>>CASH CREDIT, UNEXPLAINED
INVESTMENTS, ETC.
CASH CREDIT - SECTION
68
Indu Patel & Usha Dalal
Advocates
Subject of Cash Credits has been one of the major
areas of litigation in taxation. Though with the reduction in rates of taxes, the
importance has slightly reduced, it still remains a common issue of dispute between the
assessee’s and the department.
The authors have dealt with the subject in detail
starting with its legislative history and a thread- bare discussion of the subject. The
authors have also discussed subject in context of various eventualities like share capital
of company etc.
1. Legislative History
The provision relating to cash credit, as in section 68, was provided
for the first time in the Income Tax Act 1961 (Act No. 43 of 1961) as there was no
corresponding provision in the Income Tax Act 1922.
It would be pertinent to note that section 68 is a new section in
comparisons with the provision of the Income Tax Act, 1922, it is a culmination of a
series of judicial pronouncements under the provisions of the Income Tax Act, 1922, on the
issues relating to cash credit (1975) Tax Law Report 109 (Orissa).
2. Analysis in brief – Section 68
For the purpose of better comprehension, the section may be divided
into following parts:
Where any sum is found credited in the books of the assessee;
Maintained for any previous year; and
Assessee offers no explanation about
the source
and
the nature
The explanation offered by him, is not, in the opinion of the
Assessing officer, satisfactory; then
The sum so credited may be charged to Income Tax;
As income of the assessee, of that previous year, in relation to
which it is so found to have been credited.
3. Initial catchwords are
Where any sum is found credited
In the books of account of the assessee.
Section 68 is attracted where an entry relating to a sum is found to
have been credited in the books kept by the assessee, which thus implies, existence of
books and recording of a sum which the Assessing Officer considers as doubtful. The
Assessing Officer then starts enquiry, specifically to satisfy himself of the source of
such credit. If, during the enquiry, he is satisfied that the entries are not genuine,
then he will have every right to add the said sum represented by such credit entry as
income from other sources. The satisfaction of the assessing officer is the basis of
invocation of his powers under section 68. However, such satisfaction must not be illusory
or imaginative but must have been derived from relevant facts and factors, and is on the
basis of proper enquiry of all material before him but also to which he has command. The
enquiry envisaged under section 68 is an enquiry which is reasonable and just. (227 ITR 900 (Gauhati). It was held in this case that the amount
of cash credits could not be included in the total income of the assessee because the
Assessing Officer had not made proper enquiry. If an undisclosed income is found from an
unknown source or if the amount represents some concealed income which was not credited in
the books kept by him, the position would probably be not different from what is laid down
in the various cases decide earlier under the 1922 Act, as observed in (1983) 144 ITR 622 (Cal), in which case the Baladin Ram vs. CIT was applied (71 ITR 427 SC).
4. Books of accounts – Relevancy of entries in such
books
"Books" as ordinarily understood means a collection of sheets
of paper or other material, blank, written or printed, fastened or bound together as to
form a material whole.
Loose sheets or scraps of papers cannot be termed as books, because
they can easily be detached and replaced.
The spiral note books and spiral pads can be regarded as books within
the meaning of section 34 of the Evidence Act, but not loose papers in a file. Section 34
of the Evidence Act 1872, provides that entries in books of account, regularly kept, in a
course of business, are relevant, whenever they refer to a matter into which the Court has
to enquire, but such statements shall not be sufficient evidence to charge any person with
liability.
It is incumbent upon the person who relies on such entries to prove
that they were in accordance with the facts, which in other words, means, that even
correct and authentic entries in the books of account cannot without independent evidence
of their trustworthiness, fix a liability on a person. (Central
Bureau of Investigation vs. V.C. Shukla (1998) 3 SCC 410)
Whether "Pass book" is " Books of
accounts of the assessee?
The relationship that exists between a banker and customer is one of a
creditor and debtor. This relationship cannot be extended to mean that the banker is a
trustee and the creditor is a beneficiary. The pass book given by a bank to its customer
represents only a copy of the customer’s account in the books maintained by the bank.
