2025 (6) TMI 229 - AT - Income Tax

Assessee successfully defends Rs. 3.5 crore advance receipt against Section 68 addition with proper documentation

The ITAT Ahmedabad dismissed the Revenue's appeal challenging deletion of addition u/s 68. The assessee received Rs. 3.5 crore as advance against property ... Addition u/s 68 - accommodation entry receipt - HELD THAT:- AO has not made any independent inquiry about the sale transaction by summoning the Notary Public who Notarised/Signed the Sale Agreement or Cancellation Deed, but simply concluded that the Agreement is unregistered. AO is also not clear whether it is compulsory to Register the Sale Agreement under the Registration Act, during March 2018. Whereas the assessee has discharged its initial onus cast upon it by providing all the relevant materials before the AO. Further when the AO issued summons u/s.133[6] to M/s. VRR Financial, the same was replied and furnished the relevant documents. Therefore the identity and genuineness are proved and the question of invoking section 68 of the Act does not arise in this case. Nature of Transaction - The assessee has produced substantial documentation to establish that the amount of ₹3.5 crore was advance against property transaction, not a loan. The Agreement to Sale and Deed of Cancellation are consistent with the timeline and supported by ledger entries and confirmations. The property in question, though not shown in the Schedule AL-1, has been explained through their CA certificate and supporting ownership documents which was not disputed by AO on merits. Genuineness and Identity of Party - The creditor is an income tax assessee with PAN, filed ITRs and audit reports are available. The transaction were carried out through banking channels and repayment has been made, including compensation for cancellation deed. Further reply to the summons u/s. 133[6] by M/s. VRR Financial makes it clear the identity and genuineness of the transaction and not on accommodation entry. As in the case of Ambe Tradecorp Pvt Ltd. [2022 (7) TMI 902 - GUJARAT HIGH COURT] held that where assessee took loan from two parties and assessee had furnished requisite material showing identity of lenders and that assessee was not beneficiary, as loan was repaid in subsequent year, no addition u/s.68 could be made on account of such loan. As assessee has fully discharged its onus cast upon it under section 68, whereas the AO has failed to conclusively rebut the evidences and made addition based on presumption and not by conclusive evidence which is not sustainable in law. Appeal filed by the Revenue is hereby dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal arising from the reassessment order under section 147 read with section 144B of the Income-tax Act, 1961, for assessment year 2018-19 are:Whether the addition of Rs. 3.5 crores as unexplained cash credit under section 68 of the Act was justified in the facts and circumstances of the caseRs.Whether the assessee's transaction with M/s VRR Financial Services Pvt. Ltd. constituted an accommodation entry, thereby rendering the sum liable to taxRs.Whether the assessee discharged the onus cast upon it under section 68 by establishing the identity, genuineness, and creditworthiness of the creditor and the transactionRs.Whether the Assessing Officer (AO) properly appreciated the evidences and conducted necessary inquiries before making the additionRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of Addition of Rs. 3.5 Crores as Unexplained Cash Credit under Section 68Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act requires that when an unexplained cash credit appears in the books of an assessee, the assessee must explain the nature and source of such credit and establish the identity and genuineness of the creditor. Judicial precedents emphasize that once the assessee discharges this initial onus by furnishing cogent evidence, the AO must conduct independent inquiry and cannot rely on surmises or suspicion alone to make additions. Notable precedents relied upon include CIT v. Lovely Exports Pvt. Ltd., Kishorilal Santoshilal v. CIT, and PCIT v. Ambe Tradecorp Pvt Ltd.Court's Interpretation and Reasoning: The Tribunal noted that the AO's addition was based solely on statements of third parties recorded during a search action, without independent verification or inquiry into the transaction. The AO rejected the assessee's explanation primarily because the property was not disclosed in Schedule AL-1 of the ITR and the Agreement to Sell was unregistered and notarized only, which the AO deemed self-serving.Key Evidence and Findings: The assessee produced an Agreement to Sell dated 08.03.2018, a Deed of Cancellation dated 23.09.2022, bank statements showing transaction flow, ledger accounts, confirmation letters from VRR Financial, copies of ITRs and audit reports of both parties, GST returns, and property ownership documents. The assessee also furnished a Board Resolution authorizing execution of the Agreement. VRR Financial responded to summons under section 133(6) with relevant documents.Application of Law to Facts: The Tribunal observed that the assessee discharged its initial onus by submitting detailed documentary evidence establishing the identity of the creditor, genuineness of the transaction, and creditworthiness of VRR Financial. The AO failed to conduct any independent inquiry such as summoning the Notary Public or verifying the necessity of registration of the Agreement. The transaction was carried out through banking channels and was repaid subsequently, including compensation for cancellation.Treatment of Competing Arguments: The Revenue contended that the Agreement was self-serving and unreliable, and that VRR Financial was an accommodation entry provider. However, the Tribunal