Non-Filing of Creditor’s ITR Alone Not Enough to Make Income Tax Additions: Patna High Court

The Patna High Court has held that non-filing of creditor’s Income Tax Returns (ITR) alone is not enough to make income tax additions under Section 68 of the Income Tax Act, 1961 when identity is established and funds move through banking channels. The bench of Justice Bibek Chaudhuri and Justice Dr. Anshuman has aside an order of the Income Tax Appellate Tribunal (ITAT) which had restored an addition of Rs. 1.91 crore as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The bench restored the earlier relief granted by the Commissioner of Income Tax (Appeals) , holding that the Tribunal had applied an incorrect legal standard while reassessing the evidence on record. Rajnandani Projects Pvt. Ltd., a civil construction company based in Patna, had filed its income tax return for the Assessment Year 2015–16 declaring an income of ₹1.96 crore. During scrutiny assessment, the Assessing Officer noticed that the company had received ₹1.91 crore through banking channels from M/s Champion Group of Companies, a proprietorship concern. The Assessing Officer treated the amount as unexplained cash credit under Section 68, observing that the assessee had initially described the amount as a loan and later claimed it to be an advance against the sale of sand. On this basis, the addition was made by an assessment order dated 31 December 2017. On appeal, the CIT(A) examined the ledger accounts, bank statements, PAN details, confirmations, and income tax returns of the creditor, along with a remand report submitted by the Assessing Officer. Finding that the identity of the creditor was established and the transaction had taken place through banking channels, the CIT(A) deleted the addition in September 2019. However, the Revenue succeeded before the ITAT, Patna Bench, which reversed the CIT(A)’s order in November 2022. The Tribunal held that while the identity of the creditor was proved, the assessee had failed to establish the genuineness of the transaction and the creditworthiness of the creditor, particularly noting that the creditor had not filed a return of income for the relevant assessment year. Hearing the appeal under Section 260A of the Act, the Patna High Court framed multiple substantial questions of law relating to the scope of Section 68 and the Tribunal’s approach. The Court observed that the CIT(A) had passed a reasoned order after examining all documentary evidence and the remand report, and there was no finding that the documents relied upon were false or fabricated. The High Court held that non-filing of a return of income by the creditor for the relevant year, by itself, could not be a decisive factor to reject the explanation under Section 68, especially when the transaction was routed through established banking channels and the identity of the creditor was not in dispute. It further noted that the Tribunal’s approach effectively required the assessee to prove the “source of the source,” which is not ordinarily mandated under Section 68 unless supported by adverse material. The Court emphasized that while the assessee bears the initial burden under Section 68 to establish identity, genuineness, and creditworthiness, this burden must be assessed reasonably and on the basis of evidence on record. It found that the Tribunal failed to demonstrate any perversity or legal infirmity in the findings of the CIT(A) and had reversed the appellate order without adequately addressing the remand report or the banking trail. Allowing the appeal, the Patna High Court set aside the ITAT’s order dated 3 November 2022 and restored the CIT(A)’s order deleting the Rs. 1.91 crore addition. The Court answered all substantial questions of law in favour of the assessee and clarified that no costs would be payable. Case Details Case Title: Rajnandani Projects Pvt. Ltd Versus PCIT Case No.: Miscellaneous Appeal No.206 of 2023 Date: 18/12/2025 Counsel For Petitioner: Ajay Kumar Rastogi, Sr. Advocate Counsel For Respondent: Archana Sinha @ Archana Shahi Click Here To Read Order Read More: No Pre-Deposit Waiver In Crude Palmolein Imports Case Involving Penalty Of Nearly Rs. 417 Crore: Karnataka High Court

Non-Filing of Creditor’s ITR Alone Not Enough to Make Income Tax Additions: Patna High Court

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