Unsecured Loans from Directors Accepted: Source Explained via Land Sale and Overdraft

By | November 28, 2025
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Unsecured Loans from Directors Accepted: Source Explained via Land Sale and Overdraft

Issue

Whether unsecured loans received by the assessee-company from its directors can be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961, when the Assessing Officer (AO) alleges lack of creditworthiness, despite the assessee providing evidence of the source (sale of agricultural land and bank overdrafts) and the transaction being routed through banking channels.

Facts

  • Assessee: A company engaged in real estate (purchase/sale of land, construction of flats).

  • The Transaction: During Assessment Year 2022-23, the company took unsecured loans from various parties, including two of its directors, ‘SK’ and ‘KS’.

  • AO’s Action: The AO added the loan amounts to the assessee’s income under Section 68, treating them as unexplained.

  • AO’s Reasoning: The AO held that merely filing Income Tax Returns (ITR) and computation of income was insufficient. He believed the assessee failed to prove the creditworthiness of the lenders (directors) because the specific source of their funds was not explained to his satisfaction.

  • Assessee’s Evidence:

    • Banking Channels: All loans were received through proper banking channels.

    • Confirmation: Loan confirmation letters were submitted.

    • Financials: Copies of ITRs and financial statements of the lenders were provided, reflecting the loan transactions.

    • Source of Funds (The Crux):

      • Director ‘SK’: Explained the source as proceeds from the sale of agricultural land and an agricultural drop-line overdraft (OD) facility from a bank. Bank statements evidencing payments from the OD account were furnished.

      • Director ‘KS’: Explained the source as consideration received from the sale of agricultural land.

Decision

    • The Tribunal/Court ruled in favour of the assessee and deleted the addition.

    • Creditworthiness Proven: The authority held that the assessee had successfully discharged the onus of proving the creditworthiness of the creditors (directors).

    • Source Explained: The specific explanation regarding the sale of agricultural land and the utilization of the bank overdraft limit was supported by documentary evidence (bank statements, sale details). This was considered a satisfactory explanation of the source.

    • Transactions Reflected: The loans were duly recorded in the audited financial statements of both the assessee-company and the lenders, reinforcing the genuineness of the transaction.

  • Conclusion: Since the identity, genuineness, and creditworthiness (including the source of funds) were established, the addition under ction 68 was unjustified.

Key Takeaways

  • Directors’ Loans: Loans from directors are often scrutinized. Proving the “source of source” (where the director got the money) is critical.

  • Valid Sources: Proceeds from the sale of property (agricultural land) and funds drawn from sanctioned bank limits (OD/CC accounts) are valid, explainable sources for advancing loans.

  • Documentation: The combination of Bank Statements (showing the flow), ITRs, Confirmations, and Financial Statements creates a robust defense against Section 68 additions.

  • Section 68 vs. 69: Section 68 applies to credits in the books. If the lender admits the loan and explains the source, the burden shifts back to the Revenue to prove the source is bogus.

