Unexplained cash credit addition fails where lender identity, bank records and repayment evidence establish genuine unsecured loans.

Unsecured loans supported by creditor confirmations, ledger extracts and bank statements could not be treated as unexplained cash credits under section 68 where the creditors were tax-assessed and repayments were recorded in the remand report. The assessee discharged the burden by proving the creditors' identity and the receipt of funds, and the addition could not rest only on third-party statements or suspicion without independent enquiry or contrary material. As the loan addition failed, the consequential disallowance of interest on those loans also could not survive, since its basis was solely the alleged bogus nature of the borrowing.

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Issues: (i) Whether the addition made as unexplained cash credit under section 68 in respect of unsecured loans was sustainable. (ii) Whether the disallowance of interest on such unsecured loans was sustainable.

Issue (i): Whether the addition made as unexplained cash credit under section 68 in respect of unsecured loans was sustainable.

Analysis: The assessee furnished confirmations from the loan creditors, their ledger extracts and bank statements. The creditors were stated to be regularly assessed to tax, and the remand report recorded repayment of the loans. The addition was based principally on statements of third parties and inference, without independent enquiry from the creditors or material showing that the credits were not genuine. Once the identity of the creditors and the receipt of funds were established, the assessee's onus stood discharged.

Conclusion: The addition under section 68 was not sustainable and the finding is in favour of the assessee.

Issue (ii): Whether the disallowance of interest on such unsecured loans was sustainable.

Analysis: The interest disallowance was made only as a consequence of treating the underlying loans as bogus. Since the loan addition itself was not sustained and the repayment along with interest was supported by the record, the basis for disallowing interest did not survive.

Conclusion: The disallowance of interest was not sustainable and the finding is in favour of the assessee.

Final Conclusion: The revenue's challenge failed on both the principal loan addition and the consequential interest disallowance, leaving the assessee successful on the disputed additions.

Ratio Decidendi: Where the assessee establishes the identity of the lender, documentary support for the transaction, and repayment through banking records, an addition for unexplained cash credit cannot be sustained merely on suspicion or third-party statements, and a consequential interest disallowance based solely on that addition also fails.

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