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Judgment
PER MANISH AGARWAL, AM :
The captioned cross-appeals filed by the assessee and the Revenue against the order dated 08.09.2025 by Ld. Commissioner of Income Tax (A)-3, Noida [“Ld. CIT(A)”] in Appeal No. CIT(Appeals) Delhi-2/10402/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 23.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18.
The issues involved in both captioned cross-appeals filed by the assessee and the Revenue are common, therefore, they have been heard together and accordingly, adjudicated by a common order.
Brief facts of the case are that the assessee filed its return of income on 26.10.2017, declaring loss of INR 1,07,95,144/-. The case of the assessee was selected for complete scrutiny under CASS and notice u/s 143(2) of the Act was issued on 16.08.2018. Thereafter, various notices u/s 142(1) alongwith questionaries were issued from time to time which were duly replied by the assessee. The AO alleged that assessee has received fresh loan of INR 80.00 Lakhs however, the genuineness of this loan is not proved nor commercial expediency is there for taking high loans. Besides this, the AO further disallowed interest expenses claimed at INR 1,12,02,629/- u/s 36(1)(iii) of the Act. In first appeal, Ld. CIT(A) has deleted the addition u/s 68 towards the unsecured loan and restricted the disallowance made u/s 36(1)(iii) to INR 22,87,300/- as against the disallowance made at INR 1,12,02,629/- by the AO.
Aggrieved with the said order of ld. CIT(A), both the parties are in appeal before the Tribunal by taking various Grounds of appeal as per appeal memo.
Ground of appeal Nos.1, 3, 4 & 5 taken by the assessee are with respect to the restriction of disallowance made u/s 36(1)(iii) of the Act at INR 22,87,300/- and Ground of appeal No.4 of the Revenue wherein Revenue has challenged the deletion of disallowance u/s 36(1)(iii) of the Act by ld. CIT(A).
Before us, Ld.AR submits that Ld. CIT(A) has accepted the contention of the assessee in part that the funds invested of INR 38.82 crores were substantially out of non-interest bearing funds available with the assessee in the shape of preferential share capital and interest free loans received from the Directors. Ld.AR submits that assessee has received fresh preferential capital of INR 28.10 crore which was utilized for making interest free advances. In the written submission, the assessee at page 3 & 4 has given tables showing that Ld. CIT(A) has held that total interest bearing loans of INR 4,17,17,087/- were utilized for making investment in shares and by applying interest rate @8% has computed the amount of disallowance. Ld. AR submits that, the assessee has paid total interest of INR 3,95,343/- on these loans however, by applying the interest rate of 8%, ld. CIT(A) uphold total disallowance of INR 16,01,050/-. Ld.AR thus submits that at the most, the addition could be sustained at INR 3,95,343/- u/s 36(1)(iii) of the Act.
Ld.AR further submits that Ld. CIT(A) has restricted the disallowance by applying 8% interest as against interest paid @ 4% to 12% by the assessee which is supported by the chart given at pages 3 & 4 of the written submission. Accordingly, the Ld. AR submits that disallowance made u/s 36(1)(iii) of the Act at INR 22,87,300/- deserves to be deleted. He further placed reliance on the judgment of Hon’ble Supreme Court in the case of S A Builder vs CIT reported in 280 ITR 1 (SC).
On the other hand, Ld. SR DR vehemently supported the order of AO and submits that AO has discussed this issue in detail and from page 23 onwards of the assessment order has observed that the assessee has utilized interest bearing funds for making interest free advances/investments to the related parties and therefore, the AO has rightly made the disallowance of entire interest expenses claimed u/s 36(1)(iii) of the Act and requested that the disallowance made by AO deserves to be uphold.