IN THE ITAT HYDERABAD BENCH ‘A’
Deputy Commissioner of Income-tax
v.
Rathnamma Infratech (P.) Ltd.*
VIJAY PAL RAO, Vice President
and MANJUNATHA G, Accountant Member
ITAppeal No.1235 (Hyd) of 2024
[Assessment year 2022-23]
NOVEMBER  7, 2025
K.C. Devdas and Divya Santhanam, C.As. for the Appellant. Ms. U. Mini Chandran, CIT-DR for the Respondent.
ORDER
Manjunatha G., Accountant Member.- This appeal filed by the Revenue is directed against the order learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, dated 25.09.2024 relating to the assessment year 2022-23.
2. The brief facts of the case are that the assessee “Rathnamma Infratech Private Limited” is a company engaged in the business of purchase and sale of land, construction and development of flats and other related activities. The assessee had filed its return of income for A.Y. 2022-23 on 07.11.2022 admitting a total income of Rs. 52,52,850/-. The case was selected for scrutiny under CASS to verify high liabilities as compared to low-income/receipts and to verify unsecured loans. During the course of assessment proceedings, the A.O. issued notice under Section 142(1) of the Income Tax Act, 1961 (for short “the Act”) on 16.08.2023 and called upon the assessee to furnish relevant evidences, including details of unsecured loans and liabilities, etc. In response, the assessee on 30-08-2023 furnished a brief note on the business activities of the company, copies of annual report and statements of computation of total income. Further, on 21-11-2023, the assessee furnished Form 26AS in respect of TDS deduction under Section 194H of the Act, confirmations in respect of unsecured loans and the details of loans etc. The A.O., on the basis of information submitted by the assessee observed that, the assessee had taken unsecured loans from various parties, including, Shri K.V. Satish Kumar, Smt. K. Swapna, S.S.K. Prime Spaces Ltd., and K.S.V. Oil Seeds Pvt. Ltd. The A.O. further observed that, the assessee has furnished income tax return acknowledgement and statement of total income of all four parties. Except filing ITR and statement of total income, the assessee has not furnished any evidence with regard to the source of the above persons for lending such huge loans to the assessee company. Therefore, opined that, the assessee has failed to discharge the creditworthiness of the parties and accordingly, issued a Show Cause Notice on 8-032024 and called upon the assessee to file its objections, if any, for proposed variations totalling to Rs. 12,39,53,148/- to the total income of the assessee. In response to the said Show Cause Notice, the assessee filed its response on 13-03-2024 and furnished confirmation letters from Shri K Satish Kumar, Smt. K Swapna, SSK Prime Spaces Ltd., and K.S.V. Oil Seeds Pvt. Ltd. along with their income tax return filed copies and statements of total income. The assessee had also explained the source for the loan creditors to give advance to the assessee and submitted that, Shri K.V. Satish Kumar and Smt. K. Swapna have given loans to the assessee out of sale proceeds of agricultural lands and also out of agricultural loans received from Indus Ind Bank. To this effect, furnished relevant copies of sale deeds and also bank account statements, including loan borrowed from bank. In respect of K.S.V. Oil Seeds Pvt. Ltd., the assessee has furnished relevant bank account statements and stated that, the loan had been given out of Overdraft taken from ICICI Bank Ltd. Similarly, the assessee has furnished details of SSK Prime Spaces Pvt. Ltd. and stated that, the loan had been given out of the amount received from Shri K.V. Satish Kumar.
3. The A.O., after considering relevant submissions of the assessee and also taking note of various details submitted in support of loans taken from various parties, observed that, although the assessee has claimed to have received loans from Shri K.V. Satish Kumar and Smt. K. Swapna out of sale proceeds of agricultural land, but it is not clear when the said agricultural land was sold and who are the owners of the said agricultural land to show their shareholding, share percentage and the consideration received from the said sale whether the sale consideration was received through bank, etc. In the statement of total income, the details of capital and details of consideration received exempt is not available. Further, both the parties claimed to have taken agricultural term loan of Rs. 350 lakhs each from Indus Ind Bank, however, on verification of the said loan sanction letter in their individual capacity, it is found that the purpose of the said loan was “farm infrastructure development and to meet short-term working capital requirement for pre and post-harvest activities”. Thus, it is not clear as to how the loans obtained were utilized otherwise