The Income Tax Appellate Tribunal, Ahmedabad, has clarified that mere suspicion of unexplained income under Section 68 of the Income Tax Act cannot sustain an addition when the creditor’s identity, genuineness, and transactional purpose are substantiated by documentary evidence and direct confirmation. This ruling reinforces the principle that tax authorities must move beyond presumption and require concrete, verifiable proof before treating funds as undisclosed income.
Background & Facts
The Dispute
The assessee, Raghav Ashwinkumar Sheth, was assessed for Assessment Years 2016-17 and 2017-18 under Section 147 read with Section 144B of the Income Tax Act, 1961, following information received from the Investigation Wing regarding unsecured loans received from Neeta Rajendra Sheth. The Assessing Officer (AO) treated Rs. 19,00,000 received in A.Y. 2016-17 and Rs. 51,00,000 received in A.Y. 2017-18 as unexplained income under Section 68, despite the assessee providing evidence of the transaction’s legitimacy.
Key Facts
- The assessee filed his return for A.Y. 2016-17 on 10.07.2016 declaring income of Rs. 10,18,840
- The AO received information on 28.03.2022 that the assessee received Rs. 70,00,000 from Neeta Rajendra Sheth, split as Rs. 19,00,000 in A.Y. 2016-17 and Rs. 51,00,000 in A.Y. 2017-18
- The AO issued notice under Section 133(6) to Neeta Rajendra Sheth, who responded categorically that the amounts were not loans but part of the purchase consideration for three shops purchased from M/s Aarya Infra, a partnership firm in which the assessee was a partner
- The assessee submitted bank statements showing transfer of Rs. 19,00,000 (in A.Y. 2016-17) and Rs. 51,00,000 (in A.Y. 2017-18) to M/s Aarya Infra
- A copy of the sale deed executed between M/s Aarya Infra and Neeta Rajendra Sheth was produced, confirming the property purchase
- The AO rejected these submissions and added Rs. 19,00,000 under Section 68 for A.Y. 2016-17 and Rs. 51,00,000 for A.Y. 2017-18, also applying Section 115BBE for the latter
- The CIT(A) upheld the additions on 09.06.2025
Procedural History
- 10.07.2016: Assessee filed return for A.Y. 2016-17
- 28.03.2022: AO completed assessment under Section 147 r.w.s. 144B, adding Rs. 19,00,000 for A.Y. 2016-17
- 09.06.2025: CIT(A) dismissed appeal for both A.Y. 2016-17 and 2017-18
- 26.03.2026: Hearing before ITAT Ahmedabad
- 07.04.2026: ITAT pronounced order allowing both appeals
The Parties' Positions
For the Assessee
- The funds received were not loans but purchase consideration for property
- The creditor, Neeta Rajendra Sheth, confirmed the transaction in writing under Section 133(6)
- The amount was immediately transferred to M/s Aarya Infra, the seller
- The sale deed corroborated the transaction
- No evidence of fictitious transaction or money laundering was produced by the department
- The addition resulted in double taxation as the same amount was later offered as income by the firm
For the Revenue
- No direct explanation was given by the assessee as to why funds were received by him when the property was booked by the firm
- The transaction lacked sufficient documentary trail to establish genuineness
- The AO was entitled to treat the amount as unexplained income under Section 68
Relief Sought
The assessee sought deletion of the additions of Rs. 19,00,000 for A.Y. 2016-17 and Rs. 51,00,000 for A.Y. 2017-18 under Section 68, and consequential deletion of tax and penalty under Section 115BBE. He also sought relief from double taxation.
The Legal Issue
The central question was whether Section 68 of the Income Tax Act permits an addition of unexplained cash credit when the identity of the creditor is established, the transaction is corroborated by documentary evidence, and the creditor herself confirms the nature of the payment as purchase consideration rather than a loan.
Arguments Presented
For the Appellant
The assessee’s representative argued that the creditor’s written reply under Section 133(6) constituted a statutory admission of the transaction’s nature. He relied on CIT v. M/s. S. S. Agarwal & Co. and CIT v. M/s. R. K. Jain & Co., where the Tribunal held that once the identity and creditworthiness of the creditor are established and the transaction is supported by documentary evidence, the burden shifts to the Revenue to disprove genuineness. He emphasized that the sale deed and fund transfers created a complete chain, negating any presumption of unexplained income.
For the Respondent
The Revenue’s representative contended that the assessee failed to explain why the funds passed through his account before reaching the firm. He argued that the absence of a direct agreement between the assessee and the creditor rendered the transaction suspect. He cited CIT v. S. R. Ramanathan to assert that mere confirmation by the creditor is insufficient without a clear paper trail linking the assessee’s receipt to the firm’s receipt.
The Court's Analysis
The Tribunal examined the nature of the transaction holistically. It noted that the creditor, Neeta Rajendra Sheth, had not merely confirmed receipt of funds but explicitly stated that the amounts were paid as purchase consideration for property, not as loans or advances. This was not a vague or conditional statement but a categorical denial of the loan character.
"In view of this specific and categorical reply of the Neeta Rajendra Sheth, the AO was not correct in treating the transaction of Rs. 19,00,000/- as unexplained. Not only the identity of the creditor was proved but there was no material for the AO to treat the transaction as non-genuine. Further the amount received was also not in the nature of loan or advance taken by the assessee."
The Tribunal further observed that the assessee had transferred the exact amounts received to M/s Aarya Infra, the seller, and that the sale deed confirmed the property transaction. The Tribunal held that the Revenue’s reliance on the intermediary passage of funds through the assessee’s account was legally untenable. The flow of funds was consistent with a tripartite arrangement where the buyer paid through the seller’s partner, a common commercial practice.
The Tribunal rejected the Revenue’s argument that the transaction lacked a direct agreement, noting that Section 68 does not require a loan agreement to be executed. It held that the combination of creditor confirmation, fund transfer records, and sale deed constituted sufficient proof of genuineness.
Regarding the application of Section 115BBE to the Rs. 51,00,000 addition, the Tribunal held that since the entire addition under Section 68 was deleted, the consequential tax under Section 115BBE could not survive.
The Verdict
The appeals were allowed. The additions of Rs. 19,00,000 for A.Y. 2016-17 and Rs. 51,00,000 for A.Y. 2017-18 under Section 68 were deleted. The consequential tax and penalty under Section 115BBE were also set aside. The order of the CIT(A) dated 09.06.2025 was quashed in its entirety. The case was remanded to the AO to compute the correct income without the impugned additions, with liberty to consider any other relevant material if necessary.
What This Means For Similar Cases
Creditor Confirmation Is Sufficient Under Section 68
- Practitioners can now rely on written replies under Section 133(6) as conclusive evidence of transactional genuineness if they are specific and categorical
- The Revenue cannot insist on a loan agreement where the creditor explicitly denies the transaction is a loan
- The burden of disproving genuineness lies with the department once identity and transactional purpose are established
Documentary Chain Trumps Suspicion
- A complete paper trail - creditor confirmation, fund transfer records, and sale deed - creates an insurmountable defense against Section 68 additions
- Intermediary passage of funds through the assessee’s account does not invalidate the transaction if the end use is documented
- The Tribunal’s approach aligns with the principle that tax assessments must be based on evidence, not conjecture
Double Taxation Is Not Permissible
- Where the same amount is later offered as income by the recipient entity (here, the firm), the Revenue cannot tax it again in the hands of the intermediary
- Practitioners must raise double taxation as a standalone ground in appeals, even if the primary addition is challenged under Section 68
