Addition Under Section 68 Unjustified When Loan Identity, Capacity, and Genuineness Are Duly Proven

By | October 15, 2026
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Addition Under Section 68 Unjustified When Loan Identity, Capacity, and Genuineness Are Duly Proven

Issue

  1. Whether unsecured loans from creditors can be added as unexplained cash credits under Section 68 merely due to non-response to Section 133(6) notices when identity, creditworthiness, and genuineness are established through primary documents and subsequent repayment through banking channels.
  2. Whether interest on unsecured loans can be disallowed under Section 37(1) read with Section 68 when the underlying loans are proved genuine and the interest expense was capitalized to inventory rather than claimed as a profit and loss deduction.

Facts

  • Background: The assessee-company, engaged in real estate, filed its return declaring NIL income and a business loss for AY 2017-18.
  • Unsecured Loans Recorded: During assessment proceedings, the assessee reflected unsecured loans from 21 parties, including ~Rs. 1.35 crores from M/s Dome Bell Electronics India Pvt. Ltd. and ~Rs. 1.35 crores from M/s Akshit Impex Pvt. Ltd.
  • Evidentiary Submissions: The assessee furnished loan confirmations, broker details through whom loans were arranged, and brokers’ ledger accounts.
  • AO’s Action: The Assessing Officer (AO) issued Section 133(6) notices on a sample basis. Because these two creditors did not respond, the AO held that their creditworthiness and genuineness were not proved and made an addition of Rs. 2,69,99,000 under Section 68.
  • Evidence for M/s Akshit Impex Pvt. Ltd.:
    • The assessee submitted confirmation, ITR, financial statements, and creditor bank statements showing advances (Rs. 85.00 lakh and Rs. 49.99 lakh) originating directly from the creditor’s account.
    • Interest was paid after TDS deduction, and the entire loan was repaid via banking channels on 15.01.2018 (in the following previous year).
  • Evidence for M/s Dome Bell Electronics India Pvt. Ltd.:
    • The transaction was conducted through banking channels, interest was paid post-TDS, and the company was registered with MCA.
    • As the creditor was under insolvency proceedings, the assessee provided details of the Resolution Professional (RP) for the AO to contact, which the AO failed to pursue.
  • Disallowance of Interest: The AO disallowed interest aggregating to ~Rs. 36.83 lakhs paid on these loans under Section 37(1) read with Section 68. The assessee had not claimed this interest as a P&L deduction but capitalized it into stock-in-trade/inventory.

Decision

On Section 68 (Cash Credits / Unsecured Loans)

  • The assessee discharged its initial burden of establishing the three statutory pillars: identity of creditors, capacity/creditworthiness, and genuineness of transactions.
  • Repayment of loans through banking channels in subsequent periods strongly supports genuineness, to which the Revenue provided no rebuttal.
  • The requirement to prove the “source of source” for general loan credits was not statutorily applicable to AY 2017-18.
  • Consequently, the addition of Rs. 2,69,99,000 under Section 68 was ordered to be deleted. (In favour of assessee)

On Disallowance of Interest

  • A disallowance under Section 37(1) presupposes an explicit claim for deduction in the Profit & Loss Account.
  • Where interest is capitalized to unsold stock-in-trade (inventory) rather than debited to P&L, no deduction has been claimed, leaving nothing to disallow or add back.
  • Since the primary loans were held genuine, the premise for disallowing interest was invalidated.
  • The disallowance of Rs. 36.83 lakhs interest was accordingly deleted. (In favour of assessee)