The bank does not act as agent of the customer nor can it be said that the banker
maintains the pass book under the instructions of the customer. It is thus not a book
maintained by the assessee, but an extract of record maintained by the bank, which acts as
an agent of the account holder. Therefore the pass book supplied by the banker cannot be
regarded as the books of account of the assessee. Therefore, a cash credit shown in
assessee’s pass book, relevant to particular previous year, but not represented in
the cash book maintained by the assessee, does not attract the provisions of section 68.
It may, however, be noted that such credit may come within the ambit of section 69 as
Unexplained Investments.
5. Books of the assessee–firm and its partner
The books of a firm cannot be said to be the books of
‘partner’ of the firm, for the purpose of section 68, as was held in 171 ITR 532
(P & H). In the case of a firm, if cash credits are found in the partners account, in
the books of a Firm and if no evidence or material is produced to indicate they are the
profits of the firm, then, such sum cannot be assessed in the hands of the firm, but shall
be assessed in the hands of the individual partners of the said firm.
6. The nature or the type of Cash credit entries
Section 68 is attracted to the entries on the credit side of the
capital account of an assessee. This section is attracted in spite of the fact that some
of the entries in the capital account relates to the cost of assets (139 ITR 700 (Bom)).
In the case of the Bansidhar Aggarwal vs. CIT a sum of Rs. 57,251/- was
found credited in the Capital Account as on 3-4-1972, in the books of account maintained
by him for the year 1972-73, the relevant assessment year being A.Y. 1973-74. The
Assessing Officer, was satisfied with the assessee’s explanation to the extent of Rs.
24,400/-. The Assessing Officer, assessed the balance of Rs. 32,581/- as income under
section 68. The assessee’s explanation that the amount represents capital build-up in
the earlier years, was not accepted, on the ground that there was no specific findings to
this effect in the assessment orders of the earlier years and therefore it could not be
said that the assessing officer had in relation to the earlier years, accepted the growth
of capital, as seen from the statements attached to the returns for the earlier years.
7. Some of the circumstances in which Section 68 would
be applicable
If a cash credit entry is found in the books of account of the firm
no distinction is made for application of section 68 even if such entry is found in a
partner’s account or a third party’s account, and the burden then lies on the
assessee firm to prove the identity, capacity and genuineness of such party and of the
transaction relating to it.
In cases where there is failure of the assessee to offer satisfactory
explanation to the Assessing Officer the same would justify the addition made by the
Assessing Officer treating it as income from undisclosed source.
If a cash credit entry is found in the firms books, the burden
primarily lies on the firm to establish that the amount was in fact given by a lender.
It is incumbent on the part of the taxing authorities to carefully
examine and take into consideration all the factors leading to genuineness and regularity
in the maintenance of accounts.
The explanations offered are required to be supported by documentary
evidence or other evidence. Failure to do so invited the deeming fiction created
u/s 68 of the Act.
CIT vs. Shiv Shakti Timbers (1997) 229 ITR
505 (MP)
The Assessing Officer found credits recorded in the assessee’s
books in the names of partners addition was made in assessment of the firm under section
68. The Tribunal allowed appeal by the assessee.
The High Court, however, held that the assessee’s case is governed
by section 68 in view of the entries in the books of account of the assessee and the
income is that of the assessee-firm. It was held that where there is a credit entry in the
assessee’s books and there is no satisfactory explanation, then it will be deemed to
be the income of the firm.
CIT vs. Bhadra Enterprises (1997) 228 ITR
645 (Ker)
A cash credit entry was found in the books of the assessee-firm, which
came into existence on 1-3-1977 in accordance with the deed of Partnership executed on
1-3-1977. But the firm started its business on 1-4-1978. The Assessing Officer made
addition of Cash Credit which was deleted by the Tribunal. It was held that the tribunal
was not justified in deleting the addition made by the Income Tax Officer on the ground
that the business of the firm was started on 1-4-1978, even though the firm participated
in a bid on 10-3-1978 that is after coming into existence on 1-3-1977. This is so because
the law is clear on the point which says that the firm comes into its legal existence on
executioin of the agreement. It cannot be said that it is not in existence because it had
not started its business activity. In this view of the matter, the Tribunal was not right
in taking a view that the business of the firm had not commenced prior to 1-4-1978 in
relation to the assessment year 1978-79.
