ITAT Upholds Section 68 Addition for Bogus Loans But Restricts Estimated Profit to 2% of Sales:

Sarvesh Mercantile Private Limited filed appeals before the Tribunal challenging additions made by the AO for Assessment Years 2013-14, 2014-15 and 2015-16. The disputes primarily concerned the estimation of business income after rejection of the books of accounts under Section 145(3) of the Income Tax Act, 1961, and additions made under Section 68 on account of unsecured loans allegedly received from accommodation entry providers.

For Assessment Year 2013-14, the AO rejected the books of accounts and estimated profit at 2% of sales amounting to Rs. 13,78,85,318, resulting in an addition of Rs. 27,57,706. The AO also added Rs. 2.35 crore under Section 68 for loans received. For Assessment Year 2014-15, the AO estimated profit at 5% of sales of Rs. 18,31,85,888, resulting in an addition of Rs. 91,59,294. The AO also made an addition of Rs. 1 crore under Section 68 and disallowed interest paid on loans from the alleged accommodation entry providers under Section 69C. For Assessment Year 2015-16, the AO estimated profit at 5% of sales of Rs. 16,26,52,072, resulting in an addition of Rs. 81,32,604, and made a further addition of Rs. 2,06,56,349 under Section 68. The CIT(A) upheld the additions. 

The Tribunal noted that the assessee had failed to produce adequate supporting evidence to establish the genuineness of its business transactions. For Assessment Years 2014-15 and 2015-16, however, the Tribunal found merit in the assessee’s contention that the AO had adopted a profit rate of 5%, despite applying a rate of 2% in the assessment for Assessment Year 2013-14 on similar facts.

Considering the circumstances and the approach adopted in the earlier assessment year, the Tribunal restricted the estimated profit addition to 2% of sales for Assessment Years 2014-15 and 2015-16 and directed the AO to recompute the actual quantum of the addition.

For Assessment Year 2014-15, the assessee also challenged the disallowance of interest paid on loans from the alleged accommodation entry providers under Section 69C. The Tribunal held that the issue was interlinked with the genuineness of the underlying loans and followed its findings on the Section 68 additions for Assessment Year 2013-14. Accordingly, it upheld the appellate order and dismissed the grounds relating to the unsecured loans and associated interest expenditure.

For Assessment Year 2015-16, the Tribunal similarly upheld the addition of Rs. 2,06,56,349 under Section 68, applying its findings in the appeal for Assessment Year 2013-14. The Tribunal dismissed the appeal for Assessment Year 2013-14 and partly allowed the appeals for Assessment Years 2014-15 and 2015-16.