TaxTMI 
TaxTMI 
2026 (10) TMI 506
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....bad in law, illegal and void ab-initio, as the same is based on borrowed satisfaction from the Insight Portal that the Appellant has sold immovable properties of Rs. 67,74,72,067/- which are not disclosed in Return of Income of the Appellant, without any independent verification and application of mind by the Learned Assessing Officer and without any tangible material coming to the possession of the Learned Assessing Officer. 2. That the learned CIT(Appeals) failed to appreciate that the notice u/s. 148 and the order u/s. 148A(d) were issued by the Jurisdictional Assessing officer (JAO), who is not the 'specified authority' empowered under the provisions of Sec. 151A and the Notification No. S.O.1466(E) dated 29th March.2022 issued by CBDT. That the reassessment proceedings were mandated to be conducted in a faceless manner through the National Faceless Assessment Centre (NFAC) and therefore, the issuance of notice u/s. 148, subsequent to proceedings with reference to Section 148A(b) and Order u/s. 148A(d) by JAO is wholly without jurisdiction, illegal and void ab initio. 3. That the learned CIT(Appeals) erred in law and on facts in upholding the reassessm....
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.... Department, contrary to the scheme of section 68 3. Whether, on the facts and in the circumstances of the case and in law, the Learned CIT A erred in substituting the section 68 addition of Rs. 2,87,75,495 with a direction to compute a deemed interest 10 percent on the said sum, which is not contemplated as an alternative to section 68 and defeats the statutory consequence of taxing unexplained credits 4. Whether, on the facts and in the circumstances of the case and in law, the Learned CIT A erred in directing assessment of a new item deemed interest on corpus OR society deposits amounting to enhancement OR new source, without complying with the mandatory requirement of notice under section 251(2), thereby vitiating the direction 5. Whether, on the facts and in the circumstances of the case and in law, the Learned CIT A erred in granting relief in respect of Rs. 11,25,000 Flat No. 602 merely on the premise that it is recorded as sales, despite the purchaser s non compliance to notice u s 133(6) and without conclusive verification of identity genuineness so as to rule out application of section 68 6. Whether, on the facts and in the circumstance....
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....92/- clarifying the details of flats sold during the Financial Year (FY) 2015-16 and revenue recognized in the said year. Primarily, the assessee failed to submit confirmation from the parties who have tendered unsecured loan to the assessee. It was submitted that the confirmations are not given by the parties in view of non-payment of interest due to financial crisis. The assessee was also required to furnish details of certain amounts received in the form of corpus funds and set aside deposits for sale of flats during the FY 2015-16 to which the assessee responded that such amounts were collected from the flat purchasers in terms of agreements entered into with each flat purchaser. The said funds will be paid to society which will be framed pursuant to conveyance and handing over of the society to the members when it is formed. Due to pending litigation also, pending approval from Aviation Ministry for construction of higher floors, the project is not completed yet. Admittedly, the assessee has corpus funds of Rs. 2,45,00,000/- and society deposit of Rs. 42,75,495/- till 31st March, 2016. 5. During the assessment proceedings, in order to verify the genuineness and creditworthi....
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....and on account of approval of Aviation Ministry for construction of higher floors. The Ld. AO was not convinced with the submissions of the assessee as the funds were not utilized as per terms of agreement nor were recognized as revenue from operations. Therefore, an amount of Rs. 2,87,75,495/- (Rs.2,45,00,000/- on account of corpus fund and Rs. 4275495/- as security deposit) is treated as unexplained cash credit u/s 68 of the Act and added to the income of the assessee. In terms of aforesaid additions, the taxable income of the assessee was recomputed by the Ld. AO and determined as under: S. No. Description Amount (in INR) 1. Income as per Return of income filed 3,40,72,650/- 2. Income as computed u/s 143(1)(a) 3,40,72,650/- 3. Variation in respect of issue of unexplained credit u/s 68 (as per Para 3.6 above) 4,09,00,495/- 4. Total income determined 7,49,73,145/- 5. Rounded Off 7,49,73,150/- 7. Being dissatisfied with the findings of Ld. AO, assessee preferred an appeal before the Ld. CIT(A) who had partly allowed the appeal of the assessee wherein the Ld. CIT(A) had decided the issues by observing as under: (i) Re....
