Section 68 is one of the most powerful weapons now-a-days in the hands of Assessing Officer though it is a most debated provision. There were no provisions corresponding to section 68 in the 1922 Act. But the provisions contained in this section give a legislative recognition to a long line of judicial decisions on the point (CIT v. Hanuman Das Maheshwari (1975) Tax LR 109, 112 (Ori).
Under this section, any sum found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.
Finance Act 2012 has inserted two provisos to section 68 w.e.f. 1-4-2013 (AY 2013-14). First proviso enlarges the onus of a closely held company and provides that if a closely held company receives any share application money or share capital or share premium or the like, it should also establish the source of source (i.e., the residents from whom such money is received)
2nd proviso provides that the 1st proviso will not apply if the receipt of sum (representing share application money or share capital or share premium etc.) is from a venture capital company or venture capital fund referred to in section 10(23FB).
Object of the Provision
A widely prevalent method adopted by the assessees to employ in their business their concealed profits while continuing to conceal their nature was the introduction into the books of sums of money shown as having been lent to them or deposited with them by a third party, or sometimes as their own capital contribution from capital resources. Abstraction of profits from business could have been made earlier by inflating expenditure or by understating receipts or by a combination of them. When liquid funds are needed for the business, the abstracted profit would be brought into the business in the shape of loan or capital by the device aforesaid. Sometimes the credit entry introducing the money is cancelled by corresponding debit entry – showing the alleged loan as repaid – either in the same accounting year or in a subsequent accounting year when the need for money has abated and the money can be withdrawn. When the cancellation occurs in the same accounting year, the alleged liability will not appear in the Balance Sheet and will escape assessment unless there is a close scrutiny by the officer.
Accordingly, the group of 6 sections i.e., section 68 to 69D have been introduced into the taxing enactment step-by-step in order to plug loopholes and in order to place certain situations beyond doubt even though there were judicial decisions covering some of the aspects. For example, even prior to introduction of Section 68 in the statute book, Courts had held that where any amounts were found credited in the books of an assessee in a previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was in the opinion of AO not satisfactory, the sum so credited could be charged to income tax as income of the assessee of the relevant previous year. This principle was approved by the Supreme Court in
A. Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC)
Lakhmi Chand Baij Nath v. CIT (1959) 35 ITR 416 (SC)
Jamna Prasad Kanahiya Lal v. CIT (1981) 130 ITR 244 (SC)
& other cases.
Thus in effect, section 68 is only a statutory recognition of what was the state of law even prior to enactment of the 1961 Act.
Object of the Amendment by Finance Act 2012
As explained in the memorandum, certain judicial pronouncements have created doubts about the onus of proof and the requirements of the section, particularly in cases where the sum which is credited as share capital, share premium etc.
Judicial pronouncements, while recognising that the pernicious practice of conversion of unaccounted money through masquerade of investment in the share capital of a company needs to be prevented, have advised a balance to be maintained regarding onus of proof to be placed on the company. The Courts have drawn a distinction and emphasised that in case of private placement of shares, the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large.
In the case of closely held companies, investments are made by known persons. Therefore, a higher onus is required to be placed on such companies besides the general onus to establish identity and creditworthiness of creditor and genuineness of transaction. This additional onus needs to be placed on such companies to also prove the source of money in the hands of such shareholder or persons making payment towards issue of shares, before such sum is accepted as genuine credit. If the Co. fails to discharge the additional onus, the sum shall be treated as income of the company and added to its income.
Thus in case of Private Limited Companies, higher onus is cast upon them to explain even source of source of the share application money / share premium etc.
Analysis of section 68
As per section 68, the unexplained amount is added back to the total income of the assessee and tax will accordingly be charged on the said sum.
Delhi High Court in the case of Yadu Hari Dalmia v. CIT (1980) 126 ITR 48 (Del.) has observed that “the whole history of the introduction of sections 68 to 69D and the judicial decisions bearing thereupon clearly establish the proposition that these sections are only clarificatory and that even otherwise an addition can be made towards income from undisclosed sources in respect, inter alia, of amounts of expenditure which the assessee is found to have actually incurred but not satisfactorily explained.”
The ingredients of section 68 are as under:
i) there must be books of an assessee maintained for any previous year,
ii) Any sum is found credited in the books of assessee,
iii) the sum so credited may be charged to income tax as the income of the assessee of that previous year if,
a) assessee offers no explanation about the nature and source of the sum credited in the books or,
b) the explanation offered by the assessee is not satisfactory in the opinion of Assessing Officer.
An unexplained cash credit could be either treated as undisclosed income of the business in respect of which the accounts are maintained or as the assessee’s income from undisclosed sources.