Distinction has also to be made between the books of assessee and its
creditors. In other words, such books have to be the books of the assessee himself and not
of any other assessee, as was observed in 171 ITR 532 (P &
H).
If cash credit entry is found in the books of the firm, although in
the name of a partner of the firm, section 68 can not be made applicable so as to treat
such cash credit as income of the assessee-partner, since the primary burden is that of
the firm to prove otherwise. This is so because, the books of account of a firm cannot be
treated as those of partners – [223 ITR 5449 (Gauhati).]
8. Capital contribution by partners
The capital contribution made by the partners prior to the commencement
of the business by the assessee-firm and if the partners fails to come up with a
satisfactory explanation as to the source of such capital contribution, then such
contribution can be treated as income of respective partners alone, and though found to
have been entered in the books of the assessee-firm, such credits can not be regarded as
income of the firm. (212 ITR 508 (Allahabad).]
9. Share application money received by a assessee
company
The Assessing Officer has vast power which gives him authority to
enquire as to the nature and source of a sum found to have been credited in the books of
account of an assessee company.
In a case where the assessee company represents that it has issued
shares on receipt of share application money, then the amount so received would be
credited in the books of account of the assessee company. In such a case the Assessing
officer is entitled to enquire as to whether the alleged shareholders do, in fact, exist
or not. The assessee company is then required to furnish a list of shareholders and their
addresses.
On enquiry, if the Assessing Officer finds that the shareholders do not
exist or that the names and addresses of the shareholders are found to be fictitious, then
he would have power to treat such credit to be the income of the assessee-company (1994) 205 ITR (Del) (FB).
10. Shifting of burden
It has been held in 212 ITR 199 (Orissa),
that where the assessee filed confirmation letters from the creditors to explain and
establish the source of credits, and the Assessing Officer does not call upon the assessee
to adduce any further evidence in support of the letters, the assessee can be said to have
discharged the onus cast on him and the onus now shift on the Department.
11. Burden of proof and extent of onus
Under section 68, the onus is on the assessee to offer explanation
where any sum is found credited in the books of account and if the assessee offers no
explanation or the explanation offered is not in the opinion of the Assessing Officer,
satisfactory, then such cash credit is liable to be charged to income tax as income of the
assessee of that relevant previous year.
Where the assessee fails to prove to the satisfaction of the Assessing
Officer, the source and nature of the amount of cash credits, he is entitled to draw an
inference that the receipts are of an income nature (140 ITR 151).
It is not the duty of the Assessing Officer to locate the exact source of the cash credits
(72 ITR 807 (SC)).
The burden to locate the source lies upon the assessee and he is
required to explain the genuineness of the credit entry. However, in certain
circumstances, this onus might shift on the Assessing Officer (98 ITR 337).
In 171 ITR 373( Madras) it was held
that the production of discharged hundies and vouchers were sufficient to discharge
initial burden under section 68. Thereupon the burden shifted to the department to examine
creditors and to provide an opportunity to the assessee to cross examine their bankers.
Furnishing names and addresses of the creditors
In the case reported in 159 ITR 78 (SC),
the assessee furnished names and addresses of the alleged creditors as also their GIR
numbers. Now the burden is shifted to the department to establish revenue’s case; and
in order to sustain the addition the Revenue has to pursue enquiry and to establish the
lack of creditworthiness. Mere issue of notices under section 131 of the Income Tax Act,
is not enough. If the parties even on receipt of the summons do not appear, the assessee
could not be blamed. It is not for the assessee to produce the witness without a summons.
The assessee having discharged the initial burden, by giving complete name and address of
the bankers and confirmation letters, it was for the Income Tax Officer to show that the
explanation rendered by the assessee was not true [90 ITR 396
(Bom)].
The Calcutta High Court has laid down in 208
ITR 465 that the assessee is expected to establish:–
Proof of identity of his creditors;
Capacity of creditors to advance money;
Genuineness of transaction.
As for the genuineness, it is for the assessee to prove that the entry
found is genuine. In 208 ITR 465 (Cal), it was held that the transaction is not genuine,
simply because some, out of many, of the transactions are by cheque. Conversely, it is not
open for the Assessing Officer to add token amount merely for the purpose of making the
returned income into a round figure. Where certain sum of money claimed by the assessee to
have been borrowed from certain persons, it is for the assessee to prove by cogent and
proper evidence that they are the genuine borrowings for the reason that the facts are
exclusively within the assessee’s knowledge.
