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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<\/strong> <\/p>\n 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.<\/p>\n 1.1<\/strong> 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.<\/p>\n <\/p>\n 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:<\/p>\n 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%.<\/p>\n 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<\/p>\n 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.<\/p>\n 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.<\/p>\n Section 68 of the Act provides inter alia<\/em> 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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<\/em> deny all bona fide<\/em> 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.<\/p>\n 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<\/em>.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/strong><\/p>\n 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.<\/strong><\/p>\n 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.<\/strong><\/p>\n 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.<\/strong><\/p>\n 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.<\/p>\n 2.2 W.E.F. Asst. Year 2013-14,<\/strong> 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.<\/p>\n 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 The Supreme Court in the cases of Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC)<\/em> and Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) <\/em>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.<\/p>\n In the case of Shankar Industries v. CIT [1978] 114 ITR 689 (Cal.),<\/em> the Calcutta High Court held that it is necessary for the assessee to prove prima facie<\/em> 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<\/em> the aforesaid, the onus shifts to the department.<\/p>\n The Madras High Court in the case of V. Datchinamurthy v. Asstt. Director of Inspection [1984] 149 ITR 341 (Mad.)<\/em> 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.<\/p>\n The Kerala High Court in the case of ITO v. Diza Holdings (P.) Ltd. [2002] 120 Taxman 539 (Ker.)<\/em> 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.<\/p>\n The Rajasthan High Court in the case of CIT v. R.S. Rathore [1995] 212 ITR 390 (Raj.)<\/em> 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.<\/p>\n The Calcutta High Court in the case of C. Kant & Co. v. CIT [1980] 126 ITR 63 (Cal.)<\/em> 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.<\/p>\n On the other hand, it was held in the case of CIT v. Metachem Industries [2000] 245 ITR 160 (MP) <\/em>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 (Regarding burden of proof in case of share application money credited in the books of the company, see para 24.3).<\/p>\n In Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau.)<\/em> 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.<\/p>\n On appeal the Gauhati High Court held –<\/p>\n (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.<\/p>\n (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.<\/p>\n (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.<\/p>\n (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.<\/p>\n 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<\/em> 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 (<\/em>Assam<\/em>).<\/em><\/p>\n In CIT v. Kamdhenu Vyapar Co. Ltd. [2003] 263 ITR 692 (Cal.), <\/em>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<\/em> discharged by the assessee, it never shifts on the Department. But in order to ascertain whether prima facie<\/em> 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.<\/p>\n In Atmaram J. Manghimalani (HUF) v. ITO 67 ITD 289 (Mum.) : 62 TTJ (Mum.) 35<\/em>7 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.<\/p>\n In a recent decision of Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (<\/em>Cal.<\/em>)<\/em> 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.<\/p>\n 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.<\/p>\n In the case of Anand Ram Raitani v. CIT [1997] 223 ITR 544 (Gau.)<\/em> 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.<\/p>\n 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).<\/em> 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)<\/em>.<\/p>\n 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).<\/em><\/p>\n In CIT v. Neemar Ram Badlu Ram [1980] 122 ITR 68 (All.),<\/em> 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. <\/p>\n 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.<\/p>\n In CIT v. Tyaryamal Balchand [1987] 165 ITR 453 (Raj.),<\/em> 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.<\/p>\n Similarly, in CIT v. K.S.M. Guruswamy Nadar & Sons [1984] 149 ITR 127 (Mad.),<\/em> 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.