Assessee Not Required To Prove “Source Of Source” Of Funds Credited Prior To Finance Act 2022: Delhi High Court

The Delhi High Court has held that once the initial onus cast upon an assessee to show the genuineness of its creditors is duly discharged, the question as to whether the funds of the creditor were obtained through genuine purchases or not cannot be gone into by the Revenue.

A division bench of Justices V. Kameswar Rao and Vinod Kumar observed,

“Once the assessee discharges its initial onus of proving the identity and creditworthiness of the creditor and also the genuineness of the transaction, it is not incumbent upon the assessee to prove the genuineness of the funds at the hands of its lender, i.e., the “source of the source” of the funds.”

The observation was made with respect to transactions prior to introduction of Finance Act 2022, which amended Section 68 of the Income Tax Act, 1961.

Section 68 pertains to cash credits. It requires an assessee to satisfy the 'triple test' of establishing identity, genuineness and creditworthiness of the lender. The 2022 amendment casts an additional requirement for the assessee to prove the “source of the source”.

In the case at hand, the Department had challenged orders of CIT(A) and ITAT, setting aside addition of Rs.10,00,00,000/- made to assessee's income on account of alleged bogus unsecured loan.

To verify the veracity of the unsecured loans taken by the assessee, the AO asked the assessee to prove genuineness of the transactions, creditworthiness and the identity of the lender (Shashi Foods).

Assessee responded that the loan had been taken for the purpose of business through proper banking channels.

The Department however contended that a mere submission that a loan has been received through banking channels does not mean that it is genuine. It submitted that the lender does not appear to have the financial worth to lend such huge sums, leading to the conclusion that the loan is not genuine.

The High Court at the outset observed that the loan was advanced in FY 2013-14, i.e., AY 2014-15.

It stated that the identity of the creditor has been proved by documentary evidence and it has also been established that Shashi Foods advanced the loan out of the funds credited in its bank account, proving the creditworthiness of the entity.

Thus, even though AO was of the opinion that Shashi Foods did not have the necessary funds in its bank account to provide the loan, the High Court held, “the question as to whether the funds at the hands of Shashi Foods were obtained through genuine purchases or not cannot be gone into by the Revenue.”

Reliance was placed on CIT v. Dwarkadhish Investment (P.) Ltd. where the Court had held that assessee need not to prove the “source of source”.

Similarly, the Gujarat High Court in Deputy Commissioner of Income Tax v. Rohini Builders, (2002) held that assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source.

As such, the Court dismissed Department's appeal, stating, “the present case relates to the AY 2014-15, 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 Shashi Foods needs to be examined is devoid of any merit.”

Appearance: For the Appellant : Mr. Abhishek Maratha, SSC, Mr. Apoorv Aggarwal, JSC, Mr. Parth Samwal, Ms. Nupur Sharma, Mr. Gaurav Singh, Mr. Bhanukaran Singh Jodha and Ms. Muskan Goel, Advocates.. For the Respondent : Mr. Sachit Jolly, Senior Advocate with Ms. Mansha Anand, Advocate.

Case title: Principal Commissioner Of Income Tax-4 Delhi v. KRBL Infrastructure Ltd

Citation: 2025 LiveLaw (Del) 1581

Case no.: ITA 494/2024

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