Section 68 Addition Unsustainable When Lender’s Capacity Is Accepted in Its Own Scrutiny Assessment

Overview of the Dispute

The Delhi Bench “E” of the ITAT, in the case of Passion Realtech Pvt. Ltd. vs ACIT for AY 2017-18, examined whether an unsecured loan received from M/s Height Propcon Pvt. Ltd. could be treated as unexplained cash credit under Section 68 of the Income Tax Act 1961 when the same lender’s creditworthiness had been accepted in its own scrutiny assessment under Section 143(3).

The assessee, a private limited company engaged in real estate development, was subjected to limited scrutiny under CASS, specifically on:

  • Expenses related to exempt income, and
  • Investments / Advances / Loans

During the course of assessment, the Assessing Officer (AO) made an addition of Rs. 4,87,00,000 under Section 68, treating the loan from M/s Height Propcon Pvt. Ltd. as unexplained, despite the assessee having filed extensive supporting documentation. The CIT(A) upheld the addition. The assessee carried the matter to the Tribunal.

The ITAT ultimately deleted the entire addition of Rs. 4.87 crore, holding that the Revenue cannot simultaneously accept the lender’s financial capacity in its own assessment and yet treat the same lender as bogus or lacking creditworthiness in the borrower’s case.

Background Facts and Assessment Proceedings

Nature of Business and Return Filing

  • The assessee is a real estate company incorporated as a private limited entity.
  • For AY 2017-18, it filed its return of income on 18.10.2017, declaring a loss of Rs. 4,780.

Selection for Limited Scrutiny

The case was selected under CASS for limited scrutiny with two flagged issues:

  1. Expenditure claimed for earning exempt income; and
  2. “Investments / Advances / Loans” reflected in the financials.

Notice under Section 143(2) was issued on 28.09.2018, followed by several notices under Section 142(1) along with questionnaires. The assessee responded with submissions and supporting documents from time to time.

Addition Under Section 68

In the order passed under Section 143(3) on 27.12.2019, the AO made an addition of Rs. 4,87,00,000 under Section 68 on account of unsecured loans received from M/s Height Propcon Pvt. Ltd., holding the credit as unexplained.

The AO’s primary basis:

  • Reliance on certain statements recorded during search/survey operations and
  • Findings of the Investigation Wing allegedly indicating that M/s Height Propcon Pvt. Ltd. was an accommodation entry provider / dummy entity.

The assessee’s appeal before the CIT(A)-3, Gurgaon was dismissed on 28.01.2025, leading to the present appeal before the ITAT.

Grounds Raised Before the Tribunal

The assessee raised multiple grounds challenging:

  • The validity of the scrutiny assessment itself,
  • The AO’s jurisdiction in expanding limited scrutiny, and
  • The merits of the Section 68 addition.

Key effective grounds included:

  • Challenge to the conversion of limited scrutiny into complete scrutiny without proper approval, allegedly contravening CBDT Instruction No. 225/402/2018/ITA-II dated 28.11.2018.
  • Contention that “Investments / Advances / Loans” in the limited scrutiny reasons referred to assets only and not liabilities, invoking the rule of ejusdem generis.
  • Objection to the Section 68 addition on the basis that:
    • The assessee had fully discharged the onus under Section 68;
    • The AO relied on third-party statements recorded behind the assessee’s back, without granting cross-examination;
    • No adverse action had been taken in the case of the lender or in earlier/subsequent years; and
    • Bank statements should not be treated as “books” for the purpose of Section 68.

The assessee also argued that the entire assessment was driven by mere suspicion, allegedly based on search conducted in the case of M3M Group, and that the assessee was wrongly branded as an accommodation entry beneficiary.

Tribunal’s Findings on Jurisdiction and Scope of Scrutiny

Challenge to Expansion of Limited Scrutiny