Facts of the Case

The appellant, an individual assessee, declared income from salary, house property, and other sources. During the relevant assessment year, she recorded a loan of ₹1 crore taken from M/s Pediment Tie-up Pvt. Ltd. (PTPL), which was later repaid without interest after one year through banking channels.

The Assessing Officer (AO) treated the loan as an unexplained credit under Section 68, holding that the transaction lacked genuineness. This addition was upheld by the Commissioner of Income Tax (Appeals) and later confirmed by the Income Tax Appellate Tribunal (ITAT).

Issues Involved

  1. Whether the loan of ₹1 crore received by the assessee was genuine or a bogus accommodation entry.
  2. Whether the conditions under Section 68—identity, creditworthiness, and genuineness—were satisfied.
  3. Whether repayment through banking channels establishes the authenticity of the transaction.

Petitioner’s Arguments

  • The loan was genuine and repaid before assessment proceedings.
  • The transaction was conducted entirely through banking channels.
  • The lender company (PTPL) had accepted the transaction, and no addition was made in its hands.
  • The Tribunal ignored vital facts and reached perverse findings.

Respondent’s Arguments

  • The assessee failed to establish the creditworthiness of the lender.
  • PTPL was a shell company with negligible income and no real business activity.
  • The transaction was merely an accommodation entry designed to introduce unaccounted money.
  • The assessee could not explain the purpose of the loan or demonstrate any real connection with the lender.

Court’s Findings / Order

The Delhi High Court upheld the findings of the Tribunal and dismissed the appeal, holding that:

  • The transaction failed the threefold test under Section 68—identity, creditworthiness, and genuineness.
  • PTPL was found to be a shell/paper company with negligible income and dubious financials.
  • Directors of the company did not comply with summons under Section 131.
  • The assessee lacked knowledge about the loan, indicating a non-genuine transaction.
  • Mere repayment through banking channels does not establish genuineness.

The Court relied on the principles laid down in:

  • CIT v. Durga Prasad More (1971) 82 ITR 540 (SC)
  • Sumati Dayal v. CIT (1995) 214 ITR 801 (SC)

The Court emphasized that substance over form must prevail, and apparent transactions can be disregarded if found to be sham.

Important Clarifications

  • Repayment of a loan does not automatically validate its genuineness.
  • The burden lies on the assessee to prove:
    • Identity of the creditor
    • Creditworthiness
    • Genuineness of the transaction
  • Shell companies providing accommodation entries will not satisfy Section 68 requirements.
  • Courts will look beyond documentation to determine the real nature of transactions

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:4104-DB/CSH11072018ITA7232018.pdf 

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