2026 Supreme(Online)(ITAT) 13544

INCOME TAX APPELLATE TRIBUNAL (RAIPUR BENCH)
Partha Sarathi Chaudhury, Judicial Member
Rahanda Mal Gehani Prop. Krishna Cloth Stores – Appellant
Versus
Income Tax Officer, Bhatapara – Respondent
ITA No.591/RPR/2025

Mere payment through banking channels does not establish genuineness or creditworthiness under Section 68. The assessee must prove identity, creditworthiness, and genuineness of the creditor. Circular transactions of own unaccounted money are not genuine.

Headnote:

(A) Income-tax Act, 1961 - Section 68 - Unexplained cash credits - For upholding an addition under Section 68, the assessee must prove three conditions: identity of the creditor, capacity of such creditor to advance money, and genuineness of transaction - The burden of proof on the assessee is not discharged merely by showing payment through banking channels - Where the lenders have meagre income, no specified business, and their bank statements reflect no transactions other than those with the assessee and amounts credited just before the loan, it indicates a circular transaction channeling the assessee's unaccounted money - Such transactions, though apparent, are held not real ones - Reliance placed on Sumati Dayal vs. CIT (1995) 125 CTR (SC) 124 and CIT vs. P. Mohanakala (2007) 210 CTR (SC) 20. (Paras 5-7)

(B) Income-tax Act, 1961 - Section 38 - Disallowance of car depreciation - In the absence of a log book or evidence showing exclusive use of a vehicle for business purposes, an addition on account of personal use is sustainable. (Paras 9-11)

(C) Income-tax Act, 1961 - Prepaid expenses - Advance freight debited to profit and loss account is a prepaid expense not allowable as a deduction for the year under consideration if the assessee fails to show that the liability accrued or services were rendered in that year. (Paras 12-13)

Facts of the case:
The assessee, a proprietor running a pulses business and a wholesale cloth business, preferred an appeal against the order of the CIT(Appeals) who had upheld additions made by the Assessing Officer. The AO had made an addition of Rs.14,00,000 under Section 68 for unsecured loans received from four lenders, treating them as unexplained cash credits. This was on the ground that the lenders had meagre income, no specified business, and their bank statements showed only transactions with the assessee, with the loan amounts being credited just before the loans. The AO also made additions of Rs.55,245 on account of car depreciation and Rs.25,000 for advance freight claimed as an expense. The assessee had not pressed its first ground of appeal regarding the validity of the assessment.

Findings of Court:
The Tribunal dismissed the appeal. Regarding the Section 68 addition, it held that the lenders lacked creditworthiness and the transactions were not genuine, being merely circular transactions channeling the assessee's unaccounted money. The car depreciation addition was sustained as the assessee failed to provide a log book or evidence of exclusive business use. The advance freight addition was also confirmed as the assessee could not demonstrate it pertained to the relevant year.

Issues: The main issues were whether the assessee had discharged the burden under Section 68 to prove the identity, creditworthiness, and genuineness of the loan transactions, and whether the disallowances of car depreciation and advance freight were justified.

Ratio Decidendi: The court ruled that mere payment through banking channels does not establish genuineness of a transaction or creditworthiness of a creditor under Section 68. Where lenders have no source of income and no business activity, and their bank statements show only a single transaction with the assessee, it is a circular transaction of the assessee's own unaccounted money. The assessee must independently prove all three conditions under Section 68.

Result : Appeal dismissed.

Table of Content
1. section 68 requires assessee to prove identity, creditworthiness, and genuineness of creditors. (Para 1 , 3 , 4 , 5 , 6 , 7 , 8)
2. ground of appeal no.1 is dismissed as not pressed. (Para 2)
3. depreciation on car requires exclusive business use and documentary evidence. (Para 9 , 10 , 11)
4. prepaid expenses are not allowable in the current assessment year. (Para 12 , 13)
5. the appeal is dismissed in its entirety. (Para 14)

आदेश / ORDER

PER PARTHA SARATHI CHAUDHURY, JM

The present appeal preferred by the assessee emanates from the order of the Ld.CIT(Appeals), Raipur-3, dated 31.07.2025 for the assessment year 2017-18 as per the following grounds of appeal:

“Gr. No.1

On the facts and circumstances of the case and in law, assessment made u/s.143(3) dt.28-12-2019 by ITO- Bhatapara is invalid, since notice issued u/s143(2) by ITO on 11-8-18 is invalid who was not having pecuniary jurisdiction over the assessee for issuing notice u/s143(2) for AY17-18 as per CBDT Instruction No.1/2011, dt.31-1-11, Instruction No.6 dt.8-4-11 & Notification issued by Chief CIT, Raipur dt.30-5-11 which is binding on IT authorities u/s.119, since returned income is Rs.12,24,340; assessment made u/s.143(3) by the ITO, who was not having valid authority of law for making assessment over the assessee, is invalid & is liable to be quashed."

Gr.No.2

"On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in sustaining addition of Rs.14,00,000 on account of unsecured loan u/s. 68 as unexplained cash credits, which is unjustified and is liable to be deleted.

Gr.No.3

"On the facts and circumstances of the case and in law, ld. CIT(A) has erred in sustaining addition of Rs.55,245, which is unjustified & is liable to be deleted."

Gr.No.4

"On the facts and circumstances of the case and in law, ld. CIT(A) has erred in sustaining addition of Rs.25,000, which is unjustified & is liable to be deleted."

2. At the very outset, the Ld. Counsel for the assessee submitted that he is not pressing Ground of appeal No.1. Having heard the submissions of the Ld. Counsel, Ground of appeal No.1 is dismissed as not pressed.

3. As regards Ground of appeal No.2 in respect of addition of Rs.14,00,000/- on account of unsecured loan u/s.68 of the Income Tax Act, 1961 (for short ‘the Act’) treating as unexplained cash credit, it was held and observed by the A.O as follows:

“5.2 The contention of the assessee has been perused. The loan received from other than family member’s i.e. from (i) Shri Rajkumar Vaswani (HUF), ii) Shri Rajkumar Vaswani, iii) Shri Naresh Vaswani and Smt. Divya Vaswani are accepted in view of reply filed by the assessee and considering their creditworthiness and particularly looking to the fact that assessee does not have any influence over their business. However, in the case of loan taken from the following family members, the genuineness and creditworthiness is not proved for the following reasons:

The above lenders have shown a meager income of Rs. 2,96,990/- in their ITR of 2017-. It is further noticed that the above lenders has shown income from business in which no books of account are kept. No specified business is found shown and income has been shown on estimate basis and no payment of any income tax. Mere filing of return is not sufficient ground to establish that the income shown by any person is genuine. Further verification of their bank statement reveals no major transaction except with the assessee is reflected in the said bank account. Thus the genuineness of transaction and the creditworthiness of the lender are not found established. The contention of the assessee firm that the lender is assessed to tax since long is not a sufficient ground to establish the creditworthiness of the lender. Thus the genuineness and creditworthiness of the loan totaling to Rs.14,00,000/-from the above four lender is not established. In this regard, reliance is place on the decision of Hon'ble Chhattisgarh High Court in the case of Kus

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