Addition u/s 68 on NBFC Loans Invalid in Absence of Substantive Evidence: ITAT Sets Aside ₹5 Crore Addition [Read Order]

The Income Tax Appellate Tribunal (ITAT) Delhi Bench has set aside additions aggregating to ₹5 crore made under Section 68 ofthe Income Tax Act, 1961 holding that unsecured loans received from Non-BankingFinancial Companies (NBFCs) could not be treated as unexplained cash credits merely on the basis of suspicion and unsubstantiated allegations.

The issue arises after conducting the searches and seizures according to Section 132 in the case of the ACE Group and others. In the process of assessment the AO looked into different unsecured loans extended to the assessee by different lending firms and made certain entries under accommodation entries as per him, since there were shell companies which were functioning through dummy directors. The additions were made according to Section 68.

The assessee contended that ACE Infracity Developers Pvt. Ltd. all the loans were made in genuine business dealings duly backed by documentary proof like PAN, Income Tax Returns, confirmation of payment, audited accounts, and bankers’ statement of the lender.

However, most of the lenders were registered as NBFCs carrying on their finance businesses and having adequate capacity to give out loans. It was asserted that all the loans were recovered through normal banking processes.

The Tribunal held that there was no evidence put forth by the Revenue to show that there was any transaction without account or accommodation entry. It was observed that the fact that the lenders were shell companies or their business might be commercially unsound did not make the addition under section 68 of the Income Tax Act justifiable after the assessee had succeeded in fulfilling his basic burden of establishing their identity and genuineness.

Based on the principle that an assessee is not bound to prove the source of the source’ in such cases, the addition is maintained by the Commissioner of Income Tax (Appeals) on account of loans taken from lenders such as Sundram Consultants Pvt. Ltd., Sesun Marketing Pvt. Ltd., and Manikaran Mercantile Pvt. Ltd. were not sustainable.

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