Heard the parties and perused the material available on record. It is observed that during the year under appeal, assessee has received fresh share capital in shape of 8% non-convertible and non-cumulative preference shares of INR 100/- each by converting unsecured loans of INR 28.10 crores. Besides this, the assessee was having equity share capital of INR 9.24 crores though the same was eroded out of recurring losses incurred over the years but the fact remained that the fresh funds was received at INR 28.10 crores by converting the interest bearing loans into capital, thus interest liability to this extent stood reduced. It is further observed that assessee is having long term loans and advances of INR 1,23,05,197/- and short term loan and advances of INR 7,50,01,150/-. Besides this, assessee has received interest free loans from Directors of INR 13.65 crores and has interest bearing loans of INR 5.49 crores from related parties where interest @ 8-10 % was paid. If the total interest free funds in the shape of preferential share capital and loans from Directors are taken together, resultant interest free funds available with the assessee were of INR 41.75 crores for making investments/interest free advances. As observed above, assessee has made total investment of INR 38.64 crores and short terms advances were given of INR 7.50 crores thus, as against total interest free funds of INR 41.75 crores, assessee has made investment/interest free advances of INR 46.14 crores, therefore, apparently the observations of Ld. CIT(A) that unsecured interest bearing loans of INR 4.17 crores were utilized for making investments/advances is appears to be correct.
However, we find force in the argument of Ld.AR that Ld. CIT(A) has applied 8% rate of interest on the entire funds utilized for making interest free advances/ investments by ignoring the fact that the assessee has actually paid interest only of INR 3,95,343/- on such loans ranging the rate of interest between 4% to 8%. Thus, as against the total disallowance of INR 16,01,050/- sustained on these unsecured loans, we uphold the disallowance of INR 3,95,343/- u/s 36(1)(iii) being the actual amount of interest paid by the assessee.
It is further observed that, out of total sum of INR 4.17 crores of unsecured loan utilized in making interest free advances/ investments, a loan of INR 68.62 Lakhs was taken from M/s Sungrace Products India Pvt. Ltd. on which interest @ 10% was paid. Therefore, the same is to be considered for making total disallowances u/s 36(1)(iii) of the Act which comes to INR 10,81,593/- (INR 3,95,343/- + 10% of 68,62,500/- i.e. 6,86,250/-).
Now coming to the assessee’s contention that INR 4.17 crores is part of the total investment of 38.82 crores considered by Ld. CIT(A) is accepted then availability of interest free funds in the shape of preferential share capital and interest free loans from Directors are sufficient to cover up the total interest free advances of INR 38.82 crores. In this regard, we have already observed herein above that the total investment as well as interest free advances given were of INR 46.14 crores and the gross interest free funds were of INR 41.75 crores therefore, this contention of the assessee cannot be accepted. Accordingly, as discussed above, total disallowance u/s 36(1)(iii) of the Act is restricted at INR 10,81,593/-. The Ground of 1, 3, 4 & 5 of the assessee are partly allowed and Ground 4 of Revenue is dismissed.
The remaining Ground of appeal No. 2 is withdrawn by the assessee therefore, the same is dismissed as withdrawn.
Now coming to the remaining Grounds of appeal No. 1 to 3 raised by the Revenue wherein the revenue has challenged the deletion of addition of INR 80.00 Lakhs made u/s 68 by the AO is challenged.
Before us, ld. Sr. DR vehemently supported the order of AO and submits that AO has discussed this issue at page 2 onwards wherein the AO has discussed the financial position and the business activity of the assessee company and concluded that no effective business was carried on by the assessee and merely, funds received in the shape of unsecured loans/capital were utilized for making non-current investments and interest free advances to the related parties. Ld. Sr. DR further drew our attention to the statements of the Directors of certain companies from whom capital/loans were received where they stated having no knowledge about the business of the assessee company. He further stated that the AO after considering these facts and circumstances, hold the loans taken from M/s Gandhipati Infra Project Pvt. Ltd. of INR 75 lakhs and from M/s. Sungrace Products Pvt. Ltd. of INR 5 Lakhs as bogus. Ld. Sr. DR further submits that Ld. CIT(A) while deleting the addition had admitted the additional evidence filed by the assessee without obtaining Remand Report and therefore, requested that AO has rightly hold the loans taken during the year as bogus which order deserves to be restored.
