The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld additions aggregating approximately ₹5.41 crore under Section 68 of the Income-tax Act, 1961, holding that loan confirmations, income-tax returns and bank entries did not establish genuine borrowings when the surrounding evidence showed that the lenders were accommodation-entry providers.

The bench of Siddhartha Nautiyal (Judicial Member) and Prabhash Shankar (Accountant Member) found that the lenders’ failure to respond to repeated summons, coupled with statements concerning their involvement in providing accommodation entries, remained unexplained. It held that the assessee had failed to establish the creditworthiness of the lenders and the genuineness of the transactions.

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However, the Tribunal granted partial relief on a separate issue by reducing the estimated business income from 5% to 2% of sales for assessment years 2014–15 and 2015–16.

The appeals arose from assessments completed following an earlier remand by the Tribunal. The principal disputes concerned the rejection of the company’s books of account, estimation of business income and additions relating to unsecured loans treated as unexplained cash credits.

For assessment year 2013–14, the company had filed a return declaring a loss of ₹10,57,574. In the fresh assessment proceedings, the Assessing Officer estimated income at ₹27,57,706, representing 2% of sales of ₹13,78,85,318, and made a separate addition of ₹2.35 crore under Section 68.

The disputed loans for that year comprised ₹1.50 crore from Marine Gems Private Limited, ₹35 lakh from Parshwanath Gems Private Limited, ₹25 lakh from Karishma Diamond Private Limited and ₹25 lakh from Keshariya Diamonds Private Limited.

The Commissioner of Income Tax (Appeals) upheld the additions, prompting the company to approach the Tribunal.

The Tribunal had restored the issues to the Assessing Officer for fresh examination. The remand permitted verification of books, supporting documents and additional evidence concerning the loans.

During the fresh proceedings, the Assessing Officer sought purchase and sales records, vouchers, delivery documents, loan particulars and evidence establishing the lenders’ financial capacity.

The assessment record noted that the company’s director appeared with computerised books of account but did not produce adequate supporting evidence for the entries, apart from a few original purchase and sale bills.

The Assessing Officer also issued summons under Section 131 to the relevant lenders on two occasions. The lenders did not comply.

The company maintained that the loans were genuine, interest-bearing transactions received through banking channels and subsequently repaid. It relied on documentary evidence, including confirmations, bank statements and income-tax records, to contend that the requirements of Section 68 had been satisfied.

It also objected to the absence of an opportunity to cross-examine the persons whose statements were relied upon by the tax authorities.

The central issue was whether these documents and banking transactions sufficiently established the loans when the lenders’ creditworthiness and the commercial reality of the transactions remained disputed.

The Tribunal held that the assessee was required to establish the lenders’ identity, their creditworthiness and the genuineness of the transactions. Establishing identity on paper did not, by itself, satisfy the remaining requirements.

The Bench referred to investigation findings concerning entities controlled by Gautam Jain, Pramod Kumar Ranka and Vijay Narendra Kothari. According to the findings discussed in the order, the entities were used for providing accommodation entries rather than conducting genuine business.

Against that background, the Tribunal concluded that routing funds through bank accounts could not independently establish legitimate borrowings.

It also noted that the Assessing Officer had attempted to verify the transactions directly by summoning the lenders. Their repeated non-compliance prevented that examination, and the assessee did not satisfactorily explain their failure to appear.

The Bench consequently upheld the finding that the company had not discharged its primary burden under Section 68.

The Tribunal rejected reliance on subsequent affidavits retracting the earlier statements. It found that the retractions were unsupported by corroborative evidence and did not overcome the lenders’ continued failure to participate in the assessment proceedings.

The Bench questioned why the directors could furnish affidavits but could not appear before the Assessing Officer for examination.

It endorsed the appellate authority’s assessment that the documents established identity and only a superficial indication of financial capacity, while the genuineness of the loans remained unsubstantiated.

Referring to CIT v. Durga Prasad More and Sumati Dayal v. CIT, the order emphasised the relevance of surrounding circumstances and human probabilities when examining the reality behind apparently documented transactions.

The Tribunal also upheld the rejection of the company’s cross-examination objection.

The reasoning turned on the fact that the additions did not rest solely on third-party statements. The authorities had also relied on the lenders’ failure to respond to summons and the company’s failure to establish their creditworthiness and the genuineness of the borrowings during the fresh proceedings.

Accordingly, the objection did not displace the cumulative evidence relied upon in this case.

Applying its findings across the connected appeals, the Tribunal sustained Section 68 additions of ₹2.35 crore for assessment year 2013–14, ₹1 crore for assessment year 2014–15 and ₹2,06,56,349 for assessment year 2015–16.

The total additions upheld under Section 68 therefore amounted to ₹5,41,56,349.

For assessment year 2014–15, the Tribunal also sustained the disputed interest addition of ₹22,85,828 under Section 69C, applying its findings concerning the underlying loans.

The company secured relief regarding the rate applied to estimate business income for assessment years 2014–15 and 2015–16.

For assessment year 2014–15, the Assessing Officer had applied 5% to sales of ₹18,31,85,888, resulting in an addition of ₹91,59,294. The company argued that the original assessment had applied 2% and that the same rate had been adopted for assessment year 2013–14 on similar facts.

The Tribunal accepted this contention and restricted the estimate to 2%, directing the Assessing Officer to recompute the amount.

It extended the same relief to assessment year 2015–16, where the Assessing Officer had applied 5% to sales of ₹16,26,52,072 and made an addition of ₹81,32,604.

For assessment year 2013–14, the company did not press its challenge to the 2% estimate, and that ground was dismissed.

The Tribunal ultimately dismissed the appeal for assessment year 2013–14 and partly allowed the appeals for assessment years 2014–15 and 2015–16, with relief confined to the reduction in the estimated income rate. 

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