Revenue appeal fails as unsecured loan under s.68 r.w.s.115BBE held genuine; interest allowed as business expense

The ITAT Delhi dismissed the Revenue's appeal challenging deletion of addition under s.68 r.w.s. 115BBE in respect of an alleged bogus unsecured loan. It upheld the CIT(A)'s finding, based on independent inquiries, that the loan from a corporate lender had sufficient creditworthiness and that the transaction was genuine, thereby satisfying the conditions of s.68. As the Revenue could not rebut these factual findings or produce contrary material, the addition was rightly deleted. Consequently, disallowance of interest on the said loan was also set aside and allowed as business expenditure.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the addition under section 68 read with section 115BBE in respect of unsecured loan received from M/s Hallow Securities Pvt. Ltd. was sustainable on the grounds of alleged bogus nature of the transaction, shell company classification, search statements, and improper admission of additional evidence under rule 46A.

1.2 Whether the addition under section 68 read with section 115BBE in respect of unsecured loan received from M/s Dhankalash Distributors Pvt. Ltd. was justified on the ground that the assessee failed to prove creditworthiness and genuineness and did not explain "source of source".

1.3 Whether disallowance of interest expenditure on loan from M/s Hallow Securities Pvt. Ltd. was justified on the footing that the underlying loan itself was non-genuine.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Addition under section 68 in respect of loan from M/s Hallow Securities Pvt. Ltd.

Legal framework (as discussed)

2.1 The Tribunal relied on and reproduced its earlier detailed decision in another case concerning the same lender and group, where section 68 was applied to loans from M/s Hallow Securities Pvt. Ltd., and where it was held that:

(i) Under section 68, the assessee must explain nature and source of the credit; the Assessing Officer's dissatisfaction must be based on objective appreciation of material on record.

(ii) The requirement to explain "source of source" for loans is introduced by the Finance Act, 2022 via second proviso to section 68, applicable from assessment year 2023-24 onwards; prior to that, such extended onus was not legally mandated.

(iii) The appellate authority has plenary and co-terminous powers with the Assessing Officer under section 250(4) to make independent enquiries; such enquiries and material so obtained are not hit by rule 46A when initiated suo motu by the appellate authority.

Interpretation and reasoning

2.2 The Tribunal noted that all factual allegations, evidentiary pattern and arguments of the Assessing Officer on the Hallow Securities loan in the present case were identical to those considered in the earlier appeal where the same loan provider, same group (ACE Group), same search/survey material, same statements, and same Ministry of Finance press release on "shell companies" were examined.

2.3 In the earlier decision (reproduced and relied upon), the Tribunal had:

(i) Recorded that the assessee had filed confirmation, bank statements, ITR acknowledgements and audited financials of M/s Hallow Securities Pvt. Ltd. establishing identity, banking trail, and availability of sufficient funds at the time of advancing the loans.

(ii) Held that addition under section 68 could not rest solely on uncorroborated statements of third parties (including employees/directors and an alleged entry operator) recorded in other proceedings/years, without any incriminating material linked to the specific year's loan transaction.

(iii) Noted that no incriminating document relating to alleged bogus loans was found in search, and that the statements relied upon did not specifically establish that the impugned loan to the assessee was bogus.

(iv) Accepted that the lender was a registered NBFC, that loans were routed through banking channels, that no cash deposits coincided with loan disbursals, and that sufficient funds were available in the lender's bank account.

(v) Observed that the assessee had, in fact, explained "source of source" in detail, even though such requirement did not apply for the assessment year in question, including demonstrating receipt of substantial CCD funds by the lender from a high net worth corporate (Teesta Retails Pvt. Ltd.) and tracing repayment flows.

(vi) Held that the Finance Act, 2022 amendment introducing the second proviso to section 68 for loans (source-of-source requirement) applied only from assessment year 2023-24; nevertheless, on facts, source of source stood explained.

(vii) Considered and rejected reliance on a Ministry of Finance press release describing "shell companies", in light of direct enquiries by the appellate authority with SFIO and with the lender, which showed: regular ROC/RBI compliance by the lender; absence of any SFIO investigation or proceedings; and no regulatory action classifying the lender as a tainted entity.

(viii) Recorded that similar loans from the same lender to other group entities had been partly accepted as genuine by the Assessing Officer, creating an inconsistency in treating only a part of the same lender's advances as unexplained.

(ix) Noted that loans had been repaid in subsequent years through banking channels, and relied on judicial precedents holding that where unsecured loans are duly repaid and all basic evidences are furnished, section 68 additions are not justified.

(x) Held that reliance only on selected portions of statements without considering contrary or exculpatory material amounted to impermissible "cherry-picking" and lacked evidentiary fairness.

