The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹1.47 crore made under Section 68 of the Income Tax Act, 1961, holding that the Assessing Officer (AO) failed to produce any evidence to establish that the impugned gold transactions were sham or accommodation entries. 

The Tribunal comprising Vijay Pal Rao (Vice President) and Manjunatha G. (Accountant Member) has observed that  the assessee had produced comprehensive records supporting purchase of gold bullion, loan of the bullion to the partnership firm, receipt of interest, ownership reflected in wealth tax returns, subsequent receipt of gold ornaments, and eventual sale of those ornaments.

The assessee had filed its return declaring a total income of ₹1.84 crore and disclosed a long-term capital loss of ₹7.44 lakh arising from the sale of gold ornaments.

During scrutiny, the assessee explained that in Financial Year 2011-12, it had purchased 5,000 grams of gold bullion for ₹1.12 crore. The bullion was subsequently loaned to a partnership firm, M/s P. Satyanarayana & Sons, carrying interest at 6% per annum, which was duly offered to tax. The firm later returned 5,458 grams of gold ornaments having 91.60% purity. These ornaments were sold back to the same firm on 27 February 2016 for ₹1.475 crore, resulting in the claimed long-term capital loss. 

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To substantiate the transaction, the assessee furnished purchase invoices, sale bills, wealth tax returns, gold loan documents, receipts, vouchers and other supporting records. 

The Assessing Officer questioned the commercial rationale behind the transaction and concluded that the gold bullion was purchased and loaned to the same partnership firm on the very same day; no satisfactory evidence was furnished regarding conversion of bullion into ornaments; wealth tax returns continued to reflect ownership of bullion despite the gold being with the partnership firm; and VAT records of the partnership firm did not indicate corresponding purchases from unregistered dealers.

Based on these observations, the AO treated the entire arrangement as an accommodation entry without any actual movement of gold and added the entire sale consideration of ₹1.47 crore as unexplained cash credit under Section 68, instead of merely disputing the capital loss claim. The CIT(A) affirmed this view. 

Before the Tribunal, the assessee contended that the transactions were fully supported by documentary evidence, including purchase bills, loan receipts, wealth tax records, sale invoices and books of account.

It was further argued that Section 68 itself was wrongly invoked because no unexplained credit had arisen in the assessee’s books during the relevant year. The credit, if any, appeared only in the books of the partnership firm. The Revenue had proceeded merely on suspicion without disproving the authenticity of any of the supporting documents. 

The Tribunal observed that these materials established that the transactions were genuine business dealings and not accommodation entries.

The Bench held that parties are free to arrange their commercial affairs in any lawful manner and that the Revenue had failed to establish that the transactions were designed solely for tax avoidance or were outside the framework of law. 

The Tribunal emphasized that the Assessing Officer’s conclusions were founded only on suspicion regarding the commercial logic of the transaction rather than on any concrete evidence.

Referring to the Supreme Court’s landmark judgment in Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775, the ITAT reiterated that although an Assessing Officer is not bound by strict rules of evidence, assessments cannot be based on pure guesswork or conjectures unsupported by material evidence. 

Holding that the department had failed to establish that the gold transactions were fictitious or bogus, the Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition of ₹1.47 crore made under Section 68.

Accordingly, the assessee’s appeal was allowed. 

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