Unsecured loan and section 68 addition fail where identity, creditworthiness and genuineness are proved with documentary evidence.

An unsecured loan addition under section 68 was treated as unsustainable where the assessee produced confirmations, bank statements, financial statements and tax records showing the creditor's identity, creditworthiness and the genuineness of the transaction. The funds moved through banking channels, the lender had sufficient resources, and the Revenue brought no contrary material beyond a source-of-source objection. The Tribunal noted that, for the relevant year, the law did not require proof of source of source and that a mere suspicion could not displace the documentary evidence. The related disallowance of interest was therefore also not sustainable.

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Issues: Whether the deletion of the addition made under section 68 of the Income-tax Act, 1961, in respect of the unsecured loan received from the lender, and the consequential disallowance of interest thereon, was justified.

Analysis: The loan transactions were supported by documentary evidence, including confirmations, bank statements, financial statements, and income-tax records of the lender. The funds moved through banking channels, the lender had sufficient available funds and share capital, and the Assessing Officer had itself accepted the genuineness of a substantial part of the same lending stream. The appellate authority also made enquiries under its powers of further enquiry and recorded findings that the funds had earlier been returned to the lender or stood taxed in the lender's hands, making the source-of-source objection unsustainable on the facts. The Tribunal also noted that the relevant law did not require the assessee to prove source of source for the assessment year in question, and that addition on mere suspicion could not stand against the material on record.

Conclusion: The deletion of the addition under section 68 and the consequential disallowance of interest was upheld. The Revenue's challenge failed.

Final Conclusion: The assessee's explanation regarding the loan was accepted as adequate, and the addition as well as the related interest disallowance were held to be unsustainable.

Ratio Decidendi: For an unsecured loan, once the assessee substantiates the creditor's identity, creditworthiness, and genuineness of the transaction with credible material, and the Revenue brings no contrary evidence, an addition under section 68 cannot be sustained on a mere source-of-source objection or suspicion.

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