Loan Repayment With TDS Proves Genuineness: Section 68 Addition Deleted by ITAT Delhi

Background of the Dispute

In ITO Vs Mundra Agencies Private Limited (ITAT Delhi), the core controversy centred around an addition of ₹2,07,96,642/- made under Section 68 of the Income Tax Act, 1961 on the allegation that the assessee had obtained accommodation entries in the guise of unsecured loans from certain entities.

The Assessing Officer treated the loan receipts from four concerns as unexplained cash credits, alleging that these entities were merely paper companies used for providing accommodation entries in lieu of cash. However, both the National Faceless Appeal Centre (NFAC) and later the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) concluded that the transactions were genuine loan transactions duly repaid with interest and after deduction of TDS, and therefore did not attract Section 68.

Procedural History

Reopening of Assessment

  • The assessee company originally filed its return of income on 14-10-2016, declaring income of ₹9,84,49,950/- for A.Y. 2016-17.
  • During a search on Sh. Anand Kumar Jain and Sh. Naresh Kumar Jain, the Investigation Wing alleged that these persons were engaged in providing accommodation entries through banking channels against cash.
  • Based on this information, the assessee was identified as a supposed beneficiary of accommodation entries aggregating to ₹2,07,96,642/- from four concerns, including Gomati Consultants, Karda Traders, and M3M Traders, for A.Y. 2016-17.
  • On this basis, reassessment proceedings were initiated under Section 147 after obtaining due approval, and notice under Section 148 was issued on 26-03-2021.
  • In response, the assessee once again filed its return declaring income of ₹9,84,49,950/-.

Assessment Order

During reassessment, notices under Section 143(2) and questionnaires were issued. After considering the material filed by the assessee, the Assessing Officer concluded that certain credits in the books represented accommodation entries and made an addition under Section 68 of ₹2,07,96,642/-, broadly broken up as:

  • M3M Traders Pvt. Ltd. – ₹13,59,780/-
  • Karda Traders Pvt. Ltd. – ₹75,59,875/-
  • Gomati Consultants – ₹41,39,364/-
  • (and other connected loan transactions forming part of the overall figure)

The AO’s central reasoning was that the loan-providing entities were not engaged in any real business activity and were established as dummy/paper concerns during investigation. Therefore, according to the AO, the identity, creditworthiness and genuineness of the loan providers were not satisfactorily proved.

Appeal Before NFAC

The assessee challenged the reassessment order before the National Faceless Appeal Centre / Commissioner of Income Tax (Appeals). The NFAC partly allowed the appeal, but more importantly, it fully deleted the addition under Section 68 relating to the alleged accommodation entries.

The Revenue then carried the matter in appeal before the ITAT, with a delay of 42 days, which the Tribunal condoned after accepting the cause shown.

Revenue’s Grounds of Appeal

The Revenue advanced, inter alia, the following principal grounds before the ITAT:

  1. Perverse deletion of addition: It was argued that the NFAC’s decision to delete the Section 68 addition of ₹2,07,96,642/- was perverse, as it allegedly failed to appreciate the entire factual matrix suggesting that the assessee had only taken accommodation entries from:
    • M/s M3M Traders Pvt. Ltd.
    • M/s Karda Traders Pvt. Ltd.
    • M/s Gomati Consultants
    • M/s Ambaranuj Finance and Investment Pvt. Ltd.