Section 68
Cash credits
General principles
Assessing Officer must form opinion by applying his mind - A bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by the assessee, that such credit has to be of a sum during the previous year, and that the assessee offers no explanation about the nature and source of such credit found in the books or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory. It is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression ‘the assessee offers no explanation’ means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion - CIT v. P. Mohanakala [2007] 161 Taxman 169 / 291 ITR 278 (SC).
Amount credited in business books can normally be presumed as business receipt - When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business, if the explanation given by the assessee as to how the amounts came to be received is rejected by all the income-tax authorities as untenable - Lakhmichand Baijnath v. CIT [1959] 35 ITR 416 (SC).
Provision applies to non-commercial loans also - Section 68 does not make any distinction between commercial and non-commercial loans - C. Kant & Co. v. CIT [1980] 126 ITR 63 (Cal.).
Provision cannot be extended to penalty proceedings - Section 68 is confined to assessment proceedings, and cannot be extended to penalty proceedings as well - CIT v. Bhuramal Manikchand [1981] 130 ITR 129 (Cal.).
Provision applies to all credit entries - The language of section 68 shows that it is general in nature and applies to all credit entries in whomsoever name they may stand, that is, whether in the name of the assessee or a third party - Gumani Ram Siri Ram v. CIT [1975] 98 ITR 337 (Punj. & Har.).
Section 68 v. Section 69 - A close reading of sections 68 and 69 makes it clear that in the case of section 68 there should be a credit entry in the books of account whereas in the case of section 69, there may not be an entry in the books of account. This is a fundamental difference between the two provisions - CIT v. Shiv Shakti Timbers [1997] 90 Taxman 349 (MP).
Section 68 v. Section 132(4A) - Section 68 is a provision of general application and there is nothing either in section 132 or section 68 or elsewhere to exclude the application of this general provision to a case where the business or the residence of a person has been searched and the documents and other things seized under section 132. The presumption under section 132(4A) does not override or exclude section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under section 68, nor does it do away with the burden which is on the assessee to establish the requisites of cash credits - Pushkar Narain Sarraf v.CIT [1990] 183 ITR 388 (All.)/Daya Chand v. CIT [2001] 250 ITR 327 (Delhi).
Power can be invoked only if books of account have been maintained by the assessee - The Assessing Officer before invoking the power under section 68 must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account. The existence of books of account is a condition precedent for invoking of the power. Further, as held in Smt. Shanta Devi v. CIT [1988] 171 ITR 532 (Punj. & Har.), a perusal of section 68 of the Act shows that in relation to the expression ‘books’ the emphasis is on the word ‘assessee’ meaning thereby that such books have to be the books of the assessee himself and not of any other assessee. A partnership firm is an assessable entity distinct from the individual partner. The books of account of a partnership cannot be treated as those of the individual partner - Anand Ram Raitani v. CIT [1997] 223 ITR 544 (Gau.).
Burden of proof
Burden is on assessee to prove source of receipt - The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. Where the nature and source of a receipt, whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source - Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC)/ Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC).
It is for the assessee to prove that even if the cash credit represents income, it is income from a source which has already been taxed - CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC).
Department need not locate source of receipt - Where the assessee has failed to prove satisfactorily the source and nature of a credit entry in his books, and it is held that the relevant amount is the income of the assessee, it is not necessary for the department to locate its exact source - CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC)/A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC).
The principle laid down in Ganapathi Mudaliar’s case (supra) applies alike to cases in which an entry is found in the books of account of the assessee and to cases in which no such entry is found. If the amount represented the income of the assessee of the previous year, it was liable to be included in the total income and an enquiry whether for the purpose of bringing the amount to tax it was from a business activity or from some other source was not relevant - CIT v. Durga Prasad More [1969] 72 ITR 807 (SC).
If explanation of assessee is unsatisfactory amount can be treated as assessee’s income - If the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory, there is prima facie evidence against the assessee, viz., the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature. While considering the explanation of the assessee, the department cannot, however, act unreasonably - Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC).
Onus is on assessee to discharge that cash creditor is a man of means - The onus is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit. There should be identification of the creditor and he should be a person of means. When the cash creditor is an income-tax assessee, it cannot be said that he is not a man of means - Kamal Motors v. CIT [2003] 131 Taxman 155 (Raj.).
Assessee’s burden is confined to prove creditworthiness of creditor with reference to transaction between assessee and creditor - A harmonious construction of section 106 of the Evidence Act and section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been eventually received by the assessee. It is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, since, these aspects may not be within the special knowledge of the assessee - Nemi Chand Kothari v. CIT [2004] 136 Taxman 213 (Gau.).