A. Any “sum” found credited
The word ‘sum’ used in the section is very exhaustive. It applies to all the credits by whatever name being called. As held by the Punjab & Haryana High Court in the case of G.R. Sriram v. CIT (1975) 98 ITR 337. The ultimate aim of the Court is to keep the intent of the legislature alive.
Thus the term ‘sum’ will include the amount credited in the books either on capital account or on revenue account. It may be share application or the purchases or the gifts or loan etc.
Additions in the partners Capital A/c – Whether firm is liable to explain and whether addition can be made to firm’s income u/s. 68.
a) Where the cash credit is found in the books of the firm, the following points are to be noted:
i) there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a 3rd party,
ii) the burden to prove the identity, capacity and genuineness has to be on the firm,
iii) if the cash credit is not satisfactorily explained, the Assessing Officer is 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 u/s. 68 can be invoked,
b) In that view of the matter, 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 in all cases it has to be assessed as an undisclosed income of the partner alone (CIT v. Kishori Lal Santoshi Lal (1995) 216 ITR 9, 14 (Raj.), CIT v. Shiv Shakti Timbers (1998) 229 ITR 505, 510 (MP).
c) In CIT v. Metacam Industries (2000) 245 ITR 160 (MP), it is held that where the assessee firm had satisfactorily explained the credits standing in the name of its partners the responsibility of the assessee firm 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.
B. Books of an Assessee
For making addition u/s. 68, existence of books of an assessee is a condition precedent.
a) The expression “books of the assessee” refers to the assessee whose books show the credit entry. 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 (Shanta Devi v. CIT (1988) 171 ITR 532 (P&H) Anand Ram Raitani v. CIT (1997), 223 ITR 544) (Gau)
b) In Sunder Lal Jain v. CIT (1979) 117 ITR 316 (All.), in the assessment of a partner, the mere fact that the cash credit entries had been found in the books of the firm of which he was the partner was held immaterial, because the books in which such entries had been found were those of a different assessee i.e., the partnership firm. Such a case may be covered by section 69, for section 68 to apply, a cash credit entry, it was pointed out, has to be found in the books of the individual partner who is the assessee.
c) Books of account must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT (1998) 171 ITR 532 (P&H), it was held that a perusal of section 68 would show that the expression “books” has been used with reference to the word “assessee”. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income u/s. 68 in the hands of partner.
d) Bank passbook is not the books of account for the purpose of section 68. In CIT v. Bhai Chand H Gandhi 141 ITR 67 (Bom.), it was held that the passbook supplied by the bank to the assessee cannot be regarded as the book of the assessee, i.e., a book maintained by the assessee or under his instructions.
e) Now the question arises as to what may be termed as the “books” of the assessee. As per section 2(12A) of Income-tax Act, books includes ledgers, day books, cash books, whether kept in the written form or as print out of the data stored in floppy, disk, tape or any other electromagnetic data storage device.
f) In CBI v. V.C. Shukla & Ors (1998) 3 SCC 410 popularly known as Jain Hawala Case, Supreme Court held that books ordinarily means a collection of sheets of paper or other material blank, written, printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as book
for they can be easily detached and replaced.
g) In SP Goyal v. Deputy CIT (2002) 82 ITD 85 (TM), it is held that mere entry on loose sheet of paper not supported by actual cash cannot be considered to be sufficient evidence to treat the same as cash credit u/s. 68 of the Act.
h) In Satnam Singh Chhbra v. Deputy CIT (2002) 74 TTJ (Luck.) 976, it is held that loose paper cannot be construed as books and therefore, section 34 of the Evidence Act would not apply and therefore, it cannot be the basis for addition.
i) In Prarthana Construction (P) Ltd. v. DCIT (2001) 70 TTJ (Ahd.) 122, it is held that addition on the basis of loose papers without any corroborating evidence cannot be the basis for addition.
j) In S. K. Gupta v. DCIT (1999) 63 TTJ (Del.) 532, it is held that addition made on the basis of loose sheet and torn papers found during the search were unwarranted.
k) Though the loose sheets are not books of account but it is a fact that such loose slips, papers, diaries or documents have been a source of information for large additions and often become contentious issues in post search assessment / block assessment as to the extent of reliance to be placed and the evidentiary value of such loose papers or documents normally found during search.
l) In Atul Kumar Jain v. DCIT (1999) 64 TTJ 786 (Del), the documents was found showing ₹ 1,050/- spent on marriage which was deciphered as ₹ 10.50 lakh. On evidentiary value of the document, Tribunal held as under:
“The word “document” has been defined in section 32 of Indian Evidence Act to mean – any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of those means, intended to be used or which may be used for the purpose of recording that matter. The word “document” has also been similarly defined in the general clauses Act. According to the Hon’ble Supreme Court in the case of Ramji Dayawala & Sons (P) Ltd. v. Invert Import (AIR 1981 SC 2085) mere proof of handwriting of a document would not tantamount to a proof of all the contents or the facts stated in the document, if the truth of the facts stated in a document is in issue………….. the truth or otherwise of the facts or contents so stated would have to be proved by admissible evidence i.e. by the evidence of those persons who can vouch safe for the truth of the facts in issue” (Pg. 801 & 802).
