HOTEL SIVAPRIYA,DINDIGUL vs. COMMISSIONER OF INCOME-TAX (APPEALS), DINDIGUL,TAMIL NADU

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ITA 1628/CHNY/2026Status: DisposedITAT Chennai03 August 2026AY 2020-202111 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that the issue of unsecured loans required fresh verification by the AO due to factual inconsistencies in the FAA's order. The addition for low net profit was also set aside for fresh adjudication by the AO, as neither the books of account were rejected nor the assessee's explanation for the profit decline was substantiated.

What were the facts?

The assessee, a hotel firm, did not file its return of income for AY 2020-21. The department initiated reassessment proceedings and made additions for low net profit and unsecured loans. The FAA confirmed the low net profit addition but reduced the unsecured loan addition.

What were the issues?

Whether the AO was justified in making additions for low net profit and unsecured loans without proper examination of evidence and without rejecting the books of account. Whether the FAA correctly applied Section 68 to outstanding unsecured loans.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 144,Section 68,Section 250

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & MS PADMAVATHY S

Hearing: 22.07.2026Pronounced: 03.08.2026

आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 07.01.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2020-21.

- 2 - ITA No.1628/CHNY/2026 Hotel Sivapriya 2. Brief facts of the case are as follows: The assessee is a firm. It is engaged in the business of hotel industry. For the assessment year 2020-21, assessee had not filed its return of income. Department had information that assessee had earned interest income and sales, which was reflected in GST portal. Hence, notice u/s.148 of the Act was issued to the assessee on 27.03.2024. In response to the notice issued u/s.148 of the Act, assessee filed its return of income on 30.06.2024 disclosing total income of Rs.68,891/-. The assessment was completed u/s.147 r.w.s.144 of the Act vide order dated 09.12.2024. In the said assessment order, the AO made addition on account of low net profit of Rs.12,25,887/-. Further, the AO made addition of Rs.3,71,74,287/- being amounts received as unsecured loans by doubting genuineness of the transaction.

3.

Aggrieved, assessee filed appeal before the FAA. Before FAA, it was contended that the addition made by the AO on account of low net profit is bad in law since assessee’s hotel industry business had severely been impacted due to Covid-19 pandemic and also on account of change in management of the assessee firm. However, the FAA rejected the contentions and confirmed the view taken by the AO. The relevant finding of the FAA reads as follows:-

- 3 - ITA No.1628/CHNY/2026 Hotel Sivapriya “Regarding the addition on account of low net profit, the appellant pleaded that his business was severely impacted due to covid 19 Pandemic on the hotel Industry and the change in management following the retirement of key partners. The appellant has failed to explain that how the change of management or Covid-19 effected his business by providing necessary and material evidence. Moreover, it is seed that no ITR has been filed u/s 139 and the Audit Report submitted by the appellant is beyond the due date of filing the same. In view of the above, I see no reason to interfere with the order of the AO . Hence plea of the appellant is rejected on this ground.”

4.

As regards the addition on account of unexplained unsecured loan, the assessee contended that most of these loans were accumulated balance brought forward from previous years and section 68 of the Act can only be invoked for the amounts that are credited in the assessee’s books of accounts during the relevant previous year. The assessee had also furnished confirmation from various parties (which was not furnished before the AO). The FAA held that only credits received during the year can be brought to tax u/s.68 of the Act and not the outstanding loans from the earlier years. Accordingly, out of the unsecured loan of Rs.3,71,74,287/-, the FAA confirmed the addition for a sum of Rs.20,34,000/-. The relevant finding of the FAA in reducing the addition u/s.68 of the Act to Rs.20,34,000/- reads as follows:- “Loans or cash credits received and outstanding from an earlier year cannot be added under section 68 in the current assessment year. It is seen from the statement submitted during the course of appeal proceedings that out of the un-secured loan Rs.3,71,74,287/-, only Rs. 20,34,000/- has been secured during the year. Considering the plea of

- 4 - ITA No.1628/CHNY/2026 Hotel Sivapriya the appellant, the addition under section 68 is limited to fresh credit during the year under consideration (i.e. Rs.20,34,000/-) on account of unexplained unsecured loan. Hence, the appellant is allowed a relief of Rs. 3,51,40,285/-.”

