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Facts
The assessee company received unsecured loans from its directors, Ranga Reddy Anekapalli and Sharath Chandra Reddy. These loans were allegedly funded by withdrawals from a partnership firm, RK Interiors, in which the directors were partners. The Assessing Officer and CIT(A) made an addition under Section 68 of the Income Tax Act, doubting the genuineness and source of these loans.
Held
The Tribunal held that the assessee had discharged its onus to prove the identity, creditworthiness, and genuineness of the loan transactions. The transactions were duly recorded in the books of accounts and routed through banking channels, supported by bank statements of all parties involved, including the partnership firm and the directors. The Tribunal noted that the share of profits in the partnership firm is not the only source for withdrawal, and other sources like loans and capital contributions should also be considered.
Key Issues
Whether the addition made by the Assessing Officer under Section 68 of the Income Tax Act on account of unsecured loans from directors, routed through a partnership firm, is sustainable when the assessee has provided documentary evidence of the transactions and the source of funds.
Sections Cited
68, 115BBE, 40(a)(ia), 194Q, 271AAC(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G.
PER VIJAY PAL RAO, VICE PRESIDENT :
This appeal by the Assessee is directed against the Order dated 14.10.2025 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC], Delhi, for the assessment year 2023-2024.
2 ITA.No.1865/Hyd./2025 2. The assessee has raised the following grounds of appeal:
1. “On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in both law and facts while passing the Order.
2. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in sustaining the addition, of Rs.11,66,67,629/- towards unsecured loan creditors, u/s 68 r.w.s. 115BBE of the Act, made by AO without appreciating the facts furnished by the appellant.
3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in drawing erroneous conclusion that lenders do not have credit worthiness without appreciating the facts in its entirety.
4. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in drawing erroneous conclusions that explanations tendered by the appellant are evasive, lacking in evidentiary support and do not discharge the burden of proof as laid down by law.
5. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in not appreciating the fact that the Creditors (Directors) routed these loan amounts through the Banking Channels out of their own declared incomes.
6. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in concluding that routing of funds of a 3 ITA.No.1865/Hyd./2025 partnership firm with questionable financials and lack of bona fides in the transactions.
7. On the facts and in the circumstances of the case and in law, the Learned CIT(A) has not appreciated the fact that addition made of Rs.11,66,67,629/-by AO towards unsecured loan creditors, without jurisdiction.
8. On the facts and in the circumstances of the case and in law, the Learned CIT(A) and the AO has not considered the information with respect to the ingredient of Section 68 was proved by the appellant during the course of Appellate/Assessment proceedings.
9. Any other ground or grounds that may be urged at the time of hearing of the appeal.”
3. The solitary issue arises in this appeal of the assessee is regarding addition made by the Assessing Officer u/sec.68 of the Income Tax Act [in short "the Act"], 1961 on account of unsecured loans from the Directors.
Brief facts of the case are that the assessee company is engaged in the business of interior decoration, design service, turnkey projects, mechanical designing, space analysis, planning, designing and construction etc. For the year under consideration, the assessee filed its return of income on 17.10.2023 declaring total income of 4 ITA.No.1865/Hyd./2025 Rs.4,57,82,582/-. The return was processed u/sec.143(1) on 08.12.2023 and thereafter selected for scrutiny under CASS to verify non-deduction of TDS u/sec.194Q of the Act on business purchases and consequently, disallowance u/sec.40(a)(ia) of the Act. While completing the assessment vide order dated 21.03.2025 the Assessing Officer made two additions i.e., addition u/sec.40(a)(ia) as well as u/sec.68 of the Act for a sum of Rs.1,44,05,947/- and Rs.11,66,67,629/- respectively. On appeal, the assessee did not press the issue of disallowance made u/sec.40(a)(ia) for non-deduction of tax on purchases and consequently, the same was dismissed as withdrawn. The learned CIT(A) has confirmed the addition made by the Assessing Officer u/sec.68 of the Act on account of unsecured loans from Directors.
