Preliminary Remarks :-
Before we start to deal with the nitty gritties of Section 68 of the Income Tax Act, 1961, sharing a perspective:-
Have you been to a bank or a financial institution to borrow money? Did you ask the lender (bank) whether it has the capacity to lend you money or check their financial statements to determine the creditworthiness of the lender.Its usually the other way round, isn’t it?. Not with Income Tax. It does not suffice to say that when a lender issued a cheque or draft and the same did not return unpaid (“bounce“), the lender had the capacity and means to extend a credit (or loan).
To set the record straight, the dictionary meaning of the term “creditworthiness” is “trustworthiness with money as based on a person’s credit history; a general qualification for borrowing” – I’d repeat for the sake of emphasis – a qualification for borrowing. The term “creditworthiness” has been principally associated with the borrower, not the lender. In common parlance, it signifies whether the borrower would in ordinary circumstances repay the money borrowed – that is whether the borrower is worthy of being extended a credit (loan). In India, the judiciary, particularly with reference to Section 68, contrary to the natural meaning of the term “creditworthiness”, has used the term to signify the capacity of the borrower to lend.
[…] This post will be updated further. Stay tuned.
CA Nirmal Ghorawat's Blog 