Bank Passbook Evidence Validates Loan Transaction: ITAT deletes Addition u/s 68, Remands Interest Disallowance Issue [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai, ruled to delete an addition under Section 68 of the Income Tax Act, 1961, concerning unsecured loans. While granting this relief, the Tribunal partly allowed the appeal by remanding disallowances on interest to the Assessing Officer for fresh consideration in Assessment Year 2013-14.

The appellant, Paltex, is a partnership firm based in Mumbai, who approached the Tribunal against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [CIT(A)] for Assessment Year 2013-14 dated December 23, 2024, which upheld the Assessing Officer’s (AO) findings.

The AO had treated Rs. 2,50,000 received as an unsecured loan as unexplained cash credit under Section 68 of the Income Tax Act, 1961, and further disallowed interest of Rs. 5,69,325 paid on partners’ capital as well as Rs. 4,76,026 paid on unsecured loans.

Advocate Abhay N. Agarwal, representing the appellant, argued that the unsecured loan of Rs. 2,50,000 from Anjana D. Prajapati was genuine and supported by her bank passbook, which established the lender’s identity, creditworthiness, and genuineness of the transaction.

He further submitted that the interest paid on partners’ capital was in line with Section 40(b) of the Income Tax Act, duly authorized by the partnership deed, and should not be disallowed merely because the firm did not earn business income during the year.

On the issue of interest on unsecured loans, it was contended that the borrowed funds were used for advances that generated taxable interest income, making the expenditure fully deductible.

Senior Departmental-Representative, Mahesh Dattatraya Londhe, representing the Revenue, contended that the assessee failed to demonstrate the creditworthiness of the lender, that the conditions for admitting additional evidence under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 were not satisfied, and that the nexus between borrowed funds and advances generating interest income had not been established.

Judicial Member, Pawan Singh, held that the bank passbook showing the debit entry corresponding to the loan, was important evidence establishing the genuineness of the transaction. Accordingly, the Tribunal deleted the addition of Rs. 2,50,000 under Section 68 and also allowed the consequential deduction of Rs. 19,333 interest on the loan.

However, the Tribunal remanded the issues of disallowance of interest on partners’ capital and disallowance of interest on unsecured loans to the AO for fresh adjudication after giving the assessee an opportunity to produce supporting evidence.

Thus, partial relief for the appellant was secured.

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