2025 (5) TMI 2158 - HC - Income Tax

Addition u/s 68 - unexplained credit/entry in his books of accounts - HELD THAT - The requirement of explaining the source of the source of funds credited as unsecured loans in the books of accounts was introduced by virtue of the Finance Act 2022. The same was not applicable during the relevant assessment year AY 2015-16. Thus in our view the Assessee cannot be burdened with the requirement to explain the source of funds of Mr. Hitesh Bhatia. Assessee had produced sufficient material in support of its explanation. Assessee had discharged the said burden to explain identity of the source capacity of such source and genuineness of the transaction. As noted above there is no cavil as to the identity of the person who had extended the unsecured loan reflected as outstanding in the books of account of the Assessee. The Assessee had explained that the funds had been lent by its director Mr. Hitesh Bhatia. Additionally the Assessee produced relevant documents to show that funds had been received through banking channels from the bank account of Mr. Hitesh Bhatia. Insofar as the genuineness of the transaction is concerned there is material on record to indicate that the amount credited in the books of account which has been reflected as loans from Mr. Hitesh Bhatia were unsecured loans. Mr. Bhatia had also confirmed the same. He is not a stranger to the Assessee and is vitally interested in the affairs of the Assessee. Therefore the financial assistance extended by him cannot be doubted. Thus we find that the additions made as unexplained credit under Section 68 of the Act are unsustainable. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(i) Whether the Income Tax Appellate Tribunal erred in holding that Rs. 27,50,000/- received by the assessee from its director as a loan constituted unexplained credit liable for addition under Section 68 of the Income Tax Act, 1961;

(ii) Whether the Tribunal's conclusion that the said amount was required to be added to the assessee's income was perverse, given that the assessee had discharged its onus of proof.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Whether the Rs. 27,50,000/- loan from the director constituted unexplained credit under Section 68

Relevant legal framework and precedents: Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee and the assessee offers no satisfactory explanation about its nature and source, the sum may be charged to income tax as the income of the assessee. The proviso to Section 68, as amended by the Finance Act, 2012, applies specifically to credits in the nature of share application money, share capital, or share premium, requiring the person in whose name the credit is recorded also to offer a satisfactory explanation. The Court noted that the proviso did not extend to unsecured loans during the relevant assessment year (AY 2015-16), as the requirement to explain the source of funds for loans was introduced only by the Finance Act, 2022.

Court's interpretation and reasoning: The Court applied the principle of noscitur a sociis to interpret the proviso, concluding that it was limited to credits related to share capital and not loans. Since the amount in question was an unsecured loan, the proviso's enhanced burden did not apply. The Court emphasized that the assessee had explained the nature of the credit as an unsecured loan from its director and identified the creditor clearly.

Key evidence and findings: The assessee produced bank statements showing receipt of Rs. 51,00,000/- through banking channels from the director's account. The director had availed an overdraft facility from Lakshmi Vilas Bank, secured by fixed deposits, which was the source of the funds. The director had also filed income tax returns declaring his income. The Assessing Officer's summons to the director remained unanswered, but the assessee provided a bank certificate confirming the overdraft facility.

Application of law to facts: Since the assessee identified the source (director), the nature of the credit (unsecured loan), and provided evidence of the funds' origin (bank overdraft secured by fixed deposits), the explanation was satisfactory under Section 68 as it stood during AY 2015-16. The Court held that the burden to explain the "source of the source" of the funds credited as loans was not applicable at that time.

Treatment of competing arguments: The Revenue relied on suspicious cash deposits in the director's bank account totaling Rs. 27,50,000/- during the relevant period, arguing that this cast doubt on the genuineness of the loan and justified addition under Section 68. The Court rejected this argument, holding that any doubt about the director's source of funds was a matter for his own assessment proceedings, not the assessee's. The Court also noted that the director was not a stranger to the assessee and was interested in its affairs, supporting the genuineness of the loan transaction.

Conclusion: The Court concluded that the Tribunal and CIT(A) erred in treating the loan amount as unexplained credit. The explanation offered by the assessee was satisfactory and met the requirements of Section 68 as applicable for AY 2015-16.

Issue (ii): Whether the Tribunal's conclusion to add Rs. 27,50,000/- was perverse given the assessee's discharge of onus

Relevant legal framework and precedents: The assessee bears the burden to establish (a) the identity of the lender, (b) the capacity of the lender to advance the loan, and (c) the genuineness of the transaction. The Court reiterated these principles as established in prior decisions interpreting Section 68.

Court's interpretation and reasoning: The Court found that the assessee had discharged this burden by producing documentary evidence including bank statements, bank certificates confirming overdraft facilities, income tax returns of the director, and confirmations of the loan transactions. The director's capacity was established by the overdraft facility secured by fixed deposits. The genuineness was supported by the director's close association with the assessee and the nature of the transactions.

Key evidence and findings: The Court highlighted that the overdraft facility from Lakshmi Vilas Bank was the source of funds, secured by the director's fixed deposits, thereby establishing his capacity to lend. The director's income tax returns demonstrated his financial standing. The assessee also showed that the director had an opening balance in his books sufficient to explain the cash deposits. Further, the assessee disputed the Revenue's contention that the overdraft was extinguished by cash deposits, producing confirmations of deposits from various related parties totaling Rs. 43,50,000/- through banking channels.

Application of law to facts: The Court applied the legal test for discharge of onus under Section 68 and found that the assessee's evidence and explanations were adequate. The unexplained cash deposits in the director's account did not translate into unexplained credits in the assessee's books.

Treatment of competing arguments: The Revenue's reliance on suspicious cash deposits was rejected as insufficient to negate the assessee's explanation. The Court emphasized that doubts about the director's source of funds were not relevant to the assessee's assessment and should be addressed in the director's own proceedings.

Conclusion: The Tribunal's conclusion was found to be perverse and unsustainable. The addition of Rs. 27,50,000/- to the assessee's income under Section 68 was not justified.

3. SIGNIFICANT HOLDINGS

The Court held that:

"The proviso to Section 68 of the Act, as was in force prior to 01.04.2023, did not require the assessee to explain the source of the source of funds other than share capital money, share capital, share premium or any amount of such nature."

"Any doubt as to the source of funds used by Mr. Hitesh Bhatia to discharge his liability to Lakshmi Vilas Bank cannot be a ground to make an addition of unexplained credit in the hands of the Assessee."

"The unsecured loan amount, as reflected by the Assessee in its books of account, has been duly explained. The source of the source of the funds has also been established as the overdraft from Lakshmi Vilas Bank."

Core principles established include:

• The burden on an assessee under Section 68 is to explain the nature and source of the credit appearing in its books; for unsecured loans, the explanation of the source of the source is not required unless the proviso applies.
• The proviso to Section 68, as applicable during AY 2015-16, applied only to share capital related credits and not to unsecured loans.
• Doubts regarding the source of funds of the lender are to be examined in the lender's own assessment, not in the assessee's assessment.
• The identity of the creditor, capacity to lend, and genuineness of the transaction must be established by the assessee, which was done in this case.

Final determinations on each issue:

On Issue (i), the Court ruled that the Rs. 27,50,000/- loan from the director did not constitute unexplained credit under Section 68 and the proviso did not apply.

On Issue (ii), the Court held that the Tribunal's addition of the amount to the assessee's income was perverse and unsustainable, as the assessee had discharged its onus.

The appeal was allowed in favour of the assessee and against the Revenue.