ITAT quashes Disallowance of Interest on Credit already confirmed to be Genuine [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Surat Bench, quashed the disallowance of interest on an unsecured loan, which had already been confirmed as genuine by the assessee.

In this case, the appellant, Prarthana Gems, had received an unsecured loan of Rs. 25,00,000 from the late Mr. Rafique Peer Mohammad, a well-known individual in the diamond industry. Despite initial scrutiny, the ITAT acknowledged that the identity, genuineness, and creditworthiness of the lender had been sufficiently demonstrated.

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The assessee had presented several pieces of evidence, including the lender's PAN, ITR, and bank statements, to prove the transaction's legitimacy. The loan, originally received via account payee cheque, had been repaid in kind by the sale of polished diamonds, which was confirmed in the assessee’s books.

The Assessing Officer ( AO ) had earlier treated the loan as an unexplained cash credit under Section 68 of the Income Tax Act, noting that the lender’s death in 2016 and the lack of a direct response from his legal heirs had created doubts. However, the Tribunal found that the facts and circumstances presented by the assessee—including the lender’s established financial standing—were compelling.

The Tribunal highlighted that the lender’s residence in South Mumbai’s Breach Candy locality and his business dealings confirmed his financial capability and creditworthiness, further rejecting the AO’s doubts about the loan's authenticity.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

In addition to reversing the addition made under Section 68, the Tribunal also ruled in favor of the assessee regarding the disallowance of interest payments. The assessee had paid interest amounting to Rs. 1,25,000 to the late lender’s account, making necessary TDS deductions through banking channels. Since the principal loan was confirmed to be genuine, the disallowance of interest was deemed unjustified.

Two member Bench comprised of Pawan Singh ( Judicial Member ) and Bijayananda Pruseth ( Accountant Member ) concluded by setting aside the orders of the CIT(A) and directing the Assessing Officer to delete the additions under both Section 68 and the disallowance of interest. This ruling reflects the importance of documenting and proving the genuineness of financial transactions, especially in cases involving unsecured loans.

In Conclusion , the appeal of Prarthana Gems was allowed.

To Read the full text of the Order CLICK HERE

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