Mumbai ITAT Strikes Down Section 68 Additions Based Solely on Entry Operator Statement: A Strong Reaffirmation of Law and Natural Justice
In a significant and taxpayer-friendly ruling, the Hon’ble Mumbai Income Tax Appellate Tribunal (ITAT) has once again drawn a clear line between documented genuine transactions and additions based on suspicion and third-party statements.
In Nandkshore Telefilms & Media Pvt. Ltd. v. DCIT (ITA No. 2563/Mum/2025), the Tribunal held that once an assessee discharges its onus under Section 68, additions cannot be sustained merely on the basis of a retracted statement of an alleged entry operator, especially when cross-examination is denied.
This ruling is extremely relevant in the current assessment environment, where Section 68 additions are frequently made by mechanically relying on search statements of alleged entry operators, without independent verification or adherence to principles of natural justice.
Background: The Ever-Controversial Section 68 Additions
Section 68 of the Income-tax Act, 1961, empowers the Assessing Officer to treat unexplained credits as income if the assessee fails to explain:
• Identity of the creditor
• Creditworthiness of the creditor
• Genuineness of the transaction
However, judicial precedent has consistently held that once the assessee furnishes primary documentary evidence, the burden shifts to the Revenue. Additions cannot survive on assumptions, borrowed satisfaction, or third-party statements alone.
The Mumbai ITAT’s ruling reinforces this settled legal position.
Facts of the Case: Fully Documented Unsecured Loans
The assessee company received unsecured loans aggregating ₹50 lakh from five companies during the relevant assessment year.
To substantiate the transactions, the assessee furnished:
• Confirmations from all lenders
• PAN details of creditors
• Copies of Income-tax Returns
• Bank statements evidencing receipt and repayment
• Proof that loans were repaid within the same year
Despite this, the Assessing Officer made additions of ₹50 lakh under Section 68 and ₹50,000 under Section 69C, alleging accommodation entries.
Basis of Addition: Statement of an Alleged Entry Operator
The sole basis for the additions was the statement of Shri Vipul Bhatt, recorded under Section 132(4) during search proceedings in another case, wherein he allegedly admitted to providing accommodation entries.
Key weaknesses in the Revenue’s case:
The statement was later retracted
• No independent material linked the assessee to any bogus transaction
• Cross-examination was not granteddespite specific request
• No defect was found in the assessee’s documentary evidence
Nevertheless, the CIT(A) upheld the additions, citing non-appearance of creditors and reliance on the said statement.
Core Issue Before the Tribunal
Whether additions under Sections 68 and 69C can be sustained when:
• The assessee has furnished complete documentary evidence
• The Revenue relies solely on a retracted third-party statement
• Cross-examination is denied
• No contrary evidence is brought on record
Tribunal’s Findings: A Clear Win for the Assessee
The Mumbai ITAT decisively ruled in favour of the assessee and deleted all additions.
1. Onus under Section 68 Fully Discharged
The Tribunal held that the assessee had conclusively established:
• Identityof the creditors
• Creditworthiness through ITRs and bank statements
• Genuineness of transactions through banking channels and repayments
Once these three pillars are satisfied, Section 68 cannot be invoked merely on suspicion.
2. Reliance on Retracted Statement Is Legally Unsustainable
The Tribunal strongly criticised the Revenue’s approach of relying exclusively on the statement of Shri Vipul Bhatt, particularly when:
• The statement was retracted
• No corroborative evidence was brought on record
• The assessee was denied cross-examination
The Tribunal relied on the landmark Supreme Court judgment in Andaman Timber Industries v. CCE, which categorically held that denial of cross-examination amounts to violation of principles of natural justice, rendering the addition invalid.
3. CIT(A)’s Own Observation Favoured the Assessee
Interestingly, the Tribunal noted that the CIT(A) himself observed that “prima facie everything is in four corners of law”.
This admission further weakened the Revenue’s case and strengthened the assessee’s claim of genuine transactions.
The copy of the order is as under:
1764833871-ysHQ2e-1-TO
