Section 68 source-of-source proviso not retrospective; pre-amendment identity, genuineness and creditworthiness sufficed, addition deleted for assessee.

Pre-amendment test for unexplained cash credits required the assessee to establish identity of the creditor, genuineness of the transaction and creditworthiness; the post-amendment proviso requiring explanation of the source-of-the-source took effect from 1 April 2013 and is not retrospective. The assessee produced creditor confirmations, ITR acknowledgements and bank records, thereby discharging the prima facie onus under the pre-amendment rule. Applying the correct temporal test, the addition treating credited sums as unexplained cash credit is unsustainable and is deleted in favour of the assessee.

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Issues: (i) Whether the addition of Rs.1,26,00,000 under section 68 of the Income-tax Act, 1961 can be sustained where the assessee established identity of creditors but authorities applied the post-2013 proviso requiring explanation of the source of the source.

Analysis: The applicable pre-amendment statutory test under Section 68 required the assessee to prima facie establish (i) identity of the creditor, (ii) genuineness of the transaction and (iii) creditworthiness of the creditor. The proviso to Section 68 introduced by Finance Act, 2012 became effective from 1 April 2013 and is not retrospective. Jurisprudence of the jurisdictional High Court confirms that prior to the proviso the assessee was not obliged to explain the source of the source. The authorities below applied the post-amendment requirement to the assessment year 2011-12; however the assessee had established identity of the creditors by producing confirmations, ITR acknowledgements and bank records, thereby discharging the prima facie onus under the pre-amendment Section 68. On this legal foundation the addition founded on non-establishment of source of the source is unsustainable.

Conclusion: Addition of Rs.1,26,00,000 as unexplained cash credit under Section 68 of the Income-tax Act, 1961 is deleted and the appeal is allowed in favour of the assessee.

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