than for the purpose for which it was sanctioned. Further, Shri K.V. Satish Kumar and Smt. K. Swapna declared their income for the assessment year 2022-23 out of salary from the assessee company and K.S.V. Oil Seeds Pvt. Ltd. From the computation of income filed, it is seen that, both of them do not have creditworthiness to lend such huge sums to the assessee company. In respect of K.S.V. Oil Seeds Pvt. Ltd., although the assessee company had advanced loan of Rs. 1.60 crores out of working capital loan taken from ICICI Bank, but upon verification of relevant sanction letter, it is noticed that, the said loan was given for working capital facilities of the company and thus, the enhanced credit facility was not utilized for the purpose for which it was obtained. The source of funds of loan given to the assessee company has not been proved. Similarly, in respect of loans taken from SSK Prime Space Ltd., the assessee had admitted a loss of Rs. 35,411/- for A.Y. 2022-23 and from the bank statement furnished, it shows that, the company had transferred funds to the assessee company out of amount received from Shri K.V. Satish Kumar. From the above, it is clear that, the company do not have creditworthiness to lend the assessee company a sum of Rs.2.80 crores. In the case of M/s. Sainethra Developers, no confirmation and no other details have been been furnished. Therefore, the A.O. observed that, the assessee has failed to prove the genuineness of the transactions and creditworthiness of the persons from whom the loans have taken. Thus, rejected the explanation of the assessee and made addition of Rs. 25,24,08,811/- under Section 68 of the Income Tax Act 1961, as unexplained cash credit.
4. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).
5. Before the Ld. CIT(A), the assessee has reiterated the submissions made before the A.O. and stated that, the assessee company has discharged the onus by filing relevant details of loan creditors, including the details of identity, genuineness of the transactions, and creditworthiness of the parties. The assessee company has also furnished relevant details of the source of source of the loan creditors and claimed that, Shri K.V. Satish Kumar and Smt. K. Swapna have advanced loans to the assessee company out of sale proceeds of agricultural land and agricultural term loan received from Indus Ind Bank. The assessee has also furnished relevant details in respect of SSK Prime Spaces Ltd. and K.S.V. Oil Seeds Pvt. Ltd., including confirmation letters from the parties, their financial statements and bank statements. Although the assessee has furnished relevant details, but the A.O. made additions towards loans taken from the above parties as unexplained cash credit. Therefore, submitted that, the additions made by the A.O. should be deleted. The assessee further submitted that, the A.O. issued a Show-Cause Notice and proposed variation of Rs. 12,13,82,048/-, whereas finally made addition of Rs. 25,24,08,811/-, without giving an opportunity of hearing to the assessee, contrary to the CBDT Instruction No. 20 of 2015, dated 29-12-2015. In this regard, he relied upon the decision of the Hon’ble Apex Court in the case of dated 16.03.2009 (Uma Nath Pandey v. State of U.P. AIR 2009 SC 2375 ).
6. The Ld. CIT(A), after considering relevant submissions of the assessee and also taking note of the legal ground taken by the assessee challenging the additions made by the A.O. towards unsecured loans under Section 68, contrary to the show-cause notice dated 08-03-2024, observed that, the A.O. had issued a show-cause notice and proposed an addition of Rs. 12,13,82,048/-, whereas in the final assessment order, he has made an addition of Rs. 25,24,08,811/-. This deprived the assessee from the opportunity of being heard for incremental income and this is against the CBDT instruction. Non-granting of opportunity of being heard amounts to breach of principles of natural justice. Therefore, held that, the addition made by the A.O. is contrary to the show-cause notice and against the CBDT Instruction No. 20 of 2015, and thus, the additions made by the A.O. cannot be sustained.