Key Takeaways

  • Repayment as Strong Evidence: Timely repayment of loans via banking channels serves as compelling evidence to establish the genuineness of an unsecured loan under Section 68.
  • AO’s Duty of Inquiry: When an assessee furnishes details of a Resolution Professional for a company undergoing insolvency, the AO cannot draw adverse inferences without conducting inquiries with the RP.
  • Capitalized Interest Cannot Be Disallowed: Section 37(1) disallowance cannot be invoked for interest costs that are capitalized into asset/inventory value and not claimed as an expense in the P&L account.
  • Applicability of Source of Source: Amendments requiring non-corporate taxpayers or general loan recipients to explain the “source of source” do not apply retrospectively to AY 2017-18.
IN THE ITAT JAIPUR BENCH ‘B’
Pinkcity Infracon (P.) Ltd.
v.
ACIT
T.R. Senthil Kumar, Judicial Member
and Prakash, Accountant Member
IT Appeal No. 1581 (JPR) OF 2025
[Assessment year 2017-18]
SEPTEMBER  16, 2026
P.C. Parwal, FCA for the Appellant. Shravan Kumar Meena, CIT for the Respondent.
ORDER
Prakash, Accountant Member. – This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the learned CIT(A)”] dated 23.09.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) arising out of the assessment order dated 24.12.2019 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 143(3) of the Act.
2. In the appeal before us, in substance, ground no. 1 assails the addition of Rs 2,69,99,000 made under section 68 of the Act in respect of unsecured loans taken from M/s Akshit Impex Pvt. Ltd. (Rs 1,34,99,000) and M/s Dome Bell Electronics India Pvt. Ltd. (Rs 1,35,00,000), and the refusal to admit additional evidence under Rule 46A of the Income-tax Rules, 1962. Ground no. 2 assails the disallowance of interest of Rs 36,83,043 paid on those loans. Ground no. 3 is general and ground no. 4 is a prayer for cost. There is no delay in filing this appeal.
3. Briefly stated, the facts of the case are that the assessee, a company engaged in the business of real estate, filed its return of income on 29.01.2018 declaring total income of Rs NIL and a loss of Rs 1,46,39,235, and the AO completed the assessment on 24.12.2019 at a total income of Rs 2,69,99,000, reducing the business loss carried forward to Rs 91,30,609. The assessee had taken loans from 21 parties based at West Bengal, Gujarat, Rajasthan and Maharashtra and had furnished their confirmations, the particulars of the brokers through whom the loans were arranged and the ledger accounts of those brokers. Enquiry letters under section 133(6) of the Act were issued to some of the creditors on a random basis and, in the table in paragraph 3.3 of the assessment order, the outcome in respect of the two parties named above was recorded as “No reply received”. The AO then observed in paragraph 3.6 as under:
“On such enquiry, it was gathered that the aforementioned two entities did not found existent therefore, the genuineness of the unsecured loans claims to have received from them remained unproved.”
4. Relying on the decisions on the onus of proof, including those of the jurisdictional High Court in Kamal Motors v. CIT [2003] 131  [1995] 212 ITR 390 (Rajasthan), the AO held in paragraph 3.8 that creditworthiness and genuineness were not proved and added Rs 2,69,99,000 under section 68 of the Act. In paragraph 4, he disallowed interest of Rs 36,83,043, being Rs 9,84,452 paid to M/s Dome Bell Electronics India Pvt. Ltd., which he recorded as having been capitalised in the Naringhpura project, and Rs 26,98,591 paid to M/s Akshit Impex Pvt. Ltd. Separately, in paragraph 5.1, he disallowed interest of Rs 18,24,864 paid to three other entities, namely, Dunstan Goods Pvt. Ltd., Trilochana DealtradePvt. Ltd. and JN Fiscal Services Pvt. Ltd., recording that on examination in the assessment for A.Y. 2016-17 those entities were found to be jamakharchi companies used for providing accommodation entries. A further addition of Rs 719 was made under section 36(1)(va) of the Act.
5. In appeal, the learned CIT(A) called for a remand report on the application under Rule 46A and recorded in paragraph 5.3.2 of the impugned order as under:
“…. appellant has been able to establish identity aspect of the said creditors. There is no doubt that the transactions have been carried out through banking channel. There is no dispute that the said parties have filed ITRs, give confirmations and the fact that the TDS has been deducted or the aspect that the said creditors are registered as companies with the Ministry of Corporate Affairs and the master data from the said Ministry can prove existence of the said companies are not disputed. . The observation in the assessment order that the appellant is based in Rajasthan and have “shown loans from the parties based at West Bengal, Gujarat, Rajasthan& Maharashtra” certainly never reconciled by the appellant as to how such companies were contacted or how the loans were negotiated.”
6. He further held in paragraph 5.3.3 that the assessee had “almost retracted its intention of submission of so called additional evidences”, that the Novation Agreement “can at best explain the circumstance of companies existence before the insolvency authorities but the source of money advanced to this appellant could not have been explained by it”, and that no case was made out of the circumstances stipulated under Rule 46A. The Rejoinder of the assessee, reproduced in that paragraph, states:
“… the only additional evidence is Novation Agreement. All other evidences were filed before the AO. This agreement came into our knowledge after assessment and it is only a circumstance evidence in support of already filed evidence. . it is requested to again call remand report if required for decide the case on the basis of evidences filed and available on record.”
