No Requirement to Explain Source of Unsecured Loan in Books of Account Prior To April 1, 2023 u/s 68: Delhi HC [Read Order]

The Delhi High Court has clarified that the requirement to prove the "source of the source" under Section 68 of the Income Tax Act, 1961, in respect of unsecured loans, is prospective and applicable only from April 1, 2023, following the amendment introduced by the Finance Act, 2022.

The case began when the assessee's income was increased by ₹27.5 lakhs on the grounds that its director, Mr. Hitesh Bhatia, had not provided a satisfactory explanation regarding unsecured loans.

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The Assessing Officer viewed the cash deposits in the director's account as unexplained, resulting in additions under Section 68, even though the assessee had provided bank statements, income tax returns, and loan confirmations to prove the source as an overdraft facility used by the director.

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The High Court held that prior to the 2022 amendment, the obligation to establish the source of funds was limited to the primary level unless the sums involved were in the nature of share capital or premium.

It observed that “It is seen from the above 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.”

The Court ruled that the enlarged requirement of explaining the "source of the source" in respect of unsecured loans applies only prospectively from AY 2023–24. It relied on the legislative context and the principle of noscitur a sociis to differentiate between shareholder funds and borrowings.

The Division bench of Justice Vibhu Bakhru and Tejas Karia found that the assessee had satisfactorily discharged the burden under Section 68 by establishing the identity of the lender, the genuineness of the transaction through banking records, and the creditworthiness based on the overdraft facility secured against fixed deposits. The doubts regarding cash deposits in the director’s account, the Court observed, were a matter to be examined in the director’s assessment, not that of the assessee company.

Accordingly, the High Court concluded that the additions were unsustainable and allowed the appeal in favour of the assessee.

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To Read the full text of the Order CLICK HERE

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