On the contrary, Ld.AR for the assessee vehemently supported the order of Ld. CIT(A) and submits that the assessee has discharged the onus of proving the loans as genuine by submitting every possible detail of the lender companies. Ld. AR further submits that Ld. CIT(A) has appreciated these facts while deleting the addition made. He further submits that the loans taken were repaid in subsequent financial year where no doubts were raised. Ld. AR thus, submits that Ld. CIT(A) has rightly deleted the addition which order deserves to be uphold.
Heard the parties and perused the material available on record. In the instant case, it is observed that while making the addition in para 4.10 of the order, AO has observed that the two companies who had provided loans to the assessee has sufficient creditworthiness however, for the sole allegation of circular transactions, doubted the genuineness of the loan transactions and made the additions.
It is observed that assessee has filed the certificate of incorporation, PAN Nos, financial statements and the bank statements of the lender companies and thus has duly discharged the burden casted upon it u/s 68 of the Act of establishing the identity, creditworthiness of the lender companies and since the loans were taken through banking channels, the genuineness is also established. It is observed that both the loans were repaid in subsequent assessment year where no doubts were raised by the revenue. Once the assessee has established that the lender company has sufficient creditworthiness which was never in dispute merely on assumption that there were circular transactions, addition cannot be made. Ld. CIT(A) after considering these facts, has deleted the additions by making following observations:-
submitted their income-tax returns and bank statements, further confirming their financial capacity to advance the loans. In respect of Sun Grace Products India Pvt. Ltd., it is noted that the company has been regularly filing its income-tax returns and has reported taxable income ranging between ₹4.76 crores to ₹5.13 crores in different years. The company has also paid substantial taxes. Its net worth stands at approximately ₹90 crores, whereas the loan advanced to the assessee is only ₹5,00,000/-. Thus, the creditworthiness of the said company stands duly established. Similarly, in respect of Ganadhipati Infra Projects Pvt. Ltd., it is seen that the company has been filing its returns consistently, reflecting income between ₹2.05 crores to ₹3.16 crores. The net worth of the company is around ₹5.12 crores as against the loan of ₹75,00,000/- advanced to the assessee. Hence, the capacity of the lender to advance the loan is fully proved. Also, it is a fact on record that the statements of the directors of the lending companies were recorded, which establishes that the companies are active and running and therefore, no adverse observations regarding the creditworthiness of the lenders are made out.
Legal Position and Burden of Proof:
It is well settled that once the assessee discharges the initial onus under Section 68 by providing satisfactory evidence on identity, creditworthiness, and genuineness, the burden shifts to the revenue to produce material disproving the claim. In the present case, the AO has failed to bring any adverse material or allegation on creditworthiness or genuineness to rebut the assessee's evidence.
The assessee has also duly explained the source of the source of the impugned loan transactions. The relevant documentary evidences, including confirmations, audited financial statements, bank statements, and income-tax return acknowledgments of the creditor companies, were submitted before the Assessing Officer. It is further noted that the Assessing Officer has not cast any doubt or recorded any adverse finding on the evidences so placed on record. Accordingly, once the assessee has discharged the onus under section 68 of the Act, and the source of source has also been established beyond any ambiguity, no addition u/s 68 is warranted.
Repayment of Loan
It is observed that the loan raised from both the companies has duly been repaid, and therefore, no adverse inference is warranted on this account. It has been held in a number of judgments that once an unsecured loan has been returned back, the same cannot be treated as income u/s 68.