2.4 On the rule 46A objection, the earlier decision (relied upon) held that:

(i) The first appellate authority had repeatedly called for remand reports and responses from the Assessing Officer, which were not furnished.

(ii) The evidences and confirmations from the lender and third parties were obtained pursuant to enquiries initiated by the appellate authority under section 250(4), and thus constituted "clarificatory" material within the plenary powers of that authority and did not attract the procedural fetters of rule 46A.

2.5 Applying the above, the Tribunal in the present appeal found that both parties admitted there was no change in facts or evidentiary profile regarding the loan from M/s Hallow Securities Pvt. Ltd. compared with the earlier case, which was treated as the lead case on the point.

Conclusions

2.6 The Tribunal applied its earlier detailed findings mutatis mutandis and held that:

(i) The assessee had satisfactorily discharged the onus under section 68 in respect of the loan from M/s Hallow Securities Pvt. Ltd. by establishing identity of the lender, creditworthiness, and genuineness of the transaction through banking records and financial documents.

(ii) The Assessing Officer's reliance on uncorroborated search statements, general allegations of accommodation entries, and a press release on shell companies, without specific incriminating material linked to the impugned credit, was insufficient for an addition under section 68.

(iii) Objections regarding admission of additional evidence under rule 46A were untenable in view of the appellate authority's independent enquiry powers under section 250(4) and the non-response of the Assessing Officer to repeated opportunities.

(iv) The addition of Rs. 9,60,00,000/- under section 68 read with section 115BBE in respect of the loan from M/s Hallow Securities Pvt. Ltd. was unsustainable and was deleted.

(v) All grounds of the Revenue relating to this issue (including those on shell company status, statements of third parties, and rule 46A) were dismissed.

Issue 2 - Addition under section 68 in respect of loan from M/s Dhankalash Distributors Pvt. Ltd.

Legal framework (as discussed)

2.7 The Tribunal proceeded on section 68 principles as already discussed, including the limited scope of "source of source" prior to the Finance Act, 2022 amendment (applicable only from assessment year 2023-24).

Interpretation and reasoning

2.8 The Assessing Officer treated the unsecured loan of Rs. 25,00,000/- from M/s Dhankalash Distributors Pvt. Ltd. as bogus, primarily on grounds of alleged low income of the lender vis-à-vis the loan and non-explanation of source of source.

2.9 The Tribunal noted the findings of the appellate authority that:

(i) The lender had shown income under MAT of Rs. 52,22,232/-.

(ii) The lender had substantial share capital and surplus aggregating Rs. 66,13,52,657/-.

(iii) The lender had received CCDs of Rs. 400 crores from Teesta Retails Pvt. Ltd. and had made investment of Rs. 95 crores in Vodafone Idea Ltd.

(iv) During assessment and appellate proceedings, the assessee had furnished ITRs, bank statements, and confirmation from the lender.

2.10 The appellate authority had further conducted independent enquiries and, after examining all material, concluded that the lender possessed adequate creditworthiness and that the transaction complied with section 68 requirements.

2.11 The Tribunal observed that the Revenue did not bring any contrary material to rebut or displace the detailed factual findings and enquiries of the appellate authority, nor did it identify any perversity or error in those findings.

Conclusions

2.12 The Tribunal held that:

(i) M/s Dhankalash Distributors Pvt. Ltd. had sufficient financial strength and creditworthiness to extend a loan of Rs. 25,00,000/-.

(ii) Identity of the creditor, banking trail, and genuineness of the transaction were duly established; the assessee's onus under section 68 stood discharged.

(iii) The Assessing Officer's objection on "source of source" was misconceived in the light of the law applicable to the relevant assessment year, and in any event factual material supported the lender's funding capacity.

(iv) The deletion of the addition of Rs. 25,00,000/- under section 68 in respect of M/s Dhankalash Distributors Pvt. Ltd. was justified and was upheld; the Revenue's ground on this issue was dismissed.

Issue 3 - Disallowance of interest on loan from M/s Hallow Securities Pvt. Ltd.

Interpretation and reasoning

2.13 The Assessing Officer had disallowed interest of Rs. 28,07,855/- on the footing that the underlying unsecured loan from M/s Hallow Securities Pvt. Ltd. was non-genuine and hence interest was not allowable as business expenditure.

2.14 Having already held, under Issue 1, that the loan from M/s Hallow Securities Pvt. Ltd. was genuine and that the related credit could not be taxed under section 68, the Tribunal considered that the very basis for disallowance of interest stood negated.

Conclusions

2.15 The Tribunal concluded that:

(i) Once the loan itself is accepted as genuine, interest paid thereon, supported by records and arising from a bona fide borrowing, is allowable as business expenditure.

(ii) The disallowance of interest of Rs. 28,07,855/- was unsustainable and was deleted.

(iii) The Revenue's ground on this issue was dismissed.

---