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.... both are in appeal before us. 9. With respect to aforesaid additions and decision of Ld. CIT(A) qua the respective additions, the assessee has furnished a brief synopsis, inter alia, propositions which is extracted as under: "Proposition 1- (ASSESSEE APPEAL) - CONDENSED GOA NO. 4 - Addition u/s 68 with respect to unsecured loan of Rs. 10,00,000/- from Mr. Mohit Singh Khanduja and Rs. 1,00,00,000/- from M/s Shree Ganesh Enterprises The finding in the Assessment Order is at para 3.6.1 (Page 9) The finding in the CIT(A) Order is at para 6.1-6.2 (Page 49) The entire thrust of the addition by the Assessing Officer is that the two parties namely Mr. Mohit Singh Khanduja and M/s Shree Ganesh Enterprises have not responded to section 133(6) notices. Addition cannot be made on mere ground that parties failed to reply in response to notice u/s 133(6). Reliance is placed on ITO v. Gold Finger Establishment [ITA No. 4212/Mum/2015] para 11 Sonicwall v. ACIT [ITA No. 3860/Mum/2019] para 8 Further, the Assessee has produced the following documents: Unsecured Loan of Rs. 10,00,000/- from Mr. Mohit Singh Khanduja L....
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.... following amounts Rs. 5,00,000 towards corpus fund (para 21(d) at page 30 of the Condensed Paperbook Towards Society Deposits totalling to Rs. 1.00.350 Rs. 350 towards admitting Purchasers as member and for share Rs. 350 towards admitting Purchasers money of the said Society [para 21(a) at page 29 of the Condensed Paperbook] Rs. 25,000 towards Security deposits for obtaining water connection, telephone and cable facility infrastructural facilities (para 21(b) at page 29 of the Condensed Paperbook] Rs. 25,000 towards three phase electric meter charges [para 21(c) at page 29 of the Condensed Paperbook] Rs. 50,000 towards proportionate share of development charges [para 21(e) at page 29 of the Condensed Paperbook] The above amount of Rs 5,00,000 have been duly reported in the Corpus fund Ledger at page 16 as well as page 22 (detailed list of buyers) of the Condensed Paperbook wherein each flat purchaser has paid/ has to pay Rs. 5,00,000 in accordance with the aforesaid agreement. The total amount received is Rs. 2,45,00,000/- for the Corpus Fund is in accordance with the aforesaid agreement. Further, the amount o....
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....zed the amount of Corpus Fund and Society Deposit is incorrect and based on surmises. In fact, if the Balance sheet of the Assessee is examined at page 54 of the Condensed Paperbook, it is evident that the Assessee had bank balance of Rs. 11.28 crores. Therefore, it cannot be said that the Assessee utilized the amounts of Corpus Fund and Society Deposits for its "for its gain and no interest was being paid to the flat buyers.". It is a well settled law that the Revenue cannot resort to adhoc additions made purely on surmises. Thus, the ad-hoc addition was arbitrary and unjustified." 10. Regarding first addition of Rs. 1,10,00,000/-, it is submitted that the first loan of Rs. 10,00,000/- from Mr. Mohit Singh Khanduja pertains to preceding years wherein no addition was made in the year in which such loan was taken by the assessee. Further, the assessee is making consistently interest payments to the lender. Regarding loan confirmation from lender M/s. Shri Ganesh Enterprises, the confirmation has been placed in paper book at page no.11 and the loan was also taken for 4 months which was taken in October, 2015 and repaid in February, 2016. Relevant documents are furnished in the ass....
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....nce that the assessee had arranged an accommodation entry in the guise of an unsecured loan for the purpose of introducing unexplained cash credit in its books. The ratio of the said decision, having regard to the factual features noticed above, is relevant for consideration of the present transaction. 16. In view of the foregoing discussion, the addition aggregating to Rs. 1,11,00,000/- made by the Ld. AO under section 68 of the Act requires examination with reference to the individual credits. To the extent of Rs. 10,00,000/-, the amount pertains to an earlier year and, therefore, does not constitute a credit of the relevant previous year. As regards the balance amount of Rs. 1,00,00,000/-, the material placed on record evidences the receipt through banking channels as well as repayment of the loan during the same financial year. The addition, therefore, cannot be sustained merely on the basis of an inference that the transaction represented an accommodation entry, in the absence of further substantive material establishing such a character. 17. Accordingly, the finding of the Ld. CIT(A) on this aspect is set aside and the Ld. AO is directed to delete the addition of Rs. 1,....