found no material on record beyond third-party statements to substantiate this claim. The assessee's documentation and the response of VRR Financial to statutory summons negated the Revenue's presumption. The Tribunal also noted the AO's failure to grant adequate opportunity for cross-examination of key witnesses, violating principles of natural justice.Conclusions: The Tribunal concluded that the addition under section 68 was not sustainable as the AO did not rebut the evidence conclusively and relied on surmises. The assessee's explanation was found to be bona fide, and the transaction genuine.Issue 2: Whether the Transaction Constituted an Accommodation EntryRelevant Legal Framework and Precedents: An accommodation entry is a sham transaction used to conceal the true nature of funds, often to evade tax. The burden lies on the Revenue to establish the transaction as an accommodation entry by cogent evidence beyond mere suspicion or third-party statements. The Tribunal referred to the principle that identity, creditworthiness, and genuineness must be disproved by the Revenue to invoke section 68 additions.Court's Interpretation and Reasoning: The reopening was premised on statements recorded during a search indicating that VRR Financial was an entry provider. However, no material evidence was placed on record to demonstrate that the transaction was a sham or accommodation entry. The Tribunal emphasized that statements of third parties alone cannot form the basis for reopening or addition without corroborative evidence.Key Evidence and Findings: The assessee's submission of the Agreement to Sell, cancellation deed, bank statements, ledger entries, and VRR Financial's audited accounts and ITRs established the transaction's genuineness. The transaction was through banking channels and was repaid, negating the possibility of an undisclosed accommodation entry.Application of Law to Facts: The Tribunal applied the principle that the Revenue must prove the transaction to be sham and the creditor to be fictitious or non-creditworthy. Since the assessee established the identity and genuineness and the Revenue failed to rebut this with independent evidence, the transaction could not be treated as an accommodation entry.Treatment of Competing Arguments: The Revenue relied on third-party statements and the AO's observations on the unregistered nature of the Agreement. The Tribunal held that absence of registration does not ipso facto render a transaction invalid or an accommodation entry, especially when other corroborative evidence exists. The Tribunal also noted the AO's failure to verify or investigate these aspects independently.Conclusions: The Tribunal held that the transaction was genuine and not an accommodation entry. The Revenue's claim was unsubstantiated and based on mere suspicion.Issue 3: Whether the AO Properly Appreciated Evidence and Conducted Necessary InquiryRelevant Legal Framework: The principle of natural justice and fair inquiry requires that the AO conduct a proper investigation, verify documents, and provide the assessee adequate opportunity to respond and cross-examine witnesses.Court's Interpretation and Reasoning: The Tribunal found that the AO did not summon the Notary Public who attested the Agreement or Cancellation Deed. The AO also did not clarify the legal requirement of registration of the Agreement. Despite the assessee's request, the AO did not reschedule the cross-examination of a key witness, Shri Rajesh Vyas, thereby violating principles of natural justice.Key Evidence and Findings: The assessee's repeated requests for adjournment and cross-examination were denied. The AO's conclusion rested on surmises without independent inquiry or verification of documents.Application of Law to Facts: The Tribunal held that the AO's failure to conduct independent inquiry and denial of opportunity to the assessee to cross-examine witnesses rendered the reassessment order unsustainable.Treatment of Competing Arguments: The Revenue did not dispute the procedural lapses but urged that the documents were self-serving. The Tribunal emphasized that procedural fairness and independent inquiry are essential before making additions under section 68.Conclusions: The Tribunal concluded that the AO failed to appreciate the evidence properly and did not conduct necessary inquiries, thus the reassessment order was liable to be set aside.3. SIGNIFICANT HOLDINGSThe Tribunal succinctly stated:'The assessee has fully discharged its onus cast upon it under section 68, whereas the Ld AO has failed to conclusively rebut the evidences and made addition based on presumption and not by conclusive evidence which is not sustainable in law.'Core principles established include:The burden under section 68 lies initially on the assessee to prove identity, genuineness, and creditworthiness of the creditor and transaction.Once the assessee discharges this onus by submitting cogent documentary evidence, the AO must conduct independent inquiry and cannot rely solely on suspicion or third-party statements.Absence of registration of an Agreement to Sell does not ipso facto render the transaction invalid or a sham, especially when corroborative evidence is available.Procedural fairness and opportunity to cross-examine witnesses are essential in reassessment proceedings.Statements of third parties recorded during search cannot be the sole basis for reopening or additions without corroborative evidence.Final determinations:The addition of Rs. 3.5 crores under section 68 was deleted as the assessee established the genuineness of the transaction.The transaction was held not to be an accommodation entry.The reassessment order was quashed for lack of proper inquiry and violation of natural justice.The appeal filed by the Revenue was dismissed.