The Delhi Income Tax Appellate Tribunal has clarified that the mere suspicion of accommodation entries, without concrete evidence, cannot override documented proof of loan repayment and corporate existence. This ruling reinforces the principle that taxpayers who substantiate unsecured loans with banking trails, MCA records, and tax compliance need not prove the source of the source.
Background & Facts
The Dispute
The appellant, M/s. South West Pinnacle Exploration Limited, a listed company engaged in drilling and exploration services, faced additions under Section 68 of the Income Tax Act, 1961, for unsecured loans totaling Rs. 3.45 crore received during AY 2014-15. The Assessing Officer (AO) and later the Commissioner of Income Tax (Appeals) disallowed these amounts, treating them as unexplained cash credits, primarily based on a report from the Directorate of Income Tax (Investigation) Kolkata, which claimed the lender companies could not be located at their registered addresses.
Procedural History
The case progressed through multiple stages:
- 2015: Notice under Section 143(2) issued for scrutiny assessment.
- 2016: AO issued summons under Section 131(1)(d) to investigate lender entities; investigation report claimed no physical presence of lenders.
- 2016-2018: Assessee submitted detailed evidence including MCA status, audited financials, PAN, ITR copies, bank statements, and repayment schedules.
- 2023-2024: CIT(A) issued multiple show-cause notices, sought remand reports, and admitted fresh evidence but still upheld additions.
- 2025: Appeal filed before Delhi ITAT challenging both the AO’s addition of Rs. 1.95 crore and CIT(A)’s enhancement of Rs. 1.50 crore.
Relief Sought
The assessee sought deletion of:
- Rs. 16,18,775/- for belated PF/ESIC contributions (withdrawn during hearing);
- Rs. 1,95,23,424/- under Section 68 for unsecured loans;
- Rs. 1,49,76,576/- enhancement by CIT(A);
- Additions on interest and commission expenses linked to the loans.
The Legal Issue
The central question was whether the onus under Section 68 is discharged by an assessee who provides documentary proof of loan receipt, repayment with interest, corporate existence via MCA records, and tax compliance by lenders - without having to prove the ultimate source of funds lent by third-party entities.
Arguments Presented
For the Appellant
The assessee relied on Real Innerspring Technologies Pvt. Ltd. v. ACIT (2025) 174 taxmann.com 1130 (Delhi-Trib.), where the same Bench held that repayment of loans through banking channels negates the presumption of accommodation entries. It further cited Sheela Overseas Pvt. Ltd. v. PCIT (ITA 546/2023) to argue that prior to the 2022 amendment, Section 68 did not require explanation of the source of the source for unsecured loans. Supporting precedents included CIT v. Makhni and Tyagi (P) Ltd., Umbrella Projects Pvt. Ltd., and Ravindra Madanlal Khandelwal v. DCIT. The assessee emphasized that all loans were repaid before assessment proceedings began, and MCA records confirmed active status of all lenders.
For the Respondent
The Revenue relied on the AO’s and CIT(A)’s findings that the investigation report showed non-existence of lender companies. It argued that the mere production of MCA extracts and ITR copies was insufficient without direct verification of the lenders’ financial capacity or source of funds. The Revenue contended that the pattern of loans from multiple entities with identical addresses raised suspicion, and the burden remained on the assessee to dispel it.
The Court's Analysis
The Tribunal examined the evolution of Section 68 and distinguished between loans received as accommodation entries versus genuine business financing. It noted that the amendment introduced by the Finance Act, 2022, which expanded the onus to explain the source of the source, applies prospectively from April 1, 2023. Since the assessment pertains to AY 2014-15, the pre-amendment law governed the case.
"Every transaction has to be evaluated on its merit rather than on the basis of suspicion."
The Court emphasized that the AO and CIT(A) failed to address the core evidence: repayment of loans with interest via banking channels, audited financials of lenders, and active MCA status. The investigation report’s claim of non-existence was contradicted by MCA data as late as December 2023 and December 2024, which showed the lenders were active and compliant. The Tribunal held that the burden under Section 68 is prima facie - once the assessee establishes receipt, repayment, and corporate existence of lenders, the onus shifts to the Revenue to prove fraud or fabrication.
The Tribunal distinguished Checkmate Services Pvt. Ltd. v. CIT (on PF/ESIC disallowance) as irrelevant to the Section 68 issue. It reaffirmed the principle from Real Innerspring Technologies that repayment negates the inference of accommodation entries. The Court rejected the notion that the mere existence of a common promoter or investigation report justifies disallowance without direct proof of circular funding.
The Verdict
The assessee won. The Delhi ITAT held that Section 68 does not require an assessee to prove the source of the source for unsecured loans received prior to April 1, 2023, when repayment with interest and documentary evidence of lender existence are established. The additions of Rs. 1,95,23,424/- and the enhancement of Rs. 1,49,76,576/- were deleted. The appeal was partly allowed.
What This Means For Similar Cases
Documentary Evidence Trumps Investigative Suspicion
- Practitioners must insist that Revenue authorities produce concrete evidence of circular funding or fictitious entities - not merely rely on investigation reports.
- MCA status, audited financials, ITR acknowledgments, and bank transaction trails are sufficient to discharge the Section 68 burden for pre-2023 assessments.
- AO’s failure to consider or reproduce submitted documents constitutes a legal error warranting reversal.
Repayment Is a Definitive Indicator of Genuineness
- Any loan repaid in full with interest via banking channels before assessment proceedings begins strongly supports genuineness.
- The timing of repayment (even if after the financial year) is irrelevant if it occurs before the initiation of scrutiny.
- Practitioners should prepare detailed repayment charts with dates, amounts, and bank references as a standard part of Section 68 defense.
Pre-2023 Loans Are Protected from Expanded Onus
- For assessments up to AY 2022-23, taxpayers need not explain the ultimate source of funds lent by third parties.
- The 2022 amendment to Section 68 does not apply retrospectively; this is a critical jurisdictional point in litigation.
- Cases involving loans from shell companies must be defended on the basis of transactional history, not speculative association.
