Assessees not required to prove “source of the source‟ of funds Prior to Finance Act 2022

Assessees was  not required to prove the “source of the source‟ of funds received as unsecured loans Prior to the amendment of Finance Act, 2022

In a recent judgment, Hon’ble Delhi High Court held that since the case related to prior to the amendment of Finance Act, 2022 assessees was not required to prove the “source of the source‟ of funds credited as unsecured loans.

ABCAUS Case Law Citation:
4870 (2025) (11) abcaus.in HC

Important Case Laws relied upon by Parties:
CIT vs. Abhisar Buildwell Pvt. Ltd.
CIT v. Nova Prompters and Finlease (P) Ltd.
CIT v. N. R. Portfolio Pvt. Ltd.
Sheela Overseas Private Ltd. v. Principal Commissioner of Income-Tax
CIT v. Fair Finvest Ltd
CIT v. Dwarkadhish Investment (P.) Ltd.
CIT v. Kamdhenu Steel & Alloys Ltd.
Deputy Commissioner of Income Tax v. Rohini Builders,

In the instant case, the Income Tax Department had challenged the order passed by the ITAT in deleting the addition u/s 68 of the Income Tax Act, 1961 (the Act) on account of unsecured loan received and interest paid on such loan by the assessee

The assessment of the respondent assessee had been completed by the Assessing Officer (AO) under Section 153A read with Section 143(3) of the Act making addition on account of a bogus unsecured loan and a disallowance of interest paid on the said alleged bogus unsecured loan.

The Commissioner of Income Tax (Appeals) partly allowed the appeal of the assessee by deleting the addition for alleged bogus loan and disallowance of interest was reduced. The Revenue preferred an appeal against the order of the CIT(A) before the ITAT, which was dismissed.

The case of the Revenue was that a mere submission that a loan had been received through banking channels does not mean that it is genuine. In the case of the assessee, the lenders did not appear to have the financial worth to lend such huge sums, and there was also no explanation as to its relationship with the lenders. Further, there was no collateral security taken in lieu of the loans, which leads to the conclusion that the loan is not genuine.

It was submitted that in terms of Section 68 of the Act, the „triple test‟ of establishing the identity, genuineness and creditworthiness, must be satisfied before any addition is made, and the burden of proof in this regard lies with the assessee, as the applicability of these tests depends upon the facts and circumstances of each case.

The Revenue contended that the assessee had been rotating the money within its own group and the other group for the purpose of accommodation entries and this was not a case where the AO was going into “source of the source‟ but had done the entire exercise to verify the correctness of the statement made by lender and its director to prove the creditworthiness of the lender and the genuineness of the transactions.

The respondent assessee contended that onus on the assessee to prove the identity, creditworthiness and genuineness of the creditor and the transaction was duly discharged by it. The lender had confirmed extending the loan to the respondent and that it was also not in dispute that the loan was repaid in the next Financial Year.

It was further submitted that non-availability of creditors of the lender cannot be the ground for doubting the creditworthiness of the lender and genuineness of the transaction.

Reliance was placed on the decision of the Court wherein it was held that the assessee, in the context of Section 68 of the Act, is under no obligation to produce the directors or representatives of the companies who invested in the share capital of the assessee therein. It was held that the source of the funds in the hands of the lender can only be analysed in the assessment proceedings of the lender and not in the assessment proceedings of the recipient of the loan.

It was further contended that the requirement for the assessee to prove the “source of the source‟ would not extend to unsecured loans taken prior to the year 2022, as the said requirement was only brought in through an amendment to Section 68 of the Act made via the Finance Act, 2022.

The Hon’ble High Court observed that the reasons for the CIT(A) to set aside the order of the AO was that the creditworthiness of lender cannot be doubted, as undisputedly the loan was received through proper banking channels and even interest was also paid on the same. Therefore, all essential ingredients of Section 68 of the Act were duly satisfied as the identity of the creditor, its creditworthiness and genuineness of transaction were all satisfied. 

The Hon’ble High Court also observed that with respect to the enquiry made by the AO in respect of the purchases of lender, the CIT(A) held that it would be immaterial insofar as the examination of the loan received by the respondent/ assessee was concerned, as the same cannot be examined in the case of the present assessee and can be subject matter of examination only in the case of the aforesaid creditor.

The Hon’ble High Court noted that identity of the loan creditor had been proved by documentary evidence and also through the statement of the Director of loan creditor/lender recorded during the survey proceedings and also in reply to the notice under Section 133(6) of the Act. It had also been established that lender advanced the loan out of the funds credited in its bank account, proving the creditworthiness of the entity. Though the AO had held that lender did not have the necessary funds in its bank account to provide the loan, the findings of the CIT(A) and the ITAT were at variance with the observation of the AO inasmuch as that the loan had been advanced from the bank account of lender.

With regard to the argument that the purchases made by lender from other third entities were not genuine, the Hon’ble High Court held that the same was immaterial insofar as the assessment proceedings of the respondent was concerned. The initial onus cast upon the respondent/ assessee to show the genuineness of the transaction having been duly discharged, the question as to whether the funds at the hands of lender were obtained through genuine purchases or not cannot be gone into by the Revenue.

The Hon’ble High Court opined that as the present case was related to prior to the amendment brought about by the Finance Act, 2022 requiring assessees to prove the “source of the source‟ of funds credited as unsecured loans. As such, the contention that the genuineness of the funds of loan creditor needs to be examined was devoid of any merit.

The Hon’ble High Court held that the assessee had established the identity of the lender. Even the creditworthiness of the lender cannot be in question. The loan transaction having been effected through proper banking channels, i.e., through the bank accounts of the parties, there cannot be any cavil to the genuineness of the transaction, as it was clear from the judicial pronouncements.   

Accordingly, the appeal of the Revenue was dismissed and substantial questions of law were answered in favour of the respondent assessee and against the appellant Revenue.

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