Section 68 Addition on Unsecured Loans Deleted as Assessee Need Not Prove Source of Source Pre-2023

ITAT Pune allowed the assessee's appeal, deleting the addition made u/s 68 on account of alleged accommodation entry receipts in the form of unsecured loans. Relying on the legal position prior to 01.04.2023, the Tribunal held that the requirement to explain "source of source" applies only to share capital, share premium and similar amounts, not to unsecured loans. As the assessee had furnished requisite documentation, and the lender's director appeared and confirmed the loan from business receipts duly repaid, the assessee was held to have discharged the onus of proving identity, creditworthiness and genuineness.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the addition under section 68 in respect of unsecured loan received from a corporate lender was justified on the ground that the assessee failed to establish the identity and creditworthiness of the lender and genuineness of the loan transaction.

1.2 Whether, for assessment years prior to 01.04.2023, section 68 required the assessee to explain the "source of the source" in respect of unsecured loans.

1.3 Whether the disallowance of interest paid on the said unsecured loan could survive once the principal addition under section 68 was deleted.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Addition under section 68 on unsecured loan and requirement to prove "source of source"

Legal framework

2.1 The Tribunal proceeded on section 68 as applicable prior to the amendment by the Finance Act, 2022. It noted, with reference to a High Court decision, that the pre-amendment provision did not require the assessee to explain the "source of the source" of sums credited, except in cases of share capital, share premium and amounts of like nature.

Interpretation and reasoning

2.2 The Tribunal recorded that the assessee, during assessment, had furnished: return of income, computation of income, audit report, details of unsecured loans, confirmations, PAN, copies of income-tax returns, bank statements, and evidence of repayment of the loan with interest and TDS thereon. This factual position was noted as admitted by the Assessing Officer.

2.3 The Tribunal noted that summons under section 131 were issued to the lender company's director, who personally appeared before the Assessing Officer. In his statement, he:

(i) Confirmed having advanced a loan of Rs. 1,15,00,000/- to the assessee-company.

(ii) Explained that the source was collections from sundry debtors, reflected as credits in the lender's bank account.

(iii) Stated that the assessee-company was one in which his father-in-law was a director, explaining the business relationship.

(iv) Confirmed that the loan had been fully repaid by 08.06.2017.

2.4 The addition was made by the Assessing Officer on the reasoning that mere production of PAN, ITRs, confirmations, bank statements, repayment details and TDS deductions did not discharge the assessee's onus under section 68, and that the lender was allegedly a "paper company" used for accommodation entries, based on search material in a related group.

2.5 The Tribunal held that, in light of the documentary evidence and sworn confirmation by the lender's director, the assessee had discharged its onus under section 68 to establish:

(i) Identity of the lender - established through corporate details, PAN, return of income, audited accounts and personal attendance of the director in response to summons.

(ii) Creditworthiness of the lender - established through audited financials, bank statement showing receipt from sundry debtors, and availability of funds to advance the loan.

(iii) Genuineness of the transaction - established through banking channels, confirmations, recording in books, and subsequent repayment with interest.

2.6 Referring to the judicial view on the Finance Act, 2022 amendment, the Tribunal held that, for the relevant assessment year, section 68 did not mandate the assessee to explain the "source of the source" of unsecured loans, since such requirement was then confined to share capital, share premium and similar sums. Accordingly, the Assessing Officer could not sustain the addition merely by insisting on the source of the lender's funds once the lender's identity, creditworthiness and the genuineness of the loan transaction were satisfactorily established.

Conclusions

2.7 The Tribunal concluded that the assessee had fully discharged the onus under section 68 in respect of the unsecured loan from the lender. The allegation of the lender being a mere "paper company" and provider of accommodation entries was held insufficient in the face of the direct evidence on record. The addition of Rs. 1,15,00,000/- under section 68 was directed to be deleted, and the order of the first appellate authority on this point was set aside.

Issue 3: Disallowance of interest on unsecured loan

Interpretation and reasoning

2.8 The Tribunal noted that the assessee had paid interest on the impugned unsecured loan, deducted tax at source, and transacted entirely through banking channels. It treated the interest claim as intrinsically linked to the genuineness of the loan itself.

2.9 Having held the unsecured loan to be genuine and deleted the principal addition under section 68, the Tribunal implicitly accepted that the corresponding interest payment was also genuine and allowable.

Conclusions

2.10 The disallowance of interest of Rs. 2,56,500/- was held to be unsustainable as it was consequential to, and dependent upon, the addition under section 68. With the loan accepted as genuine, the interest disallowance was also deleted.

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