₹10 Lakh Family Loan Addition Cut to ₹1 Lakh: ITAT Rajkot

Ahmad Abdul Aziz Khanani Vs ITO (ITAT Rajkot)

₹10 Lakh Family Loans: ITAT Restricts Addition to ₹1 Lakh, Removes Section 115BBE Tax

Family Loans Under Scrutiny

The Rajkot Tribunal partly allowed the assessee’s appeal against an addition of ₹10 lakh under section 68, representing unsecured loans received from his parents. It restricted the addition to ₹1 lakh, taxable at normal income-tax rates, and expressly directed that section 115BBE should not apply.

The Tribunal also stated that its adjudication, considering the smallness of the amount, should not be treated as a precedent in any preceding or succeeding assessment year.

The assessee, an individual, filed his return on 1 September 2022, declaring total income of ₹6,14,510. His case was selected for scrutiny concerning low income against TCS receipts relating to timber not obtained from a forest lease.

During scrutiny, the Assessing Officer examined loans received and repaid during the year. The disputed addition concerned ₹5 lakh received from the assessee’s father, Abdul Aziz Khanani, and ₹5 lakh received from his mother, Bayabai Aziz Khanani.

Father’s Loan: Earlier Repayment and Return of Funds

The assessee explained that his father did not have a PAN and had died on 6 January 2022. He furnished the death certificate, bank passbook, ledger account and a summary of bank transactions.

The father’s loan account had an opening credit balance of ₹4,77,300. The assessee repaid ₹4,25,000 through banking channels on 20 April 2021 and subsequently received ₹5 lakh on 16 September 2021.

According to the explanation, the father had lent the earlier repayment to his daughter, Kukasvadiya Ayesha, who was the assessee’s sister. She returned ₹5 lakh to the father on 14 September 2021, and he advanced that amount to the assessee two days later.

The assessee therefore relied on a traceable movement of funds within the family, supported by banking records, to explain the fresh loan.

Mother’s Loan: Similar Banking Trail

The mother also did not have a PAN. Her Aadhaar card was furnished as identity proof, along with her bank passbook and ledger account.

Her loan account showed an opening credit balance of ₹9,35,500. The assessee repaid ₹5,60,000 on 7 April 2021, through banking channels, and received a fresh loan of ₹5 lakh on 16 September 2021.

The assessee stated that the mother had lent the repayment to her daughter, who returned ₹5 lakh on 15 September 2021. The mother then advanced that amount to the assessee.

The sister’s PAN and a bank-account summary were also furnished. The assessee contended that these materials explained the source of the funds and the mother’s creditworthiness.

Assessing Officer Invokes Section 68

The Assessing Officer rejected the explanation and added the entire ₹10 lakh as unexplained cash credits under section 68, directing taxation at the special rate under section 115BBE.

The CIT(A), through the National Faceless Appeal Centre, upheld the addition by an order dated 29 January 2026.

Before the Tribunal, the assessee argued that the transactions involved close family members whose identities were not doubtful. He submitted that family members provided financial assistance to one another when required.

Alternatively, and without prejudice to his request for complete deletion, the assessee’s counsel suggested that an ad hoc estimated addition could be made. The Revenue supported the assessment order.

Tribunal Grants Partial Relief

The Tribunal recorded that the Assessing Officer had accepted the identity of the lenders and the routing of transactions through banking channels. The addition arose from the perceived failure to establish their creditworthiness.

However, the Tribunal characterised the documents and evidence submitted during assessment as self-serving and held that they did not justify complete relief.

Accepting the alternative submission, it considered an estimated addition appropriate to address what it described as inconsistencies in the documents and evidence.

The Tribunal adopted a 10% “net profit rate” on the disputed ₹10 lakh, resulting in an addition of ₹1 lakh. It directed the Assessing Officer to tax this amount at normal income-tax rates, expressly excluding section 115BBE.

Accordingly, the appeal was partly allowed, reducing the disputed addition by ₹9 lakh. The order expressly confined the approach by stating that it should not operate as a precedent for preceding or succeeding assessment years.

Author’s Comments

This decision offers substantial relief, but its reasoning requires careful reading. The Tribunal did not accept the entire ₹10 lakh as satisfactorily explained loans. It granted relief through an ad hoc estimate, following the assessee’s alternative submission.

The reference to a 10% net profit rate on unsecured loans is a distinctive feature of this order. The Tribunal does not explain a broader statutory basis for applying such a rate to loan credits and expressly limits the precedential use of its adjudication.