<\/p>\n In Ramcharitar Ram Harihar Prasad v. CIT [1953] 23 ITR 301 (Pat.)<\/em> 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.<\/p>\n In Maddi Sudarsanam Oil Mills Co. v. CIT [1959] 37 ITR 369 (AP)<\/em> 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.<\/p>\n Similar view has been expressed in Reliable Surface Coatings v. <\/em>ACIT<\/em> [2011] 7 ITR (Trib.) 183 (Ahd).<\/em><\/p>\n In CIT v. Babban Pandey [1970] 77 ITR 601 (All.) <\/em>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.<\/p>\n In CIT v. Daluram Pannalal Modi [1981] 129 ITR 398 (MP)<\/em> 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.<\/p>\n Other relevant cases are :<\/p>\n 1. Srinivas Ramkumar v. CIT [1948] 16 ITR 254 (Pat.);<\/em><\/p>\n 2. D. C. Auddy & Bros. v. CIT [1955] 28 ITR 713 (<\/em>Cal<\/em>.);<\/em><\/p>\n 3. G. M. Chenna Basappa v. CIT [1958] 34 ITR 576 (AP);<\/em><\/p>\n 4. Ratanchand Dipchand v. CIT [1960] 38 ITR 188 (MP);<\/em><\/p>\n 5. S. Kumaraswami Reddiar v. CIT [1960]40 ITR 590 (Ker.);<\/em><\/p>\n 6. Guduthur Bros v.CIT [1966] Taxation 22 (3)-241 (Mys.).<\/em><\/p>\n 7. Mangalchand Gobardhan Das v. CIT, [1954] 26 ITR 706 (<\/em>Assam<\/em>)<\/em><\/p>\n 8. L. R. Brothers v. CIT [1957] 31 ITR 815 (All.).<\/em><\/p>\n It has been observed in CBI v. V. C. Shukla [1998] 3 SCC 410 (SC) <\/em>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…..<\/p>\n Where the genuineness and regularity of the accounts have not been challenged, the accounts are relevant prima facie<\/em> 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.).<\/em><\/p>\n 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.<\/p>\n The position prior to the amendment is enumerated below:<\/p>\n 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.<\/p>\n The Delhi High Court after a review of the precedents on the subject in CIT v. Divine Leasing and Finance Ltd.<\/em> and CIT v. Lovely Exports P. Ltd. [2008] 299 ITR 268 (Del.)<\/em> 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.<\/p>\n 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.”<\/p>\n Similar view had been adopted in CIT v. Electro Polychem Ltd. [2007] 294 ITR 661 (<\/em>Mad.<\/em>)<\/em> purportedly following the decisions in CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC).<\/em> 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.<\/p>\n Allahabad High Court in the case of Jaya Securities Ltd. v. CIT [2008] 166 Taxman 7 (All.) <\/em>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)<\/em> overruled its earlier decision in the case of Steller Investment Ltd.’s case [1991] 192 ITR 287 (Del.).<\/em><\/p>\n In yet another case in CIT v. Bhagwati Jewels Ltd. [1993] 201 ITR 461 (Del.)<\/em> 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.<\/p>\n The Calcutta High Court in CIT v. Ruby Traders and Exporters Ltd. [2003] 263 ITR 300 (Cal.) <\/em>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.<\/p>\n However in Hindusthan Tea Trading Co. Ltd. v. CIT [2003] 263 ITR 289 (Cal.)<\/em> 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.).<\/em><\/p>\n In fact, the issue came up before the Supreme Court in CIT v. Gujarat Heavy Chemicals Ltd. [2002] 256 ITR 795 (SC)<\/em> 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.<\/p>\n In Down Town Hospital Pvt. Ltd.[2004] 267 ITR 439 (Gau.),<\/em> 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.<\/p>\n 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 (<\/em>Del.<\/em>), CIT v. Dwarkadhish Investment P. Ltd. [2011] 330 ITR 298 (<\/em>Del.<\/em>), CIT v. Winstral Petrochemicals P. Ltd. [2011] 330 ITR 603 (<\/em>Del.<\/em>); 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.)<\/em> held that department must show that investment made by subscribers actually emanated from coffers of assessee to be treated as undisclosed income of assessee.<\/p>\n 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.<\/p>\n 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.)<\/em> 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.<\/p>\n The Chhattisgarh High Court in the case of ACIT<\/em> v. Venkateshwar Ispat P. Ltd. [2009] 319 ITR 393 (Chhattisgarh)<\/em> 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.<\/p>\n 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.).<\/em><\/p>\n The Delhi High Court in the case of CIT v. Orbital Communication (P) Ltd. [2010] 327 ITR 560 (Del.)<\/em> 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.).<\/em><\/p>\n However where information was obtained from investigation wing about accommodation entry providers and their modus operandi<\/em>, 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.).<\/em><\/p>\n 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.<\/p>\n In Davinder Singh v. <\/em>ACIT<\/em> [2006] 101 TTJ 505 (ITAT- Asr.)<\/em> 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.