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Section 115BBE And Sections 68/69: Taxation Of Unexplained Income Or Investment

Advocate Narayan Jain has conducted a thorough analysis of the provisions of sections 68, 69 and 115BBE and explained their precise implications. The author has answered all the important queries that arise in day-to-day practice with respect to these statutory provisions. He has also referred to all the important judgements on the subject

1. Section 115BBE

This article aims at highlighting the provisions of Section 115BBE of the Income-tax Act, 1961 (Act), applicable from Asst. Year 2017-18 onwards and some practical concerns surrounding its applicability.

1.1 Certain unexplained cash credit, investment, expenditure, etc., are deemed as income under Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and were earlier subject to tax as per the tax rate applicable to the taxpayer. As a consequence, in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit and even if such income was higher than basic exemption limit, it could be levied at the lower slab rate.

1.2 Amended Provisions of Section 115BBE

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. asst year 2017-18 now specifically levies tax on such unexplained items deemed as income at the aggregate of:

a) The amount of Income Tax calculated on the income referred to in sections 68, 69, 69A to 69D at the rate of 60 per cent (plus surcharge @ 25% on such tax and cess, as applicable). Thus effectively the rate comes to 77.25 per cent if such income is reflected in the return of income furnished u/s. 139. It may be noted that if such income is not reflected in the return of income furnished u/s. 139, then penalty of 10 per cent on tax payable u/s. 115BBE shall be imposed u/s. 271AAC w.e.f. asst. year 2017-18. In such a case the burden including penalty will come to 83.25%.

b) 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 sections 68, 69, 69A to 69D

c) Moreover, 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 the Income-tax Act in computing his income referred to in sections 68, 69, 69A to 69D.

1.3 Analysis for better understanding

For the sake of better understanding, let us now ponder on the applicability of Section 115BBE of the Act with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit.

Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income.

Consider a scenario where an individual files his return of income, declaring income from tuition fees and avails the tax slab benefit. However, such individual is unable to substantiate the source of such income and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction.

Under such circumstances, the Assessing Officer may now be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act. This means that such income, though already offered to tax by the taxpayer, would be taxable at flat rate of 60 per cent on gross basis (i.e., without any deduction / allowance), (plus surcharge @ 25% on such tax and cess, as applicable). Thus effectively the rate comes to 77.25 per cent if such income is reflected in the return of income furnished u/s. 139.

Whether it means that the Assessing Officer is vested with unfettered powers to reject any explanation, being not to his satisfaction? It may be noted that the Assessing Officer is required to act reasonable and just while framing any opinion surrounding the explanation offered by the taxpayer. At the same time the taxpayer is nevertheless saddled with the primary obligation to demonstrate the nature and source of any sum credited in books of account.

Some individuals file their return of income, offering income in the nature of Tution Fee, Commission, Brokerage, Embroidery, etc., and avail the benefit of exemption limit as well as benefit of tax slab. In the absence of requisite substance for proving nature and source in such transactions, one needs to consider the income-tax implications under amended Section 115BBE.

1.4 Some Issues on Section 115BBE

Section 68 basically applies to unexplained ‘cash credit’ like loans, deposits, advances, share capital, etc. The point to be considered is whether it will also apply to ‘income’ which is already offered to tax as normal income. If an Assessing Officer rejects taxpayer’s explanation surrounding the head of taxation (say, House Property v. Business Income or Income from other source, Business Income v. Capital Gains), being not to his satisfaction, whether Section 115BBE of the Act can still be triggered, empowering the Assessing Officer to inter alia deny all bona fide expenses / allowances as per Income Tax Act? In such a case, it may be argued that Section 115BBE of the Act is a machinery provision to levy tax on income and it should not enlarge the ambit of Section 68 of the Act to create a deeming fiction to tax any sum already credited / offered as income. Such recourse is unwarranted, keeping in view the objective of introducing Section 115BBE of the Act, which was only to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit.

So far tax laws are concerned, it is difficult to predict the precise stand of the department, but one can take adequate measures to safeguard himself from the possible complications or hindrances that may arise. Such safeguards may be an endeavour to demonstrate substance over form; maintain proper documentation evidencing the nature and source of income, Ensuring that transactions are routed through normal banking channel, which will lend due credence and it will help in proving nature and source of amount and to prove that the transaction is bona fide.

1.5 Practical problems concerning flat rate of tax if addition is made under sections 68, 69, 69A to 69D

a) Flat rate of tax, surcharge and education cess : While we appreciate the anxiety of the Revenue about taxing the income deemed and added in assessment under Section 68, section 69, 69A to 69D, lot of confusion has arisen on the practical implication and charging of the effective tax @ 77.25% u/s. 115BBE if income is reflected in the Return furnished u/s. 139. Such tax rate is prohibitive. And in case the income is not reflected in the Return, there is provision for penalty of 10% u/s. 271AAC on tax u/s. 115BBE. In such a case the effective tax, surcharge, education cess and penalty will work out to 83.25 per cent. Such stipulation needs review and the tax rates should be resumed to maximum marginal rate of 30% as prevailing prior to amendment made after demonetisation w.e.f. asst. year 2017-18.

b) The Board needs to make difference in case an assessee has already considered a receipt as his income and shown in the return say under the head Income from other sources. In such a case it will not be proper to resort to provisions of section 68 etc. as it will entail unnecessary litigation. We need to appreciate that in practical life it may not be possible for the taxpayers to prove the source with hard evidence in all cases. In contrast, if somebody is claiming any credit as capital receipt and has not offered it for tax, then the A.O. may apply provisions of section 68. In such cases marginal rate of tax may be applied at best.

c) We suggest that a proviso should be inserted to provide that if any assessee declares any income at his own under the head income from other source mentioning its nature, then in such cases section 68 or section 115BBE will not apply.

d) In case income of any other person is shown by other member of a family, the remedy is already available to the department. For example, in case any lady assessee shows income of vague nature and the department feels that it belongs to her husband, then the department is already empowered to make protective assessment in the hands of lady and make substantive assessment of such income in the hands of husband. If the case of the department is that income does not belong to the assessee, why they treat it as her income at all. Let them find out, whom it actually belongs to and tax it in his hands.

e) If the income shown by a lady assessee is from “other sources” and if such amount is invested by her, some enthusiastic A.O. may also trap her u/s. 69 by questioning source of investment and deeming the amount in certain cases as unexplained investment. For being just and avoid double jeopardy, it needs to be provided that where any amount is declared on his own by the assessee as Income from other sources, there need not be any addition u/s. 69 to the extent of such income utilised for the investment.

f) It is suggested to clarify that the amount shown as income by the assessee will not be subject to any addition u/s. 68 etc. and secondly on such amount which are declared as income by assessee on his own, the normal tax rate or at best maximum marginal rate of 30 per cent will apply. The exemption limit in respect of amount declared by the taxpayers at their own should continue to be allowed. Section 115BBE may be suitably amended to avoid unnecessary hardship.

Though section 115BBE applies to the amount of income referred to in sections 68, 69, 69A to 69D, we are confining discussion here only to implications of section 68 and section 69, as these sections are crucial for considering unexplained income.

2. Section 68

As per section 68, where any sum is found credited in the books of an assessee maintained and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the A.O., the sum so credited may be charged to income tax as the income of the assessee of the relevant previous year.

2.2 W.E.F. Asst. Year 2013-14, section 68 has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s. 68.

Further, a new section 115BBE has been inserted, w.e.f. Asst. Year 2013-14, and amended w.e.f. Asst. Year 2017-18 which provides that the deemed income on account of unexplained cash credit u/s 68, unexplained investment u/s. 69, unexplained money u/s. 69A, unrecorded investment u/s 69B, unexplained expenditure
u/s. 69C and borrowing or repaying of hundi u/s. 69D shall be taxed at an effective rate of 77.25% if such income is reflected in the Return (please refer para 1 above) irrespective of the total income of the assessee. It further provides that no expenditure or allowances shall be allowed from such income.

2.3 Burden of proof is on the assessee

The Supreme Court in the cases of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) and Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) held that 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.

In the case of Shankar Industries v. CIT [1978] 114 ITR 689 (Cal.), the Calcutta High Court held that 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 has adduced evidence to establish prima facie the aforesaid, the onus shifts to the department.

The Madras High Court in the case of V. Datchinamurthy v. Asstt. Director of Inspection [1984] 149 ITR 341 (Mad.) held that it has been a long accepted principle of income-tax law that an assessee is obliged to explain the nature and source of cash credits in his accounts and in the absence of satisfactory explanation on his part, the assessing authorities can very well proceed to treat the amount of cash credits in question as representing the taxpayer’s income.

The Kerala High Court in the case of ITO v. Diza Holdings (P.) Ltd. [2002] 120 Taxman 539 (Ker.) held that it is clear on the terms of section 68 that the burden is on the assessee to offer a satisfactory explanation about the nature and source of the amount found credited in the books of the assessee. It is also clear that the mere furnishing of particulars is not enough. The mere fact that payment was made by way of account payee cheque is also not conclusive. Therefore, the Assessing Officer would be entitled to consider whether notwithstanding the fact that the payments were made by cheques, whether the assessee has satisfactorily explained the nature and source of the amounts found credited in the books of the assessee.

The Rajasthan High Court in the case of CIT v. R.S. Rathore [1995] 212 ITR 390 (Raj.) held that 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.

The Calcutta High Court in the case of C. Kant & Co. v. CIT [1980] 126 ITR 63 (Cal.) held that 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.