Before the Tribunal, the learned Authorised Representative of the Assessee has submitted that the assessee company has received unsecured loans of Rs.5,87,00,000/- from Sri Ranga Reddy Anekapalli and Rs.5,79,67,629/- from Sharath Chandra Reddy, both are Directors of the assessee company. The assessee filed all
5 ITA.No.1865/Hyd./2025 relevant details with supporting evidence to prove the identity and creditworthiness of the loan creditors as well as genuineness of the transaction. The learned Authorised Representative of the Assessee has submitted that the assessee brought on record the relevant record to show that the Directors have given the loan to the assessee company out of withdrawals made by them from capital account of partnership firm M/s. RK Interiors. The Assessing Officer without bringing any record contrary to the claim of the assessee has made the addition u/sec.68 of the Act, which is highly arbitrary and unjustified. The learned Authorised Representative of the Assessee then referred to the findings of the learned CIT(A) and submitted that the learned CIT(A) has not appreciated the fact of withdrawal of the money by these two Directors from the partnership firm which is matter on record and rejected the claim of the assessee on misconceived fact that for the last 03 years the share of the Directors in the profit of the partnership firm is Rs.2.40 crores and Rs.3.21 crores, respectively, whereas both the Directors advanced a total sum of Rs.11.66 crores to the 6 ITA.No.1865/Hyd./2025 assessee company. The learned CIT(A) has completely ignored the fact that the withdrawal from the partnership firm is a matter on record evident from the books of the partnership firm, bank account statement of the partnership firm as well as bank statement of the two partners of the firm who are Directors of the assessee company. He has further submitted that the partnership firm M/s. RK Interiors as well as both the partners are assessed to tax. He referred to the return of income filed by the partnership firm placed at page-236 and submitted that in the books of the firm the cash was available and the transactions of withdrawal by the partners who in turn advanced the loan to the assessee company also part of the books of accounts including balance sheet placed at pages 236 and 239 of the paper book. Thus, the learned Authorised Representative of the Assessee has submitted that the transactions are duly recorded in the books of accounts of the partnership and also through banking channel as reflected from the bank account of the partnership firm as well as partners who are Directors of the assessee company. Thus, all the transactions of the 7 ITA.No.1865/Hyd./2025 withdrawals from the partnership firm as well as the loan given to the assessee company are reflected in the bank accounts of the Directors. Therefore, the identity and creditworthiness of the loan creditors has been proved without any doubt and since all the transactions are recorded in the books of accounts as well as through banking channel as per the bank account statement of all the parties i.e., partnership firm, the partners/Directors as well as assessee company, then the genuineness of the transactions cannot be doubted. The learned Authorised Representative of the Assessee has further submitted that the assessee has proved the source of source by giving all the relevant details and evidence of the partnership firm having sufficient funds and withdrawal by the partners. He has thus contended that even as per the provisions of sec.68 of the Act, the assessee has fully discharged its onus to prove the identity and creditworthiness of the creditors including the source of source as well as genuineness of the transaction. The Assessing Officer has failed to bring any material to disprove the claim of the assessee. Thus, the disallowance/addition
8 ITA.No.1865/Hyd./2025 made by the Assessing Officer is not based on the facts as well as evidence, but only on the whims and fancies of the Assessing Officer. He has thus submitted that the addition made by the Assessing Officer and confirmed by the learned CIT(A) on account of unsecured loans taken from the Directors is not sustainable and liable to be deleted.
On the other hand, learned DR has submitted that as per the provisions of sec.68 of the Act, the onus is fully on the assessee to prove the identity and creditworthiness of the creditors including the source of source as per the amended provisions of sec.68 of the Act as well as genuineness of the transaction. Thus, the source has to be proved in full satisfaction of the Assessing Officer. He has referred to the findings of the learned CIT(A) and submitted that the learned CIT(A) has referred the specific facts that even for the last 03 years the profit of these two partners in the partnership firm is of Rs.2.40 crores and Rs.3.21 crores, respectively, whereas these two partners has advanced the loan to the assessee company to the tune of Rs.11.66 crores which is the net amount received from these two Directors, whereas the 9 ITA.No.1865/Hyd./2025 actual amount received during the year was Rs.45.32 crores and thus, the assessee has failed to discharge its onus to the satisfaction of the Assessing Officer as per the terms of Sec.68 of the Act. The creditworthiness of the partnership firm has not been proved by the assessee. Therefore, the Assessing Officer has rightly given the finding that the assessee’s own unaccounted money has been brought back into the books of the assessee company in the garb of unsecured loans from Directors routing through the partnership firm. He has relied upon the Orders of the authorities below.
