💼 Unsecured Loans and Income Additions – A Deep Dive into Section 68 of the Income Tax Act

📜 Introduction

Section 68 of the Income Tax Act, 1961, empowers the Assessing Officer (AO) to treat any unexplained cash credit in the books of an assessee as income. The section plays a key role in assessments involving unsecured loans, share capital, gifts, or any other cash credits that lack clarity.

But how does one defend against it? Let’s break it down with real case laws and facts where courts have ruled both in favour and against the assessees.

🧱 The Legal Test: Three Pillars

To successfully rebut a Section 68 addition, the assessee must establish:

1. Identity of the creditor

2. Creditworthiness of the creditor

3. Genuineness of the transaction

Let’s now examine key judicial rulings that shape the interpretation of this section.

✅ 1. PCIT v. Krishan Kumar Bansal

[2023] 148 taxmann.com 483 (Punjab & Haryana High Court)

🔎 Facts:

The assessee received unsecured loans from several individuals. During assessment, the AO made an addition under Section 68 alleging that the lenders lacked capacity. However, the assessee had already submitted PAN details, bank statements, ITRs, and loan confirmations from all creditors.

The CIT(A) and ITAT both deleted the addition, stating that adequate documentary evidence had been submitted. The department appealed to the High Court.

⚖️ Held:

The High Court upheld the deletion and ruled that once the assessee provides credible evidence proving identity, creditworthiness, and genuineness, the burden shifts to the AO to disprove it with evidence — not just suspicion.

💡 Insight:

PAN + bank statement + confirmations + ITRs = strong defense against Section 68.

✅ 2. CIT v. Orissa Corporation (P) Ltd.

[1986] 159 ITR 78 (Supreme Court)

🔎 Facts:

The assessee company received certain amounts from three parties. It submitted names and addresses of the creditors during the assessment. However, the AO made no further inquiries and treated the receipts as unexplained.

⚖️ Held:

The Supreme Court ruled in favour of the assessee, stating that once the assessee provides basic details, the AO is duty-bound to investigate. Inaction on the AO's part cannot be used to penalize the assessee.

💡 Insight:

When assessee cooperates fully, the Revenue must do its part by investigating further.

✅ 3. CIT v. Kamdhenu Vyapar Co. Ltd.

[2015] 56 taxmann.com 117 (Delhi HC)

🔎 Facts:

The assessee received funds from various parties and submitted loan confirmations, bank transaction records, and income tax returns of lenders. Despite this, the AO rejected the claim, citing doubts over genuineness.

⚖️ Held:

The Delhi High Court ruled against the department, emphasizing that the AO cannot ignore valid documents. The court stressed that genuineness must be disproven with evidence, not by mere assumptions or conjecture.

💡 Insight:

Complete paperwork protects you — assumptions don’t stand in court.

❌ 4. CIT v. Nipun Builders & Developers Pvt. Ltd.

[2011] 28 taxmann.com 76 (Delhi HC)

🔎 Facts:

The assessee received funds claimed as loans. However, cash was deposited in the lenders’ accounts shortly before issuing cheques to the assessee. The AO argued this was a round-tripping technique to give the transaction a legal color.

⚖️ Held:

The Delhi HC upheld the AO’s view and ruled that such timing and patterns of transactions indicated a lack of genuineness. The lenders lacked independent creditworthiness.

💡 Insight:

Courts examine economic substance, not just documents.

❌ 5. CIT v. Precision Finance Pvt. Ltd.

[1994] 208 ITR 465 (Calcutta HC)

🔎 Facts:

The assessee submitted PAN numbers of lenders as proof. But on inquiry, it was found that the alleged lenders had negligible or no income and no financial standing to lend such amounts.

⚖️ Held:

The High Court ruled in favour of the department, stating that PAN alone does not prove creditworthiness. Without supporting financial capacity, the lenders could not be genuine creditors.

💡 Insight:

A PAN card is not a shield — financial standing matters.

📌 Practical Checklist for Assessees

Condition	What to Submit
Identity	PAN, Aadhaar, name, address, incorporation docs
Creditworthiness	ITRs, balance sheets, bank statements
Genuineness	Loan confirmations, bank transfer proof, agreements

✨ Conclusion

Section 68 is a powerful tool, but not absolute. As these judgments show, if an assessee:

• Maintains proper documentation

• Routes all funds through banks

• Obtains valid confirmationsThey can defend themselves successfully.

However, if transactions appear engineered, cash-based, or lack substance, courts are quick to confirm additions.

⚖️ “Suspicion, however strong, cannot replace evidence.” – Supreme Court