Current Year Income Alone Cannot Be the Basis to Doubt Creditworthiness U/S 68 | Biz Flow Kit

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition made under Section 68 of the Income Tax Act in respect of unsecured loans received from family members.

The Tribunal held that merely comparing the amount of the loan with the lender’s income for the relevant assessment year is not sufficient to question the lender’s creditworthiness.

It was observed that a proper evaluation of the lender’s overall financial capacity and supporting evidence is necessary before drawing any adverse conclusion.

The taxpayer, Suman Sharma, proprietor of Sri Shyam Timbers, had obtained unsecured loans of Rs 12 lakh from her husband and his HUF.

At the time of assessment proceedings, the Assessing Officer (AO) considered the loans as unexplained cash credits u/s 68 on the basis that bank statements of the lenders were not provided, and their returned income was not proportionate to the amounts advanced.

Afterwards, the AO noted that the taxpayer had not filed any interest on the loans and subsequently added Rs 12 lakh to the income of the taxpayer.

The dissatisfied taxpayer filed an appeal to the CIT(A), who confirmed the addition, noting that mere submission of confirmations and the ITRs was not enough to prove creditworthiness and genuineness of the transactions.

The taxpayer before the Tribunal claimed that the identity of the lenders and genuineness of the transactions stood established and that the creditworthiness of the lenders could not be questioned only because their income in the current year was less than the amounts advanced.

The taxpayer mentioned that non-charging of interest in family transactions is a typical exercise, and no material had been brought on record to specify that the funds actually relate to the taxpayer.

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The Revenue claimed that the taxpayer did not release the onus cast u/s 68 by not specifying the financial capacity of the lenders and the genuineness of the transactions.

The Tribunal, including Waseem Ahmed (Accountant Member) and Soundararajan K (Judicial Member), stated that the identity of the lenders was not in dispute and the transactions were not fake.

The Tribunal further noted that comparing the loan amount to the income declared by the lenders in a single year is fundamentally flawed. A person may provide loans from past savings, accumulated capital, bank withdrawals, or other available resources.

Additionally, it was observed that there was no evidence presented indicating that the funds originated from the assessee or that the lenders lacked financial capacity. The absence of interest payments or formal documentation in family transactions cannot, by itself, lead to a negative inference.

Subsequently, the Tribunal asked to delete the addition of Rs 12 lakh made u/s 68 of the Income Tax Act.

The appeal of the taxpayer was permitted to that extent.