On the other hand, it was held in the case of CIT v. Metachem Industries [2000] 245 ITR 160 (MP) that 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.

(Regarding burden of proof in case of share application money credited in the books of the company, see para 24.3).

2.4 Whether the burden to prove genuineness of transactions as well as creditworthiness of creditor between assessee and creditor and/or creditor and sub-creditor is upon the assessee

In Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau.) the assessee who carried on the business of supply of bamboo had taken loans amounting to Rs 4,35,000 and Rs 5 lakhs during the previous year relevant to the assessment year 1992-93. The amounts were paid by cheques by the creditors to the assessee. The creditors received the said amount by way of loans from their sub-creditors by means of cheques. The A.O. declined to treat the loan amount of Rs 4,35,000 as genuine. As regards Rs 5 lakhs he declined to treat the loan amount to the extent of Rs 4,25,000 as genuine. The A.O. added the two amounts to the total income of assessee as income from undisclosed sources. The Tribunal set aside the order passed by the Commissioner (Appeals) and upheld the order of the A.O. on the ground that neither the sub-creditors nor the creditors in question had creditworthiness to advance the said loans.

On appeal the Gauhati High Court held –

(i) That the assessee had established the identity of the creditors. The assessee had also shown, in accordance with the burden, which rested on him u/s. 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors which was not in dispute. Once the assessee had established these, the assessee must be taken to have proved that the creditor had the credit worthiness to advance the loans. Thereafter, the burden had shifted to the A.O. to prove the contrary.

(ii) The failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, could not, under the law be treated as the income from undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. The A.O. failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub- creditors from the assessee. Therefore, the A.O. could not have treated the said amounts as income derived by the assessee from undisclosed sources.

(iii) That no assessment could be made contrary to the provisions of law. In the instant case, the very basis for making the assessment was under challenge. If the assessment was based on a completely erroneous view of law, such findings could not be regarded as mere findings of fact, but must be treated as substantial questions of law. Therefore, the question raised in the appeal was a substantial question of law because it went to the very root of the assessment made.

(iv) That a person may have funds from any source and an assessee, on such information received, may take a loan from such a person. It is not the business of the assessee to find out whether the source or sources from which the creditor had agreed to advance the amounts were genuine or not. If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep it in the bank, the said amount cannot be treated as income of the assessee from undisclosed sources.

The above decision is likely to have far reaching effect with regard to provisions of section 68. It is praiseworthy that the Gauhati High Court has added a new dimension by reading section 68 together with section 106 of the Indian Evidence Act. Now, in view of the above decision, a creditor’s creditworthiness has to be judged vis-a-vis transactions, which have taken place between the assessee and the creditor and it is not business of assessee to find out source of money of his creditor or genuineness of his transactions, which took place between creditor and sub-creditor and/or creditworthiness of sub-creditors for these aspects may not be within special knowledge of the assessee. In Nemichand Kothari’s case the Court has followed the decision of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam).

2.5 Whether the assessee can seek the aid of section 131 to prove the genuineness of transactions:

In CIT v. Kamdhenu Vyapar Co. Ltd. [2003] 263 ITR 692 (Cal.), it has been observed that simple disclosure of certain materials will not help the assessee to discharge the burden of proving the credits u/s. 68 of the Income-tax Act, 1961. Until the onus is prima facie discharged by the assessee, it never shifts on the Department. But in order to ascertain whether prima facie onus has or has not been discharged, the A.O. has a duty to enquire into the materials so disclosed. The assessee may seek assistance of section 131 of the Act for the purpose of proving its own case. Section 131 empowers the A.O. to exercise the same power as vested in a Civil Court for compelling attendance of witnesses. An opportunity in-built in section 68 of the Act has been given to the assessee to prove to the satisfaction of the A.O. that the apparent is real and the transaction was genuine. In the process of availing of such opportunity, the assessee may seek aid of section 131 of the Act. If in the process, in order to secure attendance of a person a request is made by the assessee to the A.O. for issuing of summons, it is incumbent on the A.O. to issue such summons in order to enable the assessee to avail of the opportunity provided by the statute, otherwise the A.O. would be denying the opportunity provided to the assessee, in-built in section 68.

2.6 Whether A.O. can make an addition merely on the ground of non-appearance of the creditor / donor

In Atmaram J. Manghimalani (HUF) v. ITO 67 ITD 289 (Mum.) : 62 TTJ (Mum.) 357 it had been held that mere non-appearance of the donor, in the absence of any evidence that donated amount represents undisclosed income of the appellant, no addition can be made. Same analogy may apply in case of loan.

2.7 Whether the power of the A.O. u/s 68 is absolute one

In a recent decision of Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (Cal.) it was held that the power of the A.O. u/s. 68 is not an absolute one. It is subject to his satisfaction where an explanation is offered. The power is absolute where the assessee offers no explanation. The satisfaction with regard to the explanation is in effect an in-built safeguard in section 68 protecting the interest of the assessee. It provides for an opportunity to the assessee to explain the nature and source of the fund. Once it is explained, it is incumbent on the A.O. to consider the same and form an opinion whether the explanation is satisfactory or not.

Duty of A.O. if the conclusion is adverse : If the conclusion is adverse wholly or in part to the interest of the assessee, it is incumbent on the A.O. to intimate or inform the conclusion arrived at to the assessee. When such information or intimation is received by the assessee, the onus shifts on the assessee. He may furnish further explanation or information to support its contention. If further information or materials are furnished, the A.O. is bound to examine the same and form his final opinion and pass an appropriate order. Such opinion is also subject to examination by the Commissioner (Appeals) or the Tribunal and if it involves a question of law, it is also subject to scrutiny by the High Court.

2.8 Whether an addition can be made on account of cash credit u/s. 68 even if no books of account are maintained

In the case of Anand Ram Raitani v. CIT [1997] 223 ITR 544 (Gau.) it was held that the Assessing Officer before invoking the power u/s 68 of the Act 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 and if the assessee fails to satisfy the Assessing Officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking the power, discharging the burden is a subsequent condition.

2.9 If books of account have been rejected and tax is levied on estimated income, whether A.O. can make an addition for cash credit u/s. 68

There is nothing in law which prevents the Assessing Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account of the assessee as unreliable. This was so decided in Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC). Whether in a given case the Assessing Officer may tax the cash credit entered in the books of account of the business, and at the same time estimate the profit must, however, depend upon the facts of each case – CIT v. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194, 196 (SC).

Where a particular business income of the assessee has been estimated and determined, and in such a case certain cash credits are found, the Assessing Officer may be precluded from adding the said unexplained cash credit as undisclosed income from the business, the income of which was determined on estimate basis. But where the unexplained cash credits are not referable to the business income of the assessee which was estimated, the Assessing Officer is not precluded from treating the unexplained cash credit as income from any other source – CIT v. Maduri Rajaiahgari Kistaiah [1979] 120 ITR 294 (AP).

In CIT v. Neemar Ram Badlu Ram [1980] 122 ITR 68 (All.), the books of account of the assessee-firm for the years 1960-61 to 1963-64 were found to be irregular. The balance-sheets revealed excess of assets over actual liabilities. It was discovered that there were a large number of mistakes in the totals of the cash book and at many places the assessee had deliberately inflated the total on the credit side and deflated the total on the debit side of the cash book to suit his convenience. Taking each year separately, the Assessing Officer made addition for peak credit/unaccounted money and also for extra profits.

The Tribunal drew the inference that there was a connection between the unaccounted money and excess assets discovered in the business from year to year. There was also a connection between the unaccounted money and the extra profits withheld from the account books from year to year. The Tribunal, therefore, held that only the difference of the peak unaccounted money from year to year after giving adjustment for earlier years’ additions could be brought to tax. It was further held that there should not be any further addition on account of extra profits where the amount of such extra profits did not exceed the amount of the difference in peak credit/unaccounted money added for that year. Where, however, the extra profits estimate is more than the addition on account of the difference in peak credits, the bigger of the two alone will be added. The Tribunal’s view was upheld by the High Court.

In CIT v. Tyaryamal Balchand [1987] 165 ITR 453 (Raj.), additions were made in the trading results. Further, amount representing cash credits were also added as income from undisclosed sources. The Tribunal found that the additions in trading results would cover the amount of cash credits as also substantial additions had been made in earlier years. It was held that the Tribunal was justified in deleting the addition on account of cash credits.

Similarly, in CIT v. K.S.M. Guruswamy Nadar & Sons [1984] 149 ITR 127 (Mad.), it was held that two additions, one towards suppressed book profits and the other towards bogus cash credit, should be telescoped and covered into one addition.

In Ramcharitar Ram Harihar Prasad v. CIT [1953] 23 ITR 301 (Pat.) it was held that adding up extra estimated profits as well as the amounts of cash credits was open to authorities only when there was material to show that assessee carried on an independent business apart from the business for which assessment was being made.

In Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 (AP) it was held that where the authorities reject the books of account and estimate the gross profits at a flat rate, they cannot rely on the books for the purpose of adding cash credit which were part of the scheme of balancing accounts, to the profits so ascertained.

Similar view has been expressed in Reliable Surface Coatings v. ACIT [2011] 7 ITR (Trib.) 183 (Ahd).

