Section 68 and Accommodation Entries: Key Principles from Bihari Parmanand Kandhari Vs ACIT (ITAT Mumbai)

The decision in Bihari Parmanand Kandhari Vs ACIT (ITAT Mumbai) offers important guidance on how Section 68 of the Income Tax Act 1961 should be applied when an assessee has taken and repaid a loan through regular banking channels, and the Department alleges that the funding entity is an “accommodation entry provider”.

The Mumbai Bench of the ITAT held that an addition under Section 68 cannot be sustained merely because the lender is generally suspected of providing accommodation entries, when:

  • The assessee has produced comprehensive documentary evidence,
  • The loan transaction is fully routed through bank accounts, and
  • The loan is repaid within a short time in the same year.

This ruling is particularly relevant in cases arising out of Investigation Wing reports on alleged “entry operators”.

Background of the Case

Basic Facts

  • The assessee, Bihari Parmanand Kandhari, is an individual resident in India, engaged in real estate development activities.
  • For A.Y. 2009-10, the assessee filed a return of income on 27.09.2009, declaring income of Rs. 2,17,46,266.
  • The original assessment was framed under Section 143(3) at a total income of Rs. 2,45,90,500.

In the course of business, the assessee had taken an unsecured loan of Rs. 30 lakh from M/s. Ahuja Properties & Associates. The crucial point was that this loan was:

  • Availed during the relevant previous year, and
  • Repaid in full within a short period in the same year, resulting in the account being completely squared up.

Reopening of Assessment

Post completion of the scrutiny assessment, the Assessing Officer received information from the Investigation Wing that the assessee was allegedly a beneficiary of accommodation entries from the “Ahuja Group”.

On that basis:

  • The assessment for A.Y. 2009-10 was reopened under Section 147.
  • In the reassessment proceedings, the AO focused on the unsecured loan of Rs. 30 lakh received from M/s. Ahuja Properties & Associates, treating it as a suspicious transaction linked to the “Ahuja Group” accommodation entries.

Proceedings Before the Assessing Officer

Assessee’s Explanation and Evidence

When called upon to explain the loan transaction, the assessee reiterated that:

  • A loan of Rs. 30 lakh had been taken from M/s. Ahuja Properties & Associates.
  • The entire amount had been paid back within a short time in the same financial year.

To substantiate the transaction, the assessee furnished:

  • Copies of income tax returns,
  • Bank statements evidencing receipt and repayment of loan,
  • Loan confirmation letters, and
  • Relevant ledger accounts.

All these materials were intended to prove the identity of the lender, its creditworthiness, and the genuineness of the transaction – the three established tests under Section 68.

Reliance on Statement of Alleged Entry Provider

Despite the documentation, the AO was not satisfied. He placed reliance primarily on:

  • A statement recorded from Shri Jagdish Bhagwandas Ahuja, stated to be a key person in the Ahuja Group, wherein he is said to have admitted that the group was engaged in providing accommodation entries.

The AO noted:

  1. The assessee did not produce the lender in person, despite being asked.
  2. Summons issued under Section 131 did not result in personal appearance; instead, a reply was received by speed post from the lender.

Based on this, and the statement of Shri Jagdish Bhagwandas Ahuja, the AO concluded that: