Addition under s.68 deleted as Rs.1.62 crore loan proved through s.133(6) confirmation and banking trail

The ITAT Pune allowed the assessee's appeal, deleting the addition under s.68. The Tribunal held that the assessee had satisfactorily established the nature and source of the loan of Rs. 1.62 crores received from Lender A. In response to notice under s.133(6), Lender A confirmed the loan and produced bank statements showing the flow of funds originating from vendors of the land through intervening parties. Holding that identity, creditworthiness, and genuineness of the transaction were duly proved, the ITAT set aside the order of CIT(A)/NFAC.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the addition under section 68 of the Income Tax Act, 1961, in respect of an unsecured loan of Rs. 1.62 crore taken for purchase of immovable property, was justified when the assessee had explained the source and source of source of the credit.

1.2 Whether, for assessment years prior to 01.04.2023, section 68 required the assessee to explain the source of the source of unsecured loans not being share capital, share premium or like funds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Addition under section 68 in respect of unsecured loan and requirement to explain source of source (pre-01.04.2023)

Legal framework (as discussed)

2.1 The Tribunal considered section 68 of the Act as applicable to the relevant assessment year, and the judicial interpretation that, prior to its amendment by the Finance Act, 2022 (effective from 01.04.2023), the section did not cast an obligation on the assessee to explain the source of the source of funds, except in cases of share capital, share premium and similar nature receipts. Reliance was placed on the judgment of the Delhi High Court holding that the 2022 amendment enlarged the onus and was necessary to expressly bring within section 68 the requirement to explain source of source for sums other than such share-related receipts.

2.2 The Tribunal also referred to its own earlier decision following the aforesaid Delhi High Court view, where it was held that unsecured loans (not being in the nature of share capital/share premium) for pre-01.04.2023 years were not covered by the extended obligation to prove source of source, and that the assessee's burden under section 68 in such cases was confined to proving identity, creditworthiness of the creditor and genuineness of the transaction.

Interpretation and reasoning

2.3 The Tribunal noted that the assessee had purchased land for Rs. 1.62 crore and explained that the amount represented an interest-free unsecured loan from one creditor. That creditor, in response to a notice under section 133(6), confirmed the loan and furnished his bank statement. The creditor's bank statement showed receipt of the same amount as loan from his wife, who in turn had borrowed an identical amount from the very persons who were the vendors of the land.

2.4 The Assessing Officer treated the series of transactions as accommodation entries, disbelieved the loan, and invoked section 68 on the basis that the assessee was the ultimate beneficiary of layered transactions and that his explanation was not satisfactory. The first appellate authority applied the Supreme Court decision concerning share capital and upheld the addition.

2.5 The Tribunal observed that it was undisputed that: (i) the assessee had disclosed the loan of Rs. 1.62 crore from the named creditor; (ii) the creditor had responded directly to the Assessing Officer, confirmed the loan, and produced his bank statement; (iii) the flow of funds from the creditor's wife and further from the land vendors was on record; and (iv) a similar loan and acquisition of the other 50 per cent share in the same property by the assessee's brother had been accepted without any addition or remedial action under sections 147 or 263.

2.6 Applying the Delhi High Court's interpretation of section 68 and the coordinate bench decision, the Tribunal held that, for the relevant year, section 68 did not require the assessee to prove the source of the source of an unsecured loan, which was not in the nature of share capital or share premium. In any event, on the facts, the assessee had not only established the immediate source (the creditor) but also the source of source (creditor's wife and further lenders, being the land vendors).

2.7 The Tribunal distinguished the Supreme Court decision relied upon by the appellate authority, noting that it related to share capital/share premium, whereas the present case involved an unsecured loan. It therefore held that the ratio of that judgment was not directly applicable to the facts at hand.

2.8 The Tribunal concluded that the assessee had discharged the onus under section 68 by establishing: (i) the identity of the creditor; (ii) the creditor's creditworthiness through bank records and confirmation; and (iii) the genuineness of the loan transaction as evidenced by banking channels and confirmations. No contrary material was brought on record to negate these ingredients.

Conclusions

2.9 For assessment years prior to 01.04.2023, in relation to unsecured loans not being share capital/share premium or amounts of like nature, section 68 did not mandate that the assessee prove the source of the source of the credit; the obligation was confined to establishing identity, creditworthiness, and genuineness of the transaction.

2.10 On the facts, the assessee satisfactorily explained the unsecured loan of Rs. 1.62 crore by proving the identity and creditworthiness of the creditor and the genuineness of the transaction, and in fact also demonstrated the source of the source. The conditions for invoking section 68 were not met.

2.11 The addition of Rs. 1.62 crore made under section 68 was unsustainable and was directed to be deleted. The assessee's appeal was allowed.

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