7. The Ld. CIT(A) had also discussed the loans taken from Shri K.V. Satish Kumar, Smt. K. Swapna, SSK Prime Spaces Ltd., K.S.V. Oil Seeds Pvt. Ltd., and Sainethra Developers and discussed the issue in light of various evidences filed by the assessee, including the explanation towards source of funds of lenders, copy of their income tax returns and computation of income, audited financial statements of lenders, bank statements of lenders, and evidence in support of source of lenders, ledger extract of lenders, and loan confirmation letters issued by the lenders, and held that, the assessee has proved the loans received from Shri K.V. Satish Kumar, Smt. K. Swapna out of source available in the form of sale of agricultural land and also agricultural term loan taken from Indus Ind Bank. Both the parties have established money trail by filing relevant details along with bank statements. Similarly, the assessee has received loan from SSK Prime Spaces Ltd. against the outstanding received from the above company, and the same has been taken through proper banking channel. The assessee has also taken loan from K.S.V. Oil Seeds Pvt. Ltd. out of banking channels through ICICI Bank account, and the source for the said party is out of Overdraft loan taken from the bank. Insofar as the loan taken from M/s. Sainethra Developers, the assessee has not taken any loan from the above party during the year under consideration, and whatever the amount has been considered by the A.O. represents the opening balance of the loan only and the same is evidenced from the financial statements of the assessee company. Since the assessee has furnished relevant details in respect of loans taken from all the parties, the Ld. CIT(A) held that, the assessee has discharged the onus by filing the details of loans and proved the genuineness of the transactions and the creditworthiness of the parties. Thus, the Ld. CIT(A) held that, the A.O. has erred in making additions towards loans taken as unexplained cash credit under Section 68 of the Act. Accordingly, the Ld. CIT(A) deleted the additions made by the A.O. towards the loan amount of Rs. 25,24,08,811/- under Section 68 of the Income-tax Act, 1961.
8. Aggrieved with the order of Ld. CIT(A), the Revenue is now in appeal before the Tribunal.
9. Ms. U. Mini Chandran, the Ld. CIT-DR for the Revenue, submitted that, the Ld. CIT(A) erred in deleting the additions made by the A.O. towards loans taken from Shri K.V. Satish Kumar and Smt. K. Swapna, both the directors of the assessee company, even though both do not have creditworthiness to explain source of income of loan given to the assessee company. The Ld. CIT-DR further submitted that, the Ld. CIT(A) deleted the additions on technical grounds of not giving Show Cause Notice or there is a variation in Show Cause Notice on the additions made by the A.O. without appreciating the fact that, the Show Cause Notice issued by the A.O. is on the very same grounds and after considering relevant details, the A.O. finally concluded that, the assessee could not prove the loans to the extent received from the above parties. The Ld. CIT-DR further submitted that, the Ld. CIT(A) erred in deleting the additions towards loans taken from K.S.V. Oil Seeds Pvt. Ltd. and SSK Prime Spaces Ltd., even though both the parties do not have sufficient source of income to explain the loan given to the assessee company. Although the assessee claims to have received loan from Shri K.V. Satish Kumar and Smt. K. Swapna out of sale proceeds of agricultural land and loan taken from bank, but fact remains that, the loan from the bank is for agricultural purpose, and there is no justification in advancing the same to the assessee company. The Ld. CIT(A), without appreciating relevant facts and also by admitting additional evidences for the first time, deleted the additions without giving any opportunity to the A.O. to comment on the additional evidences filed by the assessee. Therefore, she submitted that, the non-speaking order passed by the Ld. CIT(A) in deleting the additions should be set aside and the addition made by the A.O. be sustained.
10. The learned counsel for the assessee, Shri K.C. Devdas, C.A, on the other hand, supporting the order of the Ld. CIT(A), submitted that, there is no dispute with regard to the fact that, the assessee has received loans from Shri K.V. Satish Kumar and Smt. K. Swapna, both the directors of the assessee company, through proper banking channels, and the source for the said loans was out of sale of agricultural land and further, agricultural term loan received from Indus Ind Bank. The assessee company has furnished confirmation letters from the creditors, their income tax returns filed for the relevant assessment year, bank account statements, including payment of money through banking channels, and also relevant details of sale deed copies for sale of agricultural land and details of agricultural term loan taken from the bank. The learned counsel for the assessee further submitted that, the assessee has also furnished details of loan creditors, K.S.V. Oil Seeds Pvt. Ltd. and SSK Prime Spaces Ltd., and proved that, both the companies have advanced loans through proper banking channels, and the same has been reported in their financial statements for the relevant assessment year. Although the assessee has furnished relevant details, the A.O., without appreciating the relevant facts, simply made addition towards loan as unexplained cash credit. The Ld. CIT(A), after appreciating the relevant facts, has rightly deleted the additions made by the A.O. Therefore, he submitted that, the additions made by the A.O. should be deleted.
11. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee company has received loans from Shri K.V. Satish Kumar and Smt. K. Swapna, the directors of the assessee company, and the said loans have been received through banking channels. The assessee company has also filed relevant details of the loan creditors, including their income tax returns filed for the relevant assessment year, bank account statements, sale deed copies of agricultural land, loan ledger account for agricultural term loan from Indus Ind Bank, and also confirmation letters from the creditors. Upon perusal of the relevant details submitted by the assessee, we find that, Shri K.V. Satish Kumar has advanced loan of Rs. 11,41,70,811/- during the financial year relevant to the assessment year under consideration to the assessee company. The source of the above loan has been explained by Shri K.V. Satish Kumar as out of sale proceeds received from the sale of agricultural land amounting to Rs. 8,49,29,800/-, and further out of agricultural drop-line overdraft drawn from Indus Ind Bank for Rs. 1 crore. The assessee has furnished relevant copies of sale deeds which were available in the paper book filed by the assessee. Upon perusal of the relevant evidences, we find that, Shri K.V. Satish Kumar has sold agricultural land admeasuring 10.39 acres on 13-07-2021 for a sale consideration of Rs. 13,10,87,500/-, and out of the said amount, he has advanced a sum of Rs. 1,96,53,923/- to the assessee company on various dates, which is evident from the relevant bank account statements of the loan creditor and the assessee company. The assessee has also furnished one more sale deed copy for sale of agricultural land admeasuring 5.27 acres dated 30.07.2021 for a consideration of Rs. 6,52,62,500/- and the entire amount has been transferred to the assessee company on various dates, which is evident from the bank account statement of the loan creditor and the assessee company. The assessee has also furnished relevant agricultural term loan taken from Indus Ind Bank, and out of the said loan account, has transferred a sum of Rs. 1 crore on three different dates to the assessee company, which is evident from the relevant statement of the Axis Bank account of the creditors and the bank statement of the assessee. The assessee company has also furnished the ledger account of the assessee, which indicates receipt of money from Shri K.V. Satish Kumar on various dates through proper banking channels, for which the loan creditor has explained the source. All these evidences are part of the paper book filed by the assessee. Therefore, in our considered view, the assessee has satisfactorily explained the amount of loan received from Shri K.V. Satish Kumar by filing relevant details of the loan account, including the source of the said loan amount and therefore, we are of the considered view that, there is no error in the reasons given by the Ld. CIT(A) to delete the additions made by the A.O. towards the loan received from Shri K.V. Satish Kumar.
12. Coming to the loan taken from Smt. K. Swapna, another director of the assessee company. The assessee has received a sum of Rs. 9,28,43,000/- from Smt. K. Swapna on various dates through proper banking channels. Smt. K. Swapna has furnished relevant details, including a confirmation letter along with her bank account statement. From the bank account statement of Smt. K. Swapna, it is very clear that, the entire loan amount has been transferred to the assessee company through proper banking channel. Smt. K. Swapna has also explained the source of source of loan advanced to the assessee company. Upon perusal of the relevant details, we find that, Smt. K. Swapna had sold an agricultural land to the extent of Rs. 8 crores on 13-07-2021 and received sale consideration of Rs. 10.10 crores from the sale of agricultural land to her HDFC Bank account. From the above sale proceeds, she has transferred a sum of Rs. 8,66,33,000/- on various dates starting from 25-03-2021 to 17-02-2022 to the assessee company through her bank account. Further, she has also transferred a sum of Rs. 30,00,000/- out of the agricultural term loan taken from Indus Ind Bank through proper banking channels. She has also transferred another sum of Rs. 1,00,00,000/- out of the Demand Loan Overdraft Account taken from Indus Ind Bank during the period from 10-01-2022 to 31-032022. The balance amount of Rs. 8,10,000/- has been paid out of her own source of income being the amount withdrawn from her boutique named “Swapna Kopparapu Studio” and the same is part of her income tax return filed for the relevant assessment years. From the details furnished by the assessee in respect of the loan taken from Smt. K. Swapna, Director of the assessee company, we find that, the assessee has satisfactorily explained the loan by filing relevant details, including confirmation from the loan creditor, bank account statements, ITR copies, and also proved the source of source of the said loan by filing copies of the sale deeds and agricultural term loan taken from Indus Ind Bank. Therefore, in our considered view, there is no error in the reasons given by the Ld. CIT(A) for deleting the addition made by the A.O. towards the loan taken from Smt. K. Swapna.