In the above issue, the Hon'ble Supreme Court in the case of Assistant Commissioner of Income-tax vs. Gujarat Television (P.) Ltd. reported at [2024] 159 taxmann.com 739 (SC) has held as under:
"SLP dismissed against order of High Court that where unsecured loans given to assessee were squared up on same date and nothing remained outstanding at end of day, much less at end of financial year, impugned reassessment proceedings to tax same under section 68 deserved to be quashed"
On the above issue, the Hon'ble High Court of Mumbai in the case of Principal Commissioner of Income-tax vs. Bairagra Builders (P.) Ltd. reported at [2024] 164 taxmann.com 162 (Bombay) has held as under:
"Where assessee had taken unsecured loan from two companies and had submitted all evidences to substantiate loan including confirmation from creditors and loan was taken and repaid through banking channels, Assessing Officer was not justified in treating said unsecured loan as fake and unexplained cash credit"
Further, the Hon'ble HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax (Central) vs. Dharmesh Padamshibhai Patel reported at [2023] 156 taxmann.com 491 (Gujarat) has held as under:
However, Tribunal remanded matter back to Assessing Officer to verify identity of parties - It was noted that Tribunal had observed that assessee had furnished bank accounts of all lenders wherein loans claimed were duly reflected - Creditors were assessed to tax and their confirmations were filed - Further, loans were returned through banking channels before close of subsequent financial year - Whether, on facts, an opportunity was rightly allowed by Tribunal to assessee to prove identity of lenders when their creditworthiness and genuineness of transactions as was held by Commissioner (Appeals), were already proved - Held, yes [Paras 15 and 16] [In favour of assessee]
Further, the Hon'ble HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax (Central), Surat vs Neotech Education Foundation reported at [2023] 148 taxmann.com 372 (Gujarat) has held as under:
It was noted that Commissioner (Appeals) had observed that assessee had discharged its onus by furnishing necessary details such as a copy of PAN, bank details and ITR etc. in support of identity and creditworthiness of creditor and genuineness of transaction - He further noted that payment of loan to assessee as well as repayment of loan and interest by assessee were made by account payee cheques - Further, both lower authorities had concurrently held that initial burden of proof even if not discharged by assessee at level of Assessing Officer but every transaction was explained by production of documents by assessee before Commissioner (Appeals) where two remand reports were called for - Whether, on facts, impugned addition on account of loan amount made by Assessing Officer was to be deleted - Held, yes [Paras 9 to 11] [In favour of assessee]
Further, the Hon'ble HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax vs. Merrygold Gems (P.) Ltd reported at [2024] 164 taxmann.com 764 (Gujarat) has held as under:
Section 68 of the Income-tax Act, 1961 - Cash credit (Scope of provision) - Assessment year 2016-17 - Assessing Officer made addition of certain amount to assessee's income on account of unsecured loan treading same as unexplained cash credit under section 68 - Whether since amount of loan received by assessee was returned within same financial year, appellate authorities had rightly deleted addition made by Assessing Officer - Held, yes [Paras 9 and 11] [In favour of assessee]
Further, the Hon'ble HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax vs. Ambe Tradecorp (P.) Ltd reported at [2022] 145 taxmann.com 27 (Gujarat) has held as under:
Where assessee took loan from two parties and assessee had furnished requisite material showing identity of loan givers and that assessee was not beneficiary as loan was repaid in subsequent year, no addition under section 68 could be made on account of such loan
Further, the Hon'ble HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax vs. Ojas Tarmake (P.) Ltd. reported at [2023] 156 taxmann.com 75 (Gujarat) has held as under:
Where assessee showed unsecured loans received during relevant assessment year and AO made addition on ground that assessee failed to discharge onus of liability as laid down under section 68, since amount of loan received by assessee was returned to loan party during year itself and all transactions were carried out through banking channels, impugned addition was to be deleted
In view of the above facts, it is concluded that all the three necessary ingredients of section 68 of the Income-tax Act, namely identity of the creditors, their creditworthiness, and the genuineness of the transactions, have been duly complied with. Accordingly, the addition made by the AO was held to be unsustainable. Hence, this ground of appeal is allowed.
