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Issues: (i) Whether the addition made under section 68 on account of unsecured loans was sustainable; (ii) Whether the disallowance of interest paid on such loans could survive.
Issue (i): Whether the addition made under section 68 on account of unsecured loans was sustainable.
Analysis: The assessee produced confirmations, income-tax returns, bank statements, MCA master data, 26AS records and audited financial statements of the lenders. The record showed that the loans were routed through banking channels, interest was credited, and tax was deducted at source. The lenders' financials supported their creditworthiness, and no discrepancy was pointed out in the documents. No enquiry under sections 131 or 133(6) was undertaken to dislodge the assessee's evidence. The finding that the funds were the assessee's own unaccounted money was not supported, especially when the assessee had commenced business recently and had placed the borrowed funds towards a property transaction.
Conclusion: The addition under section 68 was not sustainable and was deleted in favour of the assessee.
Issue (ii): Whether the disallowance of interest paid on such loans could survive.
Analysis: The disallowance of interest rested entirely on the conclusion that the loans were nongenuine. Once the loan addition failed, the basis for treating the interest as non-genuine also disappeared. The interest expenditure was part of the same borrowing transaction and was supported by the lending records and tax deduction evidence.
Conclusion: The disallowance of interest also failed and was deleted in favour of the assessee.
Final Conclusion: The additions made in respect of unsecured loans and the related interest disallowance were set aside, resulting in complete success for the assessee.
Ratio Decidendi: An addition under section 68 cannot survive where the assessee establishes the identity, creditworthiness and genuineness of the lenders through primary documentary evidence and the revenue fails to conduct effective enquiry to rebut it; a consequential interest disallowance founded solely on the same rejected premise also falls.
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