In CIT v. Babban Pandey [1970] 77 ITR 601 (All.) the High Court followed Maddi Sudarsanam case [observing that the decision of the Supreme Court in Kale Khan’s case, [1963] 50 ITR 14 (SC), is not an authority for the contention that where the income of an assessee has been estimated on a percentage basis, the unexplained cash credit appearing in the business books must be separately added.

In CIT v. Daluram Pannalal Modi [1981] 129 ITR 398 (MP) it was held that unless the assessee shows by adducing satisfactory evidence that the cash credits were referable to the undisclosed income of the known or disclosed source, namely, the business, income from which had already been estimated, the Tribunal cannot assume that once the business income was estimated, the unexplained cash credit is covered by the income so estimated.

Other relevant cases are :

1. Srinivas Ramkumar v. CIT [1948] 16 ITR 254 (Pat.);

2. D. C. Auddy & Bros. v. CIT [1955] 28 ITR 713 (Cal.);

3. G. M. Chenna Basappa v. CIT [1958] 34 ITR 576 (AP);

4. Ratanchand Dipchand v. CIT [1960] 38 ITR 188 (MP);

5. S. Kumaraswami Reddiar v. CIT [1960]40 ITR 590 (Ker.);

6. Guduthur Bros v.CIT [1966] Taxation 22 (3)-241 (Mys.).

7. Mangalchand Gobardhan Das v. CIT, [1954] 26 ITR 706 (Assam)

8. L. R. Brothers v. CIT [1957] 31 ITR 815 (All.).

2.10 Relevance of entries in the books of account with reference to the Indian Evidence Act, 1872

It has been observed in CBI v. V. C. Shukla [1998] 3 SCC 410 (SC) that according to section 34 of the Indian Evidence Act, 1872, entries in books of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the Court has to inquire. From a plain reading of section 34 it is manifest that to make an entry relevant thereunder it must be shown that it has been made in a book, that book is a book of account and that book of account has been regularly kept in the course of business. From the said section 34 it is also manifest that even if the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still, the statement made therein shall not alone be sufficient evidence to charge any person with liability. It is thus seen that while the first part of that section speaks of the relevancy of the entry as evidence, the second part speaks, in a negative way, of its evidentiary value for charging a person with a liability…..

Where the genuineness and regularity of the accounts have not been challenged, the accounts are relevant prima facie proof of the entries and the correctness thereof under section 34 of the Evidence Act – Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam); Dhansiram Agarwalla v. CIT [1996] 217 ITR 4 (Gau.).

2.11 In case share application money is credited in the books of company

W.E.F. Asst. Year 2013-14, section 68 has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s. 68. However the amendment shall not apply where the share capital, share premium or share application money is received from Venture Capital Fund or Venture Capital Company registered with SEBI.

The position prior to the amendment is enumerated below:

Some Courts had taken a view that amounts received towards share capital are totally outside the scope of assessment, even if they are unproved, on the ground, that they cannot be treated as cash credits falling within the purview of section 68.

The Delhi High Court after a review of the precedents on the subject in CIT v. Divine Leasing and Finance Ltd. and CIT v. Lovely Exports P. Ltd. [2008] 299 ITR 268 (Del.) in a group of cases held that section 68 would require both the identity of the depositor and his creditworthiness to be proved. Where a company furnishes the address and permanent account number (PAN), such identity is established. As regards creditworthiness in a matter of subscription to public issue, more may not be expected from the assessee. The burden of proof that is expected as regards creditworthiness has to be decided in the light of the facts of each case. Where the subscriptions were received through banking channels as prescribed under SEBI regulations, the inference that the subscribers lack creditworthiness could not have been lightly drawn without some investigation on the part of the Assessing Officer. The addition without such investigation should be treated as based upon mere surmises. The principle that identity is more important in such cases has been reiterated and that even where creditworthiness is not established to the satisfaction of the Assessing Officer, it need not be unexplained income of the company, since the legitimate inference is that the income is that of the subscriber as long as the advance of the amount to the company is established and there is nothing to suggest that the amount belonged to the company.

The SLP of the department in the case of Lovely Exports (supra) has been dismissed by Supreme Court 319 ITR (St) 5 observing: “Can the amount of share money be regarded as undisclosed income under section 68 of the Income-tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”

Similar view had been adopted in CIT v. Electro Polychem Ltd. [2007] 294 ITR 661 (Mad.) purportedly following the decisions in CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC). The view upheld by the Supreme Court in Steller Investments’ case (supra) was rendered in the context of a Departmental appeal against the rejection of reference on the decision of the Tribunal, reversing the decision of the Commissioner (Appeals) setting aside the assessment for detailed investigation regarding the genuineness of the subscriptions towards share capital. It was the said order of setting aside, which was reversed in the circumstances, where lack of genuineness was not established by the Assessing Officer. The reason, why the Supreme Court upheld the High Court order was that the Tribunal’s decision was based on facts.

Allahabad High Court in the case of Jaya Securities Ltd. v. CIT [2008] 166 Taxman 7 (All.) held that no addition u/s. 68 can be made in respect of investment made by different persons in the share capital of a company, limited by shares, whether public or private. The Full Bench of the Delhi High Court in CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 (Del.)(FB) overruled its earlier decision in the case of Steller Investment Ltd.’s case [1991] 192 ITR 287 (Del.).

In yet another case in CIT v. Bhagwati Jewels Ltd. [1993] 201 ITR 461 (Del.) the High Court even without the benefit of the Full Bench decision in Sophia Finance Ltd.’s case (supra) distinguished the High Court decision in Steller Investment’s case.

The Calcutta High Court in CIT v. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal.) held that the Supreme Court decision in Steller Investment Ltd.’s case (supra) had not bound the Income Tax Department to accept share capital amounts as falling outside section 68.

However in Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (Cal.) it was held that the amounts received as share capital by way of cheques on nationalised banks after advertisement in newspapers inviting share capital, cannot be subject to addition. Also refer CIT v. Victor Electrodes Ltd. [2010] 329 ITR 271 (Del.).

In fact, the issue came up before the Supreme Court in CIT v. Gujarat Heavy Chemicals Ltd. [2002] 256 ITR 795 (SC) in respect of credits by way of share capital in the names of certain Sikkim Companies, which were not genuine with the source of funds attributed to one Sanjay Dalmia, so that it was for this reason, that it was not assessable in the hands of the company as decided by the Tribunal and sustained ultimately by the Supreme Court.

In Down Town Hospital Pvt. Ltd.[2004] 267 ITR 439 (Gau.), the High Court reviewed the case law on the subject and concluded, where the identity of the shareholders is established, the further requirement as to the source may not be expected, since the burden shifts to the Revenue once the identity is established.

The above view has been followed in CIT v. STL Extrusion P. Ltd. [2011] 333 ITR 269 (MP); CIT v. Ambuja Ginning, Pressing & Oil Co. P. Ltd. [2011] 332 ITR 434 (Guj.), CIT v. K..C. Fibres Ltd. [2011] 332 ITR 481 (Del.), CIT v. Dwarkadhish Investment P. Ltd. [2011] 330 ITR 298 (Del.), CIT v. Winstral Petrochemicals P. Ltd. [2011] 330 ITR 603 (Del.); CIT v. Misra Preservers Pvt. Ltd. [2013] 350 ITR 222 (All.). The Delhi High Court in the case of CIT v. Value Capital Services P. Ltd [2008] 307 ITR 334 (Del.) held that department must show that investment made by subscribers actually emanated from coffers of assessee to be treated as undisclosed income of assessee.

A review of the case laws would appear to indicate that the degree of responsibility in respect of share capital on the company may well be less, but it cannot disown the responsibility especially if it is a private company, where the shareholders may ordinarily be expected to be known to the company.

The same issue came up before the Madras High Court before a different Bench in CIT v. Gobi Textiles Ltd. [2007] 294 ITR 663 (Mad.) where the assessee had on the request of the Assessing Officer produced evidence regarding share capital contributions of more than Rs.1 lakh each. Salary certificates were produced to show their identity as well as capacity to subscribe for the shares. The identity of the shareholders was not in doubt. The Assessing Officer accepted the genuineness of one of the shareholders and added the share capital of nine others. The Commissioner (Appeals) not only confirmed the addition but also sustained the penalty. The Tribunal deleted the addition since the assessee had discharged the onus by the identification and proof as to source, so that the addition could only be taken as made on mere surmise. The finding of the Tribunal being one of fact, the High Court declined to interfere. It incidentally endorsed the reasoning of the Delhi High Court in Sophia Finance Ltd.’s case [1994] 205 ITR 98 (Del.) for its conclusion, that the addition was not justified, since no enquiry was conducted by the Assessing Officer to discredit the claim of genuineness.

The Chhattisgarh High Court in the case of ACIT v. Venkateshwar Ispat P. Ltd. [2009] 319 ITR 393 (Chhattisgarh) held that merely because notice issued to some shareholders was not responded, their share application money cannot be treated as unexplained amount u/s. 68.

Where the assessee files the return of income of the share applicants and their loan confirmations, the burden of the assessee stands discharged – CIT v. Jay Dee Securities and Finance Ltd. [2013] 350 ITR 220 (All.).

The Delhi High Court in the case of CIT v. Orbital Communication (P) Ltd. [2010] 327 ITR 560 (Del.) held that where assessee has established the genuineness of the share transaction and the creditworthiness of the applicant, then mere failure to produce the creditor cannot be a ground for making addition u/s. 68. Also refer CIT v. Samir Bio Tech P. Ltd. [2010] 325 ITR 294 (Del.).

