2025 (10) TMI 941 - AT - Income Tax

Reopening under section 148 upheld and additions under section 68 sustained; section 153C approach rejected; veil piercing allowed for fraud

ITAT JAIPUR - AT upheld reopening under section 148 and sustained additions under section 68, finding the assessee failed to explain unexplained credits ... Reopening of assessment - credible information regarding accommodation entry is available on record - HELD THAT:- Despite of several reminders by the bench, the Ld. Counsel ignored the demand that the balance-sheet and bank statements of the parties are required to analyse the element of credit worthiness. Intentionally, the bank statement of the assessee was submitted alongwith its return, which was not required at all and asked for by the bench and what exactly, was asked for and required never delivered to the bench. This act of intentional omission confirms the finding of the AO that the assessee has not anything to say over the strength of the facts of the case. Since the assessee did not give the details of the credits appearing in its accounts, those entries stand unexplained and therefore, the addition made under section 68 of the Act is justified. CIT (A) finding on the issue of applicability of section 68 of the Act was not expressly there by the assessee before the tribunal and therefore, no fresh submissions on this count could be entertained by us and that is too it's Revenue's appeal. The key takeaways could be listed as under: (i) When there is credit in the books of account and such credit being loan or borrowing it has to pass the test of section 68 of the Act; (ii) Even if the loan or borrowing is squared up in the year, it could be tested for the purposes of section 68 of the Act. Obviously, in accommodation entries the lending or borrowing may be squared up and therefore, it is also caught in the net of verification of its veracity. The assessee's arguments and reliance on various judicial precedents will also be dealt in this order later in relevant paras. Courts have evolved doctrines like piercing the corporate veil, substance over form etc. enabling taxation of underlying assets in cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even in the absence of any statutory authorisation to that effect. Scope of enquiry - The case of the assessee was never selected on the ground of either AIR data or CIB information or for non-re-conciliation with 26AS data. Case of the assessee was selected in the category of full scrutiny and there is no requirement in the law, which specifies that even the scope of the full scrutiny has to be conveyed to the assessee or any approval is required. If scrutiny is being initiated on some specific issues, then certainly to expand the scope, necessary approval of the authorities as mentioned are required. But it is nowhere stated and intended also that full scrutiny can't be done, based on the criteria fixed by the CBDT based on its experience and expectations to collect the tax. Selection of the assessee's case for full scrutiny fulfilling the criteria of CBDT instructions never challenged before us. In view of the above, this argument raised under Rule 27 of the ITAT Rules, found to be not tenable. Finding of the CIT (A) that the assessment of the assessee should have been carried out as per the provisions of section 153C - We have gone through the order of the Ld. CIT (A) and facts of the case alongwith order of the AO. It is observed that the finding of the Ld. CIT (A) is erroneous as the case of the assessee false within the purview of section 148 of the Act and not in section 153C of the Act. In coming over this conclusion the Bench respectfully followed the decision of the Hon'ble Apex Court in the case of Abhisar Buildwell (P.) Ltd[2023 (4) TMI 1056 - SUPREME COURT] It is also worthwhile to mention that the case of the assessee was declared heard on 11/09/2025. But there was a request by the Ld. DR to submit some additional information pertaining to the matter. The Bench given time to her till 15.09.2025 with a direction that advance copy should be served to the Ld. Counsel also (in case she submits any material) and Ld. Counsel has time to respond the same till 25.09.2025. But as nothing submitted by the Ld. DR, there is no occasion for the Bench to examine the same and consequently matter get heard for all the legal purposes on 11/09/2025 itself. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment/reopening proceedings under section 147/148 could be validly initiated on information received from the investigation wing (post original assessment) alleging accommodation entries routed through paper entities controlled by third parties. 2. Whether amounts shown as unsecured loans/borrowing in the assessee's books (and in some instances squared up within the same year) can be treated as unexplained cash credits taxable under section 68 - in particular, whether repayment/squaring up in the same financial year negates applicability of section 68. 