The ITAT Ahmedabad has delivered a significant ruling clarifying the evidentiary standards for unsecured loans under Section 68 of the Income-tax Act, 1961. The Tribunal held that when an assessee provides comprehensive documentation establishing the identity, creditworthiness, and genuineness of lenders, coupled with repayment through banking channels, the Revenue cannot sustain additions merely on the basis of low declared income or uncorroborated investigation reports.
Background & Facts
The Dispute
The appeals before the ITAT Ahmedabad concerned the assessment years 2014-15 to 2021-22 of HK Ispat Pvt. Ltd., a company engaged in the trading and processing of iron scrap. The Assessing Officer (AO) made substantial additions under Section 68 for unsecured loans received from seven parties, and under Section 69C for unexplained expenditure based on seized digital records. The core dispute centered on whether these loans were genuine business transactions or part of a bogus accommodation entry scheme uncovered during a search under Section 132 of the Act.
Key Facts
- The search under Section 132 was conducted on 05.11.2020 at the premises of the Kothi Group, which included HK Ispat Pvt. Ltd.
- Post-search, notices under Section 153A were issued for assessment years 2014-15 to 2021-22.
- The AO identified unsecured loans totaling Rs. 2,98,14,000/- received from seven parties during AY 2015-16, which were treated as unexplained cash credits under Section 68.
- The lenders were identified as: Abedabibi Mehboob Foda, Hafsabibi Suleman Kothi, Hasan Suleman Kothi, Irfan M Firdos Kothi, Khaleda Jarda, Ubaidulla Kothi, and Zainabbibi Kothi.
- All loans were received via account payee cheques and recorded in the company’s books.
- The AO relied on digital affidavits seized during the search, which listed assets and liabilities of the lenders as of 31.03.2015, to argue that the lenders lacked the financial capacity to extend such loans.
- The AO also made an addition of Rs. 5,00,000/- under Section 69C based on the term "Cash" in a seized Excel sheet, treating it as unexplained expenditure.
- For AYs 2018-19 and 2019-20, the AO disallowed purchases of Rs. 99,49,624/- from M/s AH Traders as bogus, based on GST investigation reports indicating the supplier was a paper entity.
- For AY 2021-22, the AO made an addition of Rs. 4,04,14,720/- for the difference between book stock (Rs. 20,84,26,720/-) and physical stock (Rs. 16,80,12,000/-) as unexplained sales.
- The AO also added Rs. 41,31,648/- under Section 69C based on unsigned, undated loose sheets bearing the initials "HK."
Procedural History
- 05.11.2020: Search conducted under Section 132 at Kothi Group premises.
- 2020-2022: Notices under Section 153A issued for AYs 2014-15 to 2021-22.
- 2021-2022: Assessments completed by the AO, making the above additions.
- 28.03.2025: Ld. CIT(A) passed orders, deleting the Section 68 addition of Rs. 2,98,14,000/- and Section 69C addition of Rs. 5,00,000/-. For AYs 2018-19 and 2019-20, the CIT(A) restricted the disallowance of bogus purchases to 6% (Rs. 5,96,977/-). For AY 2021-22, the CIT(A) sustained an addition of Rs. 24,24,883/- on stock discrepancy and Rs. 41,31,648/- on seized loose sheets.
- 13.01.2026 & 15.01.2026: Hearings held before ITAT Ahmedabad.
- 18.03.2026: Judgment pronounced.
The Parties' Positions
For the Revenue
- Argued that the lenders had low declared income and no visible assets in their affidavits, indicating lack of creditworthiness.
- Contended that the seized Excel sheets and investigation reports proved a modus operandi of accommodation entries.
- Asserted that the assessee failed to prove the source of funds of the lenders (source of source), which it claimed was now mandatory under the amended Section 68.
- Maintained that the stock discrepancy and unsigned loose sheets constituted unexplained income.
For the Assessee
- Submitted PAN cards, bank statements, ITRs, and confirmations from all lenders.
- Demonstrated that all loans were received via banking channels and repaid through account payee cheques in the same or subsequent years.
- Argued that the affidavits were prepared for banking purposes and not for tax disclosure.
- Showed that the lenders’ own assessments under Section 153C were completed without adverse findings.
- For the stock discrepancy, submitted that the valuer’s report was an approximation and excluded Rs. 2.51 crores of store stock.
- For the loose sheets, argued they were undated, unsigned, and pertained to AY 2014-15, not the year under consideration.
Relief Sought
The assessee sought deletion of all additions under Sections 68, 69C, and 153A. The Revenue sought restoration of the original additions. The assessee also sought reversal of the 6% profit addition on stock discrepancy and the Rs. 41,31,648/- addition on loose sheets.
The Legal Issue
The central questions were: (1) Whether the assessee discharged its burden under Section 68 by proving identity, creditworthiness, and genuineness of unsecured loans through bank statements, ITRs, and confirmations, even if the lenders’ declared income was low? (2) Whether the source of the lender’s funds (source of source) must be established under the pre-2023 version of Section 68? (3) Whether a 6% profit addition on bogus purchases and stock discrepancy is legally sustainable? (4) Whether unsigned, undated loose sheets bearing initials can constitute unexplained expenditure?