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....h deposits by using such funds for its commercial benefits which is challenged by the assessee whereas the Department is in appeal against the relief granted by the Ld. CIT(A). 24. Before us, Ld. Counsel of the assessee submitted that such funds are shown by assessee in the balance sheet as other liabilities, namely "Corpus Fund Debt - Shikhar" for Rs. 2,45,00,000 and Rs. 42,75,495/- as "Society Deposit - Shikhar" thereby the total other liabilities of the assessee aggregated to Rs. 5,61,36,590/- and such liability was shown in the balance sheet in Schedule-F under the project head "Current Liabilities". It is further submitted by the assessee that such liability was represented by way of bank balance for Rs. 11,28,78,087/- under the head current assets loans and advances in Schedule - E of the balance sheet. It is submitted that once the assessee has bank balance of Rs. 11.28 crores, the Revenue Authority cannot make an addition purely based on surmises that the assessee has used the funds of society for its all-commercial benefits. 25. Per contra, Ld. DR vehemently objected to the contentions raised by the assessee and had submitted a note in this respect which is extracted....
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....whom the money is received, their creditworthiness, and the genuineness of the transactions. The law is well-settled that until the assessee discharges this onus, the AO is not obliged to accept the entry as explained. Here, the assessee's explanation for Rs.2.87 Cr was that these were amounts received from multiple flat buyers. Simply asserting that in the sale agreements buyers agreed to pay a corpus and deposit does not discharge the onus. The assessee needed to provide a complete list of all purchasers, the amounts each paid towards corpus/deposit, and evidence of receipt (e.g. copy of each buyer's ledger or receipts, their PANs, confirmation letters, etc.). However, the record shows the assessee furnished only a summary ledger and one "representative" agreement. Details of individual contributors (names, PANs beyond the one sample, dates and mode of payments) were not on record. The AO highlighted that the assessee failed to show utilization of the funds or furnish documentary proof of project still incomplete beyond its own statements. Thus, the primary onus remained undischarged a point CIT(A glossed over. By law, the onus never shifts to the Department until the ass....
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....its might actually be the assessee's own unaccounted money parked under this head. Without thorough verification, the possibility of accommodation entries unsubstantiated credits cannot be ruled out. The CIT(A essentially gave a clean chit without investigation precisely what Section 68 guards against. High Courts have consistently held that mere book entries or self-serving agreements cannot suffice if surrounding circumstances indicate potential camouflage. The Delhi High Court in CIT v. Nova Promoters & Finlease (342 ITR 169) and the Supreme Court in PCIT v. NRA Iron & Steel (412 ITR 161, 2019) have reiterated that the Department is entitled to pierce the explanation and investigate the source of the source if needed, especially where the credits seem the funds dubious. In the present case, the AO identified a red flag were collected even before requisite approvals (aviation NOC) were in place, meaning the assessee took substantial money from buyers for a project that was uncertain. This could indicate desperation for funds or a method to inject cash. The AO was therefore correct to treat the explanation as unsatisfactory and make the addition when the assessee could not pro....
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....transferred, the society also typically wouldn't be taxed on a capital receipt. Section 68 is meant to prevent such escape when the facts indicate the credit could be the assessce's own unaccounted money. CIT(A's reliance on MOFA provisions is thus not a shield; rather, the assessee's noncompliance with those very provisions (no interest or transfer for many years) strengthens the Revenue's case that the funds were indistinguishable from the assessee's own capital during the interim. Moreover, even capital receipts can be taxed under Section 68 if unexplained e.g. share capital, partner's capital, etc., when source is not proven, are treated as income by fiction of law. The Bombay High Court in CIT v. Fakir Mohmed Haji Hasan (247 ITR 290) observed that the character of a receipt (capital or revenue) does not bar its taxation under deeming provisions if the assessee fails to explain it. Here, the assessee's failure to fully explain the Rs.2.87 Cr means the sum is deemed to be income, notwithstanding the argument that it's a "liability". CIT(A's blanket statement that these deposits "cannot be the income of the assessee or attract section 68" i....
