Navigating Section 68 of the Income Tax Act: A Taxpayer's Lifeline in Unexplained Credit Cases

Income Tax Act, 1961 (the Act) empowers the tax authorities to levy tax on unexplained credits found in a taxpayer's books under Section 68. This can be a significant concern for businesses that receive loans or borrowings. However, a recent case provides valuable insights for taxpayers dealing with assessments for years prior to 2023-24.

This case involved M/s. GXXXXXXXXXXXXXXXX Ltd. (assessee) facing an additional tax liability of Rs. 4,19,90,000 for unexplained cash credits received from three parties. This case, successfully contested by the assessee represented by Advocate Pulkit Saini, provides valuable guidance on navigating Section 68 challenges before the Court of Law.

Proving Your Case: Building a Strong Defense Against Section 68 Additions

The Tribunal's decision in this case highlights the importance of maintaining robust documentation to prove your case when faced with additions under Section 68. Here's what the assessee did to successfully defend their position:

• Established Identity and Genuineness

• Demonstrated Creditworthiness

Advocate Pulkit Saini meticulously presented evidence to establish the identity & creditworthiness of the creditors and the genuineness of the transactions. This effectively countered the department's claims about the creditors' financial incapacity to lend the money. It was further established before the tribunal that the low income reported in the creditors' Income Tax Returns (ITRs) cannot be the sole basis to deem their creditworthiness as insufficient.

Crucial Point: Burden of Proof and The “Source of Source” Advantage (Pre-AY 2023-24)

The assessee in this case successfully argued that they were not obligated to prove the "source of source" for the unsecured loans. This means they didn't have to explain where the creditors obtained the funds used to lend them money. This is an important point to remember, especially considering a recent amendment to Section 68.

Post-AY 2023-24 Landscape: A Shift in Burden of Proof

It's important to acknowledge that the legal landscape has changed for assessments pertaining to AY 2023-24 onwards. A recent amendment to Section 68 places an additional burden on taxpayers. For these assessments, taxpayers may be required to explain the source of funds used by the creditor to provide the loan/borrowing. This highlights the importance of staying updated on legislative changes.

Conclusion: A Case Study for Pre-AY 2023-24 Assessments

The case of M/s. GXXXXXXXXXXXXXXXX Ltd., adeptly argued by Advocate Pulkit Saini, serves as a valuable case study for taxpayers facing Section 68 challenges, particularly those with assessments pre-dating AY 2023-24. By meticulously documenting loan transactions, establishing the identity and creditworthiness of lenders, and utilizing the pre-amendment legal landscape regarding the "source of source," taxpayers can strengthen their defense against additions under Section 68. However, staying informed about legal amendments is crucial to navigate the ever-evolving tax environment.