2025 (7) TMI 1421 - AT - Income Tax

Addition made on account of unsecured loans in the hands of assessee and on account of interest paid to the lender - HELD THAT - As undisputed the present assessee had taken unsecured loan from M/s Sunshine Merchants Private Limited. Since the case of lender has also been reopened and the source of funds of loan to the assessee company has also been added in the hands of the lender. Therefore making additions of unsecured loan in the hands of assessee would lead to double additions which is not permissible under law. Since the final outcome of the additions made in the hands of the lender has not been brought on record. Therefore in our considered view sustaining additions both i.e in the hands of lender as well as the assessee would lead to double additions which is not permissible under law. Ends of justice would be met only if the matter is restored back to the file of CIT(A) to a certain the final outcome of the additions in the hands or of the lender and in case the additions are finally found to be sustained in the hands of the lender then in that eventuality the additions in the hands of the assessee be deleted. Hence with these directions matter stands restored to the file of CIT(A) to act in terms indicated above. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES:

1.1 Whether the addition of unsecured loans received by the assessee can be sustained when the lender's source of funds is under scrutiny.

1.2 Whether interest paid on such unsecured loans can be disallowed under section 37 of the Income Tax Act, 1961.

1.3 Whether making additions both in the hands of the lender and the assessee leads to impermissible double additions under the Income Tax Act.

1.4 Whether the matter requires restoration to the assessing authority for determination of final outcome regarding additions in the hands of the lender.

2. RULINGS / HOLDINGS:

2.1 The addition of unsecured loans in the hands of the assessee cannot be sustained if the lender's source of funds is also under assessment and additions are made in the lender's hands, as this would result in "double additions, which is not permissible under law."

2.2 The interest paid on the unsecured loans was disallowed under section 37 of the Act, but such disallowance is contingent upon the genuineness and source of the loan funds being established.

2.3 Since the final outcome of the additions in the hands of the lender was not on record, sustaining additions in both the lender's and assessee's hands would be impermissible; hence, the matter must be restored for determination of the lender's case first.

2.4 The matter is restored to the CIT(A) with directions to ascertain the final outcome of the additions in the hands of the lender and to delete the additions in the hands of the assessee if the additions against the lender are sustained.

3. RATIONALE:

3.1 The Court applied the principles under the Income Tax Act, 1961, particularly sections 68 (unexplained credits) and 37 (business expenditure), alongside the burden of proof requirements, emphasizing the "preponderance of probability" standard.

3.2 The Court recognized that if the lender's source of funds is not established, the loan amount in the assessee's books can be treated as "unexplained credit."

3.3 The Court avoided double taxation by prohibiting "double additions" for the same loan amount in the hands of both lender and borrower, aligning with established tax principles against double taxation.

3.4 The decision to restore the matter for fresh adjudication reflects a procedural safeguard ensuring that the final determination of the lender's case precedes any conclusive addition in the assessee's hands, thereby maintaining fairness and legal consistency.