The statute makes the person in whose name the credit is recorded explain his own source — one layer, not a chain — and only for the years and the credits the provisos cover. Beyond that the case law runs both ways: one line confines the enquiry to the transaction between the assessee and his creditor, another lets the officer look further where the file shows funds moving in a circle. Which line applies turns on the facts of the file, not on a general rule.
Start with the section as it now stands, because the provisos do most of the work. The main limb of s.68 charges a sum found credited in the books where the assessee offers no explanation about its nature and source, or the explanation is not satisfactory in the officer's opinion.
The first proviso, inserted by the Finance Act 2022 with effect from 1 April 2023 and so applying from assessment year 2023-24, reads: "Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,—(a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory".
The second proviso, which came in earlier by the Finance Act 2012, does the same thing for a company in which the public are not substantially interested where the credit consists of share application money, share capital, share premium or any such amount, and requires the resident person in whose name the credit is recorded to explain his own source. A third proviso takes venture capital funds and venture capital companies out of both.
Read them literally and two things follow. First, the statutory burden is one step deep. It attaches to "the person in whose name such credit is recorded in the books of such assessee" and to no one behind him. Nothing in either proviso obliges the assessee to explain the source of that person's source. Second, the burden is selective — it bites on loans and borrowings only from assessment year 2023-24, and on share capital in a closely held company only from the year the 2012 proviso applies. For anything outside those descriptions, and for earlier years, the position is whatever the case law makes it.
On the case law there are two lines, and the editorial surveys collect them without resolving the conflict. The limiting line runs from Nemi Chand Kothari v. CIT (Gauhati), where the burden to prove genuineness and creditworthiness was held to remain confined to the transactions which have taken place between the assessee and the creditor, through Kinetic Capital Finance and MOD Creations in the Delhi High Court, and into the Bombay High Court's decision in Ami Industries. The most recent addition is PCIT v. KRBL Infrastructure Ltd (Delhi, November 2025), where the officer's material was against the lender's own purchases and the Court held that the assessment could not go into those purchases in the absence of anything connecting them to the assessee.
The permitting line runs the other way. Diza Holdings (Kerala) allowed the officer to ask whether the depositor had the source to make the deposit. N.R. Portfolio (Delhi) put it as a qualification rather than a rule — the doctrine of source of source cannot be applied universally, without reference to the factual matrix and the facts of each case. Mihir Kanti Hazra (Calcutta) treated the source of the source as a relevant enquiry. Rajmandir Estates (Calcutta), where the special leave petition was dismissed, went furthest: on a file showing matching credits into the subscribers' accounts shortly before their cheques were presented, the Court said the submission that a source-of-source enquiry is irrelevant did not appear to be correct.
The reconciliation that works in practice is N.R. Portfolio's: the deeper enquiry is not a standing entitlement, it is what an officer may do when the material in front of him shows the credit moving in a circle. Where the file shows an ordinary loan from a real lender with his own funds, the enquiry stops at the lender. Where it shows the money arriving with the lender days before it left him, the officer will be allowed to follow it, and an officer who does not may find the assessment revised under s.263 — which is what actually happened in Rajmandir Estates.
Where the lender is itself a company or a non-banking finance company, the practical question is not how many layers but what capacity is measured against. In DCIT v. ACE Infracity Developers the Delhi Tribunal held that where the lender is an NBFC and lending is its regular business, and no regulator has found any deficiency, identity is not in doubt; and that capacity is read off share capital, reserves, investments and long-term loans and advances rather than off revenue from operations. A lender whose business is lending will always have a large number of credits; that fact by itself is not a badge of an accommodation entry.
One digest reports the Tribunal referring to the provision by its Income-tax Act 2025 number, s.102. I have not verified that renumbering against the Act itself and it should be checked before use.
The reply you write depends on which of these two positions the file puts you in, and the first thing to fix is the assessment year — for most loans the statutory source-of-source burden simply does not exist before assessment year 2023-24, and a great many notices ignore that. Where it does exist, it stops at your creditor, and a demand for the creditor's creditor's records is a demand the statute does not make. Where the officer has material showing a circular flow, arguing that the enquiry is barred in principle will not work, and the answer has to be built on the facts instead.
The Assessing Officer rejected my explanation for cash credits. Must he then prove where the money actually came from before taxing it?
My society runs a college and ended the year with a surplus. Does that surplus mean we no longer exist solely for educational purposes and not for profit?
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 reassessment was done in between. Does the two-year clock for s.263 restart from it?
Can the Commissioner revise on a ground that was not in the show cause notice?
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?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.