Appeal allowed: advances with TDS u/s 194I not taxable as unexplained cash credits u/s 68, invalidates 148

ITAT Delhi allowed the assessee's appeal. It held that the disputed sums received from the purchaser as advances under duly executed agreements for sale of farmhouses, with TDS deducted u/s 194I, constituted genuine advance receipts for transfer of immovable property and could not be taxed as unexplained cash credits u/s 68. The Tribunal found the purchaser's creditworthiness established and rejected the AO's characterization of the receipts as unexplained. Further, additions based on documents seized from a third person were deleted, as the AO failed to comply with the mandatory procedure and approvals required under Explanation 2 to section 148 for using third-party material against the assessee.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether advances received from a non-banking finance company against proposed sale of immovable property, and/or treated as loans, could be taxed as unexplained cash credits under section 68 read with section 115BBE.

1.2 Whether, for the impugned year, the assessee had discharged the onus under section 68 regarding identity, genuineness of transaction and creditworthiness of the non-banking finance company creditor, including the aspect of "source of source", and whether reliance solely on third-party statements without corroborative evidence was legally sustainable.

1.3 Whether the allegation that the lender was a "shell company" based on a press release, in absence of any adverse finding from the nodal investigation agency (SFIO) or regulatory non-compliance, could justify additions under section 68.

1.4 Whether the first appellate authority was justified, under section 250(4) and without invoking rule 46A, in making enquiries (including from SFIO and the lender) and relying on material so obtained when the Assessing Officer failed to respond to repeated opportunities for remand comments.

1.5 Whether the fact that the loans/advances from the lender were repaid in subsequent years, through banking channels, has bearing on taxability as unexplained cash credits.

1.6 Whether, in reassessment proceedings initiated under section 148 on the basis of a search in the assessee's own case after 1.4.2021, additions could validly be made on the strength of documents (Excel sheet) seized in a later, separate search on a third party, without complying with clause (iv) of Explanation 2 to section 148 and obtaining prior approval of the prescribed authority.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Taxability under section 68 of advances/loans from the non-banking finance company

Legal framework as discussed

2.1 The Tribunal referred to section 68, noting that addition can be made only where: (i) there is a credit in the books in the relevant previous year; (ii) the assessee offers no explanation, or the explanation is found unsatisfactory; and (iii) the Assessing Officer's opinion rejecting the explanation must be based on objective appreciation of material and surrounding circumstances.

2.2 The Tribunal also noted the later amendment by Finance Act, 2022 inserting a second proviso to section 68 (effective from AY 2023-24) which places an additional onus on the assessee to explain "source of source" for loans and borrowings, with carve-out for specified regulated entities, and recorded that this amendment does not apply to the assessment years under consideration.

2.3 The Tribunal relied on its earlier coordinate bench decision in a connected group case (involving the same lender and substantially identical allegations and facts), wherein additions for loans from the same non-banking finance company had been deleted, and adopted those findings mutatis mutandis.

Interpretation and reasoning

2.4 The Tribunal found that, on the "loan/credit" aspect, all factual allegations and reasoning of the Assessing Officer in the present case were materially identical to those already examined in the earlier group decision. In that earlier decision, the Tribunal had, inter alia, held:

(a) The Assessing Officer relied mainly on statements of certain individuals (including a director of the assessee and an alleged entry provider), recorded years earlier in relation to other periods, without any incriminating document pertaining to the impugned year or the impugned transactions.

(b) No incriminating material was seized from the assessee, its directors or employees during search, linking the impugned loans to any cash or "hawala" accommodation entries.

(c) The assessee had furnished comprehensive documentary evidence for the lender, including: confirmed account statements, bank statements, audited financial statements and income-tax return acknowledgments; these demonstrated identity, regular business, and sufficiency of funds in the lender's bank account at the time of granting loans/advances.

(d) The Assessing Officer himself accepted part of the loans from the same lender as genuine and made addition only for a portion, though all transactions were on identical factual footing; such selective treatment undermined the allegation that the lender lacked creditworthiness.

(e) By producing detailed bank statements and a tabular reconciliation, the assessee had, in fact, demonstrated "source of source" in the lender's hands, even though such requirement was not legally applicable for the relevant years.

(f) There was no evidence of any cash deposit in the lender's bank account contemporaneous with the advances to the assessee which could indicate cash accommodation entries.

2.5 The Tribunal endorsed the appellate authority's detailed discussion that:

(a) Statements of one employee/director relied upon by the Assessing Officer were "standalone", uncorroborated and contradicted by statements of other directors; no documentary material was brought to connect such statements specifically to the impugned loans or year.

(b) The Assessing Officer failed to analyse all available evidence, indulged in "cherry picking" of statements, and ignored exculpatory material and statements favouring the assessee.

(c) Law does not permit additions under section 68 solely on the basis of uncorroborated statements (especially of third parties) when the assessee has furnished primary documentary evidence establishing identity, genuineness and creditworthiness; the appellate authority cited multiple precedents to that effect, which the Tribunal approved.

