ITAT confirms addition u/s 68 by lifting the veil of secrecy to see beyond paper trail

We cannot be blind to reality of money laundering through accommodation entries, mere paper trail not enough – ITAT

In a recent judgment upholding the addition u/s 68, the Tribunal held that it cannot be blind to the reality of money laundering through accommodation entries, and it was needed to lift the veil of secrecy and see beyond the paper trail.

ABCAUS Case Law Citation:
5251 (2026) (10) abacus.in ITAT

Important Case Laws relied upon by Parties:
Real Innerspring Technologies Pvt. Ltd. vs. ACIT
Ganesh Ganga Investments (P.) Ltd.
Bhawani Finvest Private Limited
Shankar Industries vs. ACIT
N.R. Portfolio (P.) Ltd
Seema Jain vs ACIT

There was a search u/s 132 of the Income Tax Act, 1961 (the Act) on a Business Group, which also included founder of the group and two entry providers.

During the said searches, it transpired that the two entry providers were involved in providing various types of accommodation entries to a large number of beneficiaries through certain entities managed and controlled by them, with the help of dummy Directors and Professionals.

The field enquiries and departmental data base indicated that such entities did not conduct any actual business and, importantly, were not found existing at the given addresses. The analysis of the financials of these entities revealed that these entities have declared meager turnover over the past few assessment years, fixed assets recorded are negligible, salaries and wages to employees, statutory benefits such as ESI, PF etc recorded were also negligible in contrast to huge reserves and surplus lying in their balance sheets.

It was also found that these entry providers were regularly opening new companies, and shifting the business of accommodation entries to these new entities. It was also seen that Directors of many of these companies were found to be same and their financial analysis also indicated that they were persons of little or no means.

During physical enquiries no such company/entity was found existing at the addresses provided. None of the entities comply with the summons issued nor they were found to exist at the addresses mentioned in their returns of income.

In his statement recorded u/s 131(1A) of the Act, the accountant of the Group accepted that the companies of the group had received/given accommodation entries in the form of bogus unsecured loan, and the founder had given said documents to him.

Similarly, during the searches at the office premises, certain incriminating WhatsApp chats were noticed and extracted from phone of son of the entry provider wherein various photos of rupee notes and chats of cash/ “kg” transfer were found. He admitted that the chats pertained to providing bank entries by these entities on the directions of his father against receipt of cash. He admitted ‘1 kg’ in the chat denoted ‘Lakhs’. He also admitted picking cash against currency note using it as token for delivery as per directions of his father.

Also, an Employee of the entry provider in statement recorded u/s 132(4) accepted being a dummy director in both the entities which were controlled by the entry provider.

During the course of search proceedings, various incriminating documents such as tally data set of various entities controlled and managed by the two entry providers were found. During the course of post search investigation, statements of various Chartered Accountants were recorded who were being reported as statutory Tax Auditors on Financial statements of these bogus entities. During statement recorded on oath u/s 131(1A) the CA stated that they did the audit without following procedure as per law and merely signed the documents of such companies without verifying their actual businesses, voucher/bill/invoice and also did not verify the addresses of such companies, where the books of accounts were maintained.

During the Assessment, the AO invoked provisions of Section 68 of the Act by holding that the assessee had accepted huge amount as loan from allegedly bogus entities which, apparently, had no genuine businesses, with physical existence not proved, and also having no creditworthiness.

Thereafter, the AO inter alia added the said amount to the income of the assessee u/s 68 of the Act. The AO also invoked the provisions of Section 115BBE of the Act to apply the enhanced rate of tax stipulated therein.

However, the CIT(A) partly allowed the appeal on the ground that loans were repaid prior to the issuance of notice u/s 148 of the Act.

Before the ITAT, the defence of the assessee was that were taken through banking channels. Additions had been based on third party statements. It was submitted that the copies of statement were not provided to the assessee nor the cross examination was allowed.

It was also submitted that bank statements PAN, Address and Confirmation were duly submitted by the assessee, but the same were rejected by the AO. It was the submission that except the loans taken from two entities, all others were repaid before the notice u/s 148 was issued. This squaring up was also done through banking channels. During the assessment proceedings, the assessee furnished complete documentary evidences which included certificate of incorporation, MOA, AOA, confirmations of accounts, bank statements, master data downloaded from MCA showing the companies as “Active”, acknowledgements of filing of income-tax returns, audited financial statements and ledger accounts along with bank statements evidencing grant and repayment of loans.

It was averred that the lenders had sufficient capital and reserves to advance loans to the assessee, were compliant on the MCA portal and were regular tax payers, declaring profits in their return of income for relevant assessment years. It was argued that in the light of this, the assessee had furnished complete documentary evidences and fully discharged the onus to establish the identity, creditworthiness and genuineness of the lender parties in each AY.

It was the case of the assessee that there was no material on record to doubt the identity, creditworthiness or genuineness of the lenders. That once complete documentary evidences establishing identity, creditworthiness and genuineness of the lenders were placed on record, no addition under section 68 could survive.

The Tribunal observed that regarding the professed genuineness of the loan transactions, or otherwise vis-à-vis section 68 of the Act, the Hon’ble Supreme Court had held that it is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor; the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. These findings must be proved prima facie by the assessee and only after the assessee had adduced evidence to establish prima facie the aforesaid, the onus shifts on the department.

The Tribunal opined that mere repayment of loan would not imply that it was genuine in the first place as Delhi High Court had upheld the ITAT order in rejecting mere paper work and look at the reality behind a facade created to hoodwink and deceive observing that merely because the transaction was squared in the next financial year would not establish that the transaction was genuine and not bogus.

The Tribunal observed that this binding case law was not considered by the ITAT in the case law vehemently relied upon by the assessee.

The Tribunal further observed that as held by the Co-ordinate Bench mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them. That even if in later years the entire quantum of loans had been squared up, then also there would be no relief from the rigours of section 68 of the Act.

The Tribunal observed that in the instant case, loan givers were entities which are created solely for the purposes of providing different types of accommodation entries in lieu of cash and commission. Further, these companies had meager turnover, meager fixed assets, very few employees, and depict huge premium being raised which does not, prima facie, justify their intrinsic worth. The loan givers had cross holdings to boost their capital in order to provide more accommodation entries and for circular rotation of funds. No plausible rebuttal was offered by the assessee to the aforesaid findings of Revenue during assessment proceedings. It was incumbent on the assessee to produce the Directors of the loan givers to prove its contention that the lenders were genuinely engaged in NBFC activities, more so because the assessee was in touch with some of them as substantial loans were squared up around the time of assessment proceedings, even when there is a finding that the loan givers could not be located at the given addresses.

The Tribunal held that it cannot be blind to the reality of money laundering through accommodation entries, there was need to lift the veil of secrecy in this case, and see beyond the paper trail, placed before it.

Accordingly, the Tribunal uphold the action of AO in treating the impugned loan u/s 68 of the Act. As a consequence, ITAT reversed the finding of the CIT(A).

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