However where information was obtained from investigation wing about accommodation entry providers and their modus operandi, and the list contained the name of the assessee to whom entry providers had provided entries, and further summons to such persons were not responded to, in such a case the affidavits filed by assessee after 2 years from entry providers to the effect that transactions were genuine, are of no evidentiary value. There is no duty on assessing officer to prove that monies emanated from coffers of assessee – CIT v. Nova Promoters and Finlease (P) Ltd. 342 ITR 169 (Del.).

2.12 When can the income be treated as cash credits u/s. 68

As per section 68, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of the previous year if the explanation offered by the assessee about the nature and source thereof, is, in the opinion of the Assessing Officer, not satisfactory.

In Davinder Singh v. ACIT [2006] 101 TTJ 505 (ITAT- Asr.) it has been held that the expression "any sum" is very wide and general in nature. It covers all credit including loan, receipts and any other amount of similar nature. The credit shall also include both loans and trade credits and also other receipts, be that of cash or kind. These may be in the name of the assessee i.e., capital a/c or in the name of a 3rd party.

The Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801: 80 Taxman 89 (SC) held that in case 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 unreasonable.

In the case of Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.) 13, some of the creditors were produced before the A.O. while affidavits of some of them have been produced. Balance Sheets of some of the creditors were also produced wherein the transactions were entered into. Some of the creditors have filed confirmations. Cash creditors being income-tax assessees who also had bank accounts, the finding of the A.O. that the creditors were not creditworthy was not justified. The examination by the A.O. of some of the creditors had not revealed any finding adverse to the claim of the assessee. Thus, when the cash credits stand explained, no addition, including addition on account of interest thereon, was justified. Presuming that cash credits are unexplained, the CIT(A) was fully justified in allowing set off of intangible additions against addition on account of unexplained cash credits – Asstt. CIT v. IndiaTyre House [2001] 72 TTJ (Gau.) 316, CIT v. Heeralal Chaganlal Tank [2002] 257 ITR 281 (Raj.) : [2002] 176 CTR (Raj.) 495; Shivam Synthetics (P) Ltd. v. Asstt. CIT [2002] 76 TTJ (Jd.) 164; Rohini Builders v. Dy. CIT [2002] 76 TTJ (Ahd.) 521; R. Dalmia through L.R. v. CIT [2002] 172 CTR (Del.) 180 and B & Brothers Engg. Works v. Dy. CIT [2003] 78 TTJ (Ahd.)(TM) 876 relied on.

The Kerala High Court in the case of Oceanic Products Exporting Co. v. CIT [2000] 241 ITR 497 (Ker.) held that after the enactment of section 68, the burden is placed on the assessee to prove a credit appearing in its books of account. That burden has to be discharged with positive material. When it is contended that a person has advanced money or had given a loan, it has to be established that the person was not a man of straw and had the capacity to give the money. A conclusion regarding credit- worthiness or otherwise is essentially one of fact. It does not give rise to a question of law unless it is established that the conclusion was contrary to the materials on record. Section 68 gives statutory recognition to the principle that cash credits which are not satisfactorily explained may be assessed as income. (In this case, cash credits appeared in the names of illiterate and nomadic fishermen who were not capable of lending huge amounts and who were not shown to have owned any assets worth the name, and who also gave different versions during their examination from what they had given earlier in written statements. The High Court sustained the additions made).

The Supreme Court in the cases of A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC); CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC) held that 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.

The Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 121 CTR (Cal.) 20 held that it is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. Mere furnishing of the particulars is not enough. Where the enquiry of the ITO revealed that either the creditor was not traceable or there was no such file, the first ingredient as to the identity of the creditor could not be said to have been established. If the identity of the creditors has not been established, the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors does not and could not arise.

Allahabad High Court in the case of CIT v. Jaiswal Grain Stores [2005] 272 ITR 136 (All.) has held that in case of a new business, the addition u/s. 68 on the very first day of the commencement of the business should not be made. On the first day of the business it could not be assumed that the assessee firm though assessed as AOP, had unexplained income.

2.13 If a lender, issues confirmation for loan given and also gives affidavit, resiles or retracts later on the plea that it was a hawala transaction

Under similar facts and circumstances Jaipur Bench of ITAT in the case of Sohan Lal Jain v. ITO [1987] 59 CTR (Trib.)(Sp) 17 held that merely because a creditor turns hostile, the contention of the assessee setting up a cash credit should not be disbelieved otherwise creditors could bring their assessee to ransom. It further observed that the A.O. should have gone deeper into the matter and should have called the creditors by issuing a notice u/s. 131 to find out the truth and the assessee can certainly produce other collateral evidence to show the circumstances under which the creditor has resiled.

The ITAT set aside the above case for fresh examination.

2.14 Whether loan received in the earlier year can be added u/s. 68 as unexplained cash credit

As per section 68 only amount found credited during the year can be added as such loan received in the earlier year cannot be added – ITO v. Nasir Khan J. Mahadik [2012] 134 ITD 166 (Mum).

2.15 Where a diary containing receipts not recorded in the books of account for a period of 2 months is found, can A.O. presume similar undisclosed receipts for the balance part of the year?

In the absence of any other diary or note book for the remaining period, multiplying formula or estimate cannot be applied for the period, for which no omitted receipts were evidenced by slips or notebook or diary

– Dr. R.M.L. Mehrotra 68 ITD 288 (Ahm.).

2.16 Whether credits in rough cash book can be added u/s. 68

Where cash credits are recorded in the rough cash book of the assessee and there is no proper explanation, sec. 68 will apply and the credit amount will be assessable as income of the assessee – Haji Nazir Hussain v. ITO [2004] 271 ITR (AT) 14 (Del). However loose sheets of paper are not books. Central Bureau of Investigation v. V.C. Shukla [1998] 3 SCC 410.

2.17 Where the Investigation Wing of the Income-tax Department found that the subscribers of the shares had availed of accommodation entries from professional name-lenders

There is no evidentiary value of the affidavits filed after two years specifically in view of the fact that subscribers did not appear or respond to the summons and issued statement before investigation wing that share application was accommodation entries – CIT v. Nova promoters and Finlease (P.) Ltd. [2012] 342 ITR 169 (Delhi).

2.18 Bank pass book cannot be regarded as a Books of Account

The Bombay High Court held that 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.).

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". In other words, such books have to be books of the assessee himself, and not of any other assessee. Thus, the books of account of 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 the partners.

2.19 Treatment of Cash Credits in the case of Firms : There has been difference of judicial opinion on the issue of Treatment of Cash Credits in the case of Firms.

The following cases are relevant –

In CIT & Another v. Md. Perwez Ahmad & others [2004] 268 ITR 381(Pat.) – Where the Tribunal after having considered the material on record, had found that section 68 of the I.T. Act, 1961 was not attracted in the case for the reason that in this case credit in the books of account of the assessee firm, was on account of introduction of capital by the partners and the firm had failed to prove the amount credited in the books of account and as such it would be assessed in the hands of the partners as unexplained investments. The High Court held that this was a finding of fact and no substantial question of law arose from the order of the Tribunal.

In CIT v. Burma Electro Corporation [2001] 252 ITR 344 (P&H): [2002] 172 CTR (P&H) 541: [2003] 126 Taxman 533 (P&H), the assessee was a firm comprising 12 partners. The cash credit to the extent of Rs 10,000 of Shri Hari Singh,
Rs 5,000 of Shri Gurdev Singh and Rs 5,000 of Smt.Dhan Raj have not been properly explained by the assessee as sufficiency of funds at the time of assessment in their case to the extent have not been explained. In these circumstances, the Tribunal held that this amount of cash credits of the partners cannot be assessed as the income of the assessee-firm u/s. 68 of the Income-tax Act but it may be assessed in their individual hands as their unexplained investments, if that is permissible u/s. 69 of the Income-tax Act. Thus, according to the Tribunal the result was that the above calculated unexplained cash credit relating to partners cannot be added in the income of the firm as its unexplained income. The High Court held "In our opinion, the reasons assigned by the Tribunal for deleting the additions are directly referable to the provisions of section 68 of the Act and we do not find any cogent reason to interfere with the same merely because on a reappraisal of the entire matter, it may be possible to form a different opinion." Similar view has been expressed in Abhyudaya Pharmaceuticals v. CIT [2013] 350 ITR 358 (All.) and Patel Vishnubhai Kantilal and Co. v. ITO [2013] 21 ITR (Trib) 204 (Ahd.).

In CIT v. Metachem Industries [2000] 245 ITR 160 (MP), it has been held that 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 the 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 A.O. to undertake further investigation with regard to that individual who has deposited the amount.

India Rice Mills v. CIT 218 ITR 508, 511(All.) – Where the capital contributions are made by the partners prior to the commencement of the business by the assessee-firm, it is for the partners to explain the source of such capital contributions and if they fail to discharge such onus then such capital contributions, although entered in the books of the assessee firm, cannot be regarded as income of the assessee-firm.

Surinder Mohan Seth v. CIT 221 ITR 239 at page 240 (All.) – In this case the decision in India Rice Mill (supra) was followed.

CIT, Allahabad v. Jaiswal Motor Finance 141 ITR 706 (All.) – the Court held – "It appears to be well-settled that if there are cash credit entries in the books of the firm in which the accounts of the individual partners exist and, it is found as a fact that cash was received by the firm from its partners then in the absence of any material to indicate that they were profits of the firm, it could not be assessed in the hands of the firm. We are, therefore, of the opinion that the Tribunal did not commit any error of law and rightly held that the deposits shown in its accounts were satisfactorily explained."

CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.) – In the case of cash credits in the accounts of a firm, the following points need be noted :

(a) 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;

(b) the burden to prove the identity, capacity and genuineness has to be on the assessee;

(c) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources;

(d) the firm has to establish that the amount was actually given by the lender;

(e) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities;

(f) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by section 68 can be invoked;

(g) 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.

It was held by Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam) that 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. (also see para 25.6).

2.20 Whether ownership of the person in respect of cash credits is necessary:

The Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC) held that 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.

In the same decision it was further held that 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 & far-fetched conclusion to hold that the money belongs to B.

2.21 Where charitable trust or institution receives a donation and fails to explain the source thereof, can the same be added u/s. 68

Donations other than corpus donations are always treated as income of the trust subject to its application towards the object of the trust. Since the donation receipts are income of the trust, question of its inclusion in the income of the trust does not arise – DIT (E) v. Keshav Social and Charitable Foundation [2005] 278 ITR 152 (Del)..

W.E.F. Asst. Year 2007-08 anonymous donations received by charitable trusts and institutions other than religious or partly religious trust or institution is taxable @30% u/s. 115BBC (subject to the limit of 5% or Rs 1 lakh, whichever is more).

2.22 Can an educational Institution claim exemption u/s. 10 in respect of the income added u/s. 68

In case of an educational institution exempt u/s. 10(22) [now 10(23C)], the Assessing Officer noticed some credits, which he sought to treat as deemed income u/s. 68 of the Income- tax Act, 1961 and brought to tax, but denied exemption for such amount. It was argued on behalf of the assessee that the income which is exempt has to be understood in a wide sense. The High Court in Director of Income Tax (Exemption) v. Raunaq Education Foundation [2007] 294 ITR 76 (Del.) found that the income cannot be given a restricted meaning following the decision of the Supreme Court in different context in P.R. Prabhakar v. CIT [2006] 284 ITR 548 (SC). It also referred to a decision of the Supreme Court in Adityapur Industrial Area Development Authority v. Union of India [2006] 5 Scale 321 (SC), where it was held that an exemption granted cannot be taken away, unless it is expressly provided for. In such cases where the Assessing Officer infers income for a charitable institution other than what is admitted in the books, whether by anonymous donations or by way of loan, the source of which cannot be proved, such income will also be exempt subject only to the
conditions for application of such income as well, so that there could be no liability on such income.

The above view has also been taken in the case of ACIT v. Muslim Educational Society [2010] 1 ITR (Trib.) 527 (Coch.).

However the law as regards anonymous donations has been amended by insertion of section 115BBC, whereby anonymous donations are taxed in certain cases. Even so income with reference to sction 68 would not be so covered by the amendment.

2.23 Whether section 68 can be applied against bank for deposit received

The Amritsar Bench in the case of ACIT v. Citizen Urban Co-operative Bank Ltd. [2009] 314 ITR (AT) 91 held that public deposits accepted by bank are not covered u/s. 68 as the bank is not obliged to question the source of deposit of customers where depositors have been properly introduced.

2.24 Whether section 68 can be applied to the bank with respect to deposits in the accounts of account holders

Similar point came before Punjab & Haryana High Court in the case of CIT v. Citizen Urban Co-op. Bank Ltd. [2011] 336 ITR 62 (P&H) wherein A.O. found that some deposits were made by some account-holders and the accounts were closed immediately withdrawing the deposits in cash, applying section 68. A.O. asked to explain the said deposits to assessee. It was held that since there is no nexus between depositor and the bank, section 68 cannot be applied.

2.25 Where the assessee receives advance against tenancy

The Madhya Pradesh High Court in the case of CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP) held that the landlord is only to prove the identity of the tenant and the genuineness of transaction under which deposit was made. There is no necessity to prove capacity of tenant to make deposit. Section 68 does not apply in such a case.

2.26 Cash credits in case of intangible additions

It was held by the Supreme Court in the case of Anantharam Veerasinghaiah & Co. v. CIT [1980] 123 ITR 457 (SC) held that 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.

The Delhi High Court in the case of R. Dalmia v. CIT [2001] 119 Taxman 547 (Delhi) held that 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.

The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.) held that the funds comprising the intangible additions made in earlier year would not help an assessee to presume that the said fund was always available to cover the unexplained income of the succeeding years. It is for the assessee to establish that he has not earned any secret profits during the relevant year and that the investment flowed from the intangible additions made in the preceding years.

Also refer the decision Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.)

2.27 Whether A.O. can make addition u/s. 68 without making proper enquiry

Section 68 of the Income-tax Act 1961, empowers the Assessing Officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation, A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained – Khandelwal Constructions v. CIT 227 ITR 900 (Gau.).

The assessee may seek assistance of section 131 of the Act for the purpose of proving its own case. Section 131 empowers the A.O. to exercise the same power as vested in a civil court for compelling attendance of witnesses. Further the assessee has the right to cross-examine.

2.28 Right to cross-examine

The assessee is also entitled to cross examine any person whose statement has been recorded by the A.O. and such statement is proposed to be used by the A.O. – CIT v. Eastern Commercial Enterprises 210 ITR 103 (Cal.).

The assessee had for its part produced the discharged hundis and also vouchers showing payment of interest. That is sufficient for the assessee to discharge its initial burden. It was for the ITO to have examined the bankers when he wanted to rely on the statements obtained from them. The A.O. ought to have given an opportunity to the assessee to cross-examine them before taking into account the contents of those statements – CIT v. Gani Silk Palace [1988] 171 ITR 373 (Mad.).

3. Section 69

3.1 Provisions of Section 69

As per section 69, where the assessee has made investments which are not recorded in the books of account maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not satisfactory in the opinion of the A.O., the value of the investments may be deemed to be the income of the assessee of the corresponding financial year.

W.E.F. Asst. Year 2013-14, the Finance Act, 2012 has inserted a new section 115BBE which provides that the deemed income on account of unexplained cash credit u/s. 68, unexplained investment u/s. 69, unexplained money u/s. 69A, unrecorded investment u/s. 69B, unexplained expenditure u/s. 69C and borrowing or repaying of hundi u/s. 69D shall be taxed at a flat rate of 30% irrespective of the total income of the assessee.

3.2 Explanation of the assessee is necessary

Section 69 provides that A.O. may treat the value of the investments as the income of the assessee in case the explanation offered by the assessee is not found satisfactory to him.

The Supreme Court in this regard held in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC) : 103 Taxman 382 that even if assessee’s explanation regarding source of an investment is not found to be satisfactory, AO has discretion to treat or not to treat such investment as assessee’s income.

Similarly, the Andhra Pradesh High Court in the case of CIT v. Moghul Durbar [1995] 216 ITR 301 (AP) held that even if the explanation of the assessee is rejected, section 69 confers only a discretion to the AO to deal with the investments as income of the assessee, because the word used is ‘may’ and not ‘shall’ in the said section.

The Kerala High Court in the case of CIT v. G. Anandarajan [1997] 228 ITR 664 (Ker.) held that if the books of account reveal sales and in regard thereto there is no material of a corresponding nature that the assessee could purchase the commodity for the purpose of offering for sale, the situation becomes an invitation for the assessee to explain as to how and from what source he held the amount of the commodity with regard to its purchase before it was offered for sale. However, in the absence of an explanation the deeming provision of section 69 will apply.

The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.) held that the funds comprising the intangible additions made in earlier year would not help an assessee to presume that the said fund was always available to cover the unexplained income of the succeeding years. It is for the assessee to establish that he has not earned any secret profits during the relevant year and that the investment flowed from the intangible additions made in the preceding years.

The Kerala High Court in the case of T.C.N. Menon v. ITO [1974] 96 ITR 148 (Ker.) held that it is clear from a reading of section 69 that before the amount of unexplained investment is included in the total income of an assessee, he is entitled to an opportunity to explain.

Where the deposit stands in the name of the third person, even that person is related to the assessee, the assessee cannot be called upon to explain such deposit. In such case, the proper course is that either the person in whose books the deposit appears or the person in whose name the deposit stands should be called upon to explain the deposit – CIT v. Roshan Lal Seth 178 ITR 660 (Punj.). In this case it was held that the deposit in the name of the assessee’s wife could not to be added to the assessee’s income.

3.3 Department also liable to prove the existence of unexplained investment

The Allahabad High Court in the case of CIT v. Daya Chand Jain Vaidya [1975] 98 ITR 280 (All.) has held that merely because the assessee’s explanation regarding certain investments made by his wife and sons is not acceptable, the revenue cannot treat the investments as the undisclosed income of the assessee. The revenue should bring on record material from which it could be concluded that the investments were in fact made by the assessee. If this was not done, no amount could be added as the undisclosed income of the assessee.

3.4 Additions towards cost of construction of property

It is settled law that when the credibility of the books of account maintained by the assessee is not doubted, the revenue should not be carried away merely by the report of the departmental valuer. When there is neither doubt about the books of account maintained by the assessee nor there is rejection of the same document by the Revenue, the Court should not interfere by substituting its own estimate in the place of one by the Tribunal unless it is shown that the estimate of the Tribunal could not possibly be reached. Thus, where the Tribunal accepted the cost of construction as debited in the books of account of the assessee, it would be justified in deleting the additions made towards estimated undisclosed investment on the basis of the report of the departmental valuer – Asstt. CIT v. C. Subba Reddy 2005 Tax LR 373 (Mad.).

