Unsecured loan receipts treated as s.68 cash credits: creditor confirmations and bank trails accepted; additions and disallowance reduced.

Where unsecured loans were treated as unexplained cash credits under s.68, the Tribunal held that the assessee discharged the primary onus by furnishing creditor confirmations/affidavits, bank statements evidencing availability of funds, and routing of transactions through banking channels; absent any independent enquiry by the AO (including failure to issue summons/notices under s.133(6)) and in the absence of material showing accommodation entries, addition based on mere suspicion (including low returned income or cash deposits in creditors' accounts) was impermissible; the s.68 second proviso inserted by Finance Act, 2022 was inapplicable to AY 2016-17. The s.68 addition was deleted. For unverifiable expenses, an ad hoc disallowance was restricted from 20% to 5%.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether the addition under section 68 on account of unsecured loans received from individual creditors was sustainable, having regard to the assessee's evidentiary discharge of onus, the Assessing Officer's failure to conduct independent enquiry, and the inapplicability of the "source of source" requirement for the assessment year in question.

(2) Whether the assessment order and the section 68 addition could be sustained in the absence of a specific show cause notice on the proposed addition, in light of the principles of natural justice and CBDT Instruction No. 20/2015.

(3) Whether the ad hoc disallowance of expenses, made at 20% for want of complete bills and vouchers, was justified on the facts and to what extent such disallowance was reasonable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Sustainability of addition under section 68 in respect of unsecured loans

Legal framework (as discussed)

Section 68 requires the assessee to offer an explanation about the nature and source of any sum credited in the books to the satisfaction of the Assessing Officer, covering: (i) identity of the creditor; (ii) capacity/creditworthiness of the creditor; and (iii) genuineness of the transaction. The second proviso to section 68, inserted by Finance Act, 2022, extending the onus to explanation of "source of source" in the hands of the creditor, applies only from assessment year 2023-24 onwards and, as per judicial precedents cited, was earlier limited to specified share capital/share premium cases.

Interpretation and reasoning

(a) The Tribunal noted that the assessee had received unsecured loans aggregating to a specified sum from five named individuals. To discharge the onus under section 68, the assessee furnished confirmations/affidavits from all loan creditors, copies of their bank statements showing availability of sufficient funds at the time of advancing loans, Aadhaar and PAN details, and income tax returns wherever applicable. All transactions were through banking channels.

(b) On these facts, the Tribunal held that the assessee had established identity of the creditors, genuineness of the loan transactions, and prima facie creditworthiness, thereby discharging the initial burden under section 68. Once such primary onus is discharged, the burden shifts to the Revenue to rebut the explanation with cogent material.

(c) The Tribunal emphasised that if the Assessing Officer had any doubt regarding creditworthiness or genuineness, it was incumbent upon him to make direct, independent enquiries by issuing summons/notices under sections 131/133(6) to the creditors or conducting field enquiries, particularly since full particulars and addresses of the creditors were on record. In the present case, no such enquiry was carried out; the Assessing Officer merely drew adverse inferences on the basis of alleged low income/meagre resources of the creditors and alleged lack of "source of source".

(d) Relying on the principle laid down in decisions including that where an assessee furnishes names, addresses, and supporting financial documents of creditors, the burden shifts to the Department to establish lack of creditworthiness, the Tribunal held that the Assessing Officer could not sustain the addition merely on suspicion, surmise, or the presumed inadequacy of the creditors' income. It reiterated that suspicion, however strong, cannot take the place of evidence and that additions cannot be made on mere "preponderance of probability" without objective material showing that the loans were in fact accommodation entries or that the assessee's own unaccounted cash was routed back.

(e) The Tribunal further held that the Assessing Officer's insistence on explanation of "source of source" in respect of these individual loans was legally untenable for the year under appeal (AY 2016-17). The second proviso to section 68, which statutorily extends the onus to explaining the source in the hands of the creditor, is effective only from 1 April 2023 and applies to assessment year 2023-24 onwards. It also noted tribunal precedent that, even prior to this amendment, the extended enquiry into "source of source" was statutorily contemplated only in share capital/share premium cases from 01.04.2013 and did not authorize examination of "source of source" in non-share capital (including loan) cases for earlier years.

