The Delhi High Court ruled that once the taxpayer discharges his initial onus of proving the identity and creditworthiness of the creditor and also the genuineness of the transaction, it is not incumbent upon him to prove the genuineness of the funds at the hands of its lender, i.e., the “source of the source” of the funds.

Further, the loan transaction having been effected through proper banking channels, i.e., through the bank accounts of the parties, the Court clarified that there cannot be any cavil to the genuineness of the transaction.

The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the present case relates to the Assessment Year 2014-15, which is before the amendment brought about by the Finance Act, 2022, requiring the taxpayers to prove the “source of the source” of funds credited as unsecured loans.

The Bench also observed that the issue of whether the transaction was a genuine loan or an accommodation entry, which is a pure question of fact, was considered by the CIT(A) and the ITAT. Therefore, when the genuineness of the transaction has been affirmed by the final fact-finding quasi-judicial authorities, such a loan transaction, having been effected through proper banking channels, cannot be considered as bogus.

The Bench noted that the identity of the creditor has been proved by documentary evidence and also through the statement of the Director of the creditor recorded during the survey proceedings, and also in reply to the notice under Section 133(6). Further, it was also established that the creditor had advanced the loan out of the funds credited in its bank account, proving the creditworthiness of the entity.

Though the AO had held that the creditor did not have the necessary funds in its bank account to provide the loan, the findings of the CIT(A) and the ITAT are at variance with the observation of the AO since the loan was advanced from the bank account of the creditor, added the Bench, while dismissing the appeal in favour of the respondent company.

Briefly, pursuant to a search and seizure operation carried out on the KRBL Group in 2016, the respondent filed its return declaring a loss of Rs. 3.49 crores. The AO, however, completed the assessment under Section 153A at an income of Rs. 7.53 crores, by making an addition of Rs. 10 crores on account of a bogus unsecured loan and a disallowance of Rs. 1.03 crores on account of interest paid on the alleged bogus unsecured loan.

On appeal, the CIT(A) deleted the addition of Rs. 10 crores and reduced the disallowance of Rs. 1.03 crores to Rs. 84 lacs, which stands confirmed by the ITAT.

Appearances:

Senior Advocate Abhishek Maratha, along with Advocates Apoorv Aggarwal, Parth Samwal, Nupur Sharma, Gaurav Singh, Bhanukaran Singh Jodha, and Muskan Goel, for the Appellant/ Revenue

Senior Advocate Sachit Jolly and Advocate Mansha Anand, for the Respondent/ Taxpayer