“Further Hon’ble Supreme Court in the case of Mohd Yusuf (Sir) v. D Air, (AIR 1968 Bom 112) has observed that the contents contained in a document is hearsay evidence unless the writer thereof is examined before the Court. The Hon’ble Court, therefore, held that the attempt to prove the contents of the document by proving the signatures in the handwriting of the author thereof is to set at naught, the well recognised rule that heresay evidence cannot be admitted………… The said paper therefore, does not come within the compass of the definition of the word “document” to be used as an evidence. The papers seized therefore, has no evidentiary value and accordingly, the same cannot form the basis for assessing the undisclosed income.” (Pg. 802)
m) Evidentiary Value of a statement recorded u/s. 132(4)
Statement recorded u/s. 132(4)can be used in evidence in any proceeding under the Income-tax Act. By virtue of newly inserted Explanation (with effect from
1-4-1989) to section 132(4), such statement cannot be confined only to the books of account, other documents or assets found as a result of search etc. because Explanation permits interrogation of persons not only in relation to the books of account etc. found as a result of search but also on any other matter relevant for any proceeding under the Act. In that view of the matter if a partner of the firm whose premises were searched, comes forward to disclose about non-entry of the excess stock in the registers during the search, which took place prior to the insertion of the said Explanation, there is no reason why the ITO shall not make use of it even though there is no actual verification of the stock, where the statement was made by the partner voluntarily and was not obtained by coercion or intimidation (V. Kunhambu & Sons v. CIT (1996) 219 ITR 235, 241-42 (Ker.).
n) Presumption u/s. 132(4A) cannot be availed u/s. 48
The presumption arising u/s. 132(4A) does not override or exclude section 68, i.e., it does not obviate the necessity to establish by independent evidence the genuineness of the cash credit u/s. 68. The presumption arising u/s. 132(4A) applies only in relation to provisional adjudication contemplated u/s. 132(5). For this limited purpose, the legislature has provided u/s. 132(4A) that the books of account etc. seized from the possession of the assessee shall be presumed to belong to the assessee if they are found in the possession or control of the assessee during the course of search.
o) It is not necessary that books of account must be rejected before making addition u/s. 68 of the Act. In Devinder Singh v. ACIT (2006) 101 TTJ 505 (ASR), ITAT has held that there is nothing in section 68 that books of account must be rejected before making an addition u/s. 68 of the Act. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt of credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the Assessing Officer.
C. Explanation about nature and source of cash credit
The issue of cash credit has always been a matter vexed litigation. Section 68 enacts a golden rule of evidence which is not in dispute i.e., if any sum is found credited in the books of accounts of the assessee, the onus is on him to explain the said entry. The principal embodied in section 68 is only a statutory recognition of what was always understood to be the law based upon the rule that the burden of proof is on the taxpayer to prove the genuineness of borrowing since the relevant facts are exclusively within his knowledge.
The expression “nature and source” in section 68 has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. Hon’ble Supreme Court in Kalekhan Mohd Hanif v. CIT, 50 ITR 1 (SC) pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. The law after section 68 is not different. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue.
The Department often acts on a confirmatory letter as evidence, the onus does not get discharged merely by confirmatory letters as held by Calcutta High Court in CIT v. Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596 (Cal.), nor does the fact that the amount received by an account payee cheque makes it sacrosanct (CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal.). Even the particulars from assessment records of the creditor may not be sufficient as observed in CIT v. Korlay Trading Co. Ltd. (1998) 238 ITR 820.
However, affidavits filed by the assessee cannot be rejected outrightly without cross-examination as was found by the Apex Court in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC). It is pointed out that where assessee’s accounts are accepted as genuine, it is ordinarily not possible to show that the credits therein do not come from the sources attributed for them.
Burden of Proof
The satisfaction of the Assessing Officer is the basis of invocation of provisions of section 68. The onus is on the assessee to offer explanation as to the source and nature of the cash credit where any sum is found credited in his books of account.
Once the assessee has proved identity and credit worthiness of the creditors and the genuineness of the transactions, his burden stands discharged and the burden then shifts to the Revenue to show that though covered by cheques, the amount in question, actually belonged to, or was owned by the assessee himself.
In Kamal Motors v. CIT (2003) 131 Taxmann 155 (Raj.), it is held that the responsibility is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit.
Ingredients of assessee’s onus – It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of his creditor, the capacity of such creditor to advance the money and lastly the genuineness of the transaction. Only after the assessee had adduced evidence to establish prima facie the aforesaid, the onus shifts on the Department. Merely establishing the identity of the creditor is not enough (Nemi Chand Kothari v. CIT (2003) 264 ITR 254, 261 (Gau.).
Mere filing of confirmatory letters does not discharge the onus that lies on the assessee (CIT v. United Commercial & Industrial Co. (P) Ltd. (1991) 187 ITR 596, 599 (Cal.).
Mere furnishing of the particulars is not enough. Mere payment by Account Payee Cheque is not sacrosanct, nor can it make a non-genuine transaction genuine (Hindustan Tea Trading Co. Ltd. v. CIT (2003) 263 ITR 289, 297 (Cal.).
The Law does not compel the doing of impossibilities
But at the same time, law does not expect the impossible on the part of taxpayer as pointed out in LIC of India v. CIT (1996) 219 ITR 410 (SC), although pronounced in a different context. What is material is that the explanation should be prima facie reasonable. If it is so, it cannot be rejected on mere surmises as has been held in CIT v. Bedi & Co. Pvt. Ltd. (230 ITR 580)(SC). The affidavits filed cannot be rejected out rightly without cross-examination as was found by the Supreme Court in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC).
Materials, relevant & irrelevant – What evidence will, in a particular case, be sufficient to establish assessee’s representation, as also, what material is relevant or not relevant would depend on the facts of each case. The Evidence Act embodies the principles of relevancy in sections 5 to 16. Though the Evidence Act is not applicable to proceeding under the Income-tax Act, the principles that emerge from these sections are that anything which has a bearing on the question at issue before the judicial Tribunal would be a relevant fact (CIT v. Sahib Ganj Electric Cable (P) Ltd. 1978 (115 ITR 408, 414, 415)(Cal).
The Assessing Officer’s rejection, not of the explanation of the assessee but of the explanation regarding the source of income of the depositor, cannot buy itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee’s books of account (Sarogi Credit Corporation v. CIT (1976) 103 ITR 344, 349-50 (Pat).
Various decisions on burden of proof would indicate, that the ultimate inference in such cases is to be drawn from the facts and the preponderant probability of such explanation. In an often-repeated passage in Hasti Mal(s) v. CIT (1963) 49 ITR 273 (Mad.), it was pointed out that after a lapse of decade, the assessee should not be placed upon the rack and called upon to explain not merely the origin and source of a capital contribution, but also the origin of the origin and the source of the source as well. The difficulty in proving an explanation is a fact, which cannot be ignored.
In CIT v. P. K. Noorjehan (1999) 237 ITR 570 (SC), the assessee was unable to explain the source of investment for purchase of a property attributed to the amount left by the assessee’s step father, which could not be established by the assessee. Considering her age and the circumstances in which she was placed, Tribunal held that the mere fact that she was unable to establish the source, did not justify addition. High Court also endorsed the view of the Tribunal. Satisfaction in the opinion of the Assessing Officer certainly involves an element of discretion in drawing an inference from the facts and circumstances of a particular case. It was this view of the High Court which was endorsed by the Supreme Court, when it affirmed the decision of the High Court. In other words, the inference should rest upon the credibility of the explanation rather than the materiality of evidence.
Gujarat High Court in DCIT v. Rohini Builders (2002) 256 ITR 360 (Guj.) held that mere identification of the source of the creditors even without evidence as to the nature of income could justify acceptance, where the assessee has given the GIR Nos. / PAN of the creditor and also shows that the amounts were received by account payee cheques.
Shifting of Onus to the Department
Lord Hansworth M.R. in Stoney v. East Bourne R. D. Council (1927) 01 CH. 367, 397 has observed “there can only be sufficient evidence to shift the onus from one side to the other if the evidences sufficiently prima facie to establish the case of the party on whom the onus lies. It is not merely a question of weighing feathers on the one side or the other, and on saying that if there were two feathers on one side and one on the other that would be sufficient to shift the onus. What is meant is, that in the first instance, the party on whom the onus lies must prove his case sufficiently to justify a judgment in his favour if there is no other evidence.”