5.

Aggrieved, the assessee has filed the present appeal before the Tribunal. With regard to the addition of low net profit, the Ld.AR submitted that that the authorities below were not justified in applying the historical profit rate of earlier years to the impugned assessment year, which was marked by extraordinary circumstances. It was argued that unless the books of account are rejected by pointing out specific defects, inconsistencies or instances of unverifiable purchases or sales, the declared results cannot be disregarded merely because the gross profit or net profit rate is lower than that of preceding years. The method of accounting consistently followed by the assessee ought to have been accepted, as there was no finding that the books of account failed to reflect the true profits of the business. It was further submitted that a mere fall in the gross profit or net profit rate, by itself, does not constitute sufficient ground for rejecting the books of account when the assessee has furnished a reasonable and plausible explanation supported by the surrounding circumstances. The Ld.AR argued that the FAA could not rely upon past years' profitability as the sole basis for estimating the income without

- 5 - ITA No.1628/CHNY/2026 Hotel Sivapriya first demonstrating that the books of account were incomplete, unreliable or otherwise liable to be rejected under the provisions of the Act. The Ld.AR, therefore, submitted that the addition of Rs.12,58,887/- is liable to be deleted in its entirety, as it has been made without invoking any statutory provision and without recording any finding regarding defects in the books of account. The Ld.AR relied on various judicial pronouncements in support of the above contention

6.

As regards the addition sustained on account of unsecured loans, the Ld.AR submitted that the AO had erred in treating the loan received by the assessee as unexplained cash credit u/s.68 of the Act. It was contended that the addition was made without properly appreciating the nature of the transaction and the documentary evidences placed on record. The Ld.AR further submitted that the First Appellate Authority, while correctly observing that the provisions of section 68 are applicable only in respect of fresh credits appearing during the relevant previous year, committed a factual and arithmetical error in sustaining an addition of Rs.20,34,000/- instead of the actual fresh credit of Rs.20,84,000/-. It was argued that the figure confirmed by the FAA is contrary to the facts borne out from the books of account

- 6 - ITA No.1628/CHNY/2026 Hotel Sivapriya and constitutes an apparent mistake on record. The Ld.AR submitted that the impugned loan was received from Kodai Valley View Resorts Private Limited, an existing corporate entity duly identifiable through its PAN and CIN. The transaction represented a genuine inter-corporate loan and was duly reflected in the lender's books of account as a short-term loan. It was further submitted that the entire transaction was carried out through normal banking channels, namely through the assessee's SBI Overdraft Account No. 32484844173, leaving no scope for any adverse inference. The Ld.AR contended that the assessee had discharged the primary onus cast upon it u/s.68 by establishing the identity of the lender, its creditworthiness and the genuineness of the transaction through documentary evidence, including the lender's financial statements, bank statements and other supporting records. Therefore, the ingredients required for invoking section 68 were fully satisfied in favour of the assessee. The Ld.AR, therefore, submitted that the addition sustained u/s.68 of the Act is legally unsustainable and liable to be deleted in its entirety. In support of his contention, the Ld.AR placed reliance on the order of the Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd., [(2008) 216 CTR 195 (SC)] and Hon’ble Delhi High Court in the case of CIT vs. Divine Leasing & Finance

- 7 - ITA No.1628/CHNY/2026 Hotel Sivapriya Ltd., [(2008) 299 ITR 268 (Delhi)]. Accordingly, the Ld.AR prayed that the entire addition be deleted.

7.

The Ld.DR supported the orders of the AO and the FAA.

8.

We have heard the rival submissions and perused the material available on record. Insofar as the addition sustained under section 68 of the Act is concerned, we find that the assessee had furnished before the FAA the ledger account of Kodai Valley View Resorts Pvt. Ltd., confirmation letter from the lender, and the relevant bank statements. From the ledger account, it is evident that the opening balance as on 01.04.2019 stood at Rs.1,46,47,720/- and the closing balance as on 31.03.2020 was Rs.1,67,31,720/-, indicating fresh credits of Rs.20,84,000/- during the relevant previous year. However, the FAA has sustained the addition only to the extent of Rs.20,34,000/-, which is factually inconsistent with the fresh credits reflected in the ledger account. We further notice that the fresh credits received from Kodai Valley View Resorts Pvt. Ltd. were admittedly routed through normal banking channels. The assessee had also placed on record the bank statements evidencing the receipt of funds, the ledger account and the balance confirmation issued by the unsecured

