The Income Tax Appellate Tribunal, Delhi, has clarified that repayment of loans through banking channels before the initiation of scrutiny proceedings, along with documentary evidence of interest payment and TDS deduction, is sufficient to establish the genuineness of such transactions under Section 68 of the Income Tax Act, 1961. The Tribunal rejected the Revenue’s reliance on suspicion or association with third-party entities, emphasizing that each transaction must be evaluated on its own merits.
The Verdict
The assessee won. The Tribunal held that loans received and fully repaid with interest through banking channels before the initiation of scrutiny proceedings cannot be treated as unexplained cash credits under Section 68, even if the creditors are linked to entities previously involved in accommodation entries. The Tribunal deleted the additions of Rs. 2 crore, disallowance of interest, and 3% commission, and upheld the deductibility of expenses for setting up an overseas subsidiary. The decision reinforces that repayment and documentation, not mere association, determine genuineness.
Background & Facts
The assessee, M/s South West Pinnacle Exploration Limited, was assessed under normal scrutiny under Section 143(3) for Assessment Year 2016-17. The Assessing Officer (AO) added Rs. 2 crore as unexplained cash credit under Section 68, comprising two loans: Rs. 50 lakh from M/s XO Infratech Pvt. Ltd. and Rs. 1.5 crore from M/s Unishire Urban Infra Limited. The AO also disallowed interest paid on these loans and added 3% of the loan amount as alleged commission. Additionally, Rs. 7,00,106 spent on establishing a wholly owned subsidiary in Dubai was disallowed as non-business expenditure.
The assessee submitted detailed bank statements, loan agreements, repayment vouchers, and TDS certificates. For the Rs. 50 lakh loan, repayment with interest occurred within the same financial year. For the Rs. 1.5 crore loan, the initial borrowing occurred in FY 2013-14, which had been previously examined and accepted by the AO in AY 2014-15. The entire outstanding balance was repaid in FY 2017-18, well before the scrutiny notice was issued in August 2018. The assessee also provided incorporation documents and invoices for the Dubai subsidiary expenses.
The Commissioner of Income Tax (Appeals) upheld all additions. The assessee appealed to the Tribunal, arguing that the transactions were genuine, documented, and repaid in full.
The Legal Issue
The central question was whether a loan received by an assessee and fully repaid with interest through banking channels before the initiation of scrutiny proceedings can be treated as an unexplained cash credit under Section 68, merely because the creditor entity has been associated with accommodation entry providers in unrelated cases.
Arguments Presented
For the Petitioner
The assessee’s counsel argued that Section 68 requires the Revenue to prove the non-genuineness of a transaction, not merely raise suspicion. They relied on the Tribunal’s own decision in Real Innerspring Technologies Pvt. Ltd. v. ACIT, which held that repayment through banking channels, with interest and TDS, negates the presumption of accommodation entry. They emphasized that the loans were not merely recorded but actively repaid, demonstrating business purpose. The expenses for the overseas subsidiary were incurred for expansion and were legitimate business costs under Section 37.
For the Respondent
The Revenue’s counsel relied on the AO and CIT(A) orders, which treated the creditor entities as linked to known accommodation entry operators. They argued that the timing and pattern of transactions raised a suspicion of circular funding, and that the burden shifted to the assessee to prove the source beyond doubt. They contended that prior acceptance of similar loans in AY 2014-15 did not bind the AO for subsequent years.
The Court's Analysis
The Tribunal conducted a meticulous review of the repayment trail and banking evidence. It noted that the Rs. 50 lakh loan was repaid within the financial year, with interest and TDS deducted and deposited. The Rs. 1.5 crore loan, though initially raised in FY 2013-14, was fully settled by March 2018, over a year before scrutiny proceedings commenced. The Tribunal emphasized that the repayment was not partial or delayed but complete and verifiable.
"When the assessee takes the loan and repaid along with the interest clearly shows that the transactions are genuine. By returning the loan, the assessee has only utilised the loan for the purpose of business and repaid the same."
The Tribunal distinguished this case from those involving accommodation entries, where loans are typically never repaid and exist only on paper. Here, the transactions were active, documented, and closed. The mere fact that the creditors were associated with other entities under investigation did not, by itself, render the transactions non-genuine. The Tribunal reiterated that suspicion cannot replace evidence.
Regarding the overseas subsidiary expenses, the Tribunal found no basis to disallow them. The expenditure was incurred for establishing a wholly owned subsidiary, a legitimate business expansion strategy. The cost was properly recorded and supported by invoices and payment vouchers.
The Tribunal also held that since the principal addition under Section 68 was deleted, the consequential disallowances of interest and commission must also be deleted.
What This Means For Similar Cases
This judgment provides a clear roadmap for taxpayers facing Section 68 additions based on creditor associations. Practitioners can now confidently argue that full repayment with interest through banking channels, supported by TDS records and prior audit acceptance, is sufficient to rebut the presumption of unexplained credit. The decision limits the Revenue’s ability to rely on speculative links to third-party investigations.
It also reinforces that prior assessment history of similar transactions is relevant and cannot be ignored. Taxpayers should maintain comprehensive documentation of loan origination, repayment schedules, interest calculations, and TDS compliance. The ruling discourages blanket disallowances based on association and mandates individual transaction evaluation.
However, the decision does not immunize all loans from scrutiny. If repayment is delayed, incomplete, or lacks banking trail, the Tribunal’s reasoning may not apply. The key is demonstrable, verifiable closure of the transaction before any notice is issued.