Where the creditor appears before the Income Tax Officer but if he is
unable to explain the source of credit in his hand, there cannot be addition in the hands
of the assessee, because the assessee has satisfactorily explained the source of credit
shown in his books as also the identity of the creditor has also been established. (103 ITR 344 (Pat) and 49 ITR 723 (Bom)).
12. Summons under section 131
Failure of the Income Tax Officer to issue summons to the creditors
whose names and addresses have been furnished by the assessee absolve the assessee from
any further liability.
13. Explanation and time taken to offer explanation
The length of time taken after assessee is called upon to explain a
cash credit is also relevant factor in considering whether the evidence produced is
satisfactory.
In (1980) 123 ITR 329 (Del), it was
observed that, "….. it must be noted that the proceedings were started in 1957,
calling upon the assessee to explain capital credit made/found in his books in 1947. The
department has to bear in mind that the transaction should not be placed on rack and be
called upon to explain the origin and source of his capital contribution.
14. Alternative explanation
Section 68 which requires the assessee to offer explanation in respect
of the cash credit, does not allow the assessee either to change or substitute the
explanation given by him, but it also does not totally debar the assessee from offering
alternative explanation in place of one already offered and if either of them is accepted
by the Assessing Officer, the cash credit cannot be charged to Income tax [144 ITR 140 (MP)].
15. Section 68 when applicable
Section 68 is a charging section and it applies when the
assessee’s explanation with respect to the cash credit is rejected as being
unsatisfactory and also where the assessee does not render any explanation. The Assessing
Officer is to state how he has formed his opinion that the explanation is unsatisfactory.
16. Duty of the taxing authorities
It is the duty of the Assessing Officer and the authorities up to and
including the hon’ble Tribunal to consider all the facts and record which is before
them and which is in its command (which can be made available by him by exercising his
authority) and then to record its findings on all contentions. The enquiry too must be
conducted in accordance with the rules of natural justice.
All the material whether for or against the assessee must be shown to
the assessee and afford him opportunity to rebut, where necessary, and meet the case of
the department.
In 87 ITR 395 (SC), the Supreme Court
dismissed the appeal made by revenue on the ground that the Tribunal, which is the final
fact finding authority, had arbitrarily rejected the assessee’s explanation without
examining the merit of the assessee’s case.
17. Omission to file appeal by the assessee
Forbearance or abstinence to file an appeal may have been motivated by
many considerations. The assessee may have been compelled or may have opted, not to go in
appeal. His forbearance or abstinence will, therefore not indicate that the assessee
thereby admits that the relevant cash credit represents his income. (1983) 141 IT R 60 (Mad.)
18. Winnings from races – Now included in 'Income'
under section 2(24)(IX) of the IT Act
In Sumati Dayal [214 ITR 801 (SC)],
certain amounts were found credited in the capital account of the appellant assessee, in
her books of accounts for the assessment years 1971-72 and 1972-73. The assessee offered
an explanation that the said receipts are from winnings from races.
The dispute was, whether receipts were really from the winnings from
races?
This raised a question whether the "Apparent can be considered as
real" ?
The Supreme Court in Durga Prasad More (82 ITR 540 (SC), stated that
"apparent must be considered as real, until it is shown that, there are reasons to
believe that apparent is not the real", and that the Taxing Authorities are entitled
to look into the surrounding circumstances to find out reality and the matter has to be
considered by applying the test of human probabilities.
It has been held by the Supreme Court that having regard to the conduct
of the appellant-assessee, as discussed in her sworn statement as well as from other
material on record, an inference can reasonably be drawn that the winning tickets were
purchased by the appellant-assessee after the event. The Settlement Commission has, after
considering the surrounding circumstance and after applying the test of human
probabilities rightly concluded that the appellant-assessee’s claim about the amounts
being her winnings from races is not genuine. It cannot be said that the explanation
offered by the appellant assessee in respect of the said amount has been rejected
unreasonably, and that the said amounts are income of the appellant from other sources, is
not based on evidence.
