If genuineness of loan doubted, addition justified u/s 68 instead of section 41(1) as remission

Supreme Court dismissed SLP against addition made u/s 68 instead of section 41(1) as where genuineness of the loan transaction was doubted, there can not be any remission of liability.

Supreme Court dismissed SLP against judgment of Delhi High Court confirming addition u/s 68 and holding that where the genuineness of the loan transaction was doubted, there can not be any remission of liability in terms of section 41(1) of the Act.

ABCAUS Case Law Citation:
4594 (2025) (06) abcaus.in SC

The appellant assessee was a corporate entity. In course of assessment proceedings, for the relevant Assessment Year, the Assessing Officer noticed that in the year under consideration, the assessee had credited a loan stated to have been availed from another company.

The Assessing Officer called upon the assessee to prove the identity of the loan creditor, the genuineness of the loan transaction and the creditworthiness of the creditor by furnishing documentary evidences.

In response to the query raised by the Assessing Officer, assessee submitted that in order to meet the operational capability, the assessee took unsecured loan from the concerned party to procure fixed assets/capital goods required in the process of manufacturing of their finished goods.

The assessee also produced a loan agreement with the loan creditor. However, the assessee submitted, since, the name of loan creditor was struck off from the record of Registrar of Companies (ROC), the assessee could not furnish the ITR and other evidences to substantiate the creditworthiness of the lender.

The Assessing Officer observed, not only the name of the lender had been struck off by the ROC but there were no return of the lender available on the site of Ministry of Corporate Affairs (MCA).

Accordingly, added the alleged unsecured loan as unexplained cash credits under Section 68 of the Income Tax Act, 1961 (the Act).

Though, the assessee contested the addition before the first appellate authority, however, it was confirmed. Before the Tribunal, the assessee took an alternative plea that the assessee had not repaid the loan to the extent of such non-repayment the amount can be treated as cessation of liability under Section 41(1) and since it was a capital receipt, it cannot be brought to tax.  

The Tribunal observed that assessee had failed to furnish PAN details, address proof, loan confirmation, ITR copy of the lender. Also, the name of the concerned lender had been struck off in the records of ROC. Therefore, there was serious doubt regarding the existence of the lender company. The assessee had also failed to prove the creditworthiness of the lender coupled with genuineness of the transaction.

The Tribunal held that on the facts of the case, the unsecured loan remained unexplained and therefore, the addition made u/s 68 of the Act.

Aggrieved, the assessee appealed to High Court.

Before the High Court the appellant contended that “the triple test” enunciated by the courts for discharging the onus stood satisfied as the identity, creditworthiness, and genuineness of the transaction were established. In support of this plea, it was further stated that the appellant could not go beyond production of the loan agreement, as the name of the lender was struck off from the Register of Companies.

It was also the submission of the assessee that it was well within the powers of the AO to issue requisite notices and collect necessary information with regard to the lender. It was, contended that since there was remission of liability, the provisions of Section 41(1) of the Act came into play, which is an aspect that was not fully appreciated by the statutory authorities.

The High Court observed that a loan agreement showed that it was printed on the letterhead of the appellant/assessee. The purpose of the loan appeared to be the remission of liabilities against fixed assets/capital goods and not for the routine operational requirements of the appellant/assessee.

The High Court opined that apparently, remission of liabilities had been incorporated with a strategic plan in mind, which was, if the loan was not to be repaid for any eventuality, i.e., if there is remission of liability, it would then not be treated, in law, as a taxable amount as facially the remission of liability would be on capital and not on revenue account.

The High Court further observed that as per the terms of the loan agreement, the appellant/assessee was not obliged to pay any interest to the loan creditor, the appellant/assessee could pay the loan amount after four years in three annual installments, as per “mutual consent”. Such term included in the loan agreement for interest and repayment of debt was out of the ordinary.

The Hon’ble High Court opined that the loan agreement entered into with the lender raised more questions than answers as to what was the reality. Strangely, this agreement did not impose any burden on the appellant assessee i.e., the borrower, with regard to interest. The loan, apparently, could be repaid after four years in three annual installments, albeit on mutually agreed terms.

The Hon’ble High Court opined that since the lender was a private limited company, it was perhaps open to the appellant assessee i.e., the borrower, to produce the erstwhile directors to establish the genuineness of the loan agreement. None of these steps were taken by the appellant who on the other hand, tried to shift the onus onto the revenue. 

The Hon’ble High Court held that the initial onus was not discharged by the assessee. Besides this, the argument that since there was remission of liability Section 41(1) of the Act would apply and not the provisions of Section 68 of the Act, as rightly held by the Tribunal, was an untenable submission. 

The Hon’ble High Court further held that since in the instant case the genuineness of the loan transaction was doubted, there can not be any remission of liability in terms of section 41(1) of the Act.

Accordingly, the appeal was dismissed by the Hon’ble High Court.

Not satisfied with the judgment of the Hon’ble High Court, the assessee filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court challenging the judgment of the Hon’ble High Court,

However, the Apex Court dismissed the SLP with the following observations,

“After hearing learned counsel for the petitioner, we are not inclined to interfere with the order impugned passed by the High Court.”

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