In view of the decision of the Supreme Court in the case of Smt. Amiya Bala Paul v. CIT [2003] 262 ITR 407 (SC) : 130 Taxman 511(SC), the Assessing Officer would not be justified in obtaining report of the departmental valuer for the purpose of determining cost of construction and in making additions on the basis of such report towards unexplained investment. Where, by excluding such a report from consideration, there was no material whatsoever warranting any addition on account of unexplained investment, the addition made could not be sustained – CIT v. Ganesh Rice Mills [2005] 145 Taxman 452 (P& H).

3.5 In couse of search some notings were found indicating that the property purchased by the assessee might have been purchased at a price higher than the price disclosed by the assessee

Notings found during the course of search are only indicative but are not a conclusive evidence of the purchase price. In such a case the AO should conduct suitable enquiries and should make addition on the basis of findings of enquiries conducted by him. Addition made merely on the basis of notings found in the course of search without proper enquiry cannot be sustained. Some judicial pronouncements:

In the case of CIT v. P.V. kalyanasundaram [2006] 282 ITR 259 (Mad.) the assessee had purchased land on October 26, 1988 registered for Rs 4.10 lakh from one R. during the course of search some notings had been found indicating a higher consideration. Mr R’s statement was also taken. In a sworn statement on 8th Dec. 1998 he admitted that he received Rs 34.85 lakh. In another sworn statement on 11th December 1998, R stated that he received Rs 34.85 lakh. subsequently in an affidavit given on 8th January 1999 he mentioned the sale consideration at
Rs 4.10 lakh. The CIT noted that due to conflicting nature of statements given by sellers, his statement could not be relied upon and deleted the said addition. The Tribunal confirmed the findings of the CIT(A). On appeal the Madras High Court held that the burden of proving actual consideration in such a transaction was that of the Revenue. The AO did not conduct any independant enquiry relating to the value of the property purchased. He merely relied on the statement given by the seller. As such the deletion of the addition was justified.

In CIT v. Lalit Bahsin 290 ITR 245 (Del.) assessee purchased a ticket of Calcutta Stock Exchange for Rs 50,000. The AO took the value of the ticket at Rs 11.5 lakh on the basis of the prevailing market price and added Rs 11 lakh as unexplained investment. The Delhi High Court deleted the addition on the ground that AO arrived at conclusion primarily on imaginative basis and conjectures rather than on the basis of any record or books of account and hence deleted the addition.

In the case of Omega Estates v. ITO Ward VII(2) 106 ITD 427 (Chennai) AO relying on some letters given by the assessee to prospective buyers mentioning rate of flats at Rs 1,250 per sq. ft calculated sale receipts of all flats at the said rate. The Chennai Bench of ITAT held that since the revenue could not prove that actual consideration was more than that recorded by the assessee and since books of account had not been rejected, there was no basis of making the estimated addition.

In the case of Amarjij Singh Bakshi (HUF) v. ACIT 263 ITR (AT) 75 (Del.) a search was conducted at the premises of one Mr. A and the agreement between the assessee and Mr A. was found pertaining to sale of 9.16 acres of land. the consideration mentioned in the agreement was
Rs 7.07 crore as against the consideration of Rs 23.5 lakh declared by the assessee. The AO added the difference Rs 6.83 crore u/s. 69B. The court held that the provisions of the Indian Evidence Act are not strictly applicable to the proceedings under IT Act but the broad principles of law of evidence apply to such proceedings. Notings on loose sheets of paper are required to be supported/collaborated by other evidence. A distinction also needs to be drawn between slips of paper or loose sheets found from the possession of the assessee and similar documents found from a third person. In case the statement of the third person is recorded or relied upon then such statement undoubtedly has to be confronted to the assessee and he is to be allowed an opportunity of cross examination. The Delhi ITAT Bench said that the entire addition was based on the document found but there was no evidence to support Revenue’s case that a huge figure over and above the figure booked in the records and accounts changed hands between the parties and thus no addition could be made.

In the case of M. M. Financers (P) Ltd. v. DCIT [2007] 107 TTJ 200 (Chennai) a search was conducted at the premises of MR a business associate of the assessee and an unsigned MOU was found reflecting the purchase price of a land at Rs 2.4 crore whereas the disclosed value was Rs 91 lakh. The AO added the difference as income of the assessee. The Chennai ITAT Bench held that since the MOU was found at the premises of MR and not at the premises of the assessee and that the AO had not found any corroborating evidence from any seized material and since there was no evidence of payment of money other than Rs 91 lakh, the addition was not justified.

In the case of Manohar Lal Rattan Lal v. DCIT [2004] 91 TTJ (Asr) 737 an addition was made solely on the basis of a copy of agreement indicating large consideration, found and seized by the Department. The Amritsar ITAT Bench deleted the addition holding that since the signature of the assessee, i.e., the purchaser was not on the document no addition can be made merely on the ground that the said document was found at the premises of the assessee. Moreover the seller of the property was not examined. Hence no addition can be sustained.

In the case of Rejender Kumar Garg v. DCIT [2000] 67 TTJ (Del.) 347, sale consideration of a property was recorded in the books at Rs 9.3 lakh but the assessee declared during the search the sale consideration at Rs 38 lakhs. However in an agreement to sell, found in search, the consideration was stated at Rs 1.10 crore. The Delhi ITAT Bench directed the AO to compute the income by taking sale consideration at
Rs 38 lakhs and not one crore as the agreement was not signed and none of the buyers or proposed buyers were examined by AO and the department did not get the property valued to establish its real value.

In the case of Smt. Saroj Kumari L/H of Late Smt. Dampati Devi (Decd) v. ACIT [2004] 91 TTJ (Asr) 733 a search was carried out at the premises of a firm Lachman Dass Jaspal Singh, Mansa. In the course of the search an agreement between Smt. Dampati Devi and Shri Lachmann Dass for sale of a property at Rs 1,88,000 was found. The above property was acquired by Dampati Devi at Rs 33,750. The legal heir of late Dampati Devi argued that the agreement was not signed by the buyer and had not materialsed. But the AO added the same in the hands of the seller also on the ground that the purchaser had accepted the addition in his hands u/s. 69 of the entire amount of Rs 1,88,000. The Amritsar Bench held that the sole basis of addition was that Lachmann Das (the purchaser) agreed to the addition and on that fact alone addition cannot be made.

In the case of K. P. Varghese v. ITO, Ernakulam and Another 131 ITR 597 (SC), the Supreme Court held that assessee must be shown to have received more than what is declared or disclosed by him as consideration and only then addition can be sustained (also see next para).

However Kerala High Court in the case of CIT v. T.O. Abraham [2012] 347 ITR 378 (Ker) held that where admission was made by seller that price paid was more than that declared in sale deed, the assessment of difference in hands of purchaser was justified.

3.6 Whether additions can be made on the basis of loose sheets and torn papers found in the course of the search?

The principle laid down by the Supreme Court and various Tribunals is that as per section 34 of the Evidence Act, 1872 loose sheets of paper are not to be considered as ‘book’ and hence entries made therein are inadmissible as evidence and cannot be relied upon. Additions made merely on the basis of loose sheets and torn papers is not justified and Revenue has to bring some corroborative evidence to show that the loose papers and sheets actually show some transaction and that the assessee has earned income out of it, which is undisclosed from the department. The Revenue can tax only those receipts, which must have been proved to be income in the hands of the recipient, which must have been proved to be income in the hands of the receipient. Reference may be made to the decision of Supreme Court in CBI v. V.C. Shukla 1998 AIR Vol. 3 SC 410, wherein it was held that entries in the loose sheets, may not have any evidentiary value. In following cases the Tribunal have held that merely on the basis of entries in loose sheets there cannot be an addition – S. K. Gupta v. Dy. CIT [1999] 63 TTJ 532 (Del), Shri Ram Bhagwandas Raheja v. Asstt. CIT [ITA (S&S) No.118/Mum/1996, Bench "B", Order dated 23rd September, 1998].

Ashwani Kumar v. ITO [1992] 42 TTJ (Del.) 644: [1991] 39 ITD 183 (Del.), Kishenchand Shobhrajmal v. Asst. CIT [1992] 42 TTJ (Jp) 423: [1992] 41 ITD 97 (Jp), D.A. Patel v. Dy. CIT [2001] 70 TTJ (Mumbai) 969: [2000] 72 ITD 340 (Mumbai), Satnam Singh Chhabra v. DCIT [2002] 74 TTJ (Lucknow) 976.

Further Punjab & Haryana High Court in the case of CIT v. Ravi Kumar [2007] 294 ITR 78 (P&H) have held that if assessee claims that loose sheets contains rough calculations, the onus is on the revenue to rebut with material evidence.

Therefore, merely loose sheets or diaries found in the course of search, may not be sufficient for the Revenue to prove that the entries represent undisclosed income of the assessee. Further if entries are not in the handwriting of assessee or the Accountant, burden is on the Department to prove, beyond reasonable doubt that the entries represent the undisclosed income of the assessee.

Insertion of section 292C raising presumption: However after the insertion of section 292C(1) w.r.e.f. 1-10-1975 by the Finance Act, 2007 and as amended by the Finance Act, 2008, where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search u/s. 132 (w.e.f. 1-10-1975) or survey u/s. 133A (w.e.f. 1-6-2002), it may, in any processing under the Income tax Act, be presumed-

(i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person:

(ii) that the contents of such books of account and other documents are true; and

(iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.