When, however, in a case where the entries stands in the name of an independent 3rd party, the burden will lie upon the assessee to establish the identity of the said party and to satisfy the Assessing Officer that the entry is real and not fictitious. This is the law under 1961 Act which makes no distinction in credit entries recorded in own account or 3rd party’s account. Where however the identity of the 3rd party and his capability is established the initial burden which lies upon him can be said to have been discharged by him. It will, not, thereafter, be for the assessee to explain further how or in what circumstances the 3rd party obtained the money and how or why he came to make the deposit of the same with the assessee. The burden will shift onto the Department to show why the assessee’s case cannot be accepted and why it must be held that the entry, though purporting to be in the name of the 3rd party still represent the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the Department has to be in possession of sufficient and adequate material (Orient Trading Co. Ltd. v. CIT (1963) 49 ITR 723 (Bom), Sarogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat).
No burden on the Department to show that income was derived from a particular source where there is an unexplained cash credit it is open to the Assessing Officer to hold that it is income of the assessee and no other burden lies on the Assessing Officer to show that income is from any particular source. 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).
Explanation offered by the assessee how to deal with – An explanation prima facie reasonable cannot be rejected on capricious or arbitrary grounds. Explanation given by the assessee should be considered objectively by the officer before he takes a decision to accept or reject it.
i) as explained by the Supreme Court in Sreelekha Banerjee v. CIT (1963) 49 ITR 112 (SC), if the explanation given by the assessee shows that the receipt is not of income nature, the Department cannot “convert good proof into no proof” or otherwise act unreasonably and reject it. On the other hand, if the explanation is unconvincing, the same may be rejected and an inference drawn that the amount represents undisclosed income either from a disclose or an undisclosed source.
ii) The explanation given by the assessee cannot be rejected arbitrarily or capriciously, without sufficient grounds, on suspicion or on imaginary or irrelevant grounds (Sona Electric Co. v. CIT (1985) 152 ITR 507 (Del.), Roshan Di Hatti v. CIT (1977) 107 ITR 938 (Del.).
iii) Where the assessee furnishes full details regarding the creditors, it is up to the Department to pursue the matter further to trace these and examine their credit worthiness. This has been pointed out in CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC). The Assessing Officer cannot accept the explanation in part in reject it in part. This is established in Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC) and Lalchand Bhagat Ambikaram v. CIT (1959) 37 ITR 288 (SC).
iv) The Department cannot treat an item of credit as income by merely rejecting the explanation put forward by the assessee and even where the assessee explanation has been rejected correctly, it does not necessarily or invariably mean in all cases, an addition to the assessee’s income. These two aspects are seen from the Supreme Court decisions in Homy Jahangir Gheesta v. CIT (1961) 41 ITR 135 and CIT v. Bharat Engineering & Construction Co. (1972) 83 ITR 187 (SC) respectively.
D. The sum so credited “may” be charged to Income-tax
In the Bill introduced in Parliament, the clause was read : the sum so credited shall (i) be deemed to be income of the assessee; and (ii) shall be chargeable to income tax as the income of the previous year. The word “shall” occurring at two places was replaced by the word “may” at the instance of the Select Committee in order to enable the Assessing Officer to have the power to assess any 3rd person, in case, it is found that the sum so credited in books belonged to the said 3rd person and not to the assessee. It was observed : “the committee are of the view that where there is evidence to show that the amount belongs to some other person, the Assessing Officer should have power to access that person. Therefore, the fact that the explanation offered by the assessee is not satisfactory should not invariably force the Assessing Officer to treat it as income of the assessee. The clause has been amended accordingly and read as “the sum so credited may be chargeable to Income-tax as the income of the assessee”.
The section uses the word ‘may’ which gives discretion to the Assessing Officer. It is not necessary that in all cases for the amount to be treated as assessee’s income – CIT v. Noorjahan P.K. (1999) 237 ITR 570 (SC) affirming CIT v. Noorjahan (123 ITR 03); DCIT v. Rohini Builders (256 ITR 360); Nitesh Rolling v. CIT (258 ITR 278).
The word ‘may’ denotes the discretion of the Assessing Officer that he can make an addition or cannot make an addition – Umesh Electricals v. ACIT (2011) 131 ITD 127 (Agra-Trib.)(TM).
While considering the explanation of the assessee, the Assessing Officer cannot act unreasonably and his satisfaction that a particular transaction is not genuine must be based on relevant factors and on a just an reasonable inquiry – Sumati Dayal v. CIT (214 ITR 801) (SC), Rajshree v. CIT (256 ITR 331).
Further the fiction created u/s. 68 to 69C cannot, by itself, be extended to penalty proceeding to raise of presumption of concealment of income – CIT v. Baroda Tin (221 ITR 661).