4.4Ground of Appeal No. 5 In this ground, the AR has stated that AO is wrong in fact and bad in law for not giving full credit of Prepaid taxes (TDS) of Rs. 2,04,384/- which was claimed during assessment proceeding as per section 155(14) of the Act. It is a settled position of law that TDS credit is to be given in accordance with section 199 of the Income-tax Act, 1961 read with Rule 37BA of the Income-tax Rules, 1962. The appellant has contended that the said TDS was duly reflected in its books of account and was claimed in the return of income, but the AO failed to allow full credit. Such credit is a matter of factual verification from the Form 26AS and departmental records maintained in the ITD system. If the TDS pertains to income offered by the appellant in the relevant year, then denial of such credit results in double taxation, which is impermissible in law. Accordingly, the Assessing Officer is directed to verify the appellant's claim of TDS credit of ₹2,04,384/- with reference to Form 26AS and other relevant records, and allow the same in accordance with law. If on verification the TDS is found to have been deducted on the income offered to tax by the appellant, full credit shall be granted. This ground of appeal is therefore treated as allowed for statistical purposes.
4.5Ground of Appeal No. 6 In this ground, the AR has stated that AO is wrong in fact and bad in law for not allowing interest on TDS worth of Rs. 64,160/- which was claimed by the assessee in the assessment proceeding. It is well established under section 244A of the Act that where any refund becomes due to the assessee, the same shall be accompanied by interest as mandated by statute. The grant of interest on refund is not discretionary but a statutory right of the assessee. The claim of the appellant that interest on TDS of ₹64,160/- was due is verifiable from the departmental records. Since the determination of refund and consequential interest depends upon verification of TDS credits, taxes paid, and computation of income, I am of the view that this issue requires factual examination. Therefore, the AO is directed to verify the appellant's claim of interest on TDS of ₹64,160/- in light of section 244A and grant the same in accordance with law.Accordingly, this ground is also treated as allowed for statistical purposes.
4.6Ground of Appeal No. 7 In this ground, the AR has stated that AO is wrong in fact and bad in law for not allowing Brought forward business losses against the income assessed under the head business. The set-off and carry forward of losses are governed by sections 70 to 72 of the Act. It is a settled position that once the losses are determined in earlier years, they become a statutory right of the assessee to be carried forward and set off in subsequent years, subject to the conditions laid down in law. The AO, while completing the assessment, has not given any reasons for denying the set-off of brought forward losses.The appellant has submitted that such losses were duly assessed and available for set-off, but the AO failed to consider the same. Since the determination of carry forward losses requires verification of records of earlier years and cross-check with the department's system, it is necessary that the AO verifies the claim from the assessment records of preceding years.Accordingly, the AO is directed to verify the quantum of brought forward business losses available to the appellant as per the assessment records of earlier years, and if found correct, allow the set-off against the current year's assessed business income in accordance with law.This ground is therefore treated as-allowed for statistical purposes.
4.7Additional Ground of Appeal No. 8: In this ground, the AR has challenged the jurisdictional validity of the notice issued under Section 143(2) of the Income-tax Act, 1961. It is further submitted by the AR that the issuance of a valid notice under Section 143(2) is a precondition for assuming jurisdiction by the Assessing Officer (AO) and in absence of the same, any subsequent assessment proceedings are rendered null and void in law.As per AR, in the present case, the notice u/s 143(2) dated 16.08.2018 fails to conform to the mandatory requirements laid down by the CBDT Instruction No. F. No. 225/157/2017/ITA-II dated 23.06.2017. As per AR, the Instruction clearly mandates that all scrutiny notices under Section 143(2) must be issued in one of the prescribed formats, specifying whether the case is selected for limited scrutiny, complete scrutiny, or compulsory manual scrutiny. Further, the AR stated that this requirement is not procedural but jurisdictional and having been issued under the authority of Section 119 of the Act, and is binding on all Assessing Authorities.However, as per AR, the impugned notice merely states "computer aided scrutiny selection" without clarifying the nature of scrutiny and this omission is a substantive defect that invalidates the AO's assumption of jurisdiction, as it deprives the assessee of the statutory right to know the exact scope of scrutiny and to respond accordingly.