7. Relying on Sumati Dayal v. CIT  214 ITR 801 (SC), the learned CIT(A) dismissed the grounds relating to the addition of Rs 2,69,99,000 and the interest of Rs 36,83,043. On the interest of Rs 18,24,864, however, he held in paragraph 5.4.3 that “the amount which has not been claimed for deduction cannot be disallowed u/s 37 to begin with”, and directed its deletion. He also granted relief on the rate of tax under section 115BBE of the Act.
8. The learned Authorised Representative (hereinafter referred to as “the learned AR”) reiterated the submissions made below, contending that identity stands accepted, that the loans came through banking channels from companies registered with the Ministry of Corporate Affairs which had filed their returns and confirmations, that the loans were arranged through brokers whose brokerage was paid after deduction of tax at source, that tax was deducted at source on the interest, that the loan from M/s Akshit ImpexPvt. Ltd. was repaid on 15.01.2018 and its bank statement forms part of the paper book, and that M/s Dome Bell Electronics India Pvt. Ltd. had gone into insolvency, on account of which nothing beyond the Novation Agreement and the particulars of the resolution professional could be obtained. On the interest, he submitted that it was not claimed in the profit and loss account but capitalised towards stock of land which remained unsold. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the orders of the authorities below and submitted that proof of identity alone does not discharge the onus under section 68 of the Act, and that the creditworthiness of the creditors and the source of the funds advanced by them were never demonstrated.
9. We have heard the rival contentions and perused the material on record. Under section 68 of the Act the assessee must offer an explanation about the nature and source of a sum credited in its books, and that explanation is ordinarily accepted as sufficient in the first instance when the identity of the creditor, the capacity of the creditor to advance the money and the genuineness of the transaction are established prima facie. The section operates where no explanation is offered or where the explanation offered is, in the opinion of the AO, not satisfactory. That opinion must rest on material and cannot rest on the absence of material.
10. We first take up the refusal to admit the additional evidence. The learned CIT(A) declined admission principally on the view that the assessee had “almost retracted” its request in the Rejoinder. On a reading of the Rejoinder extracted above, the assessee did no such thing. It clarified that all other documents were already before the AO, that the only additional evidence was the Novation Agreement, which came to its knowledge after the assessment, and it asked that a remand report be called for again if required. A document which came into the knowledge of a party only after the completion of the assessment, and which relates to a creditor undergoing insolvency proceedings, squarely attracts clause (c) of subrule (1) of Rule 46A of the Income-tax Rules, 1962, the powers of the first appellate authority being co-extensive with those of the AO, as held by the Hon’ble Supreme Court in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC). We may add that the learned CIT(A) has himself gone on to weigh the worth of the very document he refused to admit, which is not a course that can be supported. We accordingly hold that the Novation Agreement ought to have been admitted, and we admit it. Since the AO has already commented upon it in his remand report dated 17.04.2025, no prejudice whatsoever is caused to the Revenue by its consideration, and the material on record is sufficient for us to decide the issue ourselves rather than to remit it.
11. Turning to the merits, the finding in paragraph 5.3.2 extracted above records that the identity of both creditors is established, and that the receipt of the money through banking channels, the filing of returns of income by the two creditors, their confirmations, the deduction of tax at source on the interest and their registration with the Ministry of Corporate Affairs are all undisputed. The addition has been sustained only because, in the view of the learned CIT(A), the source of the money advanced to the assessee was not explained and the assessee did not reconcile how companies of other States came to be approached.
12. So far as the source of the money in the hands of the creditors is concerned, the first proviso to section 68 of the Act, which obliges the person in whose name the credit is recorded to explain the nature and source of the sum credited, applied during the year under consideration only where the sum credited consisted of share application money, share capital, share premium or any such amount in the case of a company in which the public are not substantially interested. It was only by the Finance Act, 2022, with effect from 01.04.2023, that this requirement was extended to a sum credited by way of loan or borrowing. For the assessment year before us the assessee was therefore required to establish the capacity of its creditors, but was under no obligation to establish the source from which those creditors themselves came by the funds. The reason on which the learned CIT(A) has rested the confirmation applies a test which the statute did not impose for this year. As for the manner in which the creditors were approached, the assessee had explained before the AO that the loans were arranged through brokers and had filed their particulars, sample brokerage bills and confirmed ledger accounts, on which tax was deducted at source; and in any event the mode of introduction of a lender is not an ingredient of section 68 of the Act.
