Unexplained cash credit under Section 68: substitution of interest and regrouping tested, appeal partly allowed with remand

Section 68 requires a specific sum to be found credited whose nature and source are unexplained. The substitution of a benchmark interest rate to compute an alleged excessive interest differential does not create an independent unexplained credit; payments were routed through banking channels and the addition of Rs. 5,31,46,170 is therefore unsustainable in favour of the assessee. The alleged addition of Rs. 30,09,99,829 arose from regrouping of running account balances and lacked identification of any discrete unexplained credit; deletion of that addition was correct in favour of the assessee. Matter remitted for limited verification and consequential recomputation if required.

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Issues: (i) Whether the addition of Rs. 5,31,46,170/- computed by restricting interest on unsecured loans to 12% and treated as unexplained under Section 68 of the Income-tax Act, 1961 is sustainable; (ii) Whether the deletion by the Commissioner of Income Tax (Appeals) of the addition of Rs. 30,09,99,829/- under Section 68 of the Income-tax Act, 1961 on account of alleged regrouping of balances was erroneous.

Issue (i): Whether the addition of Rs. 5,31,46,170/- made by substituting a benchmark interest rate and treating the differential as unexplained credit under Section 68 of the Income-tax Act, 1961 is permissible.

Analysis: Section 68 requires a sum to be found credited in the books of account whose nature and source are not satisfactorily explained. The impugned amount is not an independent credit entry but a computed differential arising from substituting the rate of interest payable on disclosed unsecured loans. The interest payments were made through banking channels to identified parties and the amount in dispute represents alleged excessive interest, not a fresh credit. The computation does not identify any specific credited sum which remained unexplained.

Conclusion: The addition of Rs. 5,31,46,170/- under Section 68 is unsustainable and is in favour of the assessee.

Issue (ii): Whether deletion of the addition of Rs. 30,09,99,829/- by the CIT(A), on the basis that the difference arose from legitimate regrouping of running account balances, was incorrect for lack of independent verification and failure to discharge the burden under Section 68 of the Income-tax Act, 1961.

Analysis: The addition was founded on merging figures shown under two heads rather than identifying a particular unexplained credit entry. Ledger accounts show running balances that legitimately changed character during the year due to receipts, repayments and fresh advances, resulting in reclassification in the balance sheet. There is no material showing that the Assessing Officer identified any specific credit entry lacking identity, genuineness or creditworthiness, nor substantive verification rebutting the ledger entries presented.

Conclusion: The deletion of the addition of Rs. 30,09,99,829/- by the CIT(A) was correct and is in favour of the assessee.

Final Conclusion: The appeal filed by the assessee is allowed in respect of the addition founded on substitution of interest rate and the matter is restored to the Assessing Officer for limited verification and consequential recomputation of Work-in-Progress if required; the Revenue's appeal against deletion of the regrouping-based addition is dismissed.

Ratio Decidendi: Section 68 of the Income-tax Act, 1961 applies only where a specific sum is found credited in the books and its nature and source remain unexplained; it does not permit treating an accounting substitution of interest rate or a reclassification/regrouping of running account balances as unexplained cash credit.

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