Section 68 scrutiny of unsecured loans requires verification of creditworthiness, source of funds and repayment trail before relief is granted.

Section 68 treatment of an unsecured loan turned on the lender's creditworthiness, source of funds and repayment trail. The assessee relied on confirmations, bank statements, audited financials, returns, affidavits and repayment details, while the Department pointed to alleged accommodation entry material and doubts over the lender's financial capacity, including the claimed sale of unlisted shares and weak supporting evidence. Because the assessment order did not independently verify the repayment through banking channels, interest payment, TDS compliance and the lender's source of funds, the deletion of the addition was set aside and the matter was restored for de novo adjudication.

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Issues: Whether the addition made under section 68 of the Income-tax Act, 1961 in respect of unsecured loan was liable to be sustained or deleted, and whether the matter required fresh verification on the lender's creditworthiness, source of funds and repayment trail.

Analysis: The assessee had produced confirmations, bank statements, audited financial statements, income-tax returns, affidavits and repayment details, while the Department relied on investigation material alleging accommodation entry and lack of genuine financial capacity. The record also raised questions about the lender's source of funds, including alleged sale of unlisted shares, absence of supporting valuation material, meagre disclosed profit and lack of fixed assets. At the same time, the appellate findings noted repayment through banking channels and payment of interest after deduction of tax at source, but the assessment order did not show independent verification of these crucial aspects. In these circumstances, the controversy required deeper factual examination rather than a final merits determination.

Conclusion: The deletion of the addition was set aside and the issue was restored to the Assessing Officer for de novo adjudication after verifying the loan repayment, interest payment, TDS compliance, lender's source of funds and supporting evidence.

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