ACIT Vs HK Ispat Pvt. Ltd. – ITAT Ahmedabad Upholds Deletion of Section 68 Addition on Unsecured Loans Backed by Documentary Evidence

Case Overview

Tribunal: Income Tax Appellate Tribunal, Ahmedabad
Case References: IT(SS)A Nos. 73–78/Ahd/2025, IT(SS)A Nos. 80–82/Ahd/2025, ITA Nos. 1277/Ahd/2025, 1278/Ahd/2025 & 1392/Ahd/2025
Assessment Years: 2014-15 to 2021-22
Lead Case: IT(SS)A No. 73/Ahd/2025 for AY 2015-16

A consolidated batch of cross-appeals was brought before the ITAT Ahmedabad by both the Revenue and the assessee, arising from a common search action under Section 132 of the Income Tax Act, 1961 and the subsequent orders of the Commissioner of Income Tax (Appeals) dated 28 March 2025. Given that the factual matrix and legal issues across all appeals were substantially similar, the Tribunal treated AY 2015-16 as the lead case and directed that its findings apply uniformly across the remaining years.

Background and Facts of the Case

Search Action and Assessment

A search operation under Section 132 of the Income Tax Act, 1961 was conducted on 05.11.2020 in the Kothi Group of cases, which also covered the assessee, M/s HK Ispat Pvt. Ltd. The assessee had originally filed its return of income under Section 139(1) declaring nil total income. Following the search, a notice under Section 153A was issued, and the assessment was completed determining total income at Rs. 3,03,82,267/-.

Additions Made by the Assessing Officer

During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had received unsecured loans aggregating to Rs. 2,98,14,000/- from seven parties. These were treated as unexplained cash credits under Section 68 of the Income Tax Act, 1961, primarily on the basis of:

• Digital affidavits of members of the Kothi Group recovered during search (marked as Annexure A-24)
• Findings and reports of the Investigation Wing

The details of the additions made under Section 68 are as follows:

Additionally, based on entries found in a seized Excel file, the AO made a further addition of Rs. 5,00,000/- under Section 69C as unexplained expenditure, on the ground that cash entries in the Excel sheet were not reflected in the books of account, even though corresponding cheque transactions were duly recorded.

CIT(A) Proceedings – Deletion of Both Additions

The assessee challenged both additions before the CIT(A). The appellate authority undertook a lender-wise detailed examination of the evidence placed on record and found that:

• The assessee had submitted confirmations, PAN details, income tax returns, bank statements, and ledger accounts for all seven lenders
• All loan transactions were routed exclusively through banking channels
• No cash deposits were found in the bank accounts of any lender immediately prior to the advancement of the loans
• Summons issued under Section 131 were complied with, and lenders confirmed their respective transactions
• In certain cases, assessments of the lenders themselves, arising from the same search, were completed under Section 153C without any adverse findings regarding their capacity or sources to lend

On the question of the "source of source" argument raised by the Revenue, the CIT(A) categorically observed that the amendment introduced by the Finance Act, 2022 making it obligatory to explain the source of the source was prospective in nature, taking effect from AY 2023-24 onwards, and therefore had no application to the assessment years under consideration.

The CIT(A) also noted that the loans had been substantially repaid through account-payee cheques either during the same year or in subsequent assessment years, and such repayments had not been questioned or disputed by the AO.

Accordingly, the CIT(A) deleted both additions — Rs. 2,98,14,000/- under Section 68 and Rs. 5,00,000/- under Section 69C.

Revenue's Grounds of Appeal Before ITAT

Aggrieved by the order of the CIT(A), the Revenue filed appeals before the Tribunal raising the following key grounds:

1. The CIT(A) erred in deleting the addition of Rs. 2,98,14,000/- despite the assessee's alleged failure to substantiate the unsecured loans with cogent documentary evidence
2. The financial profile of the lenders and Investigation Wing enquiries clearly established doubtful creditworthiness
3. The modus operandi of availing bogus loans through accommodation entries was unearthed during the search
4. The CIT(A) admitted additional evidence during appellate proceedings in violation of Rule 46A of the Income Tax Rules without remanding the matter to the AO
5. The deletion of Rs. 5,00,000/- under Section 69C was erroneous since cash entries in the seized Excel file represented out-of-books transactions

ITAT's Analysis and Findings

Issue 1: Addition Under Section 68 – Unsecured Loans

Discharge of Primary Burden by the Assessee

The Tribunal commenced its analysis by reiterating the well-settled legal proposition that under Section 68 of the Income Tax Act, 1961, the initial burden rests on the assessee to establish three elements: