ITAT Deletes Section 68 Addition for Lack of AO Inquiry; No ‘Source of Source’ Required Before AY 2023-24

Surender Singh Sangwan has filed the present appeal before the Income Tax Appellate Tribunal (ITAT) Delhi against the Income Tax Officer (ITO), challenging an order passed by the CIT(A)/NFAC Delhi on December 06, 2024.

The assessee filed his income tax return (ITR) online for Assessment Year 2016-17, declaring his total income at Rs. 700,190. The tax department selected the return for scrutiny and completed the assessment, making an addition of 1.05 crore to his income as unexplained unsecured loans under section 68. Also, disallowed Rs. 94,210 out of various expenses claimed by the assessee.

The aggrieved assessee filed an appeal before the CIT(A) challenging the decision of the tax department. The CIT(A) upheld the additions made by the AO; hence, the assessee thereafter filed an appeal before the ITAT Delhi.

Before the tribunal, the assessee claimed that he had taken loans from five distinct individuals, and furnished all relevant documents before the tax authorities, such as PAN, Aadhaar, bank statements, affidavits, confirmations, and ITRs (where available). All money was received through banking channels. He further argued that he had proved the identity of lenders, the genuineness of transactions, and their capacity. Additionally, AO did not issue any summons or make any independent inquiry from the lenders. The AO wrongly asked for “source of source,” which is not required for Assessment Year 2016-17.

The tribunal heard the arguments of both sides and concluded that for the assessment years before 2023-24, the taxpayers were not required to prove the source of the source for unsecured loans. This rule of proving the source of the source for unsecured loans came into effect later via the Finance Act, 2022. Therefore, it does not apply here. The Tribunal agreed with the argument that AO indeed did not issue any notice or summons to the lenders, even though their full details were available. If the AO had doubts, he should have verified directly with them. However, AO did not do it.

The tribunal cited earlier judgments of the Supreme Court and High Court, all of which ruled that once the taxpayer submits proper documents, the burden shifts to the Department. Additions cannot be made merely based on suspicion or the low income of lenders. Since the assessee had proved all required points and it was the mistake of the AO not making proper inquiry, hence in the final conclusion, the tribunal deleted the entire addition of Rs. 1.05 crore under section 68. The AO had disallowed 20% of expenses due to a lack of bills. The Tribunal felt this was excessive. It reduced the disallowance to 5% only.