Revenue's appeal fails as section 68 and 69C additions in section 153A assessment deleted; loans held genuine

ITAT Delhi dismissed Revenue's appeal against the assessee-company. It held that additions u/s 68 in assessment u/s 153A, based solely on retracted third-party statements and an excel sheet, were unsustainable as no incriminating material was found in the search and all loan entries were already recorded in the books. The assessee had established identity, creditworthiness, and genuineness of lenders through bank statements, financials, ITRs, PAN, confirmations, and evidence of repayment. ITAT affirmed CIT(A)'s deletion of the u/s 68 addition and consequently upheld deletion of the estimated commission addition u/s 69C, treating the loans as genuine.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether additions under Section 68 for unsecured loans in search assessments under Section 153A could be sustained when based primarily on third-party statements and an excel sheet found from a third party, without any independent incriminating material found from the assessee.

1.2 Whether retracted statements of third parties, recorded during search/post-search proceedings, could be relied upon as incriminating material to justify additions under Sections 68 and 69C.

1.3 Whether denial of cross-examination of third parties, whose statements were relied upon by the Assessing Officer, vitiated the additions on grounds of violation of principles of natural justice.

1.4 Whether, on facts, the assessee had discharged the onus under Section 68 to prove identity, creditworthiness of lenders, and genuineness of loan transactions, and whether the Assessing Officer could disregard such evidence without conducting further enquiry.

1.5 Whether additions under Section 68 could survive when substantial portions of the loans had been repaid through banking channels and interest thereon, with TDS, had been accepted as genuine by the Department.

1.6 Whether consequential addition under Section 69C towards alleged commission expenditure for obtaining accommodation entries could be sustained once the loans themselves were held to be genuine.

1.7 Whether the same conclusions applied mutatis mutandis for the subsequent assessment year having identical facts and issues.

---

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Use of third-party excel sheet and retracted statements as incriminating material in 153A assessments; validity of additions under Sections 68 and 69C

Legal framework as discussed

2.1 The Tribunal examined the scope of Section 153A in light of binding precedents, holding that additions for unabated years must be based on incriminating material found during search relatable to the assessee. It relied on decisions, inter alia, in Best Infrastructure and Harjeev Aggarwal, that: (i) statements under Section 132(4) by themselves do not constitute incriminating material; (ii) such statements can be used only when linked to incriminating material found during search; and (iii) retracted statements, without corroboration, cannot be sole basis for additions.

Interpretation and reasoning

2.2 The Assessing Officer's case rested mainly on: (i) statements of an employee, and of an alleged entry operator, recorded during search/post-search proceedings, and (ii) an excel sheet titled "Funds Position" found on the employee's laptop, showing loan entries including those relating to the assessee.

2.3 The Tribunal noted the findings that: (i) the excel sheet merely contained details of loans already recorded in the assessee's regular books; (ii) there was no indication therein of any cash component or unaccounted transactions; and (iii) no cash, documents, or other material evidencing unrecorded income, unaccounted assets, or cash payments of commission were found from the assessee during search.

2.4 It was specifically recorded that the document (excel sheet) was found from a third party (the employee), who had no financial role in the assessee; thus the statutory presumptions under search provisions could not operate against the assessee, absent corroborative material.

2.5 The Tribunal observed that the employee and the alleged facilitator both retracted their statements within a short time by detailed written communications, alleging coercion and lack of voluntariness, and that such retractions were never effectively rebutted by the Department nor followed up with further investigation.

2.6 The Tribunal concurred with the appellate authority that beyond the retracted statements there was "no tangible material" found or brought on record to show that loans were accommodation entries or that any cash/commission had passed between the assessee and the lenders. It was also noted that when the employee's statement was confronted to the assessee's director during search, the director categorically denied any accommodation entry activity, and no further probing was done thereafter.

2.7 Relying on the ratio that a block/search assessment cannot be founded solely on uncorroborated, and particularly retracted, statements, the Tribunal held that such statements, especially of third parties, do not constitute incriminating material for the assessee in the absence of supporting seized evidence or subsequent investigation establishing a nexus with undisclosed income.

Conclusions

2.8 For unabated years, no addition under Sections 68 or 69C could be made in a Section 153A assessment purely on the basis of third-party statements (which stood retracted) and an excel sheet reflecting only accounted loan entries already in the books. Such material did not qualify as incriminating material against the assessee; therefore, the additions lacked legal foundation and were unsustainable.

---

Issue 3 - Denial of cross-examination and violation of principles of natural justice

Legal framework as discussed

2.9 The Tribunal referred to settled law, including Andaman Timber Industries and High Court decisions, that when an assessment is based on third-party statements adverse to the assessee, denial of a requested opportunity to cross-examine those persons constitutes a serious violation of natural justice and vitiates the addition.

Interpretation and reasoning

2.10 The assessee had specifically requested cross-examination of the alleged entry provider whose statement was used against it. The Assessing Officer neither produced him nor provided any opportunity of cross-examination, yet relied on his earlier statement to draw adverse inferences.

2.11 The Tribunal noted that, once cross-examination is sought, the authority cannot presume what would or would not emerge from such cross-examination and cannot ignore the request; using such statements without allowing cross-examination renders reliance on them legally infirm.