(f) The Tribunal distinguished the decision relied on by the Revenue (involving NRA Iron and Steel), observing that in that case, the Assessing Officer had conducted detailed enquiries and the assessee had failed to produce any meaningful evidence. By contrast, in the instant case, the assessee had produced complete documentation, and no independent enquiry was undertaken by the Assessing Officer.

(g) Applying the principles articulated in various High Court judgments cited, the Tribunal reiterated that once the assessee has furnished confirmations, bank statements, and returns of creditors, and established identity and genuineness, as well as prima facie creditworthiness, the Revenue must, if still unconvinced, gather material to rebut such evidence. A mere bald allegation that the loans represent the assessee's own unaccounted money routed back or that creditors had low income is insufficient without investigation or evidence.

Conclusions

(i) The assessee had fully discharged the onus under section 68 regarding the unsecured loans by proving identity of creditors, genuineness of transactions through banking channels, and prima facie creditworthiness via bank statements and other documents.

(ii) The Assessing Officer failed to conduct any independent enquiry under sections 131/133(6) or otherwise to contradict the assessee's evidence and proceeded to make the addition solely on suspicion and conjecture.

(iii) The statutory requirement to explain "source of source" introduced by Finance Act, 2022 was held to be inapplicable to the assessment year under appeal, and the earlier jurisprudence limiting such enquiry, in non-share capital cases, remained applicable.

(iv) In the absence of any adverse material, the loans could not be characterized as unexplained money or accommodation entries merely because the creditors had meagre income or cash deposits in their bank accounts.

(v) The addition made under section 68 in respect of unsecured loans was unsustainable and directed to be deleted.

Issue (2): Validity of assessment and section 68 addition in absence of specific show cause notice

Legal framework (as discussed)

The assessee relied on CBDT Instruction No. 20/2015 and decisions emphasizing the requirement of providing a fair and reasonable opportunity before making additions, in consonance with principles of natural justice.

Interpretation and reasoning

(a) The assessee contended that no separate show cause notice proposing the impugned additions was issued during assessment proceedings and that this omission vitiated the assessment. The Tribunal recorded these submissions but chose to adjudicate the matter on the substantive merits of the section 68 addition.

(b) Having found that the assessee had discharged the onus under section 68 and that the Assessing Officer had failed to conduct necessary enquiries or marshal contrary evidence, the Tribunal held the section 68 addition itself to be unsustainable.

Conclusions

(i) While the plea of absence of a specific show cause notice and violation of CBDT Instruction/ principles of natural justice was noted, the Tribunal effectively resolved the grounds challenging the assessment and the addition by holding that the section 68 addition was not maintainable on merits.

(ii) On this basis, the grounds seeking to quash the assessment and assailing the section 68 addition were allowed, with a specific direction to delete the addition, without a separate, independent finding that the assessment order was void solely for want of a show cause notice.

Issue (3): Justification and quantum of ad hoc disallowance of expenses

Interpretation and reasoning

(a) The Assessing Officer had made an ad hoc disallowance at 20% of various expenses on the ground of non-verification due to absence of complete bills and vouchers. The Tribunal observed that the disallowance was not based on detailed item-wise examination but on a general view of insufficiency of supporting documentation.

(b) Assessing the overall facts and circumstances, the Tribunal accepted that some disallowance was warranted in view of non-availability of full supporting vouchers; however, it considered a 20% disallowance to be excessive and not commensurate with the nature and overall pattern of expenses.

Conclusions

(i) An ad hoc disallowance was justified in principle due to partial non-verification of expenses, but the rate of 20% adopted by the Assessing Officer was unreasonable and excessive.

(ii) A reduced disallowance at 5% of the relevant expenses was held to be fair and reasonable in the facts of the case.

(iii) The disallowance was accordingly restricted to 5%, and the ground relating to ad hoc disallowance of expenses was partly allowed.

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