Arguments Presented
For the Appellant/Petitioner
The assessee relied on multiple judicial precedents to establish that once identity, creditworthiness, and genuineness are proven through documentary evidence, the burden shifts to the Revenue. It cited CIT vs. Ranchhod Jivabhai Nakhava, PCIT v. Adamine Constructions, and PCIT v. Ambe Tradecorp to argue that low income in ITRs cannot be the sole basis to doubt creditworthiness. It emphasized that the loans were repaid through banking channels, negating any suspicion of unaccounted funds. For the stock discrepancy, it submitted that the valuer’s report was an approximation and excluded Rs. 2.51 crores of store stock, rendering the discrepancy negligible. For the loose sheets, it argued that without dates or signatures, they could not be linked to the year under consideration, and the claim of relevance to AY 2014-15 was ignored by the CIT(A) without proper opportunity.
For the Respondent/State
The Revenue relied on the investigation reports and seized affidavits to argue that the lenders were part of a network of accommodation entry providers. It contended that the assessee failed to prove the source of the lenders’ funds, invoking the amended Section 68 retrospectively. It argued that the stock discrepancy was clear evidence of unaccounted sales and that the initials "HK" on the loose sheets were sufficient to attribute the expenditure to the assessee.
The Court's Analysis
The Tribunal undertook a meticulous review of the evidence and jurisprudence. It held that the assessee had fully discharged its burden under Section 68. The lenders’ PANs, ITRs, bank statements, and confirmations established identity and creditworthiness. The fact that the loans were received through banking channels and repaid via account payee cheques in the same or subsequent years was decisive. The Tribunal emphasized that the 2022 amendment requiring proof of "source of source" applies prospectively from AY 2023-24 and cannot be applied retroactively.
"The assessee has successfully discharged its onus under Section 68 by submitting loan confirmations, bank statements, and PAN data. Once this initial burden is met, the onus shifts to the Revenue to disprove the evidence provided."
The Tribunal rejected the Revenue’s reliance on seized affidavits prepared for banking purposes, noting they were not tax declarations and contained no information on inter-family loans. It further held that the assessments of the lenders under Section 153C, completed by the same AO without adverse findings, estopped the Revenue from treating the same transactions as bogus in the assessee’s hands.
Regarding the 6% addition on bogus purchases, the Tribunal affirmed the CIT(A)’s reasoning, citing binding precedents from the Gujarat High Court (PCIT v. Keshari Exports, PCIT v. Surya Impex) that in cases where sales are not disputed, only the embedded profit (typically 5-6%) should be taxed, not the entire purchase value.
On the stock discrepancy, the Tribunal found the Revenue’s case fundamentally flawed. The valuer’s report was an approximation and excluded Rs. 2.51 crores of store stock, which was clearly recorded in the books. When this was accounted for, the book stock (Rs. 16.68 crores) closely matched the physical stock (Rs. 16.80 crores). The Tribunal held that the addition of Rs. 24,24,883/- was unsustainable.
"The addition sustained by the learned CIT(A) of Rs. 24,24,883 is found to be devoid of merit. The Revenue has not produced any corroborative evidence such as evidence of cash movement, parallel cash books, or clandestine manufacturing logs to suggest that the Assessee was selling goods outside the books."
On the loose sheets, the Tribunal held that the CIT(A) erred in confirming the addition without allowing the assessee a proper opportunity to reconcile the entries with its books. It set aside the addition and remanded the matter to the AO for fresh consideration.
The Verdict
The assessee succeeded on all major grounds. The addition of Rs. 2,98,14,000/- under Section 68 was deleted in full. The addition of Rs. 5,00,000/- under Section 69C was deleted. The 6% addition of Rs. 5,96,977/- on bogus purchases was upheld. The addition of Rs. 24,24,883/- on stock discrepancy was deleted. The addition of Rs. 41,31,648/- on loose sheets was set aside and remanded to the AO. The disallowances under Sections 36(1)(va) and 37 were upheld. All appeals by the Revenue were dismissed. The appeals by the assessee for AYs 2018-19 and 2019-20 were partly allowed, for AY 2020-21 allowed, and for AY 2021-22 partly allowed for statistical purposes.
What This Means For Similar Cases
Documentary Evidence Trumps Investigation Reports
- Practitioners must insist that the Revenue produce independent verification before relying on investigation wing reports to sustain additions under Section 68.
- If the assessee submits bank statements, ITRs, and confirmations, the burden shifts to the Revenue to disprove them through third-party inquiries under Section 133(6) or Section 131.
- Merely pointing to low income in ITRs is insufficient to rebut documentary proof of creditworthiness.
Repayment Through Banking Channels Is Conclusive
- Any loan repaid via account payee cheque, even in a subsequent year, negates the presumption of unexplained income under Section 68.
- This principle applies even if the lender is a relative or director, as long as the transaction is recorded in the books and repaid through banking channels.
- Practitioners should highlight repayment evidence as a primary defense in Section 68 cases.
Stock Discrepancies Require Precise Reconciliation
- Valuation reports must be scrutinized for exclusions (e.g., store stock, consumables) that may account for discrepancies.
- If the assessee can reconcile book stock with physical stock by accounting for all categories, no addition is sustainable.
- The term "approx" on valuation reports weakens the Revenue’s case significantly.
Unsigned, Undated Documents Cannot Be the Basis for Addition
- Loose sheets without dates, signatures, or clear attribution cannot be used to make additions under Section 69C.
- The burden lies on the Revenue to prove the document pertains to the year under consideration.
- If the assessee offers a plausible explanation linking the document to a prior year, the AO must verify it before making an addition.