2.6 On the specific facts of this appeal, the Tribunal additionally noted that:

(a) The impugned sum of Rs. 40,39,05,000 was received as advance against sale of two farm houses owned by the assessee, under two separately executed agreements with the same non-banking finance company.

(b) These agreements and their cancellation documents were found and seized during search and were part of the record; tax was deducted at source under section 194-I on the advances; part of the advances was repaid when the deal was cancelled.

(c) In view of the documented nature of these transactions as advances against sale of immovable property, the Tribunal held that such receipts could not be characterised as "cash credits" within the meaning of section 68.

(d) Even assuming, arguendo, that the receipts were to be treated as loans, the same lender, on identical facts, had already been held to be genuine in the earlier group case; the Tribunal therefore applied those findings mutatis mutandis and held the impugned amount could not be taxed under section 68.

2.7 The Tribunal emphasised that suspicion, however strong, cannot substitute for proof; the power to make additions cannot be exercised on pure guess or conjecture without supporting evidence, particularly when the assessee has positively discharged its onus.

Conclusions

2.8 The Tribunal concluded that:

(a) The impugned amount was in the nature of advance against sale of immovable property, supported by executed and seized agreements, TDS compliance and subsequent part repayment; hence it did not fall within section 68 as "unexplained cash credits".

(b) Even if treated as loans, the assessee had discharged the burden under section 68 by proving identity of the lender, genuineness of the transactions and creditworthiness of the lender, and had also demonstrated source of source, though not legally required for the year.

(c) The Assessing Officer's reliance on uncorroborated statements, absence of incriminating material, selective acceptance of part of the same lender's loans, and lack of cash trail rendered the additions unsustainable.

(d) The addition of Rs. 40,39,05,000 under section 68 read with section 115BBE was unsustainable and was rightly deleted by the first appellate authority; the Revenue's appeal was dismissed on this issue.

Issue 3 - Allegation of lender being a "shell company" and effect of SFIO enquiry

Legal framework as discussed

3.1 The Assessing Officer had referred to a Ministry of Finance press release dated 08.06.2018, classifying certain entities as shell companies, and relied upon this to doubt the genuineness of the lender.

3.2 The first appellate authority exercised powers under section 250(4) to seek information directly from the Serious Fraud Investigation Office (SFIO), the designated nodal agency, regarding any proceedings against the lender.

Interpretation and reasoning

3.3 The SFIO categorically informed that no investigation was initiated, pending or disposed of against the lender and that the lender had regularly filed its annual returns with the Registrar of Companies and the Reserve Bank of India for the relevant years, with no show-cause issued since FY 2017-18.

3.4 The appellate authority, relying on the SFIO response and compliance data, concluded that:

(a) Mere reference in a general press release, without any specific proceeding or adverse regulatory action, could not establish that the lender was a shell company for the purpose of section 68.

(b) Regular statutory compliances and absence of any adverse action from SFIO or ROC militated against the "shell company" allegation.

3.5 The Tribunal concurred with this reasoning, holding that, in the face of specific SFIO clarification and regulatory compliance evidence, the "shell company" allegation could not sustain additions, particularly when otherwise supported by documentary evidence demonstrating capacity and bona fide transactions.

Conclusions

3.6 The Tribunal held that the allegation of the lender being a shell company, based solely on a general press release and without corroborating regulatory findings, could not justify invoking section 68; the appellate authority's findings rejecting this allegation were affirmed.

Issue 4 - Powers of the first appellate authority under section 250(4) and treatment of material obtained therein

Legal framework as discussed

4.1 The Tribunal examined section 250(4), which empowers the appellate authority to make or cause to be made further enquiry as it thinks fit while disposing of an appeal.

4.2 The appellate authority relied on judicial precedents clarifying that:

(a) The appellate authority's powers are co-terminous with those of the Assessing Officer; it can do what the Assessing Officer could do and can direct the Assessing Officer to do what the latter failed to do.

(b) Rule 46A restricts production of fresh evidence by the assessee but does not curtail the appellate authority's own power to call for evidence suo motu under section 250(4).

(c) Evidence obtained by the appellate authority on its own enquiry, in continuation of the enquiry initiated by the Assessing Officer, constitutes "clarificatory evidence" and is admissible without invoking rule 46A.

Interpretation and reasoning

4.3 The appellate authority issued multiple reminders to the Assessing Officer seeking remand comments and objections on enquiries conducted with the lender and SFIO and on other appellate issues; no response was received.

4.4 In these circumstances, the appellate authority:

(a) Treated the material obtained directly from the lender and SFIO as clarificatory evidence gathered in exercise of statutory enquiry powers; and

(b) Held that in the absence of any remand comments or rebuttal by the Assessing Officer, it was entitled to rely upon such material to reach a conclusion on genuineness and creditworthiness.

4.5 The Tribunal affirmed that the appellate authority had validly exercised its powers under section 250(4), that rule 46A did not apply in such a situation, and that the Assessing Officer's non-response could not vitiate reliance on such material.

Conclusions

4.6 The Tribunal upheld the appellate authority's approach of independently enquiring with SFIO and the lender and treating the resulting evidence as valid material for adjudication; the Revenue's objection that additional evidence was considered without following rule 46A was rejected.

