Interest-free loan remains a loan where surrounding evidence proves the transaction and section 56(2)(vii)(a) does not apply.

An interest-free advance was held to be a genuine loan because it was recorded as such in the books and balance sheet of both parties, confirmed by the lender, and verified by Revenue enquiry. The absence of a written agreement, guarantee, mortgage, or repayment schedule did not change its character where the surrounding evidence established a loan transaction. A contrary stand, after the Revenue itself treated the advance as a loan in the lender's assessment, was impermissible. On these facts, the receipt was not a sum received without consideration and could not be taxed under section 56(2)(vii)(a).

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Issues: Whether the amount received from the finance concern constituted a loan or a sum received without consideration so as to attract section 56(2)(vii)(a) of the Income-tax Act, 1961.

Analysis: The amount was reflected as a loan in the books and balance sheet of the lender and the assessee, was confirmed by the lender, and was also verified by the Revenue through enquiry. The absence of a written agreement, guarantee, mortgage, or repayment schedule did not, by itself, change the character of the receipt where the surrounding material showed a loan transaction. The Revenue had also treated the same advance as a loan in the assessment of the lender, and a contrary stand in the assessee's hands was impermissible. An interest-free loan remains a loan and does not become a gift or a receipt without consideration merely because no interest was charged.

Conclusion: The receipt was rightly treated as a loan and not as income chargeable under section 56(2)(vii)(a); the addition was not sustainable.

Ratio Decidendi: A bona fide loan, including an interest-free loan, cannot be assessed as a sum received without consideration under section 56(2)(vii)(a) merely because it lacks formal loan documentation, where the surrounding evidence establishes its character as a loan.

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