Income Tax Act | Loan Repayment Within Two-Day Of Receipt Alone Doesn't Prove Bogus Transaction: Delhi High Court

The Delhi High Court has recently held that mere repayment of a loan within a short span of time, even within two days, does not by itself establish that the transaction was a sham or a bogus accommodation entry for the purposes of Section 68 of the Income Tax Act, 1961.

A division bench of Justices Dinesh Mehta and Vinod Kumar observed,

“Simply because the loan has been paid within two days, it cannot be said with certitude that the loan was not a genuine loan and was only a paper entry. According to us, the other argument that no interest was paid to the creditor is also mis-placed because if the short-term loan for two-three days is taken, for whatever reason because of family or business relation or friendship, a creditor may advance the amount with lesser or even without interest.”

The Court made the observation while dismissing an appeal filed by the Principal Commissioner of Income Tax against an order of the Income Tax Appellate Tribunal (ITAT) which had deleted additions made on account of alleged unexplained cash credits in the hands of respondent taxpayer

The respondent-taxpayer had received loans from two Kolkata-based companies. During assessment proceedings, the Assessing Officer treated the loans as unexplained under Section 68, primarily on the ground that a substantial portion of the loan amount was repaid within two days, allegedly indicating that the loan was only a paper entry.

While partly sustaining the additions, the Commissioner of Income Tax (Appeals) upheld the Assessing Officer's view. However, on further appeal, the ITAT deleted the additions after recording findings that the identity, creditworthiness and genuineness of the loan transactions had been duly established through confirmations, bank statements, audited financials and responses from the creditors to notices issued by the Assessing Officer.

The High Court noted that the issue sought to be canvassed before it was essentially a finding of fact and appreciation of evidence and material, which the Tribunal had already taken into account.

As such, the Court upheld the deletion of additions under Section 68 and dismissed Revenue's appeal.

For Appellant: Advocates Ruchir Bhatia, SSC with Anant Mann