It may, however, be noted that the definition of "Income"
under section 2(24)(ix), now includes "winnings from races" also, and is made
applicable for and from the assessment year 1973-74.
19. Deposits – 'then' and 'now'
Section 45-S of the Reserve Bank of India Act, 1934, as amended by the
Reserve Bank of India (Amendment) Act, 1997, now prohibits, with effect from 1-4-1997, a
person being an individual or a firm or an unincorporated association of Individuals, from
accepting any deposit in certain circumstances. But this section has made an exception in
respect of "loan" taken by an individual or a firm from relatives.
In accordance with the provisions of the above mentioned Act, deposit
so taken prior to 1-4-1997, are now required to be repaid before 1-4-1997 or within three
years after the deposits becomes due for repayment or within three years from the date of
commencement that is, before 31-3-2000, whichever is earlier.
The proviso to section 45-S(2) however gives power to the Reserve Bank
of India to extend the said period in certain circumstances.
20. Cash credit entry on the first day of incorporation
Section 68 will be attracted where the cash credit entry appears in the
books of account, on the first day of the incorporation of the company, if the
assessee–company fails to explain the source and genuineness of the credit (180 ITR 261 (Cal).
Where an assessee is sought to be taxed for something which he claims
that it does not belong to him, the responsibility of the Assessing Officer assumes more
seriousness and he has to be more cautious and his findings of facts and material on
record must be such that it supports the claim of the Department. There should be some
direct nexus between the conclusion of facts
arrived at by the authority concerned and primary facts upon which such conclusion is
based.
21. Section 68 enacts a "deeming provision"
Section 68 applies only when the assessee’s explanation relating
to the particular cash credit entry is rejected by the Assessing Officer. The
assessee’s failure to satisfy the Assessing Officer with respect to the entry about
which he has doubt, leads him to presume that the said doubtful entry represents the
assessee’s income from an undisclosed source and therefore an undisclosed income of
the year in which it is so found entered in the books of the assessee. (108 ITR 403 (Orissa).
22. Assessee to prove nature and source.
Primary liability, under section 68, is that of the assessee in whose
books the cash credit entry is found. This liability arises only when he fails to prove
satisfactorily the source from where he received the amount, and the nature of the amount
so received, that is, he has to show how the said amount is not an income-receipt.
Needless to say that it is assessee himself who is in possession of the
first hand information and knowledge as to the source and nature of such receipt. Rightly
therefore, the liability of proving the nature and source of the receipt so found in the
books, is that of the assessee. If the assessee disputes the liability to tax, it is for
him to show that how the receipt is not income or to show that it is exempt from the
provisions of the Act. In the absence of such proof the Assessing Officer is entitled to
treat the sum as taxable income. The Assessing Officer is not required to specify or prove
the source of such credit entry.
23. Finality of findings of fact
Is it feasible to review the findings of facts?
In Dhanlaxmi Steel Re-Rolling Mills (1997) 228
ITR 780 (AP), it was observed that a finding of facts can be reviewed only on the
ground that there is no evidence in support of such findings or on the ground that it is
perverse. When a conclusion has been reached on an appreciation of a number of facts, such
a conclusion is sound or must be determined by assessing the cumulative effect of all the
facts and not by considering each single fact in isolation, because section 68 does not
stop at requiring the assessee to offer explanation about the nature and source of the
cash credit found in the assessee’s books but it is also necessary that the Assessing
Officer is satisfied about the explanation offered, by the assessee and is acceptable and
genuine. In the above mentioned case it was required to prove prima facie not only the
transaction is a genuine transaction which has resulted in cash credit but also the
identity of the creditor, capacity and creditworthiness of such creditors.
In the given case it was held that it was not possible to hold that any
irrelevant material has been taken into consideration, and also that any relevant material
has not been considered by the authorities. It was also observed that when the law has
given the Assessing officer discretion and it is his satisfaction upon which genuineness
has to be decided, his inference on the basis of facts is a finding of facts and as held
by the Supreme Court in Daulat Ram Rawatmill (87 ITR 347),
findings on questions of pure facts arrived at by the Tribunal are not to be distributed
by the High Court, unless it appears that there was no evidence before the Tribunal upon
which, they – as reasonable men – could come to the conclusion to which they
have come, that is, the conclusion they have arrived at.