Assessee can furnish alternative explanation - The section on a proper construction does not debar the assessee from offering alternative explanations and if either of them is accepted, the cash credit cannot be charged as the income of the assessee - Addl. CIT v. Ghai Lime Stone Co. [1983] 144 ITR 140 (MP)/Dhansiram Agarwalla v. CIT [1995] 81 Taxman 1 (Gau.).
Identity of creditors is not relevant for cheque transactions - The very fact that all the transactions were entered into between the parties through account-payee cheques makes the question of identity of creditors fall into oblivion and it becomes absolutely irrelevant - Addl. CIT v. Bahri Bros. (P.) Ltd. [1985] 154 ITR 244 (Pat.).
Each entry must be separately explained by assessee - While explaining the various credits and investments, it is possible that the assessee may be successful in explaining some of them, but that does not by itself mean that the entire investments has to be considered as explained. It is each and individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee - CIT v. R.S. Rathore [1995] 212 ITR 390 (Raj.).
Mere mention of income-tax file number of creditor will not suffice - Where, without filing confirmation letter from the creditor, the assessee merely mentioned the income-tax file number of the creditor (which was also not supported by any affidavit from the creditor), the genuineness of the cash credit cannot be said to have been proved by the assessee - CIT v. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (Cal.).
Assessee cannot be asked to explain whether credit has suffered tax - Where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged. Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee-firm is over. The assessee-firm cannot ask that person who makes investment whether the money invested is properly taxed or not. If that person owns the entry, then the burden of the assessee-firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited the amount - CIT v. Metachem Industries [2000] 245 ITR 160 (MP).
Transaction by cheques may not be sacrosanct - It cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors, the genuineness of the transactions which he had with his creditors, and the creditworthiness of his creditors, vis-a-vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue to show that though covered by cheques, the amounts in question, actually belonged to, or was owned by the assessee himself - Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau.).
Deposits from tenants - The position in regard to a deposit or advance paid by a tenant in regard to a lease of a premises, is different from ‘a loan’ from a third party. A lease/tenancy is governed by the terms of the lease deed or tenancy agreement. When the premises is let out on terms mutually agreed and one such term relates to the deposit or advance which the tenant agrees to pay, it is not necessary for the landlord to ascertain the source from which the tenant gets the amount to pay as a deposit/advance. Further, as the lessee/tenant will always be available for verification as he will be in occupation of the premises, the fact whether he has paid the deposit or not can be easily verified. Therefore in regard to deposit from tenants, it is sufficient if the assessee proves the identity of the tenant and the genuineness of the transaction under which the deposit is made. It will not be necessary for the assessee to prove the capacity of the tenant to make the deposit/advance. Therefore, where the tenancy is established and the tenant is actually in occupation of the premises and a lease deed or tenancy agreement is produced showing the amount agreed to be paid as deposit and the deposit is paid by cheque or demand draft and is duly accounted in the books of account of the assessee as also the tenant, it should be held that the assessee has discharged his burden under section 68. If the Assessing Officer still wants to treat such amount as unexplained income of the assessee, then the burden lies on the revenue to establish that the deposit was not really a deposit by the tenant, but the unexplained income of the assessee channelised through the ‘tenant’ - CIT v. Nevendram Ahuja [2005] 197 CTR (MP) 462.
Production of confirmatory letters - Where, in respect of certain cash credits, the assessee had not only disclosed them in his return of income but also produced confirmatory letters from the creditors, and the creditors had also declared the amounts in their income-tax returns which were accepted by the ITO, addition made as cash credits by ignoring the aforesaid facts would not be justified - Jalan Timbers v. CIT [1997] 223 ITR 11 (Gauhati).
Share application money - Where the matter concerns money receipts by way of share application from investors through banking channel, the assessee has to prove the existence of the person in whose name the share application is received. Once the existence of the investor is proved, it is not further the burden of the assessee to prove whether that person itself has invested the said money or some other person has made investment in the name of that person. The burden then shifts on to the revenue to establish that such investment has come from the assessee-company itself. Once the receipt of the confirmation letter from the creditor is proved and the identity and the existence of the investor has not been disputed, no addition on account of share application money in the name of such investor can be made in the assessee’s hands - Shree Barkha Synthetics Ltd. v. Asstt. CIT [2006] 155 Taxman 289 (Raj.).
