ITAT Delhi Deletes ₹1.23 Crore Addition To Borrower's Income Over Lender's Low-Declared Income

The Income Tax Appellate Tribunal (ITAT) at Delhi has recently reiterated that a lender's low declared income, by itself, is not sufficient to reject its creditworthiness for advancing an unsecured loan.

Allowing the appeal of Florence Nightingale Educational Society, the tribunal observed that the relevant test is the lender's ability to arrange funds and not merely its earning capacity.

Judicial Member Raj Kumar Chauhan and Accountant Member S. Rifaur Rahman allowed the appeal filed by Florence Nightingale Educational Society.

Explaining the legal test for determining a lender's creditworthiness, the tribunal observed, “Various Courts have held that creditworthiness is the ability to arrange funds to lend money not earning capacity.”

The dispute arose after the Assessing Officer treated the educational society's outstanding unsecured loans as unexplained cash credits. The Commissioner of Income Tax (Appeals) accepted the explanation regarding the opening loan balances and granted partial relief.

However, it sustained an addition of ₹1.23 crore in respect of loans received from two lenders after observing that their declared income levels did not support their creditworthiness to advance such significant amounts.

Before the tribunal, the educational society contended that it had furnished loan confirmations, ledger accounts, bank statements and documents showing that the loans were subsequently repaid with interest.

It argued that the transactions were routed through banking channels and that the lenders' identities, the genuineness of the transactions and their creditworthiness stood established.

Accepting the contention, the tribunal noted that the loans had been received through banking channels and were subsequently repaid with interest.

It held, “The assessee has taken unsecured loan and repaid the same along with interest proves the genuineness of the transaction.”

The Revenue relied on another decision to contend that repayment alone does not establish the genuineness of a loan transaction. Distinguishing that ruling, the tribunal observed that the facts before it were materially different because there was no dispute regarding the lenders' identities.

Accordingly, the tribunal deleted the addition of ₹1.23 crore made under Section 68 of the Income Tax Act.

For Assessee: CA Lalit Mohan and Advocate Ankit Kumar

For Revenue: Harpreet Kaur Hansra, Senior Departmental Representative