POSHS METAL INDUSTRIES PRIVATE LIMITED,MUMBAI vs. DCIT, CIRCLE 14(1)(1), MUMBAI

In order to verify the genuineness of the transactions and the creditworthiness of the aforesaid two creditors, the AO issued summons. In response, M/s. Ajaayu Trading and Consultancy Pvt. Ltd. did not appear in person, but furnished certain documents, including a bank statement. From the bank statement, the AO noticed that a sum of Rs.1 crore had been transferred by M/s. Ajaayu Trading and Consultancy Pvt. Ltd. to the assessee on 02.07.2013. It was further noticed that immediately prior thereto, on the very same date, M/s. Ajaayu Trading and Consultancy Pvt. Ltd. had received a sum of Rs.1 crore from M/s. Sanimo Polymers Pvt. Ltd.

Likewise, in respect of M/s. Naulakha Impex Pvt. Ltd., the assessee had received a sum of Rs.1.50 crores on 11.03.2014. The said creditor also did not appear before the AO in response to the summons, but furnished certain documents. On examination of the bank statement, the AO noticed that the immediate source of the sum of Rs.1.50 crores advanced by M/s. Naulakha Impex Pvt. Ltd. to the assessee was a corresponding credit of Rs.1.50 crores received from M/s. Sanimo Polymers Pvt. Ltd. on the very same date, i.e., 11.03.2014.

According to the AO, therefore, both the creditors had not advanced the amounts out of their own funds. Rather, the funds had been received from M/s. Sanimo Polymers Pvt. Ltd. and had thereafter been advanced to the assessee on the same day. The AO was of the view that the creditworthiness of the two creditors had consequently not been established. He accordingly treated the aggregate amount of Rs.2.50 crores, comprising Rs.1 crore received from M/s. Ajaayu Trading and Consultancy Pvt. Ltd. and Rs.1.50 crores received from M/s. Naulakha Impex Pvt. Ltd., as unexplained cash credits under section 68 of the Act.

Aggrieved, the assessee preferred an appeal before the learned CIT(A). The learned CIT(A) confirmed the addition made by the AO. The learned CIT(A) observed that although the assessee had furnished the PAN, addresses, confirmations and other particulars of the creditors, the creditors had not advanced the amounts from their own funds and that both creditors had received the corresponding funds from M/s. Sanimo Polymers Pvt. Ltd. on the very same dates on which the amounts were advanced to the assessee. The learned CIT(A) consequently observed that the creditors appeared to be shell companies having no independent source to advance such substantial amounts to the assessee.

Before us, the learned Authorised Representative (‘ld. AR’) submitted that the assessee had discharged the initial onus cast upon it under section 68 by establishing the identity of the creditors, the genuineness of the transactions and the creditworthiness of the creditors. It was submitted that the loans were received through normal banking channels and the creditors had furnished confirmations and supporting documentary evidence. It was further submitted that the amounts had subsequently been repaid by the assessee. The ld.AR also submitted that the assessee had made investments in unquoted shares of M/s. Sanimo Polymers Pvt. Ltd., and had also made investment in unquoted shares of M/s. Naulakha Impex Pvt. Ltd. It was therefore contended that the transactions could not be treated as unexplained merely because the creditors had received funds from another entity immediately before advancing the loans to the assessee.

The ld.AR placed reliance, inter alia, on the decision of the Hon'ble Delhi High Court in Sheela Overseas Pvt. Ltd. v. Principal Commissioner of Income-tax, 183 taxmann.com 236, dated 28.05.2025 and the subsequent decision of the Hon'ble Delhi High Court in Principal Commissioner of Income-tax-4, Delhi v. KRBL Infrastructure Ltd., 180 taxmann.com 502, dated 13.11.2025, in support of the proposition that, for Assessment Year 2014-15, the assessee was not required to establish the source of the source of an unsecured loan.

Reliance was also placed on the decision of the coordinate bench at Delhi in Singla Realters Ltd., reported in 183 taxmann.com 480, wherein, on the facts of that case, the assessee had furnished documentary evidence such as the income-tax returns, balance sheets, confirmations and bank statements of the lenders, and the lenders had confirmed the transactions. It was held that an addition under section 68 could not be made merely because the assessee had not established the source of the source of the loan.

Reliance was further placed on the decision of the Hon'ble Bombay High Court in Gaurav Triyugi Singh v. Income Tax Officer, 121 taxmann.com 86, wherein the Hon'ble High Court held that where an unsecured loan had been received through banking channels, the identity of the creditor and genuineness of the transaction were not in dispute and the Revenue had not brought any material to impeach the source of the credit, no addition under section 68 could be made.

The ld.AR also relied upon the decision of the Hon'ble Bombay High Court in Principal Commissioner of Income-tax v. Veedhata Tower Pvt. Ltd., 403 ITR 415, concerning the scope of the proviso to section 68 introduced by the Finance Act, 2012 with effect from 01.04.2013. It was submitted that the said proviso specifically dealt with share capital, share application money and share premium and was not applicable to unsecured loans.

Reliance was also placed on the decision of the Hon'ble Bombay High Court in CIT v. Ami Industries (India) Pvt. Ltd., 116 taxmann.com 34, for the proposition that where the assessee had discharged its burden of establishing the identity of the creditors, genuineness of the transactions and creditworthiness of the creditors, and such finding had been affirmed by the Tribunal, no addition under section 68 could be sustained in the absence of perversity in the findings.

Per contra, the learned Departmental Representative (‘ld.DR’) supported the orders of the authorities below. He submitted that the immediate source of both loans was the same entity, namely, M/s. Sanimo Polymers Pvt. Ltd., and that the funds had been transferred to the respective creditors and thereafter to the assessee on the very same dates. According to the ld.DR, this circumstance demonstrated that the creditors did not have independent financial capacity to advance the amounts and that the assessee had failed to establish their creditworthiness. He accordingly submitted that the addition under section 68 was justified.

We have carefully considered the rival submissions and perused the material available on record. The undisputed facts are that the assessee received Rs.1 crore from M/s. Ajaayu Trading and Consultancy Pvt. Ltd. on 02.07.2013 and Rs.1.50 crores from M/s. Naulakha Impex Pvt. Ltd. on 11.03.2014. The transactions were routed through banking channels. The respective creditors furnished documentary material in response to the summons issued by the AO. The principal objection of the AO is not that the amounts were received in cash or that the creditors were non- existent. Rather, the objection is that the creditors themselves had received equivalent amounts from M/s. Sanimo Polymers Pvt. Ltd. immediately before advancing the funds to the assessee.

The question, therefore, which arises for our consideration is whether, in the facts of the present case and having regard to the assessment year involved, the assessee was required to establish the source from which the creditors themselves had obtained the funds advanced to the assessee.

Section 68, as applicable to the assessment year under consideration, provided that where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offered no explanation about the nature and source thereof, or the explanation offered was not satisfactory in the opinion of the AO, the sum so credited could be charged to income-tax as the income of the assessee of that previous year.

It is well settled that, in the case of a credit appearing in the books of the assessee, the initial burden is upon the assessee to establish the identity of the creditor, the genuineness of the transaction and the creditworthiness of the creditor. Once the assessee discharges the initial burden by producing cogent material, the onus shifts to the Revenue. The assessee, however, cannot ordinarily be called upon to establish the source of the source unless the statute specifically so provides.

In the present case, it is important to bear in mind the statutory amendment made by the Finance Act, 2012. The proviso inserted in section 68 with effect from 01.04.2013 specifically required, in cases involving closely held companies receiving share application money, share capital or share premium, an explanation regarding the source of the sums received. That statutory requirement was confined to the specified category of credits. Subsequently, by the Finance Act, 2022, another proviso was inserted in section 68 with effect from 01.04.2023, whereby, in the case of certain credits representing loans or borrowings, the assessee was required to explain, inter alia, the source of the source. The amendment, therefore, has prospective application from Assessment Year 2023-24 and cannot be applied to the assessment year under consideration.

The aforesaid legal position has now been authoritatively considered by the Hon'ble Delhi High Court in KRBL Infrastructure Ltd., judgment dated 13.11.2025, relating to Assessment Year 2014-15. In that case also, the Revenue sought to question the genuineness of an unsecured loan by examining the source of the funds in the hands of the lender. The Hon'ble High Court held that once the assessee had discharged the initial onus of establishing the identity and creditworthiness of the creditor and genuineness of the transaction, it was not incumbent upon the assessee to prove the genuineness of the funds in the hands of its lender, i.e., the “source of the source”. The Court specifically noted that the relevant assessment year was AY 2014-15, prior to the amendment made by the Finance Act, 2022.

The aforesaid decision is particularly relevant to the present appeal because the assessment year before us is also AY 2014-15 and the credits in question are unsecured loans. The Hon'ble Delhi High Court has expressly held that the statutory requirement to establish the source of the source of unsecured loans introduced by the Finance Act, 2022 cannot be retrospectively applied to AY 2014-15.

In the present case, the AO has proceeded principally on the basis that the immediate source of the funds in the hands of the two creditors was M/s. Sanimo Polymers Pvt. Ltd. This, by itself, amounts to an examination of the source of the source of the funds received by the assessee. The fact that the funds were received by the creditors from another entity on the very same day may undoubtedly constitute a circumstance warranting enquiry in an appropriate case. However, such circumstance cannot, in the absence of further material, be used to impose upon the assessee a statutory burden which did not exist for the relevant assessment year.

At the same time, we are conscious that the expression “source of source” should not be understood to mean that every transaction involving a banking channel is automatically genuine. Where the AO brings independent and substantive material on record demonstrating that the ostensible creditor is merely a conduit, that the transaction is sham, or that the apparent creditor is not the real creditor, the Revenue is not precluded from examining the transaction in accordance with law. The question in the present case, however, is whether the material relied upon by the AO is sufficient to establish such a case.

On consideration of the material placed before us, we find that the principal basis for the addition is the immediate receipt of equivalent funds by the two creditors from M/s. Sanimo Polymers Pvt. Ltd. before the corresponding amounts were advanced to the assessee. No independent material has been brought on record to establish that the two creditors were fictitious or that the amounts shown as loans were not actually advanced by them. The transactions admittedly took place through banking channels and the creditors furnished documentary material confirming the transactions. The fact that the assessee subsequently repaid the amounts is also a relevant circumstance supporting the genuineness of the transactions, though repayment by itself may not be conclusive.

In our considered view, the AO and the learned CIT(A) have essentially proceeded on the basis that since the two creditors received funds from M/s. Sanimo Polymers Pvt. Ltd. immediately before advancing the same to the assessee, the creditworthiness of the creditors was not established. Such an approach, in the facts of the present case, effectively requires the assessee to explain the source of the source. For AY 2014-15, such an obligation did not arise in respect of unsecured loans under section 68.

The subsequent amendment made by the Finance Act, 2022 cannot be used to read into the law applicable to AY 2014-15 a requirement which was introduced only with effect from AY 2023-24. The distinction between the amendment relating to share capital/share application money/share premium and the subsequent amendment covering loans and borrowings is material in this regard.

The decision of the Hon'ble Bombay High Court in Veedhata Tower Pvt. Ltd., 403 ITR 415, relied upon by the learned Authorised Representative, dealt with the proviso to section 68 concerning share capital/share application money/share premium and, therefore, does not directly govern the present case. However, the principle emerging from the subsequent statutory amendment and the decision of the Hon'ble Delhi High Court in KRBL Infrastructure Ltd. directly applies to the unsecured loans involved in the present appeal.

We are, therefore, of the considered view that the assessee having furnished material establishing the identity of the creditors and the factum of the loan transactions through banking channels, the addition of Rs.2.50 crores cannot be sustained merely because the creditors had themselves received corresponding funds from another entity immediately prior to advancing the loans to the assessee. The Revenue was free to examine the source of funds in the hands of the creditors in their respective assessments. However, in the absence of any further material to show that the transactions were sham or that the creditors were merely accommodation entry providers, the addition cannot be sustained in the hands of the assessee for AY 2014-15.

In view of the foregoing discussion and having regard to the facts of the case and the legal position applicable to the relevant assessment year, we hold that the addition of Rs.2,50,00,000/- made under section 68 of the Act is not sustainable. The same is accordingly deleted.

In the result, the appeal filed by the assessee is allowed.