Where Commissioner, in section 263 proceedings, set aside ITO’s order holding that there was a device used by assessee for converting black money by issuing shares and ITO failed to conduct detailed investigation into genuineness of shareholders and Tribunal reversed Commissioner’s order and rejected reference application, Tribunal came to a conclusion on facts and as such no interference was called for - CIT v. Steller Investment Ltd. [2001] 115 Taxman 99 (SC).
In the case of a public issue, the company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The company must, however, maintain and make available to the Assessing Officer for his perusal all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of sections 68 and 69. The burden of proof can seldom be discharged to the hilt by the assessee ; if the Assessing Officer harbours doubts of the legitimacy of any subscription, he is empowered, nay duty bound, to carryout thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company. A distillation of the precedents yields the following propositions of law in the context of section 68 : The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber; (4) if relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders’ register, share application forms, share transfer register, etc., it would constitute acceptable proof or acceptable explanation by the assessee; (5) the Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee; (7) the Assessing Officer is duty bound to investigate the creditworthiness of the creditor/subscriber, the genuineness of the transaction and the veracity of the repudiation - CIT v. Divine Leasing & Finance Ltd. [2007] 158 Taxman 440 (Delhi).
‘Books’ - Meaning of
Books must be those of the assessee - Perusal of section 68 would show that in relation to the expression ‘books’, the emphasis is on the word ‘assessee’. In other words, such books have to be the books of the assessee himself and not of any other assessee. The books of account of a firm in which the assessee is a partner cannot be considered as the books of the assessee - Smt. Shanta Devi v. CIT [1988] 171 ITR 532 (Punj. & Har.).
Bank pass book is not a ‘book’ maintained by assessee - A pass book supplied by the bank to the assessee cannot be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions - CIT v. Bhaichand H. Gandhi [1983] 141 ITR 67 (Bom.).
Ownership of credit - It is a common feature of commercial and other transactions that securities are offered by other persons to guarantee the payment of the amount which may be found due from the principal debtor. The concept of security and ownership are different and it would be a wholly erroneous approach to hold that a thing offered in security by a third person to guarantee the payment of debt due from the principal debtor belongs not to the surety but to the principal debtor. The onus to prove that the apparent is not the real is on the person who claims it to be so - CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC).
Cash credits in firm’s books - In the case of cash credits in accounts of firm, the following points need be noted: (i) there is no distinction between the cash credit existing in the books of the firm, whether it is of a partner or of a third party; (ii) the burden to prove the identity, capacity and genuineness has to be on the assessee; (iii) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources; (iv) the firm has to establish that the amount was actually given by the lender; (v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities; (vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by section 68 can be invoked; (vii) simply because the amount is credited in the books of the firm in the partner’s capital account, it cannot be said that it is not the undisclosed income of the firm and that in all cases it has to be assessed as an undisclosed income of the partner alone - CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.).
The mere fact that the third party making deposit in a firm happens to be the wife of the assessee-partner does not ipso facto make the assessee come into the knowledge of the sources from which the money was realised. The mere fact that the partner is unable to satisfy the authorities as to the source from which his wife derived the money which she has deposited in the firm cannot be used against the partner - Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam).
A person can still be held to be the owner of a sum of money even though the explanation furnished by him regarding the source of that money is found to be not correct. From the simple fact that the explanation regarding the source of money furnished by A, in whose name the money is lying in deposit, has been found to be false, it would be a remote and far-fetched conclusion to hold that the money belong to B - CIT v. Daulat Ram Rawatmull (supra).
Capacity of lender - In the case of cash credit entry it is necessary for the assessee to prove not only the identity of the creditors but also to prove the capacity of the creditors to advance the money and the genuineness of the transactions. On whom the onus of proof lies in a particular case is a question of law. But whether the onus has been discharged in a particular case is a question of fact - C. Kant & Co. v. CIT [1980] 126 ITR 63 (Cal.).
(Contra)
It can never be within the exclusive knowledge of the debtor to know the sources of income of the creditor. Once he is supplied the credit that he wants, he is satisfied. Once he has furnished the true identity, the correct address and the correct GIR number of the creditor, he fulfils his obligation under the Act. The assessee is not supposed to know the capacity of the money-lender or the cash creditor. It is within the exclusive domain of the creditor. It is for that specific purpose that section 131 of the Act has been introduced so that in case of any suspicion, the ITO or the authorities concerned may exercise the power of a civil court under that provision and call upon the creditor concerned to prove his capacity to pay and the genuineness of the transaction. Once the ITO or the authority concerned is satisfied that the creditor is not telling the truth, it has been left open to the assessee to discharge his subsequent onus of proving the genuineness of the transaction and the capacity of the creditor to pay, by cross-examining him - Addl. CIT v. Hanuman Agarwal [1985] 151 ITR 150 (Pat.).
