Patna High Court Rules: Taxpayer Not Required to Prove “Source of Source” Under Section 68

Patna High Court Rules: Taxpayer Not Required to Prove “Source of Source” Under Section 68

Relief for taxpayers as court sets aside ITAT order

Identity of creditor enough to establish genuineness of transaction

By Our Legal Correspondent

New Delhi: December 29, 2025:

In a landmark ruling, the Patna High Court has clarified that taxpayers are not required to prove the “source of source” of funds once the identity of the creditor is established. The judgment, delivered in the case titled [Patna High Court – Section 68 Addition], sets aside the earlier order of the Income Tax Appellate Tribunal (ITAT). This decision is expected to have a significant impact on tax litigation across India, especially in cases involving unexplained cash credits under Section 68 of the Income Tax Act, 1961.

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Background of Section 68

Section 68 of the Income Tax Act deals with unexplained cash credits. If any sum is found credited in the books of a taxpayer, the Assessing Officer (AO) may ask the taxpayer to explain:

• The identity of the creditor
• The creditworthiness of the creditor
• The genuineness of the transaction

Traditionally, tax authorities have insisted that taxpayers must also explain the source of funds of the creditor—commonly referred to as the “source of source.” This requirement has often led to disputes and heavy additions to taxable income.

The Case Before Patna High Court

The case arose when the ITAT upheld an addition made by the AO under Section 68, arguing that the taxpayer had failed to prove the source of source of the creditor’s funds. The taxpayer challenged this order before the Patna High Court.

The High Court observed that once the identity of the creditor is established and the transaction is genuine, the taxpayer cannot be forced to prove where the creditor obtained their money. The court emphasized that the onus of proof cannot be stretched endlessly and that the law does not require taxpayers to go beyond their immediate transaction.

Court’s Observations

The Patna High Court made several important observations:

• Identity is key: If the creditor’s identity is proven, the taxpayer’s responsibility ends there.
• No endless burden: Taxpayers cannot be expected to investigate the financial background of their creditors.
• Fairness in taxation: The ruling ensures that genuine transactions are not penalized due to unrealistic expectations from taxpayers.

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This ruling aligns with earlier judicial interpretations that stressed the importance of balancing the burden of proof between taxpayers and tax authorities.

Impact of the Ruling

The decision is expected to provide major relief to taxpayers who face additions under Section 68. Key impacts include:

• Reduced litigation: Many ongoing disputes may be resolved in favour of taxpayers.
• Clarity in law: The ruling sets a clear precedent that proving “source of source” is not mandatory.
• Fair treatment: Genuine loans and credits will not be unfairly taxed.

Tax experts believe this judgment will strengthen the position of taxpayers in appeals and reduce arbitrary additions by assessing officers.

Comparison with Other Cases

The issue of “source of source” has been debated in several cases:

This comparison shows that while ITAT rulings have varied, the High Court has now provided a clear judicial direction.

Expert Opinions

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Tax professionals have welcomed the ruling:

• Ashish Mehta, Khaitan & Co. noted that the burden of proof under Section 68 has always been a “swinging pendulum,” and this judgment brings much-needed stability.
• Practicing chartered accountants believe that this ruling will prevent harassment of taxpayers who have genuine transactions but are unable to trace their creditor’s financial details.

Broader Implications

The ruling also has implications for:

• Business loans: Companies receiving loans from shareholders or directors will benefit.
• Family transactions: Individuals receiving funds from relatives will not face undue scrutiny.
• Tax administration: Authorities will need to focus on genuine cases of tax evasion rather than burdening honest taxpayers.

Conclusion

The Patna High Court’s ruling on Section 68 marks a turning point in tax jurisprudence. By setting aside the ITAT order, the court has reaffirmed that taxpayers are only responsible for proving the identity of their creditors, not the source of their funds. This ensures fairness, reduces litigation, and strengthens trust in the tax system.

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