The Income Tax Appellate Tribunal, Mumbai, has clarified that an addition under Section 68 of the Income Tax Act cannot rest solely on unverified allegations from investigation reports or non-responses to notices. The judgment underscores the necessity of independent, documented scrutiny of both the lender and borrower in cases involving alleged accommodation entries.
Background & Facts
The Dispute
The dispute arose from the reopening of the assessment for Assessment Year 2013-14 of Sunil Giridhar Raheja HUF, following information received by the Investigation Wing, Mumbai, regarding alleged bogus accommodation entries linked to Shri Vipul Vidur Bhatt and his network of paper companies. The Assessing Officer (AO) alleged that the HUF received Rs. 25,00,000 from M/s. Sampada Chemicals Ltd., a company identified as part of this network, and subsequently discovered another transaction of Rs. 25,00,000 from M/s. P. Saji Textiles Ltd., also allegedly controlled by the same individual.
Key Facts
- The HUF filed its original return on 29.09.2013 declaring nil income.
- A notice under Section 148 was issued on 12.07.2018 based on investigation inputs.
- The AO issued a show cause notice on 10.12.2018 seeking explanation for Rs. 25,00,000 received from M/s. Sampada Chemicals Ltd.
- The assessee responded by submitting bank statements showing two loans: Rs. 14,00,000 on 29.10.2012 and Rs. 11,00,000 on 30.10.2012, both repaid on 08.10.2013.
- The AO, without verifying the loan documents or the creditworthiness of the lenders, added Rs. 50,00,000 under Section 68, including Rs. 25,00,000 from M/s. P. Saji Textiles Ltd. - a party not mentioned in the reasons for reopening.
- A notice under Section 133(6) was issued to M/s. Sampada Chemicals Ltd., which went unanswered.
- The HUF did not provide loan confirmation letters from either lender at the initial stage.
Procedural History
- 29.09.2013: Original return filed by HUF declaring nil income.
- 12.07.2018: Notice under Section 148 issued for reassessment.
- 10.12.2018: Show cause notice issued for Rs. 25,00,000 from M/s. Sampada Chemicals Ltd.
- 29.09.2025: Order of the Ld. CIT(A) deleting the entire addition of Rs. 50,00,000.
- 16.03.2026: ITAT Mumbai delivers judgment on appeal by Revenue.
Relief Sought
The Revenue sought to restore the addition of Rs. 50,00,000 under Section 68, arguing that the Ld. CIT(A) erred in deleting the addition without independent verification. The assessee sought confirmation of the deletion, asserting compliance with the evidentiary requirements under Section 68.
The Legal Issue
The central question was whether an addition under Section 68 of the Income Tax Act can be sustained when the Assessing Officer relies exclusively on third-party investigation reports and non-response to notices, without independently verifying the genuineness of the transaction or the creditworthiness of the lender.
Arguments Presented
For the Appellant (Revenue)
The Ld. DR contended that the Ld. CIT(A) failed to conduct any independent scrutiny of the bank statements or loan documents submitted by the assessee. It was argued that the non-response to the notice under Section 133(6) to M/s. Sampada Chemicals Ltd. was sufficient to cast doubt on the transaction’s genuineness. The Revenue further submitted that the Ld. CIT(A)’s order was non-speaking and that the deletion of the entire addition was unjustified without any analysis of the evidence.
For the Respondent (Assessee)
The Ld. AR argued that the addition of Rs. 50,00,000 was beyond the scope of the reasons recorded for reopening, as M/s. P. Saji Textiles Ltd. was not mentioned in the notice under Section 148. It was emphasized that the assessee had furnished bank statements showing receipt and repayment of loans within the same financial year, which should have been evaluated. The Ld. AR relied on judicial precedents holding that mere suspicion or non-response to notices cannot substitute for positive verification.
The Court's Analysis
The Tribunal observed that both the AO and the Ld. CIT(A) failed to discharge their statutory obligation under Section 68 to independently examine the credibility of the lender and the genuineness of the transaction. The AO’s order was based on general allegations from the Investigation Wing and the non-response to a notice under Section 133(6), without analyzing the bank statements or seeking confirmation from the lenders.
"The reassessment order is cryptic in nature and contains no independent analysis of the evidences filed by the Appellant nor absence of the foundational document has been discussed."
The Tribunal noted that while the Ld. CIT(A) correctly identified the deficiencies in the AO’s order, it too did not undertake any verification of the documents submitted by the assessee. The Tribunal emphasized that the burden under Section 68 is not on the assessee to prove a negative, but on the Revenue to establish that the transaction is fictitious.
The Tribunal further held that the addition of Rs. 25,00,000 from M/s. P. Saji Textiles Ltd. was beyond the scope of the reasons recorded for reopening, as this entity was not referenced in the notice under Section 148. The Tribunal stated that the AO cannot expand the scope of reassessment based on incidental findings during verification.
The Tribunal concluded that neither the AO nor the Ld. CIT(A) had fulfilled the legal requirements for a valid addition or deletion under Section 68. The matter required a fresh, detailed, and speaking order based on proper verification.
The Verdict
The appeal by the Revenue was partly allowed for statistical purposes. The Tribunal set aside the orders of both the Ld. AO and the Ld. CIT(A), and remanded the matter to the Ld. CIT(A) for fresh adjudication. The Ld. CIT(A) was directed to pass a speaking order after independently verifying the loan documents, repayment evidence, and creditworthiness of both M/s. Sampada Chemicals Ltd. and M/s. P. Saji Textiles Ltd., strictly within the scope of the reasons recorded for reopening. The assessee was granted a full opportunity to present evidence and rebut any allegations.
What This Means For Similar Cases
Verification Is Mandatory, Not Optional
- Practitioners must ensure that in Section 68 cases, the Revenue must produce evidence of the lender’s non-credibility or the transaction’s fictitious nature - mere non-response to notices is insufficient.
- Taxpayers should always submit bank statements, loan agreements, and repayment proofs, even if not initially requested.
Scope of Reopening Cannot Be Expanded
- Assessing Officers cannot introduce new parties or transactions in the assessment order that were not part of the reasons recorded under Section 147/148.
- Any addition based on incidental findings during verification is legally unsustainable.
Speaking Orders Are Non-Negotiable
- Orders under Section 68 must contain a clear, point-by-point analysis of the documents submitted and the reasons for accepting or rejecting them.
- Cryptic or boilerplate orders will be set aside by appellate authorities.
Burden of Proof Is Shared
- While the assessee must provide prima facie evidence of the transaction’s legitimacy, the onus to disprove it lies squarely with the Revenue.
- Judicial precedents such as CIT v. Shri D. K. Aggarwal and CIT v. M/s. S. S. Enterprises remain binding on this principle.
