The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) clarified that the obligation to explain the “source of source” under Section 68 of the Income Tax Act, 1961, is restricted to credits like share capital and does not extend to unsecured loans received. It explained the requirements applicable from Assessment Year (AY) 2023-24.
Shri Vastimal Bhim Raj Sancheti, the assessee, had received unsecured loans amounting to Rs. 5.87 crore and Rs. 8.31 crore from Magnificent Realcon Pvt. Ltd. (MRPL) during the assessment years 2015-16 and 2016-17, respectively.
The Assessing Officer (AO) treated these loans as unexplained credits under Section 68 of the Income Tax Act, 1961, alleging that the assessee failed to prove the identity, creditworthiness, and genuineness of the transactions.
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The AO argued that MRPL was part of a multi-layered structure involving shell entities designed to obscure the true source of funds. It was alleged that these entities engaged in circular transactions and had negligible business activities or income, raising doubts about the loans’ authenticity.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, holding that the assessee had discharged the burden of proof under Section 68 of the Income Tax Act, 1961.
The CIT(A) observed that the assessee provided extensive documentation, including PAN, financial statements, bank details, and loan confirmations for MRPL and related entities, substantiating the identity and creditworthiness of the creditors as well as the genuineness of the transactions. The CIT(A) observed that the AO failed to conduct independent inquiries or provide evidence contradicting the assessee’s claims.
The Revenue challenged the CIT(A)’s decision before the ITAT, arguing that the CIT(A) ignored the complex layering of transactions and that the submitted documents, including ITRs and confirmations, were insufficient to establish genuineness. The Revenue argued that the loans lacked justification due to the creditors’ limited income and business activities.
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The two-member bench comprising Soundararajan K. (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) considered submissions from both sides. The tribunal ruled that the assessee had provided adequate evidence to substantiate the transactions and that the AO’s reliance on general observations about shell entities was insufficient to disregard the documented evidence.
The tribunal explained that the burden of proving the contrary rested with the AO, who failed to conduct any further investigation or inquiry. The tribunal also addressed the Revenue’s argument regarding the “source of source” of the funds. It clarified that the obligation to explain the source of the creditor’s funds applies only to specific scenarios, such as share capital or premium, and not to unsecured loans for the relevant assessment years.
The tribunal upheld CIT(A)’s decision to delete the additions made under Section 68 of the Income Tax Act, 1961, dismissing the Revenue’s appeal and ruling that no further intervention was needed.
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