E. Share Application Money / Share Capital
The term “any sum” found credited in the books of assessee takes within its ambit the sum credited on revenue account or on capital account. The issue whether a company has the same responsibility as regards money received towards its share capital as for other cash credits continues to be a matter of controversy with a number of decisions on the subject.
Where an assessee Co. represents that it had issued shares on receipt of share application money when the amount so received would be credited in the books of account of the assessee. In such cases, the Assessing Officer would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do in fact, exist or not. If the shareholders exists then possibly, no further inquiry need be made but if the Assessing Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words “may be charged” in section 68 clearly indicate that Assessing Officer would then have the jurisdiction, if the facts so warrant to treat such a credit to be the income of assessee (CIT v. Sofia Finance Ltd. (1994) 205 ITR 98, 104 (Del FB).
In CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del.), it is held that even if it is assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee which view has been upheld by the Supreme Court reported in (2001) 251 ITR 263 (SC). However Calcutta High Court in CIT v. Ruby Traders & Exporters Ltd. has distinguished the decision on the ground that the Supreme Court has only refused leave on the ground that the High Court decision had endorsed the Tribunal conclusion on the facts.
Thereafter, a consistent view has been taken by the various High Courts in various cases that where the assessee has furnished all the relevant documents i.e., name and addresses of the shareholders, PAN, share allotment letter, share certificates, ITRs of the creditors, bank account etc. i.e., where the assessee has proved the identity and credit worthiness of the creditor and genuineness of the transaction then no addition can be made in the hands of assessee. If the Assessing Officer is not satisfied then the addition can be made in the hands of share subscriber (CIT v. Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Del.).Once the assessee proved these ingredients, the burden shifts to the Department to show that the amount received in account payee cheque is unexplained liable to be taxed u/s. 68.
Sometimes it so happens that the assessee furnished all the details regarding share capital but the Assessing Officer does not make any inquiry though he is empowered to issue summons u/s. 131 and to enforce the attendance of the creditors. In these circumstances, the blame cannot be totally shifted to the assessee and the presumption of concealment of income cannot be made taking such an extreme view. In number of cases, Hon’ble Delhi High Court has held that it is not the responsibility of the assessee company to produce the shareholders, no adverse view can be drawn u/s. 68 merely on the ground of non-production of party by the assessee company. Some of these cases are as under :
CIT v. Dwarkadhish Investment Pvt. Ltd. (2011) 330 ITR 298 (Del.)
CIT v. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Del.)
CIT v. Victor Electrodes Ltd. (2010) 329 ITR 231 (Del.)
Madhuri Investments Pvt. Ltd. v. ACIT ITA No. 110 of 2004 dated 18-2-2006 (Kar.)
CIT v. Kamdhenu Steel & Alloys Ltd. & Ors (2014) 361 ITR 220 (Del.)
CIT vs Creative World Telefilms Ltd. (2011) 333 ITR 100 (Bom.)
CIT v. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC) (2008) 6 DTR 308 (SC)
CIT v. Value Capital services Pvt. Ltd. (2009) 221 CTR 511 (Del.) (2008) 307 ITR 334 (Del.)
CIT v. Electro Polychem Ltd. (2007) 294 ITR 661 (Mad.)
Jaya Securities Ltd. v. CIT (2008) 166 Taxman 7 (All.)
CIT v. Goelsons Golden Estate Pvt. Ltd. ITA No.212/2012 (Del.)
CIT v. Fair Finvest Ltd. (2013) 357 ITR 146 (Del.)
CIT v. Winstral Petrochemicals (P) Ltd. (2011) 330 ITR 603 (Del.)
CIT v. Dalmia Brothers ITA No.298 of 2012(Del.) order-dated 16-5-2012
CIT v. Expo Globe India Ltd. (2014) 361 ITR 147 (Del)
ACIT v. Pancham International (P) Ltd. ITA No.50/Del/2011, order-dated 23-11-2012 (Del, ITAT)
ITO v. Batra Jewels (P) Ltd. ITA No.2921/Del/2010 order-dated 18-5-2012 (Del, ITAT)
CIT v. Gangeshwari Metal Pvt. Ltd. 361 ITR 10 (Del.)
CIT v. Goa Sponge & Power Ltd. ITA No.16/2012, order dated 13-2-2012(Bom.)
ITO v. HI Tech Accurate Communication Pvt. Ltd. ITA No.1125/2012, order dated 1-6-2012 (Del. ITAT)
ITO v. M/s. Jansampark Advertising & Marketing Pvt. Ltd. ITA No. 4839/Del/2009 dated 14-6-2013
Uphar Alloys Pvt. Ltd. v. ITO ITA No.4511/Del/2010 dated 27-9-2013
ITO v. Texfab Marketing Ltd. ITA No.1177/Del/2012 dated 5-10-2012
The inference of genuineness of gift does not readily follow merely on identification of the donor on receipt of money through banking channels. His capacity to make a gift is equally relevant. In fact, the credibility of such gift except where it is proved beyond doubt, would appear to be relevant as held by the Supreme Court in CIT v. P. Mohan Kalan (2007) 291 ITR 278.