We have considered the rival submissions as well as the relevant material on record. The Assessing Officer has considered this issue in Para-3.8.2 of the assessment order as under:
“3.8.2. As discussed in Para 3.7.2 above, it is seen that the assessee company has received unsecured loans of Rs.5,87,00,000/- from Ranga Reddy A and Rs.5.79.67.629/-from Sharath Chandra Reddy, who are also directors of the company The assessee company in response to the show cause notice explained the credit worthiness and genuineness of the transactions undertaken with the directors of the company and explained that the directors have paid the loan out of the 10 ITA.No.1865/Hyd./2025 withdrawal from the capital account of the firm M/s R.K. Enterprises in which both the directors are partners. However, on perusal of the capital account of the directors in the capacity of partners in the firm, it is seen that there is no such withdrawal from the capital account of Sharath Chandra Reddy & Ranga Reddy A Further, from the bank account statement of both the directors, it is seen that most of the payment has been received from the partnership firm ie. R.K. Enterprises. The assessee company has shown unsecured loans from the directors in his books. However, from the documents made available by the assessee company, it is seen that firstly the firm paid money to its partners, who happens to be director of the company and the same money has been transferred to the company in the shape of the unsecured loans from the directors. Thus, apparently the unexplained money of the company was credited in books of the accounts of the company in the shape of unsecured loans from directors, which was routed through the firm. The sources of funds available with the directors from the firm also not established from the credentials of the firm as discussed in the Para 3.7 above. Since the money does not belong to the directors of the company and has not been advanced out of their own funds, therefore, the assessee failed to explain the creditworthiness of the directors and genuineness of the transactions undertaken Accordingly an addition of Rs.11,66,67,629/-(5,87,00,000+ 5,79,67,629) is made as per provisions of section 68 r.w.s. 115BBE of the Income Tax Act. 1961. Further penalty proceedings u/sec.271AAC(1) is also initiated as the addition refer to the section 68 of the Act.”
Thus, the Assessing Officer has doubted the genuineness of the transaction of unsecured loans from the 11 ITA.No.1865/Hyd./2025 Directors and rejected the explanation of the source and creditworthiness being withdrawal made by the Directors from the partnership firm. It is manifest from the Order of the Assessing Officer that the Assessing Officer has not given any specific finding regarding the moneys withdrawn by these two Directors from the partnership firm M/s. RK Interiors as not genuine transaction, whereas the transactions are duly recorded and reflected in the books of accounts of the partnership firm and particularly, the balance sheet placed at page-239 as under :
12 ITA.No.1865/Hyd./2025 8.1. Thus, the partnership firm has shown loans and advances to the extent of Rs.28,87,00,572/- which is including the drawings by the partners as reflected in the Schedule for loans and advances as on 31.03.2022 and 31.03.2023 placed at Page-242 of the paper book as under :
8.2. Therefore, the drawings by these two persons Ranga Reddy A and Sharath Chandra Reddy are duly part of the financials of the partnership firm M/s. RK Interiors. The books of accounts of the partnership firm were duly audited and even the report in Form-3CD was also filed and available before the department. Further all these transactions of withdrawal of the money from the partnership firm by these two Directors of assessee company/partners of the partnership firm are also reflected in the bank account statement of M/s. RK Interiors. Thus, the transactions of 13 ITA.No.1865/Hyd./2025 transfer of money from the partnership firm Bank to the accounts of the partners Ranga Reddy A and Sharath Chandra Reddy are duly reflected in the bank account statement of the partnership firm. These two partners of the partnership firm and Directors of the assessee company then transferred the said money to the assessee company which is also part of the books of accounts as well as the return of income filed by these persons. The Assessing Officer has not pointed out any discrepancy in the money transferred from the bank account of the partnership firm to the bank account of these two persons who are partners of the Firm as well as Directors of the Assessee Company. Therefore, the source in the hand of these two Directors is duly established by producing the bank account statements as well as the books of accounts of the partnership firm showing the source in the hands of the partnership firm and transactions of drawings made by these two persons in the capacity of partners in the partnership firm M/s. RK Interiors. On appeal, the learned CIT(A) has confirmed the addition by giving reasons as under:
14 ITA.No.1865/Hyd./2025
“…… ..…. ….. ….. ….. Thus, it can be seen that in case of a Company, the Act puts serious onus on the assessee/appellant to prove not only the source of the amount received but also 'source of the source' needs to be well explained. On the question of creditworthiness and genuineness, the money no doubt was received through banking channels, but was received from directors who had meagre taxable income. Even if the amount of share of profit from Firm Messrs. R.K. Interiors is to be added for the last three years. Mr. Ranga Reddy A. had total share of profit in last three years at Rs. 2.40 crores and Mr. Sharath Chandra Reddy had Rs. 3.21 crores [refer table B). Whereas both these directors advanced a total sum of Rs.11.66 crores to the appellant company. It is also worthwhile to note here that this amount of Rs. 11.66 crores is the net amount received by appellant from its two directors (net of repayments) whereas the actual amount received during the year was Rs. 45.32 crores. Though it has been established that both these directors received funds from the firm Messrs. RK. Interiors, one needs to examine the financials of the said firm if it had the capacity to lend such sum to its partners. The financial position of the partnership firm for last two years is as under.
