Assessee Not Required to Prove 'Source of Source' for Unsecured Loans Pre-2022 Amendment to Section 68 of Income Tax Act: Delhi High Court - 2025-11-25

Delhi High Court Upholds Deletion of ₹10 Crore Addition, Rules Assessee Need Not Prove 'Source of Source' for Loans Pre-2022 Amendment

New Delhi: In a significant ruling clarifying the scope of an assessee's burden of proof under Section 68 of the Income Tax Act, the Delhi High Court has held that for assessment years prior to the Finance Act 2022 amendment, a taxpayer is not required to prove the 'source of the source' of funds for an unsecured loan once the initial onus of proving the lender's identity, creditworthiness, and the transaction's genuineness is discharged.

A Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar dismissed an appeal filed by the Principal Commissioner of Income Tax against KRBL Infrastructure Ltd., upholding the orders of the CIT(A) and the ITAT which had deleted an addition of ₹10 crore made by the Assessing Officer (AO).

Background of the Case

The case pertains to the Assessment Year 2014-15. Following a search and seizure operation on the KRBL Group, the AO completed an assessment for KRBL Infrastructure Ltd. and made two key additions:

1. ₹10 crore on account of an alleged bogus unsecured loan received from M/s Shashi Foods India Pvt. Ltd., treated as unexplained credit under Section 68 of the Income Tax Act.

2. ₹1.03 crore as a disallowance of interest paid on the said loan.

The AO contended that the loan was not genuine, arguing that the lender, Shashi Foods, lacked the necessary creditworthiness. This conclusion was based on an investigation into the suppliers of Shashi Foods, where many were found to be non-existent, and on alleged links to an individual, Dinesh Jain, who had admitted to providing bogus bills.

However, both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee, KRBL Infrastructure, leading the Revenue to appeal before the High Court.

Arguments Before the High Court

For the Revenue (Appellant): Mr. Abhishek Maratha, representing the Income Tax Department, argued that the assessee had failed to satisfy the 'triple test' of identity, creditworthiness, and genuineness under Section 68. He contended that merely receiving funds through banking channels is insufficient proof. The Revenue asserted that its investigation revealed a complex web of fund rotation involving the KRBL Group and entities linked to providing accommodation entries, thus rendering the loan a sham transaction.

For the Assessee (Respondent): Senior Advocate Mr. Sachit Jolly, appearing for KRBL Infrastructure Ltd., countered that the assessee had fully discharged its primary onus. He highlighted that:

- The loan was received and later repaid through proper banking channels.

- Interest was paid on the loan, and TDS was deducted.

- The lender, Shashi Foods, had confirmed the transaction in a statement and in response to a notice under Section 133(6) of the Act.

- The AO’s investigation into the creditors of Shashi Foods amounted to an inquiry into the 'source of the source,' which is not permissible for the assessment year in question.

Court's Analysis and Key Findings

The High Court meticulously analyzed the findings of the lower authorities and the legal principles governing Section 68. The Bench affirmed the concurrent findings of the CIT(A) and the ITAT, noting that the assessee had successfully discharged its initial burden of proof.

> The Court observed, "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..."

A pivotal part of the judgment addressed the Revenue's attempt to question the source of funds in the lender's hands. The Court unequivocally held that such an inquiry was beyond the assessee's responsibility for AY 2014-15.

> "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..." the Court stated, quoting its recent decision in Sheela Overseas Private Limited .

The Court reasoned that once the identity and creditworthiness of the lender and the genuineness of the transaction are established with documentary evidence, the onus shifts to the Revenue. In this case, the Revenue's investigation into Shashi Foods' own business dealings was deemed immaterial to the assessment of KRBL Infrastructure Ltd.

Final Decision

The High Court answered both substantial questions of law in favour of the assessee and against the Revenue. It held that the ITAT was correct in deleting the additions, as the assessee had successfully proved the genuineness of the unsecured loan.

The appeal filed by the Income Tax Department was consequently dismissed, bringing finality to the dispute for the concerned assessment year and reinforcing a crucial legal principle regarding the limits of an assessee's burden of proof under Section 68 before its 2022 amendment.