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....e entire credit amount remains unexplained in a tax sense as long as the assessee cannot fully substantiate the source or until it is actually paid out to the society with proper records. In summary, the CIT(A's deletion of the Rs.2.8775 Cr addition was premature and improper. The AO's action was in line with Section 68: the assessee did not discharge its burden to explain those credits satisfactorily, making the addition legally tenable. Numerous judgments support the Revenue's stance that unverified credits must be taxed. Here, identity and genuineness of Rs.2.87 Cr were at best partially explained and at worst not verified at all. Thus, we have strong grounds to argue that CIT(A's relief was erroneously granted and should be overturned by the ITAT, restoring the full addition under Section 68. 2. Part Sale Consideration Rs.11.25 Lakh Genuineness Not Established, Section 68 Justified CIT(A)'s Finding: CIT(A treated this Rs.11.25 lakh as a genuine sale receipt pending simple verification. He accepted that the amount was recorded in the assessee's books as part of the sale of Flat No.602 to Mr. Suraj Kishore Khubchandani. The asses....
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.... buyer pay the rest? Did the sale finalize? The records show this was an amount received in Oct 2015, yet even by mid-2023 the AO had to inquire, and the buyer did not acknowledge the deal. This suggests either the buyer was untraceable, or the transaction was not arms-length. Section 68 can apply even to amounts credited as "sales" if those sales are found to be fictitious or not substantiated. The assessee's argument that "a receipt cannot be treated as unexplained cash credit if shown as sale" is an oversimplification. Courts have held that substance prevails over form if what is shown as a sale is not a real sale, the corresponding receipt is nothing but an unexplained credit in the books. The burden was on the assessee to prove the genuineness of the sale, not merely produce self-serving documents. A ledger entry and a contract copy are internal/controlled documents; the independent verification was missing. The AO's resort to Section 68 was precisely because the independent party (buyer) did not corroborate the story, leaving the transaction unverified and suspicious. The CIT(A, in our view, erred by assuming that recording it as a sale is sufficient. The Supreme Cour....
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....void letting the sum slip out untaxed in case the sale was bogus. We will argue that CIT(A should not have interfered with the AO's justified protective approach. At most, CIT(A could have asked for further evidence of genuineness (like a confirmation or affidavit from the buyer) which he did not; he simply trusted the books. c. Legal Support for Revenue's View: There is precedent that where an assessee shows a cash credit as a sale but fails to prove the sale with credible evidence, the AO can treat it as unexplained income. In similar cases, courts upheld additions when purported sales to certain parties were found unsubstantiated or the parties non-existent. The Delhi ITAT in ITO vs. Yadu Steels (2019) held that mere routing of cash through sales or purchases will not circumvent Section 68/69 if the underlying transaction is not genuine. Here, Mr. Khubchandani's non-cooperation made the transaction unverified. CIT(A himself states the ground was allowed "for statistical purpose", meaning the issue wasn't finally settled on merits. This implicitly acknowledges that if on verification the receipt was not part of income or was dubious, the addition would st....
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.... the assessee proves the basic three elements (identity, capacity, genuineness), the onus does not shift, and the AO is not obliged to accept the explanation in fact, the AO has the power to insist on more evidence or draw adverse inference if the assessee's evidence is incomplete. CIT(A's approach turns this on its head, as he essentially required the AO to find evidence of non-genuineness while the assessee's own proof was scanty. This legal error is a strong ground for appeal, as ITAT can be invited to apply the correct burden of proof and thereby find the additions justified due to the assessee's failure to dispel the suspicious circumstances. Acceptance of Self-Serving Evidence: CIT(A liberally accepted the assessee's documents at face value one sample agreement for corpus, and the sale ledger+agreement for the 11.25L without appreciating that such evidence was entirely under the assessee's control and uncorroborated by any independent source. The Supreme Court in Durga Prasad More famously held that tax authorities are not bound to accept self-serving documents which are potentially arranged, and should examine the surrounding circumstances. L....