3. What is the nature and extent of the assessee's onus under section 68 - namely, proof of (i) identity of creditors, (ii) genuineness of transactions, and (iii) creditworthiness/capacity of creditors - and consequences where third-party confirmations are denied or addresses are non-traceable. 4. Validity of the assessment notice under section 143(2) and related jurisdictional/contention based on transfer of file/jurisdiction; and whether CBDT Instruction No.7/2014 (restricting scope of CASS/AIR/CIB/26AS scrutiny) or Rule 27 objections preclude enquiry beyond the stated selection reason. 5. Legitimacy of consequential additions under section 69C (commission) when section 68 additions are sustained on facts indicating accommodation-entry operations. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 based on investigation information Legal framework: Reopening requires 'information' which gives prima facie satisfaction that income has escaped assessment; sufficiency of material for recording reasons is to be assessed at prima facie stage, not on final correctness. Precedent treatment: The bench relied on established authorities that letters/inputs from investigation wings constitute information and that the sufficiency of that material for reopening is judged at prima facie level (AO need not prove correctness of material at reason-recording stage). Interpretation and reasoning: Information received from JDIT(Inv.) regarding search/seizure showing operation of accommodation-entry network (Jain brothers), names of paper entities, control of bank accounts and admission of commission, together with corroborative examination of assessee's balance sheet showing unsecured loans from those entities, constituted material justifying recording of reasons and issuance of notice under section 148. The AO's reliance on post-search investigative material and field enquiries supplied a prima facie basis to reopen. Ratio vs. Obiter: Ratio - investigative information establishing connection between alleged entry operators and creditors supplies adequate prima facie material for reopening under section 147/148. Obiter - ancillary observations on cross-examination procedural rulings. Conclusion: Reopening under section 147/148 was validly initiated and the reasons recorded were sufficient; the Tribunal sustains AO's reopening in the appeals where this was contested. Issue 2 - Applicability of section 68 to unsecured loans/squared up within the same year Legal framework: Section 68 treats any sum credited in books as cash credit and, where recorded as loan/borrowings, enjoins that the person in whose name the credit is recorded must offer an explanation and AO must find it satisfactory; the proviso requires inquiry into identity, nature/source, and creditworthiness. Precedent treatment: Bench relied on apex-court precedents affirming assessee's onus (Kale Khan; Roshan Di Hatti; PCIT vs. NRA Iron & Steel and later Supreme Court decisions) and observations that section 68 is widely worded and includes varied forms of credits; authorities confirm section 68 can apply even where entries are squared up within same year, and transaction genuineness must be tested. Interpretation and reasoning: The tribunal emphasised that repayment/squaring up in the same financial year does not automatically exclude testing under section 68 - accommodation entries are commonly squared up and still represent bogus credits. The proviso's inclusion of creditors in the enquiry means the AO may treat such entries as unexplained where creditors deny transactions, addresses are non-genuine, or creditworthiness is absent. Detailed factual enquiries (unsuccessful service of s.133(6) letters, local inspections showing non-existent addresses, low/nominal returned incomes of creditors, and investigative findings linking creditors to entry operators) supported treating the credits as unexplained. Ratio vs. Obiter: Ratio - section 68 remains applicable to loans/credits even if squared up during the year; repayment does not per se negate inquiry into identity, genuineness and creditworthiness. Obiter - broader policy remarks on substance over form and corporate veil doctrines. Conclusion: Section 68 was correctly invoked on the facts; the AO's additions under section 68 (and consequential measures) were sustained where the assessee failed to discharge the statutory onus despite investigative material and enquiries. Issue 3 - Assessee's onus: identity, genuineness, creditworthiness; effect of denials/untraceable addresses Legal framework: The initial onus lies on the assessee to prove source of credited sums; requirements include proof of identity of creditors, capacity/creditworthiness, and genuineness of transactions; once assessees tender supporting documents, AO must make independent inquiry. Precedent treatment: The bench followed settled apex-court guidance (Kale Khan; Roshan Di Hatti; Konark Structural; PCIT vs. NRA Iron & Steel and subsequent decisions) that the assessee must produce cogent evidence, and failure or denials by creditors justify treating credits as unexplained. Interpretation and reasoning: Here, multiple s.133(6) letters were returned unserved or met with denials; inspection reports showed non-existent addresses; incomes declared by alleged