2026 (1) TMI 592 - AT - Income Tax

Unexplained cash credits contested by revenue but proven by documentary corroboration, resulting in reversal of additions and allowance of interest

Unexplained cash credits were contested on grounds of identity, creditworthiness and genuineness; documentary evidence including account confirmations, ... Unexplained cash credits u/s 68 - assessee has failed to prove the identity, credit worthiness and genuineness of the transaction - source of source of such transaction not proved - HELD THAT:- Assessee has given the details related to confirmation of accounts, copy of bank statement, copy of ITR, acknowledgment, copy of ledger account of both the parties has also explained the genuineness and identity as well as creditworthiness in the assessment year 2013-14 as well as 2014-15. Thus, the addition made u/s. 68 does not sustain as the assessee has explained the unsecured loans before the AO. Besides this, the assessee has paid the interest to the said parties has also explained and hence the same cannot be disallowed. The appeal of the assessee is allowed. Issues: (i) Whether the sums of Rs. 42,00,000 received from creditors can be treated as unexplained cash credits and added to the assessee's income under Section 68 of the Income-tax Act, 1961; (ii) Whether interest of Rs. 8,17,535 paid on the said unsecured loan can be disallowed as payment on unexplained cash credits.Issue (i): Whether the Rs. 42,00,000 received from creditors is to be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961.Analysis: The assessee furnished confirmations, bank statements, income-tax returns and ledger extracts to establish identity, genuineness and creditworthiness of the creditor entities. The same set of creditors and similar evidence were considered in the assessee's own earlier assessment year where those creditors had been accepted. The evidence before the adjudicating authorities for the year under appeal was considered sufficient to explain the receipts as unsecured loans rather than unexplained cash credits.Conclusion: The addition under Section 68 in respect of Rs. 42,00,000 is not sustainable and is decided in favour of the assessee.Issue (ii): Whether interest amounting to Rs. 8,17,535 paid on the unsecured loan is disallowable as interest on unexplained cash credits.Analysis: Since the principal receipt was held to be adequately explained by the assessee with supporting documentation and in view of the prior decision in the assessee's own case accepting the creditors, the corresponding interest payments were also explained and supported by records. There is no separate material to treat the interest payments as connected to unexplained credits once the principal receipts are held to be genuine and from creditworthy sources.Conclusion: The disallowance of Rs. 8,17,535 as interest is not sustainable and is decided in favour of the assessee.Final Conclusion: The net legal effect is that the additions and disallowances made under Section 68 and related to interest for the assessment year are set aside in favour of the assessee, restoring the tax treatment in line with the accepted evidence and the Tribunal's earlier decision for the assessee's own case.Ratio Decidendi: Where an assessee furnishes contemporaneous documentary evidence establishing identity, genuineness and creditworthiness of creditors—and such creditors have been accepted in the assessee's own earlier assessment year—the receipts cannot be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961, and related interest payments are not liable to be disallowed.