It is well settled that a finding of facts can be reviewed only on the
ground that there is no evidence to support it or that it is perverse.
24. Statement recorded under section 132(4) – and
its evidentiary value
A voluntary statement made by a partner of a firm, though made under
section 132(4) with reference to the search and seizure, there is no reason why the
Assessing officer should not make use of it, if it is not obtained by coercion or
intimidation.
In V. Kunhambu & Sons (1996) 219 ITR 235
(Ker) decided under the provisions of section 132 relating to search and seizure,
it was held that though the explanation to section 132 came into force with effect from
1-4-1989, that is, after the search was made on 25th July, 1981, it is applicable to the
case. The authorised officer has power to record statement on oath on all matters
pertaining to the suppressed income. If a partner of a firm came forward to disclose the
non-entry of excess stock in its books, the Assessing Officer is empowered – entitled
to use it even though there was no actual verification of stock. The assessment (in the
case was for the assessment years 1980-81 & 1981-82) was based on the statement of the
assessee. In this case, since no case was made that the statement was made under a
mistaken belief of fact or law and the statement being a voluntary one there was no scope
for the assessee to challenge the correctness of the assessment.
25. Intangible additions to be treated as real income
When an assessing officer estimates the assessee’s income. for
example, as x+ y , ‘x’ being the returned income and ‘y’ being the
additions made by him, the Assessing Officer proceeds on the basis that income
‘x’ is as in the books, whereas ‘y’ is the income outside the books.
Having assessed the larger income than the returned income, he cannot say that income
‘y’ does not exist, because it does not appear in the books. Such additions are
very often made on the estimates basis. Having made the addition, the department cannot
contend that the amount of addition is not real income, or say that the assessee may not
have earned that income. It is completely illogical for the department to then say that
the addition was only for the purpose of taxation and that it should never be taken as the
true income of the assessee. Thus the cash credits brought to tax by way of additions made
by the Assessing Officer, for a particular accounting year, may, be explained to have
proceeded from earlier out of book intangible additions. (86 ITR
724 (Pun) Ram Sanchi Gyanchand.
26. Few examples relating to cash credits
Amount standing credited to the name of wife – There is no
presumption that it belongs to husband – 24 ITR 16 (Pat).
If there is no source of income other than the business for which the
assessee has maintained books which disclose cash credit, the presumption is that the cash
credit represents income of the same business – 64 ITR 593
(Cal).
Unchallenged books of account are prima facie proof of the
correctness of entries made therein – 59 ITR 632 (Assam)
‘A’ borrows Rs. 1,50,000/- for which ‘B’&
‘C’ stood sureties. From another account of his, ‘A’ transferred Rs.
1,50,000/- to a joint account of ‘A’, ‘B’ & ‘C’.
‘B’& ‘C’ were assessed on their share of interest earned in the
Joint A/C, but ‘A’ was taxed on the entire amount, including the interest.
It was held that the entire amount of Rs. 1,50,000/- shown under the
joint account belonged to ‘A’ and the interest earned is his earning – 67 ITR 53 (AP).
If there are two funds one which has already suffered tax and the
other has not, and there is remittance during the accounting year of certain sum the
source of which is not indicated, then the presumption is that the remittance should have
been from the fund which has already suffered tax.
Explanation of the assessee:–
Whether the explanation offered by the assessee is a satisfactory proof of nature and
source of the cash credits, is a question of fact, and the finding of the authority that
it is satisfactory explanation, is a finding of fact. (1975) Tax
L.R. 4 (AP).
27. Few important cases relating section 68
1) Piyush Kumar Desai vs. CIT (2001) 247 ITR 368
(Guj.) – on section 69A
In a search conducted at the residence of the assessee, cash and
jewellery were seized.
The Assessing Officer came to the conclusion that since jewellery worth
Rs. 66, 432/- was not recorded in the books of accounts and the assessee had no
explanation for the same, it was liable to be included in the income of the assessee under
section 69A of the Income Tax Act, 1961.