Issue 5 - Effect of repayment of loans/advances on section 68 additions

Interpretation and reasoning

5.1 The appellate authority recorded that the impugned loans from the lender had been repaid by the assessee in subsequent years through banking channels, supported by ledger accounts and account statements.

5.2 Relying on judicial precedents, it observed that where unsecured loans are duly returned and nothing remains outstanding, particularly within the same or immediately following year, such sums are not ordinarily to be treated as unexplained cash credits under section 68, provided identity, genuineness and creditworthiness stand established.

5.3 The Tribunal noted this as a reinforcing factor, particularly when read with the absence of cash trail, proper banking transactions and acceptance of part of the same lender's loans as genuine by the Assessing Officer.

Conclusions

5.4 While repayment, by itself, was not the sole basis for deletion, the Tribunal accepted it as a corroborative circumstance militating against the allegation of bogus accommodation entries and supporting the deletion of additions under section 68.

Issue 6 - Use of third-party seized documents in reassessment without compliance with Explanation 2 to section 148

Legal framework as discussed

6.1 The reassessment for the relevant year was initiated under section 148 based on search and seizure actions conducted in the assessee's own group cases on 28.07.2021 and 04.01.2022.

6.2 Explanation 2 to section 148, as inserted by Finance Act, 2021, deems that the Assessing Officer has "information which suggests that income chargeable to tax has escaped assessment" in specified cases, including:

(i) where search or requisition is in the case of the assessee; and

(iii)-(iv) where money, valuables, books of account or documents seized/requisitioned in the case of "any other person" are found to belong to, pertain to, or contain information relating to the assessee, subject to the Assessing Officer being "satisfied", with prior approval of the Principal Commissioner/Commissioner.

6.3 The Tribunal also noted that these provisions are pari materia to the earlier regime under section 153C for "other person" assessments, where recording of satisfaction by both Assessing Officers and prior approval by the prescribed authority was a jurisdictional requirement.

6.4 The Tribunal relied on a coordinate bench decision (Homelife Buildcon (P.) Ltd.) which had held that, post 01.04.2021, where additions are based on material seized from a third party, the procedure under clause (iv) of Explanation 2 to section 148, including prior approval of the Principal Commissioner, is mandatory; non-compliance vitiates the assessment.

Interpretation and reasoning

6.5 The reassessment order itself stated that reopening was based on material found during search on the assessee's own group (ACE and Kurele Group, and later ACE and Rudra Group). There was no reference at the stage of recording reasons to any documents seized from the third party (Gaursons Group).

6.6 During the pendency of reassessment, the Assessing Officer, by notice under section 142(1), for the first time confronted the assessee with an Excel sheet titled "TB(C) 05.07" seized in a later, separate search on the Gaursons Group on 02.03.2022, purporting to show cash receipts from sale of farmhouses including entries against the assessee, and made addition of Rs. 6.90 crores treating alleged cash payments as unexplained expenditure under section 69C read with section 115BBE.

6.7 The Tribunal noted that:

(a) The material used for the impugned addition was seized in a search on a third party, not in the assessee's own search.

(b) There was no indication that the Assessing Officer had recorded the requisite satisfaction that the third-party documents "pertain to" or "relate to" the assessee, nor that prior approval of the Principal Commissioner/Commissioner had been obtained under clause (iv) of Explanation 2 to section 148 before using such material.

(c) The cause of action for initiating reassessment (search in assessee's own case) was distinct from the later-found third-party material; the Assessing Officer could not, without following the statutory procedure, superimpose third-party search material onto an already-initiated reassessment.

6.8 The Tribunal, following the reasoning in Homelife Buildcon (P.) Ltd., held that:

(a) After 01.04.2021, where additions flow from search material of a third party, the law mandates following the reassessment procedure under section 148 read with Explanation 2, including recording satisfaction and obtaining prior approval of the competent authority.

(b) Non-compliance with clause (iv) of Explanation 2 to section 148 is a jurisdictional defect; the Assessing Officer cannot bypass these safeguards by using third-party material within the confines of a reassessment initiated on a different factual foundation.

6.9 The Tribunal also observed that provisions introduced post-2021 governing search-related reassessments (including those dealing with "other persons") have precedence over general assessment provisions and must be strictly followed when invoked.

Conclusions

6.10 The Tribunal held that the Assessing Officer had not followed the mandatory procedure prescribed in clause (iv) of Explanation 2 to section 148 for using documents seized from a third party and had not obtained the required prior approval from the prescribed authority.

6.11 Consequently, the addition of Rs. 6.90 crores, based solely on entries in the Excel sheet seized from the third party, was held to be unsustainable in law and was deleted purely on this legal/jurisdictional ground.

6.12 Having allowed the legal ground, the Tribunal treated the remaining grounds on merits (including timing of alleged cash payments, absence of incriminating material in assessee's own search, lack of cross-examination, and applicability of section 69C) as academic and did not adjudicate them.

6.13 The assessee's appeal was allowed, and the Revenue's appeal was dismissed.

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