Sec. 68 & Reassessment: Ahmedabad ITAT Upholds Disclosure and Loan Genuineness

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Full Disclosure in Original Assessment Prevents Reopening After Four Years.

This landmark ruling from the Ahmedabad ITAT provides dual relief for taxpayers: first, by quashing reassessment proceedings initiated beyond four years where all material facts were disclosed; and second, by establishing that subsequent repayment of loans is a strong indicator of the genuineness of the transaction under Section 68 of the Income-tax Act, 1961.

Part I: The Validity of Reassessment Under Section 147

The Assessing Officer (AO) sought to reopen assessments for years 2014-15 to 2016-17 (beyond the four-year limit) based on 'suspicious high-value transactions' identified in the assessee's bank accounts via the Insight portal.

Key Takeaway on Reopening:

The ITAT noted that the bank accounts and all relevant transactions were fully disclosed during the original assessment proceedings. The assessee had filed a Tax Audit Report (Section 44AB), along with computation, financials, and full details of loans and repayments.

Since the period was beyond four years and the Revenue failed to prove any failure on the part of the assessee to disclose fully and truly all material facts, the reassessment proceedings initiated under Section 147 were held to be unsustainable in law.

Part II: Substantiating Loans Under Section 68 (Cash Credit)

Despite the finding on reassessment validity, the ITAT also addressed the merits of the unsecured loan additions made under Section 68. The AO had added the loan amounts on the ground that the lenders had either low income or had not filed ITRs, casting doubt on the transaction's genuineness.

The assessee successfully discharged the burden of proof by establishing the three ingredients of a genuine loan:

  • ✅ Identity: Submitted Confirmations, PAN, and ITRs of the four lenders.
  • ✅ Genuineness: Transactions were routed through proper banking channels (no cash) and were fully accounted for, including payment of TDS on interest.
  • ✅ Creditworthiness (Crucial Factor): The loans were fully repaid or substantially repaid within a short duration in subsequent years. This repayment, supported by bank statements and ledger accounts, significantly confirmed the genuineness of the loan arrangement.

The ITAT held that the AO's mere suspicion based on the lenders' low income, without bringing any adverse material on record to disprove the documents or establish the funds originated from the assessee, was insufficient to sustain the Section 68 additions.

Professional Insight: Key Takeaway 💡

This ruling provides two actionable insights for taxpayers and professionals:

  1. Protecting Assessments: For scrutiny cases where the original assessment has passed, ensure the Tax Audit Report (Form 3CD), financial statements, and all bank accounts/major transactions are explicitly disclosed—this disclosure acts as a crucial shield against reopening beyond the four-year limit.
  2. Proving Loans: The most effective evidence of loan genuineness is subsequent action. Taxpayers must document the repayment of principal and interest payments (with TDS) as these acts provide unimpeachable proof that the transaction was indeed a loan, and not the assessee's own unaccounted income.

(Note: The ITAT did remand the matter solely for verification of the repayment fact in the subsequent years, highlighting the weight given to this proof.)

Case Citation: Nikulbhai Chaturbhai Patel-HUF vs. NFAC, Delhi [2025] 178 taxmann.com 697 (Ahmedabad - Trib.)

Statutory Reference: Section 68 and Section 147 of the Income-tax Act, 1961.

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