<\/p>\n The Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801: 80 Taxman 89 (SC) <\/em>held that in case there is prima facie<\/em> 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.<\/p>\n In the case of Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.) 13,<\/em> 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. <\/em>India<\/em>Tyre<\/em> 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 (<\/em>Del.<\/em>) 180<\/em> and B & Brothers Engg. Works v. Dy. CIT [2003] 78 TTJ (Ahd.)(TM) 876<\/em> relied on.<\/p>\n The Kerala High Court in the case of Oceanic Products Exporting Co. v. CIT [2000] 241 ITR 497 (Ker.)<\/em> 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).<\/p>\n 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)<\/em> 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.<\/p>\n The Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 121 CTR (<\/em>Cal.<\/em>) 20<\/em> 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.<\/p>\n Allahabad High Court in the case of CIT v. Jaiswal Grain Stores [2005] 272 ITR 136 (All.) <\/em>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.<\/p>\n Under similar facts and circumstances Jaipur Bench of ITAT in the case of Sohan Lal Jain v. ITO [1987] 59 CTR (Trib.)(Sp) 17<\/em> 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. <\/p>\n The ITAT set aside the above case for fresh examination.<\/p>\n 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).<\/em><\/p>\n 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<\/p>\n – Dr. R.M.L. Mehrotra 68 ITD 288 (Ahm.).<\/em><\/p>\n 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.<\/em><\/p>\n 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 (<\/em>Delhi<\/em>).<\/em><\/p>\n 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.).<\/em><\/p>\n In Smt. Shanta Devi v. CIT [1998] 171 ITR 532 (P&H), <\/em>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 The following cases are relevant –<\/p>\n In CIT & Another v. Md. Perwez Ahmad & others [2004] 268 ITR 381(Pat.)<\/em> – 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.<\/p>\n In CIT v. Burma Electro Corporation [2001] 252 ITR 344 (P&H): [2002] 172 CTR (P&H) 541: [2003] 126 Taxman 533 (P&H),<\/em> the assessee was a firm comprising 12 partners. The cash credit to the extent of Rs 10,000 of Shri Hari Singh, In CIT v. Metachem Industries [2000] 245 ITR 160 (MP),<\/em> 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.<\/p>\n India Rice Mills v. CIT 218 ITR 508, 511(All.) <\/em>– 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.<\/p>\n Surinder Mohan Seth v. CIT 221 ITR 239 at page 240 (All.) <\/em>– In this case the decision in India Rice Mill (supra) was followed.<\/p>\n CIT, Allahabad v. Jaiswal Motor Finance 141 ITR 706 (All.)<\/em> – 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."<\/p>\n CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.)<\/em> – In the case of cash credits in the accounts of a firm, the following points need be noted :<\/p>\n (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;<\/p>\n (b) the burden to prove the identity, capacity and genuineness has to be on the assessee;<\/p>\n (c) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources;<\/p>\n (d) the firm has to establish that the amount was actually given by the lender;<\/p>\n (e) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities;<\/p>\n (f) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by section 68 can be invoked;<\/p>\n (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.<\/p>\n It was held by Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR 632 (Assam) <\/em>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<\/em> 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).<\/p>\n The Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)<\/em> 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.<\/p>\n 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.<\/p>\n 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)..<\/em><\/p>\n 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).<\/p>\n 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.)<\/em> 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).<\/em> 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),<\/em> 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 The above view has also been taken in the case of ACIT<\/em> v. Muslim Educational Society [2010] 1 ITR (Trib.) 527 (Coch.).<\/em><\/p>\n 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.<\/p>\n The Amritsar Bench in the case of ACIT<\/em> v. Citizen Urban Co-operative Bank Ltd. [2009] 314 ITR (AT) 91<\/em> 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.<\/p>\n 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) <\/em>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.