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....ision, by not addressing this aspect, was legally infirm. Procedural Irregularity (Enhancement vs. Deletion): A technical, but important, point: CIT(A's action of introducing a new addition of deemed interest while deleting the principal could be seen as an enhancement of income without due process. The AO had not added any interest in the assessment order. By directing a 10% interest income addition, CIT(A in effect enhanced the assessment on a new issue (interest on corpus), which requires prior notice to the assessee under section 251(2). There is no indication such notice was given. While this aspect itself is between CIT(A) and assessee, it underscores that CIT(A's remedy was legally unsound. From Revenue's perspective, this convoluted outcome (deleting one addition but adding another not originally contemplated) may not stand if challenged by the assessee. It would be far cleaner and legally robust to uphold the original principal addition itself. In appeal, we can submit that CIT(A's order, if left unchallenged, might not achieve finality anyway the assessee could object to the interest addition on procedural or substantive grounds (e.g.. arguing int....
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....ct there is contrary authority as discussed. The ITAT Mumbai in the Bhoomi Realtors case (2019) ultimately taxed the interest because that was the issue before it (the principal was not under dispute in that year or was capital in nature). But importantly, it did not say that interest in lieu of principal is the remedy where principal is unexplained. It taxed interest in addition to whatever treatment of principal (which in that case was eventually handed to society). In our case, the principal is still lying with the assessee unaccounted for. The proper course is to tax the principal (now) under Sec 68, and when the assessee actually transfers it to the society (if it ever does), that outflow can be dealt with in that future year as per law. CIT(A's direction results in an awkward situation: the AO is to "allow the addition of Rs.2.87 Cr" (meaning delete it) and instead assess interest of Rs.28.8L but CIT(A also says that interest is "not year specific", leaving ambiguity whether only one year's interest to be taxed in AY 2016-17 or cumulative interest up to handover. This lack of clarity could lead to further disputes. It is far simpler and legally sound to treat the enti....
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....tion. In that case, large foreign remittances claimed as gifts were taxed under Sec 68 as the creditworthiness and circumstances were suspect. The ratio confirms that the AO has discretion to treat a credit as unexplained if not convincingly explained, even if some paperwork is in order, and courts should not interfere if the decision is based on appreciation of facts. Supreme Court PCIT NRA Iron & Steel Pvt. Ltd. (2019, 412 ITR 161): Reiterated that the assessee must establish the identity. genuineness, and creditworthiness of creditors (in that case, shareholders who paid share premium). Merely providing PANs, bank entries, etc., may not suffice if there are indicators of accommodation entries; the AO is not bound to accept the assessee's explanation if surrounding facts make it dubious. This directly supports Revenue's stance on both the corpus deposit (creditworthiness of alleged "flat buyers" not proven at all) and the sale receipt (genuineness in doubt). The SC overturned a High Court lenient view and upheld the addition, underscoring that courts should not substitute their own conjectures if the AO's conclusion of lack of genuineness is reasonable releva....
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....Iron & Steel clarified that those judgments do not absolve the assessee from proving genuineness or creditworthiness. We will be ready to counter any reliance on Lovely Exports by pointing out that here the identities of many contributors are not conclusively established (most were not even named to AO/CIT(A)) and genuineness is in doubt. So the ratio of those cases (which anyway are on share capital with ROC details etc.) doesn't directly apply. Our case aligns more with NRA Iron & Steel where even though identities were there, the transactions were held ingenuine. In sum, the weight of legal authority favors the Revenue when an assessee has undisclosed, unverified credits. The CIT(A's order, by deviating from these principles, gives us strong grounds to appeal and expect a favourable outcome." 26. Based on aforesaid submissions, it was the prayer of revenue that the addition of Rs. 2,87,75,495/- u/s 69 on account of unexplained corpus funds and security deposit should be sustained in full in place of the directions of Ld. CIT(A) to make the addition of 10% on account of interest. 27. We have considered the rival submissions, perused the material available o....