The Tribunal however reduced the addition to Rs. 12,728/-
On reference, the High Court held that since the assessee had given
sufficient details with regard to the cash inflow and since the Tribunal had not
considered the genuineness of the relevant statements and documents pertaining to the
same, the addition of Rs. 17,728/- to the income of the assessee was not justified.
2) CIT vs. K. Pallaniappan (2000) 242 ITR 719
On amount declared under Voluntary Disclosure Scheme – The
Tribunal is a final fact finding authority, but if it renders a finding on the basis of
its conjectures and surmises, such a finding cannot be regarded as binding on courts.
The Tribunal gave three reasons to hold that the assessee had properly
explained the credit entry of Rs. 50,000/- dated 29-12-1975. The first reason was that the
amount was discussed in the declaration filed by under the Voluntary Disclosure of Income
and Wealth Tax Act, 1976. The second reason was that it could not be regarded as concealed
income of the relevant provisions year, as the assessee could not have earned in one year
such a huge amount of profit. The third reason given by the Tribunal was that there may be
possibility of some income escaping the assessment in the earlier assessment years. Even
assuming that the statement made under the said Voluntary Disclosure Act would be regarded
as a piece of evidence, the assessee must be able to prove the statement made by him in
the Voluntary Disclosure Scheme corroborated by some independent material, as the assessee
had come under the regular assessment channel and it was for him to satisfy the
authorities that the onus placed on him under section 68 was discharged. The second reason
given by Tribunal was based on probabilities of the case. The view of the Tribunal that
the assessee could not have earned Rs. 50,000/- in one year was not based in any material
and further, the reasoning given by the Tribunal was against the provisions of section 68.
The third reason given by the tribunal is also for fetched. The Tribunal had not even
discussed the nature of business or the volume of the business and how it came to the
conclusion that there would have been some escaped income in the earlier years. The
observation that there might be possibility of income escaping, assessment clearly shows
that the Tribunal had acted on the basis of probabilities. Since the matter involves
assessment for the year 1976-77, it would not be remanded. The amount of Rs. 50,000/- was
therefore assessable as income of the assessment year 1976-77.
The High Court answered the question of law in negative and in favour
of revenue.
3) CIT vs. Pithampur Conzima (P) Ltd. (2000) 244 ITR
442 (MP) – On unexplained deposits
The assessee introduced unsecured loan of Rs. 5,12,417.90 in the name
of a Director and in the name of wife of one Director. The Assessing Officer treated it as
unexplained deposit appearing in the books of the assessee but addition could not be made
in the hands of the individual in whose name such deposit had been made despite the legal
provisions of section 68.
In appeal before the Tribunal, the assessee showed that the credits
given to the assessee company were duly declared by the creditors in their respective
returns. The Tribunal concluded that the investment in the assessee company was duly
explained and no addition was called for in the hands of the assessee, and the Tribunal
deleted the addition.
Held, that the deletion of the additions in the hands of the assessee
company was based on the satisfaction reached by the Tribunal and also on the appreciation
of material before the Tribunal and accordingly no question of law arose for reference.
4) Khandelwal Construction vs. CIT (1997) 227 ITR
900 (Gau )- on failure to hold proper enquiry
The Assessee, a registered partnership firm carried on business of
contract work in construction. The assessment year involved is 1981-82, and during the
relevant previous year cash credit of Rs. 1,70, 000/- were shown to have been received
from seven different creditors.
The Assessing Officer doubted the genuineness of those entries and
therefore issued notice to the assessee to satisfy the Assessing Officer, as to the said
transactions. The assessee produced confirmation letters and also gave GIR (General Index
Register) numbers of the creditors. The Assessing Officer issued notices under section 131
to all the seven creditors.
Out of the seven creditors only four appeared and explained the
transactions to the satisfaction of the Assessing Officer. However, three notices were
returned unserved, with a remark "not known". The Assessing Officer deputed on
Income Tax Inspector to make enquiry, who enquired with the cashier of the company where
they were once working. He however did not enquire with the manager of the company. The
Income Tax Inspector, after making cursory enquiry, reported that the addressees are
fictitious. The Assessing Officer therefore, added the amount in the assessee’s hands
as "Income from other sources".
The Commissioner of Income-tax also did not feel it necessary to give
direction to the Assessing Officer to make further enquiry but allowed the appeal,
following the decision in 159 ITR 78.