- 8 - ITA No.1628/CHNY/2026 Hotel Sivapriya creditor in support of the transaction. These documents are relevant for examining the identity of the creditor, the genuineness of the transaction and the creditworthiness of the lender. However, a perusal of the impugned appellate order reveals that the FAA has not examined these evidences in their proper perspective and has merely sustained the addition with reference to the fresh credits appearing during the year without recording any finding on the documentary materials produced by the assessee. Since the aforesaid evidences were admittedly produced for the first time before the FAA and were not available before the AO for examination, we are of the considered opinion that the matter requires fresh verification at the level of the AO. Accordingly, in the interest of justice, we set aside the order of the FAA on this issue and restore the matter to the file of the AO. The AO shall examine the ledger account, bank statements, balance confirmation and such other evidences furnished by the assessee before the FAA and decide the issue afresh in accordance with law after affording the assessee a reasonable opportunity of being heard. The assessee is directed to extend full cooperation and furnish all necessary details as may be called for by the AO.

- 9 - ITA No.1628/CHNY/2026 Hotel Sivapriya 9. Insofar as the addition on account of low net profit is concerned, we find that the AO, in the assessment order, compared the turnover and profitability of the assessee for the three preceding assessment years with that of the relevant assessment year. The AO noticed that the turnover of the assessee during the year under consideration had substantially increased as compared to the earlier years. At the same time, while the average net profit rate for the three preceding years worked out to 3.08%, the assessee had declared a net profit of only 0.09% on the turnover for the relevant year. On that basis, the AO adopted the average net profit rate of 3.08%, computed the net profit at Rs.12,97,776/-, and after reducing the net profit disclosed by the assessee at Rs.38,889/-, made an addition of Rs.12,58,887/-. The First Appellate Authority confirmed the said addition. On a perusal of the audited financial statements, we notice that the gross profit disclosed by the assessee during the relevant previous year is broadly comparable with that of the immediately preceding year. However, the net profit has drastically declined to 0.09%. The explanation of the assessee is that the hotel business was severely affected by the COVID-19 pandemic and that there was a change in the management of the firm resulting in operational inefficiencies. At the same time, the turnover disclosed in the

- 10 - ITA No.1628/CHNY/2026 Hotel Sivapriya audited financial statements for the relevant year has substantially increased as compared to the preceding year, which does not, by itself, fully corroborate the explanation offered by the assessee regarding the decline in profitability. We further find that while estimating the income by applying the average net profit rate of the earlier years, the AO has neither rejected the books of account nor recorded any finding regarding specific defects, inconsistencies or inaccuracies in the audited books maintained by the assessee. Likewise, the plea advanced before us that the decline in net profit was attributable to mismanagement by the newly inducted partners has not been substantiated by placing any supporting material on record. Thus, neither has the Revenue examined the correctness of the books of account in the manner required under law, nor has the assessee substantiated its explanation for the steep fall in the net profit despite a substantial increase in turnover.

10.

Considering the totality of the facts and circumstances, we are of the view that the issue requires a fresh examination by the AO. Accordingly, we set aside the orders of the lower authorities on this issue and restore the matter to the file of the AO for fresh adjudication. The AO shall examine the assessee's explanation

- 11 - ITA No.1628/CHNY/2026 Hotel Sivapriya regarding the impact of the COVID-19 pandemic, the alleged change in management, the reasons for the decline in net profit, and the correctness of the books of account, after affording the assessee a reasonable opportunity of being heard. The assessee shall furnish all relevant documents and evidences in support of its claim and shall extend full cooperation in the remand proceedings without seeking unnecessary adjournments. The AO shall thereafter decide the issue afresh in accordance with law. It is ordered accordingly.

11.

In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the open court on 3rd August,2026 at Chennai.

Sd/- Sd/- (जॉज� जॉज� के) (प�मावती एस) (PADMAVATHY S) (GEORGE GEORGE K) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�नई/Chennai, �दनांक/Dated, the 3rd August, 2026 RSR, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त /CIT, Madurai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.08.05 09:35:15 +05'30'

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