The Income Tax Appellate Tribunal, Mumbai, has clarified that book adjustments between group companies, with no actual cash flow, cannot be treated as unexplained income under Section 68 of the Income Tax Act. This ruling reinforces the principle that tax liability arises only upon actual receipt of money, not mere ledger entries.
Background & Facts
The Dispute
The assessee, Sohum Wellness Limited, a domestic company engaged in wellness and therapeutic services, was assessed for AY 2018-19. The Assessing Officer (AO) made multiple additions totaling Rs. 6,41,30,267/-, primarily targeting transactions involving companies whose registrations had been cancelled by the Ministry of Corporate Affairs (MCA). The AO treated these as unexplained credits or repayments under Section 68, alleging lack of genuineness and creditworthiness.
Key Facts
- The assessee had received an unsecured loan of Rs. 1,51,90,000/- from M/s. Core Education Technologies Pvt. Ltd. (struck off) in its books for AY 2018-19.
- The assessee contended this was not a fresh loan but a rectification of a wrong journal entry made in AY 2016-17, where Rs. 1,51,90,000/- was erroneously recorded as payable to M/s. Wisdom Global Enterprises Ltd.
- The assessee submitted a letter from Core Education Technologies Pvt. Ltd. dated 06.01.2025, requesting rectification of the erroneous entry.
- Ledger accounts for FY 2016-17 and 2017-18 were furnished, showing the original error and its correction.
- The AO issued notices under Section 133(6) to the lender companies, but none responded.
- The assessee repaid loans totaling Rs. 30,00,000/- to Core Education Infratech Ltd., Rs. 1,97,45,600/- to Core Education Technologies Pvt. Ltd., Rs. 12,00,000/- to Core Steel & Power Ltd., Rs. 9,90,000/- to Soham Health Awareness Pvt. Ltd., Rs. 1,98,38,000/- to Wisdom Global Enterprises Ltd., and Rs. 41,66,667/- to Vireet Investment on behalf of Core Education & Technologies Ltd.
- All these companies were struck off by MCA.
- The assessee’s ultimate holding company is M/s. Wisdom Global Enterprises Ltd., and all entities involved are group companies.
- No actual cash was transferred in any of these transactions.
Procedural History
- 24.04.2021: Assessment order u/s 143(3) r.w.s 144B passed by AO, making additions of Rs. 6,41,30,267/-.
- 27.05.2025: Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, deleting all additions.
- 11.02.2026: Hearing before ITAT Mumbai.
- 29.04.2026: Judgment pronounced by ITAT Mumbai.
The Parties' Positions
Assessee (Sohum Wellness Limited): Argued that all entries were internal book adjustments between group companies, with no cash movement. The loan receipt was a rectification of a prior error, and repayments were settlements of pre-existing obligations. No income was generated. Relied on judicial precedents holding that Section 68 requires actual receipt of cash.
Revenue (Income Tax Department): Contended that since the lender companies were struck off, their creditworthiness could not be established. The absence of response to notices under Section 133(6) rendered the transactions suspect. Repayments to struck-off entities were treated as unexplained income.
Relief Sought
The assessee sought deletion of all additions made by the AO. The Revenue sought restoration of the AO’s order.
The Legal Issue
The central question was whether Section 68 of the Income Tax Act, 1961 applies to book entries representing rectification of prior accounting errors or repayment of loans between group companies, where no actual cash has been received or disbursed.
Arguments Presented
For the Appellant
The assessee relied on multiple judicial precedents to establish that Section 68 applies only when there is an actual receipt of money. It cited V.R. Global Energy Pvt. Ltd. v. ITO (407 ITR 145), where the Madras High Court held that share allotment against pre-existing liability without cash flow cannot be treated as unexplained cash credit. The Supreme Court dismissed the Revenue’s SLP in this matter. The Calcutta High Court in Jatia Investment Co. v. CIT (206 ITR 718) held that where no cash passes, there is no credit under Section 68. The Delhi Tribunal in ACIT v. Shri SurenGoel and Kolkata Tribunal in ITO v. Anand Enterprises Ltd. reinforced that journal entries without cash movement cannot attract Section 68. The assessee emphasized that the Supreme Court in H.H. Rama Varma v. CIT held that "any sum" means "sum of money," not book entries.
