Section 68 burden shifts to Revenue once identity, capacity and genuineness of cheque loans are shown.

Loans received by cheque from three creditors were held not to be unexplained cash credits where the assessee produced confirmations, addresses, PAN/GIR details, and creditor appearances that established identity, prima facie capacity, and genuineness. The Tribunal held that once this initial burden under section 68 was discharged, the onus shifted to the Revenue, which could not reject the credits merely because bank deposits appeared in the creditors' accounts or by demanding proof of the source of the source. As the loans were accepted as genuine, the consequential disallowance of interest on those loans also failed and the interest deduction was allowed.

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Issues: (i) whether the loans received from three creditors could be treated as unexplained cash credits under section 68 of the Income-tax Act, 1961; (ii) whether interest on such loans was allowable as a deduction.

Issue (i): whether the loans received from three creditors could be treated as unexplained cash credits under section 68 of the Income-tax Act, 1961.

Analysis: The assessee filed confirmations, furnished the creditors' addresses and PAN/GIR particulars, and produced two creditors who appeared before the Assessing Officer and confirmed the advances. The Tribunal held that these materials established the initial burden regarding identity, creditworthiness and genuineness. Once such primary onus was discharged, the burden shifted to the Revenue to bring adequate material to disprove the claim. The mere presence of bank deposits in the creditors' accounts before the advances did not justify rejection of the loans, because the Department could not insist on proof of the source of the source. It was also noted that the loans were by cheque and that the Revenue had not brought sufficient material to show that the credits represented the assessee's suppressed income.

Conclusion: The addition under section 68 of the Income-tax Act, 1961 was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether interest on such loans was allowable as a deduction.

Analysis: The disallowance of interest depended entirely on the character of the underlying loans. Since the loans were held to be genuine and the addition under section 68 was deleted, the basis for disallowing interest no longer survived.

Conclusion: The assessee was entitled to deduction of interest on the loans, and this issue was decided in favour of the assessee.

Final Conclusion: The assessment was interfered with to the extent of deleting the cash-credit addition and allowing the consequential interest claim, while the remaining matters were sent back for consideration in accordance with the Settlement Commission's findings.

Ratio Decidendi: Once the assessee proves the identity of the creditor, the creditor's prima facie capacity, and the genuineness of the cheque-based transaction, the burden shifts to the Revenue to disprove the credit; the Department cannot reject the credit merely by questioning the source of the source.

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