Accommodation-entry linked reopening u/ss147/151 upheld; s.68 unsecured loan addition deleted for lack of "source of source" proof.

Reopening under ss. 147/151 was upheld because the AO acted on credible Investigation Wing material identifying the assessee as a beneficiary of accommodation entries and disposed of objections by examining the record; the challenge that approval under s. 151 was mechanical was rejected, resulting in dismissal of the reopening grounds. Addition under s. 68 for unsecured loans was deleted because, for the relevant AY, the Finance Act, 2022 second proviso (requiring "source of source") was inapplicable and, in any event, the assessee substantiated the creditor's funds through bank statements and repayments were through banking channels; further, reliance on third-party statements without furnishing them or allowing cross-examination violated natural justice, vitiating the addition.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether reassessment proceedings were validly initiated on the basis of information from the Investigation Wing, and whether objections to reopening were properly dealt with so as to sustain reopening.

(ii) Whether an addition under section 68 in respect of unsecured loan could be sustained when the principal adverse material was an alleged admission/statement of an alleged entry operator, but the statement was not furnished to the assessee and cross-examination was not granted despite request.

(iii) Whether, on the evidence produced by the assessee, the identity, genuineness and creditworthiness in respect of the unsecured loan stood established so as to rebut the section 68 presumption, and whether repayment through banking channels supported deletion of the addition.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of reopening under section 147

Legal framework: The Court considered reassessment initiated under section 147 on the basis of material/information indicating escapement of income, and addressed whether reopening based on Investigation Wing information, and disposal of objections, suffered from error.

Interpretation and reasoning: The Court found that the reassessment was initiated on the basis of "materials available/credible information" received from the Investigation Wing, identifying the assessee as a beneficiary of accommodation entries in the form of unsecured loans. It noted that the assessee raised objections to reopening and that the Assessing Officer disposed those objections by a written order, considering the arguments. The Court accepted that reopening was based on examination of the material on record and found no error in the initiation of reassessment.

Conclusion: Reopening under section 147 was upheld; the grounds challenging reopening were dismissed.

Issue (ii) & (iii): Sustainability of section 68 addition for unsecured loan in absence of supplied statement/cross-examination; and sufficiency of assessee's documentary evidence

Legal framework: The Court examined addition under section 68 for unexplained credit and applied the principle that where an addition is founded on statements/material collected behind the assessee's back, denial of an opportunity to confront such material and cross-examine the maker, when requested, violates principles of natural justice and vitiates reliance on such statements.

Interpretation and reasoning: The Court recorded that the assessee received an unsecured loan and filed documents to establish the lender's identity, the genuineness of the transaction, and creditworthiness, including the loan account, lender's bank statement, return acknowledgement, and financial statements. The lower authorities treated the loan as an accommodation entry primarily on the allegation that the lender was controlled by an alleged entry operator who purportedly admitted to providing such entries. The Court found, as a decisive fact, that the alleged statement/admission forming the sole basis of the adverse inference was neither provided to the assessee nor was cross-examination granted despite repeated requests. On that basis, the Court held that the action constituted a violation of principles of natural justice, and that "no addition could be made" on such a foundation. The Court also noted, as supporting factual context, that the loan was repaid with interest through banking channels and that the repayment occurred well before the later search referred to by the Revenue; this further undermined sustaining the addition on the pleaded accommodation-entry premise in the facts.

Conclusion: The addition under section 68 in respect of the unsecured loan was deleted because the Revenue's primary adverse material was not furnished and cross-examination was not afforded, rendering reliance on such material impermissible; the assessee's supporting documentation and repayment through banking channels reinforced deletion on the facts.

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