Conclusions

2.12 Since the additions were grounded substantially on third-party statements and no opportunity of cross-examination was afforded despite specific request, there was a clear breach of natural justice, further undermining the validity of the additions under Sections 68 and 69C.

---

Issue 4 - Whether the assessee discharged its onus under Section 68; effect of non-enquiry by the Assessing Officer

Legal framework as discussed

2.13 The Tribunal reiterated the settled position that under Section 68 the assessee's burden is limited to establishing: (i) identity of the creditor, (ii) creditworthiness of the creditor, and (iii) genuineness of the transaction. Once comprehensive documentary evidence is filed, the onus shifts to the Department to rebut such material by enquiry and evidence; mere suspicion, non-service of summons, or low returned income of creditors is insufficient.

Interpretation and reasoning

2.14 As recorded in detail by the appellate authority and accepted by the Tribunal, the assessee furnished, for each lender, inter alia: PAN, certificate of incorporation, MoA/AoA, MCA master data, income-tax returns, audited financial statements, bank statements showing loan flows, confirmations, ledger accounts, interest payment records and TDS certificates, and in many cases evidence of subsequent repayment.

2.15 The Tribunal noted that the Assessing Officer himself admitted receipt of confirmations from all parties and accepted that interest income with TDS was reflected and not disturbed in the lenders' hands. The lenders were "active" on the MCA portal, and their balance sheets showed sufficient reserves/funds to advance loans; no addition had been made in their own assessments in relation to their capital/funds.

2.16 The Tribunal agreed with the appellate finding that the Assessing Officer did not specify any particular deficiency in the documents, did not use powers under Sections 131 or 133(6) to examine directors or obtain further information, and essentially ignored the evidentiary value of the documents while resting on general observations about low income, absence of fixed assets, or inspector's reports.

2.17 It was further observed that the assessee had provided updated addresses of lenders along with supporting records, yet no independent enquiry was conducted at those addresses, no meaningful verification of bank statements, financials, or tax records was undertaken, and no material was brought to show that the funds originated from the assessee itself.

Conclusions

2.18 The assessee had fully discharged its initial onus under Section 68 by proving identity, creditworthiness, and genuineness of lenders and transactions. The Assessing Officer, having failed to rebut this evidence through investigation or to demonstrate falsity or accommodation layering, could not sustain additions merely on assumptions, low income of creditors, or unverified inspector reports. The deletion of Section 68 additions was therefore justified on merits as well.

---

Issue 5 - Effect of repayment of loans and acceptance of interest; sustainability of Section 68 additions

Interpretation and reasoning

2.19 The Tribunal recorded that, barring one lender, loans from all other companies had been repaid in subsequent years through banking channels, and corresponding ledger accounts and bank entries were produced. No adverse inference was drawn by the Department in the repayment years.

2.20 A further inconsistency was highlighted: while the principal loan amounts were treated as bogus under Section 68, the interest paid thereon was allowed as a deductible expense and corresponding TDS was accepted as genuine. The Tribunal treated this as indicative of a flawed and pre-conceived approach, since if loans were allegedly non-genuine accommodation entries, interest thereon could not simultaneously be accepted as genuine expenditure.

Conclusions

2.21 In light of (i) proved repayments through banking channels, (ii) acceptance of interest and TDS by the Revenue, and (iii) absence of evidence that loan funds emanated from the assessee's unaccounted resources, the additions under Section 68 were held to be unsustainable and rightly deleted.

---

Issue 6 - Addition under Section 69C towards alleged commission for accommodation entries

Interpretation and reasoning

2.22 The Assessing Officer estimated commission expenditure at 1% of the loan amount under Section 69C on the presumption that the assessee must have paid commission to obtain accommodation entries. The Tribunal noted that: (i) no material whatsoever (cash trail, documents, or corroborative statements) was found indicating any payment of commission; (ii) the foundational allegation that loans themselves were accommodation entries had failed on facts and in law; and (iii) no specific evidence of any such 1% commission rate or actual payment existed.

Conclusions

2.23 Once the loans were held to be genuine, the very premise for commission expenditure collapsed. In absence of incriminating material or independent evidence of commission payment, the addition under Section 69C was held to be purely presumptive and was rightly deleted.

---

Issue 7 - Applicability of findings to subsequent assessment year with identical facts

Interpretation and reasoning

2.24 For the subsequent assessment year, the parties admitted that the facts, nature of additions, legal grounds, and evidentiary pattern were identical. The additions again related to unsecured loans and alleged commission in a Section 153A assessment, resting on the same type of material and reasoning.

2.25 The Tribunal applied its detailed reasoning and conclusions from the earlier year mutatis mutandis, holding that the absence of incriminating material, the evidentiary insufficiency of retracted third-party statements, the assessee's discharge of onus under Section 68, and the deficiencies in the Assessing Officer's enquiry equally vitiated the additions for that year.

Conclusions

2.26 Following the reasoning for the first year, the Tribunal upheld the appellate order deleting the additions under Sections 68 and 69C for the subsequent assessment year as well. Both appeals by the Revenue were dismissed in entirety.

---