13. Insofar as the loan taken from K.S.V. Oil Seeds Pvt. Ltd., there is no dispute with regard to the fact that, the assessee has received a loan of Rs. 1.60 crores from K.S.V. Oil Seeds Pvt. Ltd. on different dates through proper banking channels. The assessee has furnished a confirmation letter from the loan creditors, their ITR copies along with financial statements, which show the details of transactions between the assessee company and the loan creditors. The assessee company has also furnished the bank account statement with ICICI Bank, evidencing the payments made from the Overdraft account during the regular course of business. Although the A.O. has accepted this fact, but disputed the creditworthiness only on the ground that, when the working capital loan has been taken for the purpose of business, the assessee could not explain how the said loan has been used for advancing the loan to the assessee company. In our considered view, once the assessee has proved the transaction through proper banking channels and also the source of said transaction, the A.O. cannot question the purpose of transactions. Since the assessee company has filed the relevant documents of loan taken from K.S.V. Oil Seeds Pvt. Ltd., in our considered view, there is no error in the reasons given by the Ld. CIT(A) to delete the addition towards the loan taken from K.S.V. Oil Seeds Pvt. Ltd.
14. The assessee has also taken a sum of Rs. 2.80 crores from SSK Prime Spaces Ltd., where Shri K.V. Satish Kumar is one of the directors. The assessee company has received the loan from the above company starting from 08-11-2021 to 22-11-2021, which is evident from the relevant bank account statement held with Axis Ban account. The source for the said loan is out of the payments received from Shri K.V. Satish Kumar, Director of the assessee company and also Director of SSK Prime Spaces Ltd., out of sale of agricultural lands. These transactions are routed through proper banking channels. Further, the loan transactions between the parties are duly reflected in the financial statements of both the assessee company and the lender company. The A.O. has never disputed these facts, however, he made the addition only on the ground that, based on the income declared by the lender company, it does not have the capacity to advance such a huge amount. In our considered view, when the assessee has explained the transactions with the source of the source, then merely on the basis of income declared by the loan creditor, the capacity of the loan creditor cannot be judged. The Ld. CIT(A), after considering the relevant details, has rightly deleted the additions made by the A.O. towards the loan taken from SSK Prime Spaces Ltd.
15. To sum up, the assessee company has satisfactorily explained the loans taken from the above parties by filing relevant evidences, including confirmation letters from the loan creditors, their financial statements along with bank statements indicating the transfer of funds from the bank account of the loan creditors to the bank account of the assessee company. The assessee has also proved the source of the source of the loan creditors by filing relevant details, including sale of land and agricultural term loans in the case of Shri K.V. Satish Kumar and Smt. K. Swapna. Similarly, the assessee has furnished the relevant details of the source of the source in respect of SSK Prime Spaces Ltd. and K.S.V. Oil Seeds Pvt. Ltd. Since the assessee has discharged the onus cast upon it under Section 68 of the Income Tax Act, 1961 and has proved the identity of the loan creditors, the genuineness of the transactions, and the creditworthiness of the parties, in our considered view, the A.O. has erred in making additions towards the loans taken from the above companies as unexplained cash credits under Section 68 of the Act. The Ld. CIT(A), after considering the relevant facts, has rightly deleted the additions made by the A.O. Thus, we are inclined to uphold the order passed by the Ld. CIT(A) and direct the A.O. to delete the additions made towards loans taken from the above parties under Section 68 of the Act.
16. In the result, the appeal filed by the Revenue is dismissed.