Intangible additions
When an ‘intangible’ addition is made to the book profits during an assessment proceedings, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as ‘intangible’, is as much a part of the assessee’s real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be. There can be no escape from the proposition that the secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books. But it is quite another thing to say that any part of that fund must necessarily be regarded as the source of unexplained expenditure or of cash credits recorded during a subsequent assessment year. The mere availability of such a fund cannot in all cases imply that the assessee has not earned further secret profits during the relevant assessment year. It is a matter for consideration by the taxing authority in each case whether the unexplained cash deficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or they are reasonably explained by reference to concealed income earned in that very year. In each case, the true nature of the cash deficit must be ascertained from an overall consideration of the particular facts and circumstances of the case. Evidence may exist to show that reliance cannot be placed completely on the availability of a previously earned undisclosed income. A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible addition but must be regarded as pointing to the receipt of undisclosed income earned during the assessment year under consideration. It is open to the revenue to rely on all the circumstances pointing to that conclusion. What these several circumstances can be, is difficult to enumerate and indeed from the nature of the enquiry it is almost impossible to do so. In the end they must be such as can lead to the firm conclusion that the assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars - Anantharam Veerasinghaiah & Co. v. CIT [1980] 123 ITR 457 (SC).
Gifts - In the case of cash gifts recorded in the books of the donee, mere identification of the donor and showing the movement of the amount through banking channels is not sufficient to prove the genuineness of the gift. The onus lies on the donee not only to establish the identity of the donor but also the donor’s capacity to make such a gift. Where there was nothing on record to show as to (i) what was the financial capacity of the donors, (ii) what was the creditworthiness of the donors, (iii) what was the kind of relationship the donors had with the donee-assessee, (iv) what are the source of funds gifted to the assessee, and (v) whether the donors had the capacity of giving large amount of gift to the assessee, the Tribunal would not be justified in deleting the additions made by the Assessing Officer, especially when the assessee did not appear in person before the Assessing Officer despite being asked to do so - CIT v. Anil Kumar [2008] 167 Taxman 143 (Delhi).
Burden of proof to trace unexplained credits to intangible additions is on the assessee and not on the department - Smt. Annamma Paul v. CIT [1980] 121 ITR 433 (Ker.)/ M.L. Chakkoru v. CIT [1980] 121 ITR 440 (Ker.) (App.).
It cannot be an abstract proposition in law that intangible additions of previous year are to be taken note of while considering cash credit. On the facts of each case a specific plea and proof that there was any link between the intangible additions in the previous year and the cash credit has to be established, if that be a fact while tendering explanation regarding cash credit, must plainly state as a fact that the cash credit concerned did come out of the earlier intangible additions. Unless this is done, there is no requirement to make an enquiry regarding reasonableness of the explanation. It is not open to the assessee to offer two different explanations by way of alternative pleas. It is within the domain of taxing authorities to consider whether a particular cash credit, or unexplained expenditure or investment can reasonably be attributed to intangible additions, if material are placed in that regard - R. Dalmia v. CIT [2001] 119 Taxman 547 (Delhi).
Issue of summons - The law enjoins the issuance of summons in cases where the certificates purported to have been granted by creditors are produced before the assessing authority but their signatures are not proved - Jhaverbhai Bihari Lal & Co. v. CIT [1985] 154 ITR 591 (Pat.).
Where the summons was returned with the postal remark ‘not known’ (and not ‘not found’), the said endorsement presupposed that at the specific address furnished by the assessee the addressee could not be traced.The question of issuing a second summons would arise only if the address given earlier was erroneous, and not when it was almost identical - Ram Kumar Jalan v. CIT [1976] 105 ITR 331 (Bom.).
If the parties had received the summons but did not appear, the assessee could not be blamed - CIT v. U.M. Shah, Proprietor, Shrenik Trading Co. [1973] 90 ITR 396 (Bom.).
Effect of omission to file appeal - Forbearance to file an appeal might be motivated by many considerations. It will not unerringly indicate that the assessee thereby admits that the credits represent his income - CIT v. Imperial Automobiles [1983] 141 ITR 60 (Mad.).
Assessee has to establish identity of subscribers to share capital and prove their creditworthiness and genuineness of transaction; furnishing of income-tax file numbers may not be sufficient to discharge the burden - CIT v. Nivedan Vanijya Niyojan Ltd. [2003] 130 Taxman 153/263 ITR 623 (Cal.).
No comments:
Post a Comment