Vide Finance Act, 2012, it was provided that the nature and source of any sum, in the nature of share application money, share capital, share premium or any such amount by whatever name called, credited in the books of a closely held company shall be treated as explained only if the source of funds is also explained in the hands of the shareholder. However, in case of loan or borrowing, courts have held that only identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor. This was considered to have led to the provision becoming ineffective in handling evasion when routed through a layered credit claim. Therefore, the provisions of Section 68 of the Income Tax Act had been amended by FA 2022 so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor. However, before this amendment, there was no requirement to prove source of source.
Further, there cannot be any addition u/s 68 of Income Tax Act for loan taken for which complete particulars and evidence were furnished by those parties and in fact the loan taken was also repaid back. Such the transaction cannot be considered as bogus loan, fraudulent, circulated transaction,or accommodation entry, unless proved with evidence, especially when the statement given by a third party is retracted. The AO cannot reject filing of confirmations, bank statement and copy of returns merely on suspicion. Hon'ble High Court of Gujarat held in the case of Ranchhod Jivabhai Nakhava Appeal No.50 of 2011, on the ratio of that once the assessee has discharged initial onus by furnishing copy of PAN, confirmation of lenders, it was the duty of Assessing Officer to investigate or verify about the lenders, Rohini Builders [2002] 256 ITR 360 [2003] 127 Taxman 523 (Guj). The same was upheld in the case of M/s WHITE WILLOW VISHRAM APARTMENT Vs INCOME TAX OFFICER, WARD-1 [2023-VIL-1129-ITAT-SRT].
However, a word of caution for taxpayers is that to escape from rigors of Section 68 they have to furnish details and particulars showing identity of creditors/investors, their capacity and credit worthiness and genuineness of transaction. In the case of DHANWAN LEASING AND FINANCE COMPANY LTD. VERSUS ITO, WARD 2 (2), INDORE - 2023 (2) TMI 698 - ITAT INDORE it was held that for establishing a factum of conduit company, the assessee is duty bound to establish that source companies are also group companies and assessee after receiving the amount further invested same by making investments in group company. Investor companies, who invested amount in assessee company as share application money, are not part of main group company. Assessee had also onus to prove that it is a conduit company and also establish identity, capacity and credit worthiness of investor companies and genuineness of transaction.
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