The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹1.91 crore made under Section 68 read with Section 115BBE of the Income Tax Act, 1961, holding that unsecured loans cannot be treated as unexplained cash credits once the taxpayer produces sufficient evidence establishing the identity and creditworthiness of the lenders and the genuineness of the transactions.

The Bench of Kavitha Rajagopal (Judicial Member) and M. Balaganesh (Accountant Member) observed that the Assessing Officer failed to conduct any independent verification after the taxpayer furnished income tax returns, confirmations, audited financial statements and other supporting documents.

The bench held that after the taxpayer discharged the initial evidentiary burden, the onus shifted to the Income Tax Department. Since the Assessing Officer did not investigate or disprove the documents, the authorities could not reject the loans merely on suspicion.

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The appeal concerned Assessment Year 2021-22. The taxpayer filed her return of income on March 23, 2022, declaring taxable income of ₹17.20 lakh.

The case was selected for scrutiny in connection with unsecured loans received by the taxpayer. The Assessing Officer examined loans obtained from five persons and accepted the transactions involving three lenders as genuine.

However, the officer disputed two loans: ₹21.60 lakh received from Rishi Mehta; and ₹1.70 crore received from Stellar Leisure World LLP.

The Assessing Officer added a total amount of ₹1.91 crore to the taxpayer’s income under Section 68 and subjected it to the special tax provisions contained in Section 115BBE.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, subsequently upheld the addition, prompting the taxpayer to approach the ITAT.

The Assessing Officer questioned the loan from Stellar Leisure World LLP primarily on the grounds that the entity had allegedly not filed its annual returns and financial statements with the Registrar of Companies and that its financial capacity and the genuineness of the transaction were doubtful.

The ITAT, however, found that the taxpayer had submitted the lender’s income tax returns for the preceding three years. During Assessment Year 2021-22, the lender had earned income of ₹83.58 lakh, which was adjusted against brought-forward losses, resulting in nil taxable income.

The Tribunal clarified that nil taxable income, after the adjustment of carried-forward losses, could not by itself establish an absence of creditworthiness. The lender’s income and financial material showed that it possessed the capacity to undertake the transactions.

The ITAT also examined the nature and movement of funds between the parties. The taxpayer had initially advanced ₹50 lakh to Stellar Leisure World LLP and later received the amount back. A further advance of ₹40 lakh was similarly paid and returned. Another advance of ₹10 lakh was also made and subsequently recovered.

After these transactions were squared up, the taxpayer received ₹70 lakh from the lender, which remained outstanding at the end of the relevant financial year.

Although the total amount received from the lender during the year was ₹1.70 crore, the taxpayer had repaid ₹1 crore during the same year. Consequently, only ₹70 lakh remained payable at the year-end.

The Tribunal noted that all transactions were routed through regular banking channels and were in the nature of current-account transactions involving both receipts and repayments. The lender had also disclosed the amount advanced to the taxpayer in its balance sheet.

These circumstances, according to the ITAT, sufficiently established the genuineness of the transactions.

The Tribunal rejected the Revenue’s reliance on the alleged non-filing of annual returns and financial statements by Stellar Leisure World LLP before the Registrar of Companies.

It held that the mere failure of a lender to comply with its statutory filing obligations before the ROC cannot automatically render an otherwise documented loan transaction non-genuine.

The ITAT emphasised that the lender was assessed to income tax, its identity was established, and the loan confirmation and audited balance sheet were furnished before the Assessing Officer. The movement of money was also demonstrated through banking records.

Accordingly, all three essential requirements under Section 68—identity of the creditor, creditworthiness of the creditor and genuineness of the transaction—stood satisfied.

The Assessing Officer had separately questioned the ₹21.60 lakh loan received from Rishi Mehta.

The officer observed that an opening balance of ₹2 lakh remained unpaid and that the lender advanced a further ₹21.60 lakh during Financial Year 2020-21 despite having returned income of approximately ₹17.12 lakh. On this basis, the officer doubted the lender’s creditworthiness and the genuineness of the transaction.

Before the tax authorities, the taxpayer explained that Rishi Mehta was regularly assessed to income tax. His income tax return, loan confirmation and audited balance sheet were submitted during the assessment proceedings.

The money was transferred through regular banking channels, and the amount advanced to the taxpayer was recorded in the lender’s audited financial statements.

The Tribunal also noted that Rishi Mehta was the taxpayer’s husband. It found that the documentary evidence furnished by the taxpayer sufficiently proved his identity, financial capacity and the genuineness of the loan.

The ITAT reiterated that a taxpayer receiving a credit must initially produce evidence concerning the creditor’s identity, creditworthiness and the genuineness of the transaction.

Once the taxpayer submits satisfactory documents covering these requirements, the evidentiary burden shifts to the Revenue. The Assessing Officer must then verify the records, conduct enquiries or bring contrary material on record if the transaction is to be rejected.

In the present case, the Tribunal found that the taxpayer furnished all the requisite documents in response to the show-cause notice. Despite receiving this material, the Assessing Officer did not carry out any meaningful verification to test its veracity.

The ITAT held that the department could not continue to doubt the loans without disproving the documents or conducting an investigation into the lenders and their financial records.

It consequently concluded that no portion of the disputed credit could be treated as unexplained under Section 68.

Allowing the taxpayer’s appeal, the Tribunal deleted the entire addition of ₹1.91 crore made under Section 68 read with Section 115BBE.

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