The officer says my loan is unexplained — what exactly do I have to prove?
Under section 68 the initial burden is on you to explain the nature and source of any sum credited in your books, and courts have read that as requiring proof of three things: the identity of the creditor, his creditworthiness, and the genuineness of the transaction. Only once all three are established prima facie does the onus shift to the department, and since the Finance Act 2022 the explanation must in most cases also cover the creditor's own source.
Section 68 provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about its nature and source, or the explanation offered is not in the opinion of the Assessing Officer satisfactory, the sum may be charged to income-tax as the income of the assessee of that previous year.
The section speaks only of "nature and source". The three-ingredient test — identity, creditworthiness, genuineness — is judicial gloss, and it is the framework every assessment order and every appellate order uses. Identity means the creditor is a real, identifiable person or entity. Creditworthiness means that person had the financial capacity to advance what he advanced. Genuineness means the transaction actually happened as described and is not a paper entry.
The Supreme Court in PCIT v. NRA Iron & Steel Pvt. Ltd. set out the onus in these terms: the assessee is under a legal obligation to prove the receipt of share capital or premium to the satisfaction of the Assessing Officer, and only when the three ingredients are established prima facie is the department required to undertake any further exercise. Once that threshold is crossed, the burden shifts and it is for the revenue to show that the sum is nonetheless the assessee's income. The court drew on Kale Khan Mohammad Hanif, Roshan Di Hatti, CIT v. Oasis Hospitalities and CIT v. N.R. Portfolio.
The critical practical point from NRA Iron & Steel is that routing money through banking channels does not by itself establish creditworthiness. A bank statement showing an immediately preceding deposit of the same amount proves the mechanics of the transfer, not the capacity of the payer. Documents such as PAN, return acknowledgement and confirmation letters go to identity; they are necessary but not sufficient.
The statute has been progressively tightened on the "source of source" question. A proviso inserted by the Finance Act 2012 provides that where a closely held company receives share application money, share capital or share premium, the explanation is not satisfactory unless the resident person in whose name the credit is recorded also offers an explanation about the nature and source of that sum and the Assessing Officer finds it satisfactory. The Finance Act 2022 extended the same requirement to loans and borrowings, with effect from 1 April 2023, that is from assessment year 2023-24. A further proviso excludes credits from a venture capital fund or venture capital company referred to in section 10(23FB).
So the year matters. For a loan credited before assessment year 2023-24, the older line of reasoning — that the assessee's burden is confined to the transaction between himself and the creditor, as in Nemi Chand Kothari — has force. For a loan credited from assessment year 2023-24 onwards, the statute itself requires the creditor's source to be explained.
A reply under section 68 therefore has to be built as an evidence file rather than an argument. For each credit: who, proved by identity documents and confirmation; what capacity, proved by the creditor's own financial statements, returns and bank record showing where his funds came from; and what actually happened, proved by the banking trail, the loan agreement or share application, interest paid, TDS deducted, and the repayment record. Where the year attracts the source-of-source proviso, add the creditor's explanation of his own source.
Most section 68 additions are lost not on law but on gaps in the file, so the reply should be organised credit by credit against the three ingredients rather than written as a general denial. Establishing all three prima facie is what shifts the onus, and once shifted the officer has to bring material of his own rather than rely on your failure. Whether you must also explain the creditor's source depends on the assessment year, so check that before conceding the point.
The Assessing Officer rejected my explanation for cash credits. Must he then prove where the money actually came from before taxing it?
I made unexplained investments after the close of my accounting year. Which year can the officer tax them in, and can he reopen an earlier year to do it?
A fixed deposit stands in the name of a partner's son and my firm used it as security for its overdraft. The Assessing Officer says the money is really the firm's concealed income. Who has to prove what?
The officer rejected my books, estimated my profits at a flat rate, and then also added an unexplained cash credit. Can he do both, and must he say what source the credit came from?
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
I gave the lenders' names, addresses and PAN and filed their confirmations, but I cannot produce them and the summonses came back unserved. Can the loans still be added under section 68?
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
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