Delhi ITAT: Recovery of earlier advances cannot automatically be treated as unexplained income

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 14 May held that money received back by an assessee against earlier advances cannot be treated as unexplained cash credit under Section 68 of the Income-tax Act, 1961. A Bench comprising Judicial Member Raj Kumar Chauhan and Accountant Member Manish Agarwal dismissed the Revenue’s appeal and upheld the deletion of an addition of Rs. 2 crore made against Henna Industries Pvt. Ltd.

“This is a case where the assessee had given a certain sum of money to PHV Securities Ltd and then the same money was received back. The section 68 can be invoked only if the assessee could not explain the transaction or the explanation provided by the assessee is not satisfactory.”

The assessee company, engaged in manufacturing henna powder and hair dye products under the brand name “Black Rose Kali Mehandi”, had originally filed its return for AY 2012-13 declaring income of Rs.5.57 crore. Subsequently, reassessment proceedings under Sections 147/148 were initiated after the Investigation Wing alleged that the assessee had received accommodation entries from M/s PHV Securities Pvt. Ltd., a concern allegedly controlled by one Himanshu Verma.

During reassessment, the Assessing Officer treated RS.2 crore received from M/s PHV Securities Pvt. Ltd. as unexplained cash credit under Section 68. The AO relied upon statements recorded during search proceedings wherein Himanshu Verma allegedly admitted to operating shell entities engaged in providing bogus accommodation entries.

Before the CIT(A) and later the Tribunal, the assessee explained that the amount was not a fresh loan or accommodation entry but merely a refund of advance earlier paid to M/s PHV Securities Pvt. Ltd. for procurement of land in Uttarakhand for setting up a factory. The assessee produced copies of the Memorandum of Understanding dated 02.06.2011, ledger accounts, legal notices, and settlement agreement dated 25.03.2012 showing that the proposed land deal failed and the advance amount was returned through banking channels. The Tribunal pointed out that :

“If the transaction was sham transaction, the advances given should also be doubted but the same was accepted by the AO.”

The Tribunal observed that the assessee had clearly established the source and nature of the transaction and the Revenue had failed to bring any direct incriminating material against the assessee. It further noted that the AO himself had not disputed the source of the advance originally given by the assessee to the said company.

The Bench also observed that the Revenue relied only on general statements recorded from Himanshu Verma several years after completion of the transaction, without any specific material linking the assessee to accommodation entry operations.

Holding that recovery of earlier advances cannot automatically be treated as unexplained income under Section 68, the ITAT upheld the order of the CIT(A) deleting the addition of ₹2 crore and dismissed the Revenue’s appeal.

To Read Full Order, Download PDF Given Below.