ITAT allows unsecured loan deduction after lender's partner explains cash sources under section 131(1A) examination

ITAT Delhi held that addition u/s 68 regarding unsecured loan was unjustified. The assessee received loan from a trading firm for business expansion into denim cloth production. The lender's partner was examined u/s 131(1A) and explained cash deposit sources from daily sales. Revenue had accepted these sources during lender's scrutiny assessment without making additions. Since all three ingredients of section 68 were satisfied - identity, creditworthiness, and genuineness of transaction - the loan could not be treated as unexplained cash credit. Consequential interest deduction u/s 36(1)(iii) was also allowed.

---

---

Issues Involved:
The judgment deals with the appeal in ITA No. 7239/Del/2019 for AY 2016-17, arising from the order of assessment passed u/s. 143(3) of the Income-tax Act, 1961 by the Assessing Officer, ACIT, Circle-47(1), New Delhi.

Grounds of Appeal:
The assessee raised several grounds of appeal challenging the order passed by the Commissioner of Income Tax (Appeals) and the additions made under Section 68 of the Income Tax Act. The primary contentions included the confirmation of certain additions, deletion of proposed interest, and the treatment of unsecured loans received.

Assessee's Position:
The assessee, engaged in trading and commission businesses, declared a turnover and gross profit rate for the relevant year. The Assessing Officer disbelieved a loan received by the assessee from a lender based on cash deposits in the lender's bank account, leading to disallowance of interest expenses.

Lender's Background:
The lender firm, not an NBFC, was involved in trading pulses, lacking direct business connections with the assessee's cloth trading business. The Commissioner granted partial relief, leaving a dispute regarding a significant loan amount and interest expenses.

Investment and Financial Support:
The assessee intended to invest in a new company for producing Denim cloth, receiving financial support from the lender firm with a longstanding relationship. The investment was part of the assessee's business expansion plans.

Examination and Explanation:
The partner of the lender firm explained the sources of cash deposits in the firm's bank account during the assessment proceedings. Despite confirming the loan to the assessee, the Assessing Officer disregarded relevant evidence and treated the loan as unexplained cash credit.

Judgment and Conclusion:
The Tribunal found that the assessee had established the identity, creditworthiness, and genuineness of the loan transaction, supported by the lender's assessment details. The Tribunal allowed the appeal, holding that the interest paid on the loan was deductible under the Act for business purposes. Consequently, the grounds raised by the assessee were upheld, and the appeal was allowed.

Separate Judgment:
The Order was pronounced in the open court on 19/04/2024 by Shri Amit Shukla, Judicial Member, and Shri M. Balaganesh, Accountant Member.

---