<\/p>\n The Madhya Pradesh High Court in the case of CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP)<\/em> 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.<\/p>\n It was held by the Supreme Court in the case of Anantharam Veerasinghaiah & Co. v. CIT [1980] 123 ITR 457 (SC) <\/em>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. <\/p>\n 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.<\/p>\n The Delhi High Court in the case of R. Dalmia v. CIT [2001] 119 Taxman 547 (Delhi)<\/em> 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.<\/p>\n The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.)<\/em> 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.<\/p>\n Also refer the decision Jagdamba Construction Co. v. ITO [2004] 82 TTJ (Jd.) (Trib.)<\/em><\/p>\n 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.).<\/em><\/p>\n 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.<\/p>\n 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.)<\/em>.<\/p>\n 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.).<\/em><\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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<\/em> 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.<\/p>\n Similarly, the Andhra Pradesh High Court in the case of CIT v. Moghul Durbar [1995] 216 ITR 301 (AP)<\/em> 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.<\/p>\n The Kerala High Court in the case of CIT v. G. Anandarajan [1997] 228 ITR 664 (Ker.)<\/em> 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.<\/p>\n The Kerala High Court in the case of CIT v. M.A. Unnerikutty [1985] 154 ITR 844 (Ker.)<\/em> 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.<\/p>\n The Kerala High Court in the case of T.C.N. Menon v. ITO [1974] 96 ITR 148 (Ker.)<\/em> 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.<\/p>\n 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.).<\/em> 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.<\/p>\n The Allahabad High Court in the case of1. Section 115BBE<\/h2>\n
1.2 Amended Provisions of Section 115BBE <\/h2>\n
1.3 Analysis for better understanding<\/h2>\n
1.4 Some Issues on Section 115BBE<\/h2>\n
1.5 Practical problems concerning flat rate of tax if addition is made under sections 68, 69, 69A to 69D <\/h2>\n
2. Section 68<\/h2>\n
\n 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.<\/p>\n2.3 Burden of proof is on the assessee<\/h2>\n
\n regard to that individual who has deposited the amount.<\/p>\n2.4 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<\/h2>\n
2.5 Whether the assessee can seek the aid of section 131 to prove the genuineness of transactions:<\/h2>\n
2.6 Whether A.O. can make an addition merely on the ground of non-appearance of the creditor \/ donor<\/h2>\n
2.7 Whether the power of the A.O. u\/s 68 is absolute one<\/h2>\n
2.8 Whether an addition can be made on account of cash credit u\/s. 68 even if no books of account are maintained<\/h2>\n
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 <\/h2>\n
2.10 Relevance of entries in the books of account with reference to the Indian Evidence Act, 1872<\/h2>\n
2.11 In case share application money is credited in the books of company <\/h2>\n
2.12 When can the income be treated as cash credits u\/s. 68<\/h2>\n
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<\/h2>\n
2.14 Whether loan received in the earlier year can be added u\/s. 68 as unexplained cash credit <\/h2>\n
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?<\/h2>\n
2.16 Whether credits in rough cash book can be added u\/s. 68<\/h2>\n
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 <\/h2>\n
2.18 Bank pass book cannot be regarded as a Books of Account <\/h2>\n
\n tax as income u\/s. 68 in the hands of the partners.<\/p>\n2.19 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.<\/h2>\n
\n 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.).<\/em><\/p>\n2.20 Whether ownership of the person in respect of cash credits is necessary:<\/h2>\n
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 <\/h2>\n
2.22 Can an educational Institution claim exemption u\/s. 10 in respect of the income added u\/s. 68<\/h2>\n
\n conditions for application of such income as well, so that there could be no liability on such income.<\/p>\n2.23 Whether section 68 can be applied against bank for deposit received<\/h2>\n
2.24 Whether section 68 can be applied to the bank with respect to deposits in the accounts of account holders<\/h2>\n
2.25 Where the assessee receives advance against tenancy<\/h2>\n
2.26 Cash credits in case of intangible additions<\/h2>\n
2.27 Whether A.O. can make addition u\/s. 68 without making proper enquiry<\/h2>\n
2.28 Right to cross-examine <\/h2>\n
3. Section 69<\/h2>\n
3.1 Provisions of Section 69<\/h3>\n
3.2 Explanation of the assessee is necessary<\/h3>\n
3.3 Department also liable to prove the existence of unexplained investment<\/h3>\n