The Expanding Contours of Section 68
The Delhi ITAT ruling in Deputy Commissioner of Income-tax vs. Kohinoor Foods Ltd. marks a pivotal moment in India’s anti-abuse tax jurisprudence.
The case explores a crucial intersection — how bogus purchase transactions and accommodation entries can be recharacterized as unexplained credits under Section 68 of the Income-tax Act, 1961, and how Suspicious Transaction Reports (STRs) and Investigation Wing findings can validly trigger reassessment proceedings.
In an era where digital trails increasingly reveal disguised money flows, this decision strengthens the revenue’s ability to act against layered accommodation arrangements — while still reinforcing the procedural discipline of natural justice.
Case Background — The Factual Matrix
Kohinoor Foods Ltd., a prominent player in the rice and processed food sector with global operations, filed its return for AY 2011–12. The case, initially assessed under scrutiny, later attracted the attention of the Investigation Wing.
The Wing unearthed that an entity “R” had issued bogus purchase bills to the assessee, and corresponding STRs and banking analysis showed an unmistakable pattern: amounts received in “R’s” bank account were withdrawn in cash almost immediately, leaving no trace of genuine trade activity.
The Assessing Officer (AO), relying on this tangible material, reopened the assessment under Section 147, and made additions under Section 68, treating the alleged purchases as accommodation entries designed to route unaccounted income.
Legal Framework and Statutory Architecture
Section 68 — Unexplained Cash Credits
Section 68 deems any unexplained sum credited in the assessee’s books as taxable income, unless the assessee satisfactorily proves:
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Identity of the creditor,
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Genuineness of the transaction, and
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Creditworthiness of the creditor.
Failure on any of these three tests invites taxation of the amount as unexplained income. Courts have repeatedly held that this provision covers not only share capital or loans but also any credit entries that lack commercial substance.
Sections 147–148 — Reassessment Jurisdiction
Under these provisions, an AO can reopen an assessment when there exists reason to believe that income has escaped assessment. Such “reason” must arise from tangible, relevant material, though not conclusive proof (Raymond Woollen Mills Ltd. v. ITO [236 ITR 34, SC]).
In this case, STRs and bank data provided by the Investigation Wing constituted such tangible material.
Tribunal’s Analysis — The Heart of the Ruling
A. Validity of Reassessment
The Tribunal upheld the reassessment, noting that the Investigation Wing’s report was not mere borrowed satisfaction but independent, verifiable evidence demonstrating money circulation inconsistent with genuine trade.
It held that:
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STRs are credible financial intelligence inputs.
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Bank pattern showing immediate cash withdrawal supports accommodation entry inference.
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The AO’s “reason to believe” was based on cogent material, satisfying statutory conditions.
This aligns with NRA Iron & Steel Pvt. Ltd. v. PCIT (412 ITR 161, SC), where the Supreme Court confirmed that once the initial burden of the Revenue is discharged, the onus shifts to the assessee.
B. Application of Section 68 to Bogus Purchases
Traditionally, only the profit element embedded in bogus purchases was added back. However, the Tribunal observed that where such purchases are found to be mere instruments for routing unaccounted money, the entire amount becomes taxable under Section 68 as unexplained credit.
Principle affirmed:
“If the purchase transaction is a sham or merely an accommodation device, the entry represents unexplained credit and squarely falls within Section 68.”
This interpretation extends the anti-abuse reach of Section 68 to cover complex commercial disguises.
C. Evidentiary and Procedural Standards
The ITAT emphasized that once the Revenue establishes a prima facie nexus between suspicious funds and the assessee’s books:
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The burden shifts to the assessee to prove genuine trade intent.
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STRs and bank trails are admissible corroborative evidence.
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Absence of delivery, transport records, or stock linkage indicates absence of real trade.
V. Judicial and Doctrinal Alignment
| Judgment | Key Ratio | Applied Principle |
|---|---|---|
| CIT v. P. Mohanakala (291 ITR 278, SC) | Unexplained credits taxable when explanation not satisfactory | Burden of proof under s.68 |
| NRA Iron & Steel Pvt. Ltd. (SC) | Creditworthiness and genuineness must be proven | Credible Investigation Wing data valid |
| Raymond Woollen Mills Ltd. (SC) | “Reason to believe” ≠ conclusive proof | STRs sufficient to reopen |
| Andaman Timber Industries v. CCE (SC) | Cross-examination right forms part of natural justice | Procedural fairness requirement |
Practical and Compliance Implications
For Taxpayers and Practitioners
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Enhanced Vendor Due Diligence: Verify supplier PAN, GST, and financial capability before booking purchases.
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Document Banking Trails: Maintain clear linkage between goods movement, invoices, and payments.
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Internal Audit Review: Identify repetitive cash-linked suppliers or non-traceable vendors.
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Defensive Documentation: If STR-triggered queries arise, document business rationale and correspondence trail.
For Tax Authorities
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STR Integration: Coordinated use of FIU inputs enhances evidence credibility.
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Reassessment Discipline: Ensure independent application of mind before reopening.
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Natural Justice Adherence: Provide all relied-upon material and cross-examination opportunity.
Analytical Evaluation — The Broader Legal Message
This judgment reflects a paradigm shift in judicial interpretation:
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From form to substance: Courts now evaluate the economic reality of a transaction.
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From profit estimation to full disallowance: When transactions are found to be paper-based, the entire inflow is treated as unexplained.
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From reactive to preventive enforcement: STR-based intelligence gives tax authorities preemptive visibility of evasion networks.
Yet, the ITAT’s insistence on natural justice safeguards ensures that enforcement does not become arbitrary — maintaining the delicate equilibrium between revenue protection and taxpayer rights.
Conclusion — Credibility, Corroboration, and Conscience
DCIT vs. Kohinoor Foods Ltd. is not just another addition case; it’s a judicial template for handling financial opacity with evidentiary precision.
By upholding reassessment founded on credible STR intelligence and recognizing the evidentiary worth of bank flow patterns, the ITAT reinforces that the integrity of the tax system depends on both substance and process.