creditors were meagre and sometimes shown as refund claims, supporting lack of creditworthiness. The assessee's late attempt to introduce a 'mediator' lacked corroboration (no ITR or proof of income for mediator). Given these factual negatives, and the investigative material linking the creditors to entry operators, the assessee failed to discharge the onus. Ratio vs. Obiter: Ratio - where creditors deny transactions, addresses are non-genuine, or creditworthiness is absent, and investigative material links creditors to entry operators, AO is justified in treating credits as unexplained under section 68. Obiter - criticisms of counsels' conduct and procedural behavior are incidental. Conclusion: The assessee did not meet the statutory onus; the AO's factual findings (denials, untraceable addresses, lack of creditworthiness) justified additions under section 68. Issue 4 - Validity of notice under section 143(2), jurisdictional transfer, and applicability of CBDT Instruction No.7/2014 / Rule 27 objections Legal framework: Notices under s.143(2) must be validly issued; transfer/ change of jurisdiction post-filing does not per se invalidate assessment if jurisdictional objections are not taken timely; CBDT instructions govern scope of enquiry in CASS/AIR/CIB/26AS cases but apply only where selection was on those bases and limit expansion of scope absent higher authority approval. Precedent treatment: Bench relied on apex-court authority holding that an assessee who does not challenge jurisdiction within prescribed time is precluded from later disputing it; and decisions interpreting CBDT Instruction No.7/2014 to be limited in scope to CASS/AIR/CIB/26AS selections and not to cases selected for full scrutiny. Interpretation and reasoning: The tribunal held the CBDT instruction was inapplicable because the case was selected for full scrutiny (not under AIR/CIB/26AS); there is no legal bar on full scrutiny or on AO enquiring into other aspects where case falls under full scrutiny. On jurisdiction, transfer of the file to the officer having correct jurisdiction after initial proceedings did not vitiate proceedings where the assessee had not timely challenged jurisdiction (Kalinga Institute ratio applied). The Ld. CIT(A)'s quashing of proceedings on jurisdictional/technical ground without considering apex-court authority was found perverse. Ratio vs. Obiter: Ratio - CBDT Instruction No.7/2014 cannot be invoked to limit full-scrutiny enquiries where selection was not on AIR/CIB/26AS; jurisdictional challenge waived if not made timely and relevant apex-court precedent applies. Obiter - distinctions among coordinate bench decisions cited by assessee where facts differ. Conclusion: Notices and subsequent assessment proceedings under s.143(2)/s.143(3) were valid; CBDT instruction and Rule 27 objections did not preclude the AO's enquiries in these facts; quashing by lower appellate authority on jurisdiction was set aside where it ignored controlling apex-court law. Issue 5 - Addition under section 69C (commission) consequential to section 68 findings Legal framework: Section 69C relates to unexplained expenditure or investments and may attract consequential adjustments (e.g., commission charged by entry operators) where underlying credits are held bogus. Precedent treatment: The bench treated the commission addition as factual/consequential to findings that the funds represented accommodation entries supplied by entry operators, consistent with investigation statements admitting commission charges. Interpretation and reasoning: Investigation disclosed that the entry operators charged 2-6% commission for providing loan entries; AO applied a 2% commission under section 69C on amounts linked to those operators. Given sustained findings under section 68 (i.e., credits being unexplained accommodation entries originating from those operators), the consequential section 69C addition was sustained. Ratio vs. Obiter: Ratio - where investigative material establishes that entry operators charged commission and loans are accommodation entries, a consequential addition under section 69C is justified. Obiter - specific percentage application is fact-driven. Conclusion: Section 69C additions (as consequential to section 68 findings) were warranted on the facts and upheld by the Tribunal where evidence established modus operandi and commission charged by entry providers. OVERALL CONCLUSION The Tribunal sustained AO's actions on merits in respect of reopening, applicability of section 68 to the unsecured loans (even when squared up within the year), failure by the assessee to discharge the statutory onus regarding identity/genuineness/creditworthiness, validity of jurisdictional notices and scope of scrutiny (CBDT instruction inapplicable to full-scrutiny selection here), and consequential section 69C additions; lower appellate orders that quashed proceedings on technical grounds without dealing with these merits and controlling apex-court authority were set aside. The findings emphasise substance over form in taxation of accommodation entries and reaffirm the assessee's evidential burden under section 68.