notice underSection 148without material evidence - Erroneous addition of ₹15,00,000 without considering details provided during assessment and appellate proceedings
- Denial of cross-examination opportunity during both assessment and appellate stages
- Improper reliance on retracted third-party statement without cogent or incriminating material