As per section 292C(2) inserted by the Finance Act, 2008 w.r.e.f. 1-10-1975, where any books of account, other documents, or assets have been delivered to the Requisitioning Officer in accordance with the provisions of section 132A, then, the provisions of section 292C(1) shall apply as if such books of account, other documents, or assets which had been taken into custody from the person referred to in clause (a) or clause (b) or clause (c), as the case may be, of section 132A(1) had been found in the possession or control of that person in the course of a search u/s 132. (also see last para).

3.7 Where the gold ornaments seized do not tally with the description of the jewellery submitted before the department but the weight of jewellery found in the course of search is less than the disclosed jewellery

Similar facts came before the Jodhpur Bench of ITAT in the case of DCIT v. Arjun Dass Kalwani [2006] 101 ITD 337 (Jodh) wherein it was held that the assessee had been assessed for more jewellery than those found in the course of search for earlier year under Wealth-tax Act, merely because the assessee could not furnish the evidence of remaking, it cannot be said that these jewellery are unexplained investments of the assessee. No addition u/s. 69 is called for.

3.8 Where payment for painting purchased prior to search is made by cheque after search, it is not to be treated as unexplained investment

Similar facts came before the Mumbai Bench in the case of V. Sanjay Kumar v. DCIT [2012] 16 ITR (Trib.) 262 (Mum.) wherein it was held that no amount could be considered as unexplained investment unless there was confirmation from the other party that the amounts were paid in cash other than what was stated by the assessee. Just because the assessee made a payment subsequent to search, the amount paid by cheque could not be doubted and treated as unexplained. Similar view has been expressed by various Courts and Tribunals upholding the basic principle that without corroboration of evidence and cross-examination of third party, addition cannot be made in the hands of the assessee.

3.9 Where assessee admitted undisclosed profit during survey and retracted the same at the time of assessment on the ground that admission was due to mental pressure and coercion

It is a settled law that whatever statement is recorded under section 133A is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law – CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad.) affirmed by Supreme Court in 210 Taxman 248 (SC).

Further CBDT in its Instruction dated 10th March, 2003 vide No. F. No. 286/2/2003/IT (Inv) has also clarified –

"Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, such confessions during the course of search & seizure and survey operation do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. Similarly, while recording statement during the course of search & seizure and survey operations, no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations or thereafter while framing the relevant assessment orders."

The statement of the assessee cannot be made the sole basis for addition without any material evidence and there is no provision in the statute to prevent the declarant from retracting his statement. The A.O. cannot make an addition without bringing any adequate material on record to prove the real income to be as admitted by the assessee in the course of survey. The A.O. must examine the correctness of the statement before making the addition – ACIT v. A.T. Associates 99 TTJ (Nag.) 74.

3.10 Whether figures in loose papers found in survey where assessee admitted undisclosed investment but later retracted, can be added u/s. 69?

The Agra Bench in the case of Asst. CIT v. Ravi Agricultural Industries [2009] 316 ITR (AT) 1 (Agra) held that figures in loose papers, though admitted but subsequently retracted, could not be the basis for an inference of concealed investments made by the assessee. In such cases, the Assessing Officer is certainly entitled to make further enquiries regarding such information from the loose papers, but where it is not corroborated, no addition can be based on the same.

Information gathered during a survey can, no doubt, be used in the assessment. But where such information is found to be not reliable with reference to further facts, the assessee cannot be pinned down to the information gathered during survey or to the statement by him at the time, since the assessment has to be made with reference to all the materials gathered by the Assessing Officer.

The Amendment to section 292C by the Finance Act, 2008 extending the presumption of correctness to materials found during survey should not make any difference to the conclusion based on further materials.

3.11 Investments in secret business dealings

Where secret business dealings of the assessee involve unexplained investments, the amount invested is assessable u/s. 69 – Himmatram Laxminarainv. CIT 161 ITR 7 ( P & H ).

3.12 Whether entire undisclosed sale can be treated as income

The entire sale proceeds cannot be regarded as profit or treated as undisclosed income of the assessee. It is the net profit rate which is to be adopted – Manmohan Sadani v. CIT [2008] 304 ITR 52 (MP).

Sometimes, the A.O. presumes that there was corresponding purchase for undisclosed sales and he may treat the amount used for such purchase as unexplained investment. The above decision is important.

3.13 Higher stock declared to the bank – whether attracts addition u/s. 69

Reversing its earlier decision of Coimbatore Spinning and Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.), the Madras High Court in the case of CIT v. N. Swamy [2000] 241 ITR 363 (Mad.) observed that we find it little difficult to agree with the observations made in the case of Coimabatore Spinning & Weaving Co Ltd. v. CIT 95 ITR 375 (Mad.) that the alleged practice said to be followed by business houses of declaring larger stocks to the banks for the purpose of getting higher loans or overdraft facilities has neither been shown to exist nor recognised in commercial circles or by courts, and even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessees so as to enable them to go back on their own sworn statements given to the banks as to the stocks held or hypothecated by them in the banks.

It also held that the assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless there is material to corroborate that statement of the assessee given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee has undisclosed income is on the revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee has deliberately suppressed his income.

On similar facts it was held in the case of CIT v. Relaxo Footwear [2002] 123 Taxman 322 (Raj.) that where the Tribunal accepted the assessee’s explanation that the stock statement submitted to bank was to make it easier for the assessee to have availed higher credit facility by inflating the stock position to the bank, it was justified in deleting addition on account of the discrepancy between the stock shown in the books of account and the stock shown in the statement to the bank.

The Jammu & Kashmir High Court in the case of Ashok Kumar v. ITO 201 CTR (J&K) 178 : 149 Taxman 479 (J&K) held that where stock shown in the books of account is properly verified and valued as per cost, no addition should be made on account of inflated stock statement furnished to the bank.

It is immaterial that the difference has arisen on account of higher valuation or on account of disclosing higher quantity to the bank – CIT v. Khan & Sirohi Steel Rolling Mills 200 CTR (All.) 595, Pranab Kumar Dawn v. ITO ITA NO.668/Kol/2010 dated 30-9-2010.

Similar view has also been expressed by the Madras High Court in the case of CIT v. Apcom Computers (P) Ltd. [2007] 158 Taxman 363 (Mad.).

Where the book stock was reliable but inflated stock statement was furnished to bank for obtaining higher credit facility, the addition cannot be sustained – CIT v. Veerdip Rollers P. Ltd. [2010] 323 ITR 341 (Guj.). SLP filed by Department has been rejected by Supreme Court [2008] 307 ITR (St.) 3.

Different Courts and ITA T benches have held that no addition can be made merely on the basis of difference between stock statement submitted by the assessee to the bank and the stock as per books. The burden of the AO to establish the undisclosed income in the hands of the assessee does not stand discharged merely on bringing out the difference between stock statement submitted to bank and assessee’s books – CIT v. Acrow India Ltd, 298 ITR 447 (Bom); CIT v. Das Industries 303 ITR 199 (All); CIT v. Sidhu Rice and General Mills 281 ITR 447 (Bom), CIT v. Sri Padmavati Cotton Mills 236 ITR 340 (Mad); Sri Taraka Jewellers v. ITO ITA No.1007/Hyd/2011 dated 10-5-2012.

However in special facts courts and IT AT benches have held that the difference between stock statement submitted to bank and stock as per books may be added as unexplained investment – Swadeshi Cotton Mills Co. Pvt. Ltd. v. CIT 125 ITR 33 (All.); Dhansiram Agarwal v. CIT 201 ITR 192 (Gau.); CIT v. Pioneer Breeding Farms 295 ITR 78 (Mad.); CIT v. Ashok Estate Private Ltd. 141 ITR 785 (Ker.); Max Text Chemm Products v. CIT 83 ITD 96 (Pune).

3.14 Unexplained stock

Where assessee had not maintained stock register and Assessing Officer, on verification of records of assessee, found certain excess stock of bearings, he was justified in making addition on account of that as unexplained investment, since it was obligatory for assessee to maintain stock register so that one was able to ascertain actual position of stock lying with the assessee in which he was trading – Sanjay Son of Dwarkadas Jajoo v. CIT [2006] 154 Taxman 101 (MP).

Unexplained stock in trade is not covered by section 69 – Addl. CIT v. Danyabhai Pitamberdas & Co. [1974]Taxation 36(1) 25-26 (Guj.). However contrary view has been expressed in Ramanlal Kacharulal Tejmal v. CIT [1984] 146 ITR 368 (Bom.) in which stock declared to bank was in excess. (also refer the decision in the case of Smt. Amiya Bala Paul v. CIT 262 ITR 407 (SC) and provisions of section 142A).

3.15 Whether the method prescribed in Accounting Standards for valuation of stock is relevant for the purpose of unexplained investments

In a case suppose the valuation of stock shown in the books of account is on the basis of FIFO (i.e. First In First Out) method, which is mandatory as per Accounting Standard-2 issued by The Institute of Chartered Accountants of India. During the year end, the price of the stock had gone down, therefore, as per the method prescribed in AS-2 the valuation of the stock lying in the showroom as well as godown was made at reduced rate as prevailing at that time. However, the stock valuation sheet submitted to bank for the purpose of obtaining higher loans/overdraft facilities was prepared on the basis of actual costs of the stock. Thus in fact there was no question of any higher amount of stock on the basis of the value of inventory submitted to the bank.

