The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that information received from the Investigation Wing may justify further inquiry into an unsecured loan transaction, but cannot, by itself, sustain an addition under Section 68 of the Income Tax Act when the taxpayer has furnished documentary evidence and the Assessing Officer has failed to rebut it with transaction-specific material.
The Bench of Challa Nagendra Prasad (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) upheld the deletion of Section 68 additions of ₹10 lakh and ₹50 lakh concerning loans received from Meridian Gems for Assessment Years 2008-09 and 2011-12, respectively.
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The bench upheld the deletion of the corresponding interest disallowances of ₹6,148 and ₹5,09,075. Consequently, both appeals filed by the Revenue were dismissed.
The appellant/assessee is the proprietor, engaged in the trading, dealing and importing of cold-rolled grain-oriented and cold-rolled non-grain-oriented materials in the form of sheets, coils and irregular shapes and sizes.
The dispute arose from unsecured loans received by the assessee from Meridian Gems. For Assessment Year 2008-09, the assessee received a loan of ₹10 lakh. During Assessment Year 2011-12, she received a fresh loan of ₹50 lakh, while the earlier amount of ₹10 lakh continued as an opening balance.
The original assessments had been completed under Section 143(3). Subsequently, the Assessing Officer received information from the Investigation Wing alleging that entities controlled by the Bhanvarlal Jain group were engaged in providing accommodation entries in the form of unsecured loans, advances, purchases, sales and share capital. Meridian Gems was stated to be one of the entities associated with that group.
Based on this information, the assessments were reopened under Sections 147 and 148 of the Income Tax Act.
During reassessment, the assessee denied that the loans represented accommodation entries. She maintained that the amounts were received through normal banking channels and were duly recorded in the books of both the borrower and the lender.
To substantiate the transactions, the assessee produced loan confirmations, the lender’s income tax return acknowledgments, profit and loss accounts, balance sheets, bank statements of both parties and affidavits executed by Manoj Jain confirming the loans. She also furnished evidence showing payment of interest after deduction of tax at source and subsequent repayment of the outstanding amounts through banking channels.
The Assessing Officer, however, rejected the explanation primarily by relying on an earlier statement of Manoj Jain recorded by the Investigation Wing. According to the Assessing Officer, Jain had admitted that loans advanced to different parties were accommodation entries and were not genuine transactions.
The Assessing Officer held that the confirmations, financial statements and bank statements were insufficient to prove the genuineness of the loans. The subsequent affidavits affirming the transactions were also rejected as lacking evidentiary value.
Accordingly, the Assessing Officer treated ₹10 lakh for Assessment Year 2008-09 and ₹50 lakh for Assessment Year 2011-12 as unexplained cash credits under Section 68. Interest of ₹6,148 and ₹5,09,075, respectively, was also disallowed because the underlying loans had been treated as non-genuine.
On appeal, the Commissioner of Income Tax (Appeals) found that the assessee had discharged the initial burden under Section 68 by producing direct documentary evidence establishing the identity and financial capacity of the lender and the genuineness of the transactions.
The CIT(A) observed that the Assessing Officer had not identified any particular defect or inconsistency in the confirmations, financial statements, bank records, tax documents or repayment evidence furnished by the assessee.
It was further noted that Manoj Jain had subsequently affirmed the loan transactions and receipt of interest through affidavits. If the Assessing Officer considered those affidavits inconsistent with Jain’s earlier statement, he was required to summon Jain, examine him and provide the assessee an opportunity to cross-examine him.
The CIT(A) concluded that it would be unsafe to draw an adverse inference solely from an untested third-party statement, particularly when the documentary evidence and affidavits filed by the assessee remained unrebutted. The additions and related interest disallowances were therefore deleted.
Challenging the relief, the Revenue contended before the ITAT that the CIT(A) had ignored the specific information received from the Investigation Wing concerning accommodation-entry operations allegedly conducted by the Bhanvarlal Jain group.
The department argued that the assessee had failed to establish the identity and creditworthiness of the lender and the genuineness of the transactions in light of the surrounding circumstances.
Dhawal Shah, counsel on behalf of the assessee, on the other hand, submitted that the loans were supported by confirmations, income tax records, audited financial statements, bank statements, affidavits, TDS evidence and repayment records. It was argued that the Assessing Officer had made the additions merely on the basis of general Investigation Wing information and an untested third-party statement.