For the Respondent
The Revenue argued that the lender companies were struck off, making their existence and creditworthiness doubtful. The failure to respond to notices under Section 133(6) created a presumption of non-genuineness. It contended that repayments to struck-off entities could not be explained and must be treated as undisclosed income. The Revenue did not cite any contrary precedent.
The Court's Analysis
The Tribunal examined the nature of the transactions and the statutory language of Section 68, which applies when "any sum is found credited in the books of an assessee." The Tribunal emphasized that the word "sum" must be interpreted as "sum of money," as held by the Supreme Court in H.H. Rama Varma v. CIT. The Tribunal noted that the AO had not established any actual inflow of cash.
"It has been held in various decisions that the provisions of section 68 can be applied only if there is an actual receipt of money by the assessee whether by cash or cheque during the accounting year relevant to the assessment year under consideration."
The Tribunal observed that the Rs. 1,51,90,000/- was not a new loan but a rectification of an error from AY 2016-17, which had already been scrutinized and not added to income. The correction was made to reflect the true liability between group companies. The Tribunal held that such rectifications, without any cash movement, cannot be treated as unexplained income.
Regarding repayments, the Tribunal clarified that Section 68 applies only to credits, not debits. Repayment of a loan is a liability reduction, not an income. The AO’s treatment of repayments as income was legally unsustainable.
"The appellant has made repayment of loan. It is not the case that the appellant has accepted the loan which requires the appellant to prove the genuineness and creditworthiness."
The Tribunal further held that the AO’s failure to specify the section under which additions were made rendered the order procedurally defective, though the implicit application of Section 68 was evident. Even then, the substantive grounds failed.
The Tribunal concluded that the CIT(A)’s order was legally sound, well-reasoned, and aligned with binding precedents. The Revenue failed to produce any contrary authority.
The Verdict
The appeal filed by the Revenue was dismissed. The Tribunal upheld the order of the CIT(A) dated 27.05.2025, deleting all additions totaling Rs. 6,41,30,267/-. The additions of Rs. 1,51,90,000/- (loan receipt), Rs. 30,00,000/-, Rs. 1,97,45,600/-, Rs. 12,00,000/-, Rs. 9,90,000/-, Rs. 1,98,38,000/-, and Rs. 41,66,667/- (repayments) were all deleted. The Tribunal held that Section 68 does not apply to book entries without actual cash flow, and repayments to group companies cannot be treated as income.
What This Means For Similar Cases
Book Adjustments Between Group Companies Are Not Automatic Tax Triggers
- Practitioners must argue that Section 68 requires actual cash receipt; mere ledger entries, even to struck-off entities, are insufficient.
- Where transactions are between group companies with common ownership, documentary evidence of inter-company agreements and rectification letters can rebut presumptions of unexplained income.
- AO’s reliance on MCA strike-off status alone is legally inadequate without proof of cash movement.
Repayments Cannot Be Treated as Income Under Section 68
- Section 68 applies only to credits, not debits. Repayment of loans is a liability reduction, not income.
- Any addition by AO on account of repayment to struck-off entities must be challenged on the ground that it misapplies Section 68.
- The burden remains on the Department to prove actual receipt of money, not merely the existence of a book entry.
Procedural Deficiencies in Assessment Orders Are Fatal
- Assessing Officers must explicitly state the section under which additions are made.
- Implicit application of Section 68, without clear reference, weakens the assessment order and invites deletion.
- Failure to specify the legal basis for addition renders the order vulnerable to challenge even if the substance is arguable.
