ITAT Raipur on Section 68: Treatment of Unsecured Loans That Stand Repaid

1. Background of the Dispute

The Raipur Bench of the Income Tax Appellate Tribunal in ACIT Vs Maheshwari Coal Benefication and Infrastructure Pvt. Ltd. (ITAT Raipur) examined whether unsecured loans, which had been fully repaid before completion of scrutiny assessment, could still be treated as unexplained cash credits under Section 68 of the Income Tax Act 1961.

The Revenue’s appeal arose from an order dated 10.10.2025 passed by the CIT(A)-3, Nagpur for Assessment Year 2016-17, whereby:

  • An addition of Rs.1,15,00,000 treated as unexplained cash credit under Section 68 was deleted, and
  • A related disallowance of Rs.3,34,166 towards interest expenditure on such loans was also deleted.

The assessee-company, engaged in coal trading and transportation, had filed its return of income on 05.10.2016, declaring a total income of Rs.2,23,56,280/-. The case was selected for compulsory scrutiny, and notices under Section 143(2) and Section 142(1) were issued.

During assessment, the Assessing Officer (AO) noticed unsecured loans aggregating to Rs.2,85,00,000/- from five corporate entities, along with interest debits in some cases. The AO ultimately treated part of these loans as unexplained cash credits under Section 68 and made a consequential interest disallowance.

2. Unsecured Loans Examined by the AO

The AO identified the following unsecured loans and related interest:

  • Ambashree Infratech Pvt Ltd. – Rs.50,00,000/-
  • Best Advisory Pvt. Ltd. – Rs.25,00,000/- (interest Rs.2,12,310/-)
  • Dinbandhu Suppliers Pvt. Ltd. – Rs.15,00,000/- (interest Rs.8,987/-)
  • Maa Shanti Business Pvt. Ltd. – Rs.1,70,00,000/-
  • Origin Deal Trade Pvt. Ltd. – Rs.25,00,000/- (interest Rs.1,12,869/-)

Total unsecured loans amounted to Rs.2,85,00,000/-, and total interest claimed on some of these loans was Rs.3,34,166/-.

The AO called upon the assessee to establish:

  • Identity of each lender,
  • Creditworthiness of the lenders, and
  • Genuineness of the loan transactions.

In response, the assessee produced:

  • Loan confirmations,
  • Copies of income-tax returns (ITRs) of the lenders,
  • Financial statements,
  • Memorandum of Association (MOA) of the lender companies, and
  • Bank statements.

3. AO’s Independent Enquiry and Findings

To further verify the genuineness of the creditors, the AO deputed an Inspector to Kolkata to conduct on-site verification at the addresses mentioned in the tax audit report and as per Ministry of Corporate Affairs (MCA) records.

According to the Inspector’s report:

  • The alleged lender companies were not physically traceable at the stated premises.
  • Photographs were furnished indicating absence of functional activity at those locations.
  • Income as per financials of these companies was comparatively low.

Based on these findings, the AO concluded that:

  • The companies lacked adequate financial strength to advance loans of this magnitude.
  • The entities were merely paper companies.

Rejecting the assessee’s submissions, the AO treated the following portion of the total loans as unexplained cash credits under Section 68:

  • Ambashree Infratech Pvt. Ltd. – Rs.50,00,000/- (income shown Rs.1,61,213/-)
  • Best Advisory Pvt. Ltd. – Rs.25,00,000/- (income shown Rs.7,40,540/-)
  • Dinbandhu Suppliers Pvt. Ltd. – Rs.15,00,000/- (income shown Rs.98,566/-)
  • Origin Deal Trade Pvt. Ltd. – Rs.25,00,000/- (income shown Rs.1,25,410/-)

Total addition under Section 68: Rs.1,15,00,000/-

As a corollary, the AO also disallowed Rs.3,34,166/- towards interest expenditure proportionate to these disputed loans.

4. Findings and Reasoning of the CIT(A)

Before the CIT(A)-3, Nagpur, the assessee filed detailed written submissions and supporting documents.

4.1 Consideration of AO’s Enquiry

The CIT(A) noted that the AO had:

  • Issued notices under Section 133(6) to the lenders,
  • Conducted spot inspection through the Inspector at the Kolkata addresses,
  • Examined the assessee’s director under Section 131, and
  • Analysed bank statements and financials of the lending entities.

The CIT(A) emphasized that merely submitting confirmations, bank statements and ITRs is not conclusive in itself for discharging the burden under Section 68 if capacity and source of funds of the lenders are not convincingly explained.

However, the CIT(A) identified one significant issue which the AO had not meaningfully addressed – repayment of the loans.

4.2 Crucial Aspect: Repayment of Loans

The CIT(A) recorded that, on the material available: