The Income Tax Appellate Tribunal, Delhi, has clarified that for Assessment Year 2020-21, the requirement to prove the source of source of funds under Section 68 of the Income Tax Act does not apply, and mere association with a flagged entity cannot override documented evidence of creditworthiness and genuineness of transactions conducted through banking channels.
Background & Facts
The Dispute
The dispute arose from an assessment order passed under Section 147 read with Section 143(3) of the Income Tax Act, 1961, for Assessment Year 2020-21. The Assessing Officer (AO) made an addition of Rs. 2,00,00,000 as unexplained credit under Section 68 read with Section 115BBE, treating a portion of a loan received from M/s Hallow Securities Pvt. Ltd. as bogus. The AO also disallowed interest of Rs. 3,62,507 paid on this amount. The assessee, Starcity Buildcon Private Limited, challenged this before the Commissioner of Income Tax (Appeals)-3, Noida, who deleted the addition and disallowance. The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), Delhi.
Key Facts
- The assessee received a total loan of Rs. 14,00,00,000 from M/s Hallow Securities Pvt. Ltd. during AY 2020-21.
- The AO accepted Rs. 12,00,00,000 as genuine but treated Rs. 2,00,00,000 as unexplained credit.
- The loan was received entirely through banking channels via RTGS/NEFT.
- The assessee submitted the following documents to establish identity, creditworthiness, and genuineness:
- PAN of M/s Hallow Securities Pvt. Ltd.
- Audited financial statements for AY 2011-12 to AY 2017-18
- RBI certificate confirming NBFC status
- Bank statements of the lender showing sufficient balances at the time of fund transfer
- Loan confirmation letter and ledger entries evidencing TDS deduction and repayment
- Financial statements showing share capital exceeding Rs. 98,00,00,000 at the time of lending
- The lender, M/s Hallow Securities Pvt. Ltd., was referenced in a Ministry of Finance press release dated 08.06.2018 as a "red-flagged" entity, but no investigation was pending against it as confirmed by SFIO.
- The loan was repaid in subsequent years through banking channels.
- The lender had received funds from Teesta Retails Pvt. Ltd. (a group company of Reliance) in the form of Compulsorily Convertible Debentures (CCDs) amounting to Rs. 300 crores between AY 2019-20 and AY 2021-22.
- The AO had previously added the same funds in the hands of M/s Hallow Securities Pvt. Ltd. for AY 2017-18 to AY 2022-23, making the addition in the assessee’s hands a case of double taxation.
Procedural History
- 26.12.2020: Assessee filed return declaring income of Rs. 4,87,86,420.
- 28.07.2021: Search conducted under Section 132 at ACE & Kurele Group premises.
- 04.01.2022: Search conducted at ACE & Rudra Group premises and at the assessee’s business premises.
- 25.03.2024: AO passed assessment order under Section 147 r.w.s. 143(3), making addition of Rs. 2,00,00,000 under Section 68 and disallowing interest of Rs. 3,62,507.
- 15.05.2025: CIT(A)-3, Noida, allowed the assessee’s appeal, deleting the addition and disallowance.
- 10.02.2026: Hearing held before ITAT Delhi.
- 30.04.2026: ITAT Delhi pronounced order dismissing the Revenue’s appeal.
The Parties' Positions
For the Revenue (Appellant)
- Argued that the assessee failed to discharge the burden under Section 68 to prove identity, creditworthiness, and genuineness of the lender.
- Relied on the Ministry of Finance’s 08.06.2018 press release labeling M/s Hallow Securities Pvt. Ltd. as a shell company.
- Contended that the SFIO report was not conclusive and that the AO’s doubts were valid.
- Sought restoration of the AO’s order or remand for fresh verification.
For the Assessee (Respondent)
- Submitted that all documents establishing the lender’s creditworthiness were provided.
- Highlighted that the loan was received and repaid through banking channels.
- Emphasized that the amendment introducing the "source of source" requirement under Section 68 (via Finance Act, 2022) applies only from AY 2023-24 onwards and is not retrospective.
- Cited judicial precedents holding that once a loan is repaid and documented, it cannot be treated as unexplained income.
- Pointed out that the CIT(A) had independently verified facts under Section 250(4) and the AO had failed to respond to multiple reminders.
Relief Sought
The Revenue sought to set aside the CIT(A)’s order and restore the AO’s addition of Rs. 2,00,00,000 under Section 68 and the disallowance of Rs. 3,62,507 as interest. The assessee sought confirmation of the CIT(A)’s order.
The Legal Issue
The central question was whether, for Assessment Year 2020-21, the assessee was required to prove the "source of source" of funds advanced by M/s Hallow Securities Pvt. Ltd. under Section 68 of the Income Tax Act, and whether the mere classification of the lender as a "shell company" in a press release, without corroborative evidence of illegality, could override documented proof of creditworthiness and genuineness of the transaction.
Arguments Presented
For the Appellant
The Revenue contended that the assessee failed to establish the creditworthiness of M/s Hallow Securities Pvt. Ltd., relying on the Ministry of Finance’s 08.06.2018 press release that flagged the company as a shell entity. It argued that the SFIO report was inconclusive and that the AO’s doubts were reasonable given the company’s association with the ACE Group, which was under search. The Revenue further submitted that the CIT(A) had improperly relied on additional evidence obtained suo moto under Section 250(4), and that the burden under Section 68 was not discharged. It cited CIT v. Kanpur Coals Syndicate to argue that suspicion, however strong, cannot substitute proof, but contended that the facts here amounted to more than suspicion.
For the Respondent
The assessee argued that the amendment introducing the "source of source" requirement under Section 68 via Finance Act, 2022, is prospective and applies only from AY 2023-24. It relied on Mall Hotels Ltd. v. CIT and ACIT v. Smt. Prem Anand to establish that the source of source requirement does not apply to non-share capital transactions prior to AY 2023-24. The assessee submitted comprehensive documentation - financial statements, bank records, RBI NBFC certification, and repayment ledgers - proving the lender’s capacity and the genuineness of the transaction. It emphasized that the loan was repaid through banking channels and that the same funds had already been taxed in the hands of the lender, making the addition a case of double taxation. It further cited Gujarat Television (P.) Ltd. and Bairagra Builders (P.) Ltd. to establish that repayment of loans negates the applicability of Section 68.
The Court's Analysis
The Tribunal conducted a meticulous review of the evidence and the legal framework applicable to AY 2020-21. It observed that the loan of Rs. 14,00,00,000 was received entirely through banking channels, which inherently lends credibility to the transaction. The assessee had submitted audited financial statements of M/s Hallow Securities Pvt. Ltd., showing a share capital of over Rs. 98 crores, and bank statements confirming sufficient balances at the time of fund transfer. The AO had already accepted Rs. 12 crores of the same loan as genuine, raising serious questions about the arbitrary nature of the addition of the remaining Rs. 2 crores.
The Tribunal emphasized that the amendment to Section 68, requiring the assessee to prove the source of source of funds, came into effect only from AY 2023-24. For AY 2020-21, the law required only proof of identity, creditworthiness, and genuineness of the transaction - all of which were established. The Tribunal held that the Ministry of Finance’s 08.06.2018 press release, which listed companies for non-filing of returns, did not constitute a legal finding of illegality. Crucially, the SFIO, the nodal agency for such investigations, confirmed in writing dated 23.01.2025 that no proceedings were pending against M/s Hallow Securities Pvt. Ltd.
The Tribunal further noted that the CIT(A) had exercised its statutory power under Section 250(4) to make independent inquiries after the AO failed to respond to repeated reminders. The Tribunal relied on multiple High Court judgments - including Manish Build Well (P.) Ltd., Shankar Khandasari Sugar Mills, and Smt. Prabhavati S. Shah - which affirmed that the CIT(A) has plenary powers to seek clarificatory evidence and that such evidence is not "additional" under Rule 46A if it completes the trail initiated by the AO.
"The requirement of explaining 'Source' of 'Source' in respect of loans is applicable from A.Y. 2023-24 and subsequent years."
The Tribunal also held that the repayment of the loan in subsequent years, through banking channels, rendered the addition unsustainable under Section 68. It cited Assistant Commissioner of Income-tax v. Gujarat Television (P.) Ltd. and Principal Commissioner of Income-tax v. Bairagra Builders (P.) Ltd., where the Supreme Court and Bombay High Court held that once a loan is repaid and documented, it cannot be treated as unexplained income.
The Tribunal rejected the Revenue’s reliance on the statements of third parties, noting that these were uncorroborated and contradicted by the directors of the lender company. It applied the principle from Umacharan Shaw & Bros. v. CIT and Dhakeswari Cotton Mills Ltd. v. CIT that assessments cannot be based on suspicion alone.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal confirmed the order of the CIT(A) dated 15.05.2025, deleting the addition of Rs. 2,00,00,000 under Section 68 and the disallowance of interest of Rs. 3,62,507. The Tribunal held that the assessee had fully discharged its burden under Section 68 for AY 2020-21, and that the source of source requirement was not applicable. The order of the AO dated 25.03.2024 was set aside.
What This Means For Similar Cases
Source of Source Does Not Apply Retroactively
- Practitioners must argue that for AY 2022-23 and earlier, Section 68 requires only proof of identity, creditworthiness, and genuineness - not the source of source.
- The Finance Act, 2022 amendment is prospective and cannot be invoked for past assessment years.
- Any attempt to apply source of source retroactively is legally untenable.
Banking Channel + Financials Trump Allegations
- Transactions conducted through banking channels carry inherent credibility.
- Audited financial statements of the lender, coupled with bank balance confirmations, are sufficient to establish creditworthiness.
- A press release listing a company as "red-flagged" is not a legal finding of illegality and must be rebutted with official agency reports (e.g., SFIO, ROC).
CIT(A) Has Broad Powers to Seek Clarificatory Evidence
- When the AO fails to respond to appellate reminders, the CIT(A) may invoke Section 250(4) to conduct independent inquiries.
- Evidence obtained under Section 250(4) is clarificatory, not additional, and does not require compliance with Rule 46A.
- Courts and Tribunals consistently uphold the CIT(A)’s duty to ensure tax is levied on real income, not on procedural technicalities.
Repayment of Loan Neutralizes Section 68 Addition
- If an unsecured loan is repaid in full through banking channels before the close of the subsequent financial year, Section 68 cannot apply.
- This principle is now firmly established by the Supreme Court and multiple High Courts.
- Practitioners should always include repayment evidence in Section 68 cases, even if the AO has not raised it.