Where a gift is claimed to have allegedly received from donors who are not relatives and there was also no occasion for such gifts, the mere fact that they were received from banking channel cannot justify acceptance. In view of widespread practice of money laundering through foreign gifts, authorities may be justified in putting the assessee to strict proof, especially when they are not from the close relatives and it is for this reason that gifts from non-relatives are now subject to tax by deeming them as income.
G. Demonetisation & Section 68
8th November 2016 was the eventful day when the phase of Indian Economy changed. 86% of the total Indian currency consisting of 1000 rupee and 500 rupee note was intended to be replaced by new 2000 rupee and 500 rupee notes.
Demonetisation aimed to strengthen the fight against corruption, black money and the activities of terrorists, antisocials and antinationals, using fake currency. Hon’ble Prime Minister called upon the masses to participate in this Maha Yagya and join “the festival of honesty and celebration of integrity”.
Demonetisation brought with it many tax implications. In order to check black money, Government followed two approaches: persuasive and punitive. Under the persuasive approach, Govt. floated amnesty schemes both for getting foreign black money from abroad as well as in India. The persons who did not avail the amnesty scheme, have made themselves liable to penal action under the punitive provisions.
Amnesty scheme under the Black Money Act for foreign income
a) For such money a new Act titled as “Undisclosed Foreign Money and Assets (Imposition of Tax) Act 2015” (Black Money Act in short) was enacted for foreign tax evaded incomes. The Black Money Act provided one time tax compliance window for undisclosed foreign income and assets for those who wished to come clean in respect of their hidden income and wealth. A limited window was opened for this purpose with effect from 1-6-2015 to 30-9-2015 for those who wished to disclose, followed by payment of tax at 30% and an equal amount by way of penalty with the stipulation that no exemption, deduction, set off of carried forward losses etc. shall be permitted under the new legislation. On disclosure, immunity from prosecution was granted. During the 3 month period, only 644 taxpayers availed the scheme and only ₹ 2438 crore could be collected as tax.
b) Negotiations have been done with foreign countries for collecting information regarding tax evaders and repatriation of their tax evaded income to India. For this purpose, agreements have been reached with most of the countries by entering into Tax Information Exchange Agreements for exchange of information regarding Indians who have money in such countries.
Efforts to tap domestic black money
a) Government floated Income Disclosure Scheme for domestic taxpayers which was available for 3 months i.e., from 1-6-2016 to 30-9-2016. Under the scheme, declarant had to pay 45% tax and penalty on undisclosed wealth brought to books. Under the scheme, total disclosure of ₹ 55,000 crore was made and the tax of ₹ 24,750 crore was collected.
b) 2nd Amnesty scheme was floated through Taxation Laws (2nd Amendment) Act 2016. Government came-up with an income disclosure scheme called Pradhan Mantri Garib Kalyan Yojna (PMGKY) 2016 which allowed people to deposit money in their account till 1-4-2017 by paying 50% of the total amount – 30% as tax, 10% as penalty and 33% of the taxed amount i.e., 10% as Garib Kalyan Cess. Half of the remaining deposit i.e., 25% of original deposit would not be allowed to be withdrawn for 4 years
c) To penalise the persons who did not avail income disclosure scheme ended on 30-9-2016 or PMGKY 2016 till 31-3-2017, the Government introduced section 115BBE on 24-11-2016 w.e.f. 1-4-2017 to provide for the tax on an unexplained income during the window. Section runs as under:
115BBE. (1) Where the total income of an assessee,—
(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or
(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a),
the income-tax payable shall be the aggregate of—
(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent; and
(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) 65 [and clause (b)] of sub-section (1).
Thus according to this provision, the assessee has to pay the tax @ 60% on undisclosed income referred to in section 68 to 69D and against the said income, no deduction in respect of any expenditure or allowance or set off of any loss is available.
Simultaneously, section 271AAC is also introduced by the Taxation Laws (2nd Amendment) Act 2016 w.e.f. 1-4-2017, according to which assessee shall be liable to penalty @ 10% in respect of income determined u/s. 68 to 69D for any previous year. As per the proviso to section 271AAC, no penalty shall be levied in respect of income referred to in section 68 to 69D to the extent such income is included by the assessee in the return of income furnished u/s. 139 and the tax u/s. 115BBE has been paid on or before the end of relevant previous year.