The ITAT observed that Section 68 requires a taxpayer to establish three essential elements: the identity of the creditor, the creditworthiness of the creditor and the genuineness of the transaction.
The Tribunal found that the assessee had produced more than merely the lender’s name and address or evidence of movement of funds through banking channels. The record contained signed confirmations, income tax particulars, the lender’s financial statements, bank statements of both parties and affidavits affirming the transactions.
The Tribunal also took note of the fact that interest was paid after deduction of tax at source and the loans were subsequently repaid through disclosed banking channels.
Once this primary evidence was furnished, the ITAT said, the evidentiary burden shifted to the Assessing Officer to examine the documents and point out specific defects, inconsistencies or falsities.
The Assessing Officer could have independently verified the transactions from the lender, examined the lender’s books and bank accounts, or summoned the person whose statement was relied upon. However, no such exercise was undertaken.
The Tribunal clarified that information from the Investigation Wing and statements recorded during an investigation could constitute material warranting further inquiry. Such information, however, could not be treated as conclusive proof for making an addition under Section 68.
The Assessing Officer was required to examine the specific transaction in the hands of the assessee and bring evidence demonstrating either that the transaction was a sham or that the assessee’s own unaccounted money had been routed through Meridian Gems. No such transaction-specific evidence was placed on record.
The Tribunal further observed that the Assessing Officer had relied on Manoj Jain’s earlier statement without examining him during the reassessment proceedings. At the same time, Jain’s subsequent affidavits specifically confirmed the transactions with the assessee.
If the Revenue considered the affidavits contrary to the earlier statement, the Assessing Officer was required to confront the deponent, examine the alleged inconsistency and provide the assessee an opportunity of cross-examination before drawing an adverse inference.
In the absence of this exercise, the earlier statement remained untested insofar as the assessee’s particular loan transactions were concerned, the ITAT held.
For Assessment Year 2011-12, the Tribunal noted that an earlier coordinate Bench had specifically directed the CIT(A) to furnish the relied-upon incriminating statement and other material and to provide an opportunity for cross-examination.
The CIT(A) subsequently sought a compliance report from the Assessing Officer on November 24, 2025 and issued reminders on December 16 and December 24, 2025. However, the Assessing Officer neither furnished the required report nor demonstrated compliance with the earlier directions. The CIT(A) was therefore justified in deciding the issue on the basis of the material available on record.
The Tribunal acknowledged that repayment of a loan, standing alone, does not conclusively establish the genuineness of the original credit. Nevertheless, repayment through disclosed banking channels was a relevant corroborative circumstance that had to be considered along with the confirmations, income tax records, financial statements, bank statements, TDS-backed interest payments and affidavits.
Viewed cumulatively, these materials supported the assessee’s explanation, while the Revenue failed to produce transaction-specific evidence to rebut them.
The Bench also relied on earlier coordinate Bench decisions involving loans from Meridian Gems and other entities allegedly connected with the Bhanvarlal Jain group. Those decisions had held that Section 68 additions could not be sustained merely on the strength of a general investigation report when the taxpayer had produced cogent evidence establishing the lender’s identity and creditworthiness and the genuineness of the transaction.
Accordingly, the ITAT found no infirmity in the CIT(A)’s decision deleting the additions of ₹10 lakh and ₹50 lakh under Section 68.
Regarding the interest disallowances, the Tribunal observed that the Assessing Officer had not identified any independent defect in the payment of interest, its business purpose, the deduction of tax at source or the supporting evidence.
Since the only basis for disallowing interest was the treatment of the underlying loans as non-genuine, the disallowance could not survive after the principal Section 68 additions were deleted.
The Tribunal clarified that the actual interest disallowance for Assessment Year 2011-12 was ₹5,09,075, as reflected in the assessment order, reassessed income and Revenue’s grounds of appeal. References in parts of the CIT(A)’s order to ₹5,39,075 were inconsistent with the amount actually disallowed. The relief was therefore confined to ₹5,09,075.
The assessee’s cross-objections challenging the validity of the reassessment proceedings and alleging violation of natural justice were dismissed as infructuous. The Tribunal did not express any opinion on those jurisdictional grounds since the additions had already been deleted on merits and their adjudication would not affect the assessee’s ultimate tax liability.
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