In support of the above proposition, the appellant has placed reliance on Judicial Precedents wherein, it has been stated that the failure to issue a jurisdictionally valid notice under Section 143(2) in the prescribed format vitiates the entire assessment.
(a)Hind Ceramics Pvt. Ltd. vs. DCIT, Circle - 10(1), [ITA Nos. 608 & 610/KOL/2024, dated 06.05.2025] (Refer Page Nos. 60 to 68 of the Paper Book)
(b)Tapas Kumar Das v. ITO, Ward-50(5), Kolkata, [ITA No. 1660/KOL/2024, dated 11.03.2025] (Refer Page Nos. 69 to 74 of the Paper Book)
(c)Sajal Biswas v. ITO, Ward 24(1), Hooghly [ITA No. 1244/KOL/2023, dated 26.03.2025] (Refer Page Nos. 75 to 82 of the Paper Book)
(d)Srimanta Kumar Shit vs. Assistant Commissioner of Income Tax [ITA No. 1911/KOL/2024] (Refer Page Nos. 83 to 100 of the Paper Book)
(e)Anita Garg vs. Income Tax Officer, Ward 2(2)(4), [ITA No. 4053/Del/2024 – ITAT Delhi Bench] (Refer Page Nos. 101 to 109 of the Paper Book)
Thus, in view of the above circumstances, the appellant has stated that these decisions uniformly uphold the view that non-compliance with the mandatory format prescribed by the CBDT for issuing notices under Section 143(2) which as per AR, is not a mere technicality but a jurisdictional lapse which renders the assessment order legally unsustainable. Hence, as per AR, considering the facts and circumstances of the present case, the notice issued under Section 143(2) of the Income-tax Act, 1961, is bad in law, being invalid and issued without proper jurisdiction. The appellant further stated that as a result, the entire assessment proceedings conducted pursuant to this defective notice, culminating in the assessment order passed under Section 143(3), are rendered without authority of law and are therefore liable to be quashed in their entirety.
Decision
Upon careful consideration of the appellant's submissions and the material placed on record, the following findings are recorded:
(i)The appellant has challenged the validity of the assessment order on the ground that the notice issued under Section 143(2) of the Income-tax Act, 1961 was not in conformity with the mandatory formats prescribed by the CBDT Instruction No. F. No. 225/157/2017/ITA-II dated 23.06.2017, and hence the Assessing Officer lacked jurisdiction to frame the assessment. In this regard, it is observed that while the said CBDT Instruction prescribes certain formats for the issuance of scrutiny notices indicating the type of scrutiny (limited, complete, or compulsory manual), the mere absence of such specific mention in the notice, by itself, does not vitiate the assumption of jurisdiction, provided that:
(a)The notice was issued within the prescribed time limit,
(b)The assessee was duly informed of the scrutiny process,
(c)The assessee fully participated in the proceedings.
As could be observed that the ld. CIT(A) has deleted the addition by observing that the assessee has furnished comprehensive evidence as stated above, to establish the identity and creditworthiness and genuineness of the creditors and transactions. Ld. CIT(A) has further observed that the loans were repaid and additions were made on mere suspicion and on conjecture without any direct or corroborative evidence to demonstrate that the loans taken were bogus or represent undisclosed income. Before us, the revenue has failed to controvert these findings of ld. CIT(A) by placing any contrary material.
In view of the facts as discussed herein above and after considering the arguments of both the parties, we find that the assessee has duly complied with all the requirements of section 68 of the Act and duly discharged the burden casted upon it and Ld. CIT(A) after examining all the details which were already filed before the AO concluded that loans taken were genuine loans and deleted the addition which order is hereby upheld. The Ground of appeal No.1 to 3 of the revenue are thus, dismissed.
In the final result, appeal of the assessee in ITA No.6823/Del/2025 for Assessment Year 2017-18 is partly allowed and appeal of the Revenue in ITA No.7308/Del/2025 for Assessment Year 2017-18 is dismissed.