The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an amount representing a loan and interest receivable and appearing as a debit balance/asset in the assessee’s books cannot be treated as an unexplained cash credit under Section 68 of the Income-tax Act, 1961.

The bench of Amit Shukla (Judicial Member) and Accountant Member Girish Agrawal observed that the existence of a credit entry in the books of the assessee is the foundational condition for invoking Section 68. It found that the Assessing Officer (AO) had effectively reversed the character of the transaction by treating the lender as the recipient of money and an asset as an unexplained credit. 

The assessee-company had originally filed its income-tax return declaring total income of ₹6,68,160. Subsequently, the assessment was reopened on the basis of information received from the office of the Deputy Commissioner of Income-tax, Central Circle-2, Aurangabad, following a search and seizure action in the case of the Omsairam Group.

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According to the information received by the tax authorities, the assessee had provided an unsecured loan of ₹71,16,500to the group during Financial Year 2014-15. 

During reassessment proceedings, the assessee explained that it had advanced ₹40 lakh on May 9, 2014 and another ₹25 lakh on May 24, 2014 to Om Sai Ram Steel and Alloys Private Limited through ING Vysya Bank.

Interest of ₹6.85 lakh accrued on the loan, against which the borrower deducted tax at source of ₹68,500. Consequently, the aggregate amount receivable as on March 31, 2015 stood at ₹71,16,500, consisting of the principal loan of ₹65 lakh and net interest receivable of ₹6,16,500. 

AO Treated Loan Advanced as Unaccounted Income

The Assessing Officer questioned the assessee’s financial capacity to advance the amount. The AO observed that the company did not have regular business income commensurate with the loan advanced and had also not furnished a tax audit report under Section 44AB.

On this basis, the AO inferred that the assessee lacked sufficient creditworthiness to advance the loan and characterised the transaction as an accommodation entry.

Though the assessment order referred at one stage to Section 69A, the ultimate addition of ₹71,16,500 was made under Section 68 read with Section 115BBE, treating the amount as the assessee’s unaccounted income. 

CIT(A): AO Misunderstood Direction of Transaction

The CIT(A), however, found a fundamental problem with the assessment order after examining the ledger account, bank statements and financial records.

The appellate authority found that the assessee had not received money from the borrower at all. Instead, the assessee itself had advanced ₹65 lakh to Om Sai Ram Steel and Alloys Private Limited through two banking transactions.

The principal amount along with the net interest receivable appeared as a debit balance in the borrower’s account and was reflected as an asset or receivable in the assessee’s books.

The CIT(A) held that Section 68 could operate only where a sum was found credited in the books of the assessee, whereas the amount involved in the present case was a debit balance representing money recoverable by the assessee. 

The appellate authority further noted that the borrower was an incorporated company having a PAN, the principal amount was advanced through banking channels, the transaction was entered in the regular books, interest income was accrued and offered to tax, and TDS deducted by the borrower was reflected in Form 26AS. 

Significantly, the entire outstanding amount was recovered in the succeeding financial year—₹50 lakh on May 29, 2015 and ₹21,16,500 on June 1, 2015—through banking channels. 

The CIT(A) also rejected the AO’s observations concerning the assessee’s creditworthiness, pointing out that the assessee was the lender and not the recipient of the credit. If the source of the funds used for advancing the loan was doubtful, that question had to be independently examined. However, no unexplained source had been identified by the AO and no adverse finding on the source of the funds was recorded. Accordingly, the addition was deleted. 

ITAT: Credit Entry Is Foundational Requirement of Section 68

Upholding the CIT(A)’s decision, the ITAT explained the fundamental statutory requirement for applying Section 68.

The Tribunal observed that Section 68 contemplates a situation where a sum is found credited in the books of an assessee and the assessee either fails to explain its nature and source or the explanation offered is found unsatisfactory.

Accordingly, the existence of a credit entry is not merely incidental but a foundational condition for invoking Section 68. 

In the present case, the admitted factual position was that the assessee had not received ₹71,16,500 from the borrower. On the contrary, it had advanced ₹65 lakh to the company.

Together with net interest receivable of ₹6,16,500, the amount constituted an asset or receivable in the hands of the assessee. Therefore, it was a debit balance rather than a sum credited in the assessee’s books. 

The Tribunal made a significant observation on the approach adopted by the AO, stating that the AO had, in effect, “reversed the character of the transaction” by treating the lender as the recipient and an asset as an unexplained credit. 

Investigation Information Itself Showed Assessee Had ‘Provided’ Loan

The ITAT also examined the very information on the basis of which the matter had come to the Assessing Officer’s attention.

It noted that even the information received from the Investigation Wing stated that the assessee had “provided” an unsecured loan to the Omsairam Group. Thus, the information itself did not suggest that any money had been received by the assessee. 

According to the Tribunal, such information could at best justify verification of the transaction. If, during such verification, the source of the money advanced was found unexplained, the tax authorities could examine the consequences under the appropriate provision of the Income-tax Act.

However, in this case, the AO neither conducted an enquiry into any particular source of funds nor identified any unexplained amount used for advancing the loan. 

The Tribunal further held that observations concerning the assessee’s regular income, turnover and failure to file a tax audit report did not establish that the advance represented unaccounted income. More importantly, such circumstances could not convert a debit balance into a cash credit falling within Section 68. 

Mere Label of ‘Accommodation Entry’ Cannot Override Documentary Evidence

Apart from the legal defect in invoking Section 68, the ITAT found that the loan transaction was backed by a complete and verifiable documentary trail.

The loan had been advanced through banking channels to an identifiable incorporated company, recorded in the assessee’s books, and interest had been accrued and offered to tax. The borrower had deducted TDS, and the entire outstanding amount was subsequently recovered through banking channels. 

Crucially, the Tribunal found that the AO had not referred to any seized material, statement or independent evidence demonstrating that the transaction was fictitious or constituted an accommodation entry.

The ITAT held that merely describing a transaction as an accommodation entry, without supporting material, could not displace the documentary evidence available on record. 

The Tribunal also noticed another anomaly in the addition. The aggregate addition of ₹71,16,500 included net interest receivable of ₹6,16,500, even though the corresponding gross interest income of ₹6.85 lakh had already been recognised and offered to tax by the assessee. 

The ITAT held that the CIT(A) had correctly appreciated both the true nature of the transaction and the scope of Section 68.

The ₹71,16,500 represented loan and interest receivable duly recorded as an asset in the assessee’s books and was not a sum credited by any third party. Consequently, the essential statutory condition necessary for invoking Section 68 was absent.

Finding no factual or legal infirmity in the CIT(A)’s order, the Tribunal upheld the deletion of the ₹71.16 lakh addition and dismissed the Revenue’s appeal. The order was pronounced on August 25, 2026.

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