2026 (3) TMI 232 - HC - Income Tax

Source of funds burden cannot be applied retrospectively; reopening notice invalid where pre amendment disclosures were scrutinised.

A post enactment extension of the assessee's burden to explain the 'source of the source' for credited loans cannot be applied to an earlier assessment ... Reopening of assessment - Addition u/s 68 - unsecured loan - petitioner is unable to prove the “source of the source” - Applicability of proviso to Section 68 (requiring explanation of the 'source of the source') was introduced only by the Finance Act, 2022 - Validity of the show cause notice u/s 148A(b) and the subsequent notice u/s 148 where the assessee had disclosed the transaction in scrutiny proceedings and a final assessment u/s 143(3) had been passed HELD THAT: - The Court examined the record and found that the petitioner had disclosed the transaction with Gitanjali Infratech Ltd., including the development agreement and payment routed through banking channels, during scrutiny and that the assessment under Section 143(3) was completed. The original Section 148A(b) notice did not refer to the lender by name and merely alleged that the payment to Gitanjali Infratech Ltd. was a bogus transaction. The AO in the Section 148A(d) order proceeded on the basis that the assessee failed to prove the 'source of the source.' The Court held that where the assessee has specifically disclosed the transactions in scrutiny proceedings and documentary evidence was placed on record, the reopening cannot be sustained merely on a fresh contention that the 'source of the source' was not explained; the statutory scheme requires that the AO possess information suggesting escapement of income despite such prior disclosure. Applying these principles to the facts, the Court concluded that no information justifying reopening u/s 148/148A was established. [Paras 15, 16, 18, 23, 24] Proviso to Section 68 applicability - retrospective or prospective effect - Whether the proviso to Section 68 (imposing obligation to explain the 'source of the source') applies to AY 2018-19?- HELD THAT: - The Court noted that the proviso to Section 68, expanding the assessee's obligation to require explanation of the 'source of the source,' was introduced by the Finance Act, 2022 and became effective from 01.04.2023. The proviso was therefore not in force for the relevant assessment year AY 2018-19. Reliance on the decision of the Delhi High Court in Sheela Overseas [2025 (5) TMI 2158 - DELHI HIGH COURT] supported the view that the enlarged onus was a legislative change effective only prospectively. Consequently, the assessee for AY 2018-19 could not be required to explain the source of funds of the lender and could not be burdened with the amended proviso retrospectively. [Paras 19, 20, 21, 22] Final Conclusion: Writ petition allowed - reassessment notices and the order u/s 148A(d) were quashed because the transactions had been disclosed and assessed and the proviso to Section 68 relied upon did not apply to Assessment Year 2018-19. Issues: Whether the notice under Section 148A(b) and the subsequent order under Section 148A(d) and notice under Section 148 of the Income-tax Act, 1961 for Assessment Year 2018-19 are valid where the assessee had disclosed the transactions in scrutiny assessment and the proviso to Section 68 (requiring explanation of the 'source of the source') was introduced only by the Finance Act, 2022 effective from 01.04.2023.Analysis: The assessee filed return for AY 2018-19 and the transactions concerning payment to Gitanjali Infratech Ltd. and receipt of an unsecured loan from Rakesh Girdharlal Gajera were disclosed and examined in scrutiny proceedings culminating in assessment under Section 143(3) read with Sections 143(3A) and 143(3B). The impugned Section 148A(b) show cause notice and the Section 148A(d) order proceeded on the basis that the assessee failed to prove the 'source of the source' of funds and that alleged bogus transactions resulted in escapement of income. The proviso to Section 68 of the Income-tax Act, 1961 expanding the assessee's onus to include explanation of the 'source of the source' for amounts credited as loans was inserted by the Finance Act, 2022 and made effective from 01.04.2023. Prior to that effective date, such an extended burden was not statutorily required. The facts show the assessee had disclosed the relevant loan and payments during scrutiny and produced documentary evidence of banking transactions and the registered development agreement. The department's case that further inquiry into the source of the lender was necessary relies on the post-2023 proviso which does not apply retrospectively to AY 2018-19. The requirement to explain the source of the lender's funds cannot be imposed for the relevant assessment year by invoking an amendment effective after the assessment year. In these circumstances, the statutory preconditions for reopening under Section 148A(b) and issuance of notice under Section 148, insofar as they rest upon the non-application of the post-2023 proviso to Section 68, are not satisfied.Conclusion: The impugned notices under Section 148A(b) and Section 148 and the order under Section 148A(d) are quashed and set aside; the writ petition is allowed in favour of the assessee.