3.16 In case assessee purchased shares at a cost lower than the market price, whether the difference between market price and purchase price shown by the assessee can be added as income u/s. 69

In the given case the investment that is the purchase of shares have been recorded in the books of account. As per section 69 only such value of investments may be deemed to be the income of the assessee as was not recorded in the books of account. Thus section 69 is not applicable. The above view has been expressed in the case of Rupee Finance & management P. Ltd. v. ACIT (2009) 310 ITR (AT) 403 (Mum). However w.e.f. 1-10-2009 as per section 56(2)(vii) the difference between the fair market price and the purchase price will be taxed under the head ‘other sources’ if the assessee is an individual or HUF and the difference between fair market price and purchase price exceeds Rs 50,000.

3.17 Treatment of unexplained investment in case of partnership firms

The Allahabad High Court in the case of India Rice Mills v. CIT [1996] 218 ITR 508 (All.) held that in respect of capital contributed by partner in firm, the onus is on the partners to explain the source, and if they fail to do so, the amount could be added as income from undisclosed sources in the hands of the partner only and not in the hands of the firm.

3.18 If assessee is found in possession of demonetised notes, can the same be treated as unexplained investment

Demonetised notes ceases to be legal tender and has no value at all and in fact they are scrap papers. Therefore the same cannot be treated as unexplained investment – CIT v. Andhra Pradesh Yarn Combines (P) Ltd. 200 CTR (Ker.) 641.

3.19 Provisions u/s. 142A regarding estimate by Valuation Officer in certain cases

Section 142A has been inserted by the Finance (No. 2) Act, 2004, w.r.e.f. 15-11-1972 to provide that for the purposes of making an assessment or reassessment under the Income-tax Act –

(i) Where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required to be made, the A.O. may require the Valuation Officer to make an estimate of such value and report the same to him.

(ii) The Valuation Officer to whom such a reference is made shall, for the purposes of dealing with such reference, have all the powers that he has u/s 38A of the Wealth-tax Act, 1957.

(iii) On receipt of the report from the Valuation Officer, the A.O. may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment.

However, the above provisions shall not apply in respect of an assessment made on or before
30-9-2004, and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.

3.20 In case of search where there is no finding as to unexplained investment, whether A.O. can refer valuation to DVO and make additions as per DVO’s report which is not based on comparable cases

In case of search there must be some material that there is an unexplained investment for referring the matter to DVO in case of purchase or construction of a property. Moreover if the report of the DVO is not based on comparable cases, the same cannot be relied up on – CIT v. Abhinav Kumar Mittal [2013] 351 ITR 20 (Del.), CIT v. Dinesh Jain HUF 254 CTR (Del.) 534.

3.21 Whether prerequisite conditions of section 69 have to be satisfied even if presumption u/s. 132(4A) is raised against the assessee

In Ushakant N. Patel v. CIT [2006] 282 ITR 553 (Guj.) it was held that in the first instance it is incumbent upon the authority to establish that there were investments made by the assessee; that such investments were not recorded in the books of account maintained by the assessee; and that such investments had been made in the financial year immediately preceding the assessment year in question.

Even if the contention of the revenue that the provision of section 132(4A) of the Act are available to the revenue during the course of regular assessment proceeding is accepted for the sake of argument, yet nonetheless, the requisite conditions of section 69 cannot be given a go by and have to be met.

Therefore even if presumption u/s. 132(4A) is raised against the assessee, the ingredients by way of prerequisite conditions of section 69 have to be satisfied and cannot be presumed to have been established on the basis of section 132(4A) of the Act simpliciter.

3.22 Whether procedure available in regular assessment by application of the principles relating to burden of proof in sections 68, 69, 69A, 69B and 69C, also apply in search cases

The Special Bench of ITAT in the case of Triumph Securities Ltd. v. Deputy CIT [2011] 10 ITR (Trib.) 1 (Mum.)(SB): [2010] 39 SOT 139 (Mum.) (SB): [2010] 132 TTJ 257 (Mum.)(SB) held that where a search in the case of stock-broker revealed mismatch between actual transactions and those recorded in the books, the income in the block has to be computed after taking into consideration the undisclosed income inferable on the basis of materials found during search and post-search enquiries relating to such materials. The assessee’s argument that the procedure available in regular assessment by application of the principles relating to burden of proof in sections 68, 69, 69A, 69B and 69C, would have no application was found to be without merit. The inference, whether there was an element of undisclosed income embedded in the transactions discovered during search has to be considered in the light of burden of proof on the part of the assessee to explain the discrepancies. The transactions recorded by the stock exchange are good pieces of evidence. Where the assessee did not choose to explain the discrepancies except by furnishing confirmation letters of some parties which did not cover the discrepancies of all clients, the addition is justified.

3.23 Deposit in joint names

Where bank deposits were in joint names of husband and wife and there was no material on record to show who earned the money deposited, nor was there any material to show that money belonged to the husband, half of the interest on such deposits was held taxable in the hands of the husband because of the fact that the wife was assessed on half of the interest at least in one year and she was admittedly owner of a house property – CIT v. Ishwar Das Sharma 158 ITR 167 (Del.).

3.24 Whether maintenance of books of account is necessary for making addition u/s. 69

The section 69 provides that where in any financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income and if A.O. does not find satisfactory explanation from the assessee, then the value of investments may be deemed
to be the income of the assessee of such financial year.

The Madhya Pradesh High Court in the case of Dr. Prakash Tiwari v. CIT [1984] 148 ITR 474 (MP) held that where the assessee has not maintained books of account and additions are made towards unexplained investments, the additions made would be sustainable under section 69 and not under section 69B.

For applying sections 69 and 69B, it is not necessary that the books of account are to be rejected. The onus of proving the source of a sum of money is on the assessee. If he disputes the liability for tax, it is for him to show that the receipt was not income or that it was exempted from taxation under the law. In the absence of any proof, the Assessing Officer is entitled to charge it as taxable income. It is not necessary that the books of account have to be rejected expressly or that it is to be, in express terms, recorded that the books of account are not reliable or the explanation is not satisfactory – Unit Construction Co. Ltd. v. Jt. CIT [2003] 260 ITR 189 (Cal.).

Similar view has been expressed in CIT v. Ambience Hotels & Resort Ltd. 83 CCH 021 (Delhi HC).

3.25 Treatment of unexplained investment in case of partnership firms

The Allahabad High Court in the case of India Rice Mills v. CIT [1996] 218 ITR 508 (All.) held that in respect of capital contributed by partner to firm, the onus is on the partners to explain the source, and if they fail to do so, the amount could be added as income from undisclosed sources in the hands of the partner only and not in the hands of the firm. ( also see para 24.5).

3.26 What is Peak Credit theory

As per Peak theory, where a single credit or number of credits appear in the books in the account of any particular person, those with a number of debits should all be arranged in serial order, so that a credit following a debit entry should be treated as referable to the latter to the extent possible. Further the "Peak" of the credits should be treated as unexplained and not the aggregate of the credit amount. (also see next para).

3.27 What is theory of Telescoping

Telescoping is one type of technique which delinks all subsequent transactions of the original transaction or amount which have merely rotation, recycling and conversion of one into another. By this technique a real income is to be determined. The real income is subject to tax in the Income-tax Act, for example if in a search, assets of Rs 10 lakhs were found and assessee disclosed Rs 10 lakhs in his return against notice u/s. 158BBC, then it is telescoping that assets found were the application of this disclosed income as on other assets etc. were found in search. Therefore assuming or accepting that the application of this income into assets is called telescoping. Both the above theories, peak theory (see earlier para) and theory of Telescoping are applicable in case of block assessment.

In support of above view reference can be made to the decision of Jaipur Bench of the Tribunal in the case of Ramesh Chand Modi v. Asstt. CIT 1998 Tax World 510 (Jp) and Ahmedabad Bench of Tribunal in case of Kishore Mohanlal Tewala v. Asstt. CIT [1999] 64 TTJ (Ahd.) 543.

3.28 Tax Rate for deemed income u/s. 68, 69, 69A, 69B, 69C and 69D

Please refer amended section 115BBE w.e.f. Asst. Year 2017-18 in para 1 above.

Reproduced with permission from the AIFTP Journal
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9 comments on “Section 115BBE And Sections 68/69: Taxation Of Unexplained Income Or Investment
  1. Ashok Reddy says:

    Excellent and well researched article ! Mr. Jain deserves applauses. I look forward to many more articles from him.!

  2. CA M RAJESH KUMAR says:

    super sir good analysis

  3. Himanshu says:

    Simply outstanding piece of work sir. Very informative and detailed.
    Thanks a lot!

  4. Anand says:

    Excellent presentation sir

  5. B.R.MITTAL says:

    Dear Mr. Jain,

    It is very informative clearly explained article. Thanks for making such a laborious exercise .

  6. Hari Agarwal says:

    An Excellent Presentation

  7. CA Jagdish Khandelwal says:

    Good analysis done by Advocate Narayan Jain. The information given is exhaustive. In fact the finance ministry needs to know the practical problems that will faced by the assessee’s in genuine cases to provide the documents to support their cases and will be at the whims and mercy of the assessing officer.

  8. Sudhir Chintawar says:

    Very informative. The suggestions with reference to the need of amendments require to be pursued with CBDT. A substantial part of my doubts have been cleared.

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