The practical takeaway is the importance of maintaining a complete banking trail for family transactions, including opening balances, earlier repayments and intervening transfers. Here, those records supported partial relief, but did not secure complete deletion. Equally significant is the express direction that the surviving ₹1 lakh addition be taxed at normal rates.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Captioned appeal filed by the assessee, pertaining to assessment year (AY) 2022-23, is directed against the order passed under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.01.2026 by the National Faceless Appeal Centre (NFAC), Delhi/Commissioner of Income Tax (Appeals) [in short ‘Ld.CIT(A)’] which in turn arises out of an assessment order passed by the Assessing Officer (in short ‘AO’) u/s 143(3) read with section 144B of the Act dated 29.01.2024.

2. Grounds of appeal raised by the assessee are as follows:

1. The assessment order u/s 143(3) of the Act is bad in law.

2. The learned Assessing Officer has erred in law as well as on facts in making an addition of fresh unsecured loan of Rs. 10,00,000/- u/s 68 of the Act treating the same as unexplained cash credits. The ld. CIT(A) has erred in law as well as on facts in confirming the same.

3. Succinctly, the factual panorama of the case is that assessee before me is an Individual. The assessee filed his return of income for the assessment year (A.Y.) 2022-23, on 01.09.2022, declaring a total income of Rs. 6,14,510/-. The case was selected for scrutiny with the following reason: “Low income from TCS receipts – Timber not obtained from forest lease” Subsequently, the case was selected for scrutiny through CASS. During the course of scrutiny proceedings, notice u/s 143(2) dated 02.06.2023 and notices u/s 142(1) dated 17.07.2023, 23.08.2023, 08.09.2023 and 21.11.2023 were issued to the assessee requesting him to furnish certain details/documents relevant to his case. The assessee submitted replies to the queries raised on various dates before the assessing officer.On perusal of assessee’s submission, it was observed that the assessee has taken/repaid loan from/to the following parties during the year under consideration:

From the reply of the assessee, it was seen that during the year assessee had received loans from Abdul Aziz Khanani, Bayabai Aziz Khanani and Akram Kashmani. To verify the identity, genuineness and creditworthiness of the loans the assessee vide SCN dated 15.12.2023 was requested to provide the PAN, Aadhar, bank statement, copies of ITR of the last 3 years of the loan givers.

4. In response the assessee submitted reply on 23.12.2023, the extract of which is reproduced below:

“Reg. Unsecured Loan Rs. 500000 received from Abdul Aziz Khanani

1:1 Mr Abdul Aziz Khanani is the father of the assessee. He did not have Permanent Account number (PAN).

1:2 He died on 06/01/2022 and copy of his death certificate stands furnished.

1:3 I am now enclosing copy of bank passbook of his savings account no 10080100025090 with Bank of Baroda, Gandhidham Branch. The same is enclosed as Annexure “Passbook father”.

1:4 I am also enclosing copy of ledger account of Mr. Abdul Aziz Khanani in my books for FY 2021-22. The same is enclosed as Annexure “USL father”.

A perusal of above account shows that there was an opening credit balance in respect of Unsecured loan at Rs 477300. Against this, a sum of Rs 425000 was repaid through banking channel on 20/4/2021 and a sum of Rs 500,000 was received from banking channel on 16/09/2021.

All the above transactions are duly reflected in his passbook furnished above. Since the transactions have taken place through banking channel, the genuineness of same stands explained.

1:5 The assessee is further enclosing summary of bank transactions in BOB Svg account of Abdul Aziz Khanani. The same is enclosed as Annexure “Banksummary_father”.

A perusal of above shows that the sum of Rs 4.25 lacs repaid by us to Mr. Abdul Aziz Khanani was lent by him to his daughter Kukasvadiya Ayesha (Sister of the assessee).

Similarly, a sum of Rs 500,000 was received back by him on 14/09/2021 from his daughter Kukasvadiya Ayesha (Sister of the assessee). The amount so received was lent by him as unsecured loan to the assessee. The PAN of Kukasvadiya Ayesha (Sister of the assessee) is LXJPK0024P.

Reg: Unsecured Loan Rs 500000 received from Bayabal Aziz Khanani

2:1 Mrs. Bayabai Aziz Khanani is the mother of the assessee. She does not have Permanent Account number (FAN). Her Adhar card has been furnished as proof of identity.

2:2 I am now enclosing copy of bank passbook of her savings account no 2992101003701 with Canara Bank, Gandhidham Branch. The same is enclosed as Annexure “Passbook_mother”.

