The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the loans cannot be treated as bogus solely because lenders are linked to alleged entry operators.

The bench of Anubhav Sharma (Judicial Member) and Amitabh Shukla (Accountant Member) has observed that mere suspicion arising from an alleged connection with known entry operators cannot override documentary evidence establishing the genuineness of loan transactions.

The dispute pertained to Assessment Year 2020-21 and arose from a reassessment order passed under Sections 147 and 143(3) of the Income Tax Act. The Assessing Officer (AO) treated loans aggregating to ₹1.49 crore received by the assessee company from two entities as unexplained cash credits under Section 68. The AO further made additions towards alleged commission expenditure under Section 69C, presuming that the assessee had paid cash commission for obtaining accommodation entries.

According to the department, the lender entities were allegedly linked to a network operated by certain individuals who had been identified in search and investigation proceedings as accommodation entry providers. Based on information gathered during searches conducted on business groups and statements recorded from alleged entry operators, the AO concluded that the loans lacked genuineness.

The assessee challenged the additions and furnished extensive documentary evidence in support of the loan transactions. The company demonstrated that the loans were received through normal banking channels, including account payee instruments and electronic transfers. Confirmations from lenders were furnished. PAN details, income-tax returns, audited financial statements and bank statements of the lenders were produced. Interest payments were made after deduction of applicable TDS. The entire loans were repaid in the subsequent assessment year through banking channels. No material was brought on record showing any cash movement between the assessee and the lenders.

The assessee also argued that statements of third parties relied upon by the AO were never subjected to cross-examination and did not directly implicate the company in any accommodation entry arrangement.

The Commissioner of Income Tax (Appeals) examined the material on record and held that the assessee had successfully discharged the primary burden cast under Section 68 by establishing: Identity of the creditors; Creditworthiness of the creditors; and Genuineness of the transactions.

The appellate authority noted that the lenders’ tax records, financial statements, confirmations and bank statements had been furnished. More importantly, the loans had been fully repaid along with interest through banking channels, a fact which remained undisputed by the Revenue.

Relying on several judicial precedents, including decisions of the Gujarat High Court, Bombay High Court and Delhi High Court, the CIT(A) concluded that suspicion alone cannot justify an addition under Section 68 where documentary evidence supports the transaction. The authority therefore deleted the addition of ₹1.49 crore as well as consequential additions relating to interest expenditure and alleged commission payments.

Affirming the appellate order, the Tribunal observed that the CIT(A) had correctly appreciated the evidence and had rightly treated repayment of the loans through banking channels as a significant factor supporting the genuineness of the transactions.

The Tribunal noted that the Assessing Officer had largely relied upon statements of alleged entry operators and generalized findings regarding shell companies. However, no independent evidence had been brought on record to establish how the assessee’s specific transactions were sham or fictitious.

According to the Tribunal, merely because a transaction may have some connection with a person alleged to be an entry operator, every transaction involving such person cannot automatically be treated as non-genuine. The Revenue must establish a direct nexus between the assessee and the alleged accommodation entry mechanism.

The Bench observed that the Assessing Officer had proceeded largely on suspicion and broad allegations without disproving the documentary evidence furnished by the assessee. Since the assessee had established the trail of receipt and repayment of loans and the Revenue failed to demonstrate any direct evidence of accommodation entries, no interference with the CIT(A)’s order was warranted.

The ITAT dismissed the department’s appeal and upheld the deletion of additions made under Sections 68 and 69C. 

The Tribunal reaffirmed that additions based solely on suspicion, without direct evidence connecting the assessee to an alleged accommodation entry network, cannot survive judicial scrutiny.

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