It is also provided that where the penalty is levied u/s. 271AAC then no penalty shall be imposed u/s. 270A.
d) On 18-11-2016, Government cautioned Jan Dhan Account Holders that they will be prosecuted under the Income-tax Act for allowing misuse of their bank account through deposit of black money in ₹ 500/1000 notes during the 50 days window till December 30.
e) As per study of demonetisation impact
(i) 86% of the total currency (₹ 15.44 lakh crore worth of notes) went out of circulation,
(ii) ₹ 15.28 lakh crore banned notes were deposited in bank accounts before the expiry of December 31, 2016 deadline,
iii) ₹ 56 lakh more Indians joined the rank of tax assessees, who filed tax returns ₹ 2.33 crore in 2015-16 whereas ₹ 2.79 crore people filed return in 2016-17,
iv) ₹ 17.92 lakh individuals have been identified whose tax profile does not match the cash deposit made by them after demonetisation,
v) 488% jump in number of suspicious transactions in bank and other financial institutions. The comparative figures are
2015-16 : ₹ 1.06 lakh
2016-17 : ₹ 4.73 lakh (₹ 23.22 lakh accounts)
vi) 5100 notices for suspicious cash deposits have already been issued. ₹ 42,463 crore was deposited in about ₹ 48 lakh Jandhan Accounts.
On November 8, 2016
₹ 45.637 crore
After announcement of demonetisation decision in 45 days
₹ 87,100 crore
₹ 42.463 crore
vii) The huge cash deposits in banks brought down their borrowing cost, leading to a decline in interest rates across the Board.
viii) ₹ 17.73 lakh cases were detected where cash transactions did not match tax profile.
f) Very significant impact of demonetisation had been the strong signal of the Govt. decision to take stringent measures to combat corruption and black money. Following measures are adopted:
i) Benami Transaction Act – Benami Transaction (Prohibition Act) enacted in the year 1988 was almost a dead Act, which has been rejuvenated by the Government in 2016 by making it an effective and meaningful legislation by bringing significant amendments in it. As per the PMO report, property worth ₹ 3,400 crore has been seized under the amended benami law.
ii) Spurt in search, seizure and survey operations – There has been considerable increase in search, seizure and survey operations leading to seizure of more assets/cash and detection of undisclosed income
Search and seizure operation
Value of properties seized
Tax realized (₹ )
2010-11 to 2013-14
2014 to 2017-18
Surveys carried out
Financial Years 2011-14
Financial Years 2014-18
(taken from Government’s published figures from time-to-time)
Aforesaid tables reveal that there has been considerable increase in search seizure and survey operations.
iii) Banning of cash transactions above ₹ 3 lakh – Govt. has discouraged the cash transactions as under:
A. Cash payment for revenue expenditure – Section 40A(3)
Expenditure for which cash payment has been made to a person in a day exceeds ₹ 10,000/- shall be disallowed under PGBP.
(Subject to permissible Cash payments under Rule 6DD)
B. Cash Payment for capital expenditure – Section 43
Expenditure for which cash payment has been made to a person in a day exceeds ₹ 10,000/- shall not be included in actual cost which means no depreciation will be allowed in respect of such payment.
C. Cash donations under section 80G
No deduction of donation made in cash shall be allowed under section 80G of the Act in case the sum exceeds ₹ 2,000/-.
D. Presumptive taxation under section 44AD
Receipts through Cash : 8% of the sales will be deemed as income. Receipts through Bank : 6% of the sales will be deemed as income.
E. Loan or Deposit taken in Cash (incl. receipts for immovable property)-269SS
Loan or deposit taken in cash shall be less than ₹ 20,000 otherwise 100% penalty.
F. Loan or deposit repaid in Cash (incl. w.r.t. immo property)-269T:
Repayment of loan or deposit shall be less than ₹ 20,000 otherwise 100% penalty.
G. Limit on Cash transactions – Section 269ST:
No person shall receive an amount equal to or more that ₹ 2,00,000 in cash:
• In aggregate from a person in a day; or
• In respect of a single transaction; or
• In respect of multiple transactions relating to a single event.
Otherwise 100% penalty will be levied.
Permitted modes for above transactions: Account payee cheque, Account payee draft or ECS (Electronic Clearing System)
Various steps have been taken to identify the tax evaders. The Government’s intention to fight black money is loud and clear. It is equipped with adequate authority to deal with the black money holders stringently. All the escape routes for the tax evaders have been closed. In such circumstances, the role of tax practitioners also become loud. We all are supposed to give our Aahuti for nation building.
[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]