13. On the other side of the record, the Revenue’s sole material against the assessee is that the two creditors did not reply to the notices issued under section 133(6) of the Act. The AO converted that silence into a finding in paragraph 3.6 that the two entities “did not found existent”, which is contrary to his own record in paragraph 3.3, where the outcome of the enquiry is shown only as “No reply received”, and contrary to the finding of the learned CIT(A) that the existence of the two companies is borne out by the master data of the Ministry of Corporate Affairs. No summons under section 131 of the Act was issued, no information was called for from the bankers of the creditors, and no enquiry of any kind was carried further. The contrast with the AO’s own treatment of Dunstan Goods Pvt. Ltd., Trilochana DealtradePvt. Ltd. and JN Fiscal Services Pvt. Ltd. in paragraph 5.1 is instructive; there he had positive material from the assessment for A.Y. 2016-17 to hold those entities to be jamakharchi companies, whereas against these two creditors he had nothing beyond their silence. The failure of a creditor to respond to a notice under section 133(6) of the Act cannot by itself be conclusive against the assessee, as held by the Hon’ble Supreme Court in CIT v. Orissa Corporation (P.) Ltd.  159 ITR 78 (SC), wherein it was held that where the assessee has furnished the particulars of its creditors, the Revenue cannot draw an adverse inference from their non-appearance without pursuing an enquiry of its own. Nothing has been placed before the Bench to show that this judgment has been reversed or overruled.
14. Examining the two credits separately, in the case of M/s Akshit Impex Pvt. Ltd. the assessee has filed the confirmation, the return of income and the financial statements of the creditor, and its bank statement is placed at pages 36 of the paper book filed before us, so that the advances of Rs 85,00,000 on 26.08.2016 and Rs 49,99,000 on 29.08.2016 recorded in the table in paragraph 3.3 of the assessment order are traceable to the creditor’s own bank account. Interest was paid to it after deduction of tax at source and the loan was repaid in full on 15.01.2018, that is, within the following previous year and through banking channels. Repayment of a loan is a circumstance which ordinarily tells strongly in favour of the assessee, and the Revenue has offered no answer to it. On this material the explanation offered by the assessee in respect of this credit is complete.
15. In the case of M/s Dome Bell Electronics India Pvt. Ltd. the transaction is through banking channels, interest was paid after deduction of tax at source, and the company is registered with the Ministry of Corporate Affairs. The creditor having been admitted into insolvency proceedings, the assessee could obtain nothing further from it, and it furnished the particulars of the resolution professional so that the AO might approach him; that course was not taken. The Novation Agreement now admitted that bears the date of 01.04.2018 and the consideration of Rs 1,45,93,500 supports the assessee’s account of the transaction. In these circumstances the assessee has done all that could reasonably be expected of it, and the requirement of establishing the source of the funds in the hands of this creditor did not, as held above, apply to the year under consideration. Sumati Dayal (supra) does not assist the Revenue, since the preponderance of probabilities has to be assessed on the surrounding circumstances actually found; and the circumstances found here, namely, receipt by cheque, payment of interest under deduction of tax at source, brokerage paid under deduction of tax at source, Novation Agreement and the absence of any material suggesting that thecreditor was an entry provider, point the other way.
16. We therefore hold that the assessee discharged the onus that lay upon it under section 68 of the Act in respect of both the credits, that the onus thereafter lay on the Revenue, and that the Revenue placed nothing on record to displace the explanation offered. The addition of Rs 2,69,99,000 cannot be sustained and is directed to be deleted. Ground no. 1 is allowed.
17. The disallowance of interest of Rs 36,83,043 must follow. Quite apart from the fate of the loans, a disallowance under section 37 of the Act presupposes a claim of deduction, and where interest is not debited to the profit and loss account but is capitalised towards the cost of stock of land which remains unsold at the close of the year, no deduction has been claimed and there is nothing which can be disallowed and added back. The learned CIT(A) himself accepted this very principle in paragraph 5.4.3 while deleting the disallowance of interest of Rs 18,24,864, and no reason is discernible on which the same principle can be applied to one amount of interest and withheld from another in the same order. The AO has also recorded in paragraph 4 of the assessment order that the interest of Rs 9,84,452 paid to M/s Dome Bell Electronics India Pvt. Ltd. was capitalised in the Naringhpura project, and neither authority has recorded a finding that any part of the interest of Rs 36,83,043 was in fact debited to the profit and loss account. In addition, the loans having been held to be genuine, the very foundation of the disallowance disappears. The addition of Rs 36,83,043 is deleted and ground no. 2 is allowed.
18. Ground no. 3 is general and requires no separate adjudication. Ground no. 4 is a prayer for cost and no case has been made out for the award of any cost. The same is rejected.
19. In the result, the appeal filed by the Assessee is allowed.