2:3 I am also enclosing copy of ledger account of Mrs. Bayabal Aziz Khanani in my books for FY 2021-22. The same is enclosed as Annexure “USL_mother”.

2:4 A perusal of above account shows that there was an opening credit balance in respect of unsecured loan at Rs 935500. Against this, a sum of Rs 560000 was repaid through banking channel on 7/4/2021 and a sum of Rs 500,000 was received from banking channel on 16/09/2021.

All the above transactions are duly reflected in her passbook furnished above. Since the transactions have taken place through banking channel, the genuineness of same stands explained.

A perusal of bank passbook of Mrs. Bayabai shows that the sum of Rs 5.60 lacs repaid by us to Mrs Bayabai Aziz Khanani which was then lent by her to her daughter Kukasvadiya Ayesha (Sister of the assessee)

Similarly, a sum of Rs 500,000 was received back by her 15/09/2021 from her daughter Kukasvadiya Ayesha (Sister of the assessee). The amount so received was lent by her as unsecured loan to the assessee. The PAN of Kukasvadiya Ayesha (Sister of the assessee) is LXJPK0024P.

Summary of bank account of Kukasvadiya Ayesha (Sister of the assessee) [SOURCE OF SOURCE] is enclosed, she was having an opening balance of Rs 12.51 lacs and a sum of Rs 560000 was received from the assessee as repayment of opening unsecured loan. Out of this, a sum of Rs 500000 was lent as unsecured loan on 15/09/2021.

Therefore, the sum of Rs 5 lac received as unsecured loan is out of earlier payment of Rs 5.60 lacs made to her.This suitably explains the source and credit worthiness of loan transaction done by Smt Bayabai.

5. However, assessing officer rejected the above contention of the assessee and treated the unsecured loan amounting to Rs.10,00,000/- taken from Mr. Abdul Aziz Khanani and Mrs. Bayabai Aziz Khanani as unexplained cash credit u/s 68 and added back to his total income for the A.Y. 2022-23, to be taxed at special rate u/s 115BBE of the Act.

6. Being aggrieved by the said order of the Assessing Officer, the assessee filed an appeal before the Ld.CIT(A), but remained unsuccessful. Therefore, assessee is left with no other alternative but to knock on the doors of the Tribunal with this appeal praying for justice.

7. I have heard, both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Learned Counsel for the assessee submitted that this is the loan transaction among the family members. Therefore, identity of the family members are not in doubt. The family members in needy hours, provide the loan to each other. The ld.Counsel pointed out that unsecured Loan Rs.5,00,000/- received from Abdul Aziz Khanani, Mr Abdul Aziz Khanani is the father of the assessee. The unsecured Loan Rs. 5,00,000/- received from Bayabal Aziz Khanani, Mrs. Bayabai Aziz Khanani is the mother of the assessee. Therefore, addition should be deleted. Alternatively, and without prejudice to the above, learned Counsel for the assessee argued that an ad hoc estimated addition may be made in the hands of the assessee. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which I have already noted in my earlier para and is not being repeated for the sake of brevity.

8. I have considered submissions of both the parties. I note that addition of Rs. 10,00,000/- was made by AO u/s 68 on account of unsecured loans from parents for the want of their creditworthiness. As per the assessment order, it is seen that the AO has accepted the identity of the loan creditors and the fact that transactions were routed through banking channels. However, I find that the documents and evidences submitted by the assessee during the assessment proceedings, are self- servicing, documents and evidences. Therefore, full relief should not be given to the assessee. Therefore, to protect the interest of the revenue, and considering the smallness of the amount an ad-hoc, estimated addition should be made in the hands of the assessee. Therefore, I find some merit in the contention of the ld. Counsel for the assessee. Hence, I find that while the case of the assessee merits some relief, at the same time entire relief cannot be permitted to the assessee. In my view the ends of justice would be met, if a net profit rate of @ 10% of Rs. 10,00,000/-, which comes to Rs. 1,00,000/-, is adopted, since the same would take care of the inconsistencies, in the various documents and evidences submitted before the lower authorities. Therefore, in order to plug the leakage of revenue, I direct the assessing officer to make addition of Rs.1,00,000/-, by applying the normal rate of income tax ( not under section 115BBE of the Act). This adjudication has been done, considering the smallness of the amount, therefore, it is also made clear that instant adjudication shall not be treated as a precedent in any preceding or succeeding assessment year.

9. In the result, appeal of the assessee, is, partly allowed.

Order is pronounced in the open Court Today on 06/10/2026.