Cash credit verification under section 68 requires lender examination before rejection of explained loan entries.

Where cash credits are claimed as disclosed loans received through banking channels, the Assessing Officer must carry out effective verification of the lenders' creditworthiness and the genuineness of the transactions before rejecting the explanation under section 68 of the Income-tax Act, 1961. If the assessee seeks summoning of the creditors and an effective opportunity to discharge the burden, the Tribunal may direct such verification under section 131 so that the material can be tested for veracity. The High Court found no prejudice to the Revenue in that remand direction and upheld the verification process, leaving the cash-credit issue to be determined on the basis of the creditors' examination.

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Issues: Whether the Revenue's challenge to the Tribunal's order, directing verification of the cash credits by summoning the loan creditors under section 131 before drawing an inference under section 68, was sustainable.

Analysis: The loans were stated to have been received through normal banking channels and their source had been disclosed. The remaining controversy was the creditworthiness of the lenders and the genuineness of the transactions. The Tribunal had remanded the matter and required the Assessing Officer to summon the lenders, as the assessee had sought such summoning and was to be given an effective opportunity to discharge the onus under section 68. The Court held that only after recording the lenders' statements could the material placed by the assessee be properly tested for veracity.

Conclusion: The remand direction was and caused no prejudice to the Revenue; the appeal was without merit.

Final Conclusion: The Revenue's appeal failed, and the assessment issue relating to cash credits and the consequential interest deduction was left to be determined on the basis of the verification directed by the Tribunal.

Ratio Decidendi: Where cash credits are explained through disclosed loans received through banking channels, the Assessing Officer must afford effective verification, including summoning the lenders when necessary, before rejecting the explanation under section 68 of the Income-tax Act, 1961.

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