Table C Asst. Total Capital Sundry Loans & Total turnover Year Assets/Liability Account Creditors Advances 7,29,51,445 32,68,35,953 16,99,81,217 32,96,80,740 2022-23 40,00,56,040
2023-24 48,84,30,485 10,13,68,374 37,58,61,195 28,87,00,572 44,68,31,010
It can also be added here that net profit earned by firm (Before Tax) was Rs.8.92 crores for the last three years, Rs.4.29 crores for last two years and Rs.2.22 crores for FY2022-23 (before tax]. It is the contention of the appellant itself that the directors capacity was 15 ITA.No.1865/Hyd./2025 directly linked to capacity of the firm only as the funds are claimed to have been received from the firm by the directors. Thus, as far as profitability is concerned, the firm had pretax profits of only Rs.2.22 crores for the FY2022-23. Past profits of the firm will not help the cause of appellant as Rs.11.66 crores was received by appellant during FY2022-23 only and in the past also the directors have advanced huge sums to the company as can be seen from the opening balance of loans from these directors which is Rs.16.90 crores. Hence it is to be assumed that the past profits of the firm were already consumed in withdrawals by partners of the firm in granting loans to the appellant company which stood at Rs.16.90 crores as on 01-04-2022.
8.3. Thus, it is clear that the learned CIT(A) has not disputed the transaction of withdrawal by these two persons from the partnership firm and then advancing the same to the assessee company, but the claim of the assessee is denied /disallowed only on the ground that the share of these two persons in the profits of the partnership firm for the last 03 years comes to Rs.2.40 crores and Rs.3.21 crores, respectively and thus, the claim of withdrawal of the money by these two persons from the partnership firm is doubted as not genuine. It is pertinent to note that once the partnership firm has shown these amounts under the Schedule of loans and advances and drawings made by these partners, then
16 ITA.No.1865/Hyd./2025 their share in the profits of the partnership firm would not be the only source for withdrawal from the partnership firm. There is no bar for the partners to withdraw the amount from the partnership firm beyond their share in the profits or accumulated profits in the partnership firm, if the said withdrawal is treated in the books of the partnership firm as loans and advances by way of drawings by the partners. The availability of funds in the hand of the partnership firm cannot be analysed by looking at the profit of the partnership firm when there are other sources being loan, sundry creditors, contribution of capital by the partners and accumulated profit. Thus, once the assessee has brought all the details and evidence in the shape of books of accounts of the partnership firm, bank account statement of the partnership firm, bank account statements of the Directors as well as the books of accounts of the assessee company itself, then in the absence of contrary fact or material brought by the Assessing Officer on record to disprove the claim of the assessee company, the creditworthiness of the loan creditors including the partnership firm as well as genuineness of the 17 ITA.No.1865/Hyd./2025 transaction cannot be disputed. Accordingly, in view of the facts and relevant documentary evidence brought on record, we find that the assessee company has discharged its onus to prove the identity of the loan creditors which is otherwise not disputed by the Assessing Officer, the creditworthiness of the loan creditors by way of books of accounts of the partnership firm, transfer of money from the books of the partnership firm through banking channel as well as genuineness of the transaction as all these transactions are duly recorded in the books of accounts of all the persons concerned and are through banking channel. Hence, the addition made by the Assessing Officer and confirmed by the learned CIT(A) is not sustainable and liable to be deleted. We Order accordingly.
In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 09.01.2026.
Sd/- Sd/- [MANJUNATHA G.] [VIJAY PAL RAO] ACCOUNTANT MEMBER VICE PRESIDENT Hyderabad, Dated 09th January, 2026. VBP