Pranav B Prem

The Income Tax Appellate Tribunal (ITAT), New Delhi, has strongly criticised the Assessing Officer (AO) for adopting a contradictory approach by treating the principal loan amount as a bogus accommodation entry while simultaneously accepting the interest paid on the same loan as genuine expenditure. The Tribunal held that such inconsistency indicates a preconceived mindset rather than an assessment based on evidence, and that once interest on a loan has been accepted as genuine, the loan itself cannot be branded as bogus in the absence of incriminating material.

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The case arose out of search and seizure operations conducted in the Moser Baer Group, during which an Excel sheet titled “Funds Position” was found in the laptop of an employee of one of the group companies. Treating entries appearing in the sheet as indicative of accommodation loan transactions, the AO issued notices under Section 153A of the Income Tax Act and made an addition of ₹25.05 crore under Section 68 as unexplained cash credit, along with an addition of ₹25.05 lakh under Section 69C as alleged commission for obtaining the loans. The respondent–company, engaged in developing, building, owning and operating power generation facilities, had filed a return declaring NIL income after showing a loss of ₹11.05 crore.

The AO relied on statements of an employee and a facilitator, alleging that the respondent had taken accommodation loans. However, the ITAT noted that both statements were retracted within one month and that no opportunity of cross-examination was provided to the assessee, despite the additions being based entirely on such statements. The Tribunal reiterated that when additions hinge solely on statements, principles of natural justice require cross-examination, and failure to provide it renders the additions legally unsustainable.

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The Tribunal observed that the respondent had produced every possible documentary proof to demonstrate the identity, creditworthiness and genuineness of the loan transactions, including confirmations from the lender companies, PAN, financial statements, income tax returns and bank statements. The Tribunal held that once these documents substantiate the transaction and the entries are duly recorded in the books of account, an Excel sheet recovered from a third party cannot be treated as incriminating material. It further emphasized that entries discovered during a search must be corroborated by evidence linking the assessee to any alleged accommodation activity, and mere suspicion cannot replace proof.

A key factor that weighed heavily with the ITAT was the AO’s contradictory treatment of the same loan. While branding the loan transaction as a sham, the AO had simultaneously allowed the interest payment on such loans as a genuine expense and had also accepted the TDS deducted on such interest as valid, leading to the acceptance of the loss declared by the assessee after claiming such interest. The Tribunal held that this dual approach exposed that the AO had “proceeded with a preconceived notion” rather than conducting a lawful and objective assessment.

The Bench comprising Sudhir Kumar (Judicial Member) and Manish Agarwal (Accountant Member) held that the presumption of accommodation entries collapses once the assessee has established the identity of lenders, their creditworthiness and the genuineness of the loan transactions. It further noted that the theory of "preponderance of probability" assists decision-making only when there is evidence on both sides, and not when the Revenue has failed to bring a single piece of incriminating material on record.

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Since no independent inquiry was undertaken by the AO, no incriminating material was found during the search, and the statements relied upon were retracted and unsupported by evidence, the Tribunal upheld the order of the Commissioner of Income Tax (Appeals) deleting the additions under Sections 68 and 69C. In conclusion, the ITAT allowed the assessee’s appeal and confirmed the deletion of both additions, holding that the loans could not be treated as bogus and that commission for obtaining such loans could not be presumed without evidence.

Appearance

Revenue by Shri Dayainder Singh Sidhu, CIT DR

Assessee by Shri Gaurav Jain, Adv. & Shri Tarun Chanana, Adv

Cause Title: DCIT vs Indian Hydro Electric Power

Case No: ITA Nos.3906 & 3907/Del/2023

Coram: Sudhir Kumar (Judicial Member), Manish Agarwal (Accountant Member)