Funds Declared in Settlement Proceedings Cannot Be Treated as Unexplained Loans: Delhi HC rejects Revenue Appeal in Income Tax Case [Read Order]

The Court therefore rejected the Revenue’s challenge to the deletion of additions made on alleged bogus loan entries, in a case concerning income tax treatment of funds introduced through group entities.

R B Farms and Estates Private Limited, the respondent, was subjected to a search under Section 132 of the Income Tax Act, 1961 as part of proceedings against the AMP group of entities. During the assessment for Assessment Year 2015-16, the Assessing Officer (AO) noticed unsecured loans amounting to ₹10.96 crores recorded as receipts of ₹8.25 crores from Earthworks Metallurgicals Private Limited and ₹2.71 crores from Tachyons Trading Private Limited.

The AO concluded that these were sham transactions since both companies were found to be non-genuine on inquiry and added ₹10,37,50,000 under Section 68. The Commissioner of Income Tax (Appeals) [CIT(A)]deleted the addition.

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The Revenue, represented by Sanjay Kumar, argued that the transactions were sham because the entities providing the loans were not found existing at the stated addresses, and summons issued under Section 131 returned unserved. Therefore, the unsecured loans were unexplained cash credits that were rightly added under Section 68 of the Income Tax Act by the Assessing Officer.

The respondent, represented by Rohit Jain, contended that the funds infused as unsecured loans were in fact generated by a group concerned through inflated purchases. It was pointed out that the group company had filed an application before the Income Tax Settlement Commission disclosing such unaccounted income and paying tax on it.

Thus, the true source of the funds stood explained, and the same income could not be subjected to tax again in the hands of the respondent.

The Income Tax Appellate Tribunal (ITAT) held that since the group company had paid taxes on such inflated purchases and disclosed the income before the Settlement Commission, there was no reason for taxing the same amount once re-introduced in the assessee’s books as unsecured loans. The Tribunal therefore deleted the addition under Section 68.

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The High Court comprising Justice Vibhu Bakhru and Justice Tejas Karia placed reliance on the order of the Income Tax Settlement Commission dated 26 March 2018, along with its corrigendum dated 8 August 2018, which recorded that ₹10.96 crores received by the respondent as unsecured loans had been accounted for as application of undisclosed income of the group entity generated through inflated purchases. The cash flow statement submitted before the Commission was verified by the Commissioner of Income Tax.

The Court observed that the cash credits were received from the group entity although routed through two sham companies. It was noted that the amount had already been brought to tax in the hands of the group company where income was generated, and that the disclosures before the Settlement Commission could not be ignored when examining the source of credit.

Finding no ground to interfere with the concurrent findings of the CIT(A) and the ITAT, the Court dismissed the appeal.

Consequently, the High Court dismissed the appeal filed by the Revenue.

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