The revenue took up the matter before Tribunal. The Tribunal reversed
the CIT’s order on the ground that the Income Tax Officer findings have not been
dislodged or contradicted by any subsequent findings of the commissioner. The Tribunal
supported the conclusion arrived at by the income tax officer.
The assessee’s counsel agreed that the enquiry should be conducted
in manner which is reasonable and in consonance with the principles of natural justice and
a hasty conclusion on a perfunctory enquiry cannot be the basis for rejecting the
assessee’s claim.
The High Court held that the Tribunal abdicated the power and
responsibility in discharging its duty. The enquiry was not properly made. The Tribunal
has without proper materials, come to the conclusion regarding the capability of the
creditors.
The High Court answered the question in negative and in favour of the
assessee and against the revenue.
5) CIT vs. Beena Rubber Works (1997) 223 ITR 94
(Ker) – On undisclosed income
Two cash credit entries were found by the Income Tax Officer in the
accounts of the assessee firm as maintained with a bank for the assessment year 1982-83.
However, in the books of account of the assessee as maintained by him there was only one
credit. The Income Tax Officer treated the credits as undisclosed sum under section 68.
The assessee contended before the Commissioner of Income Tax that the two amounts were
withdrawn from its accounts by cheque and came to be deposited on the same day on another
bank in Calicut. The Commissioner of Income Tax and tribunal accepted the assessee’s
explanation.
On reference application by the department, the Tribunal held that
deposits stood explained and there was only a clerical mistake in making entries in the
books of account, which too was later rectified. There was, therefore no referable
question of law.
6) Raichand Kothari (HUF) vs. CIT (1997) 223 ITR 250
(Gau) – On ITOs power to examine genuineness of entries
In this case, the assessee in order to meet its requirements, took
loans from various persons during the assessment year 1982-83, as also in the preceeding
assessment year. The assessee has shown these borrowings in his books of account.
Confirmation letters from the creditors were placed-produced before the Assessing Officer
for his examination. The Assessing Officer, also disallowed the interest paid to all the
creditors.
On appeal the Commissioner of Income Tax (A), after hearing the parties
allowed the appeal in respect of loan given by six creditors out of seven creditors.
The Tribunal, however reversed the findings of Commissioner of Income
Tax (A) on the ground that the explanation offered were not satisfactory and the reasons
given by the Commissioner of Income Tax (A) could not be sustained.
On reference, it was held, that, the Tribunal did not discuss the
evidence at all, and after quoting the submissions made by both sides, the Tribunal
disagreed with the conclusions arrived at by the Commissioner of Income Tax (A). The High
Court, therefore held that the Tribunal’s findings was therefore not valid.
The Tribunal is the last facts finding authority and is required to
consider each and very fact and discuss the evidence available on record. It may not be
necessary always to discuss every evidence placed by it in detail while affirming the
order. But not so in case of reversal of order. In the case of reversal, the Tribunal is
duty bound to discuss every evidence placed before it and then come to an independent
findings and give reason for such findings.
7) Anandram Raitani vs. CIT (1997) 223 ITR 544 (Gua)
– Cash Credit – Section 68
For the assessment year 1982-83, the Assessing Officer made addition of
an amount of Rs. 2 lakhs in the assessment of the assessee’s income, by applying the
provisions of section 68, on the ground that the assessee did not produce creditors.
On appeal, the Commissioner of Income Tax (A) deleted the addition on
the ground that the creditors themselves were independent assessees.
On an appeal by Department, the Tribunal restored the additions holding
that the assessee had not discharged his burden of proving that the creditors were
genuine.
The Tribunal made a reference to the High Court on the question whether
section 68 was applicable to the facts of the case.
The High Court called for further supplementary statement of the case
indicating clearly whether the assessee maintained and produced books of accounts before
the Assessing Officer and whether the amount of Rs. 2 lakhs was shown as cash credit in
the said books. In the supplementary statement of the case the Tribunal mentioned that the
department representative (DR) submitted that nothing could be said about production of
books of account at the assessment stage, but that it was clear from the assessment order
that the assessee’s account in respect of the income from the other sources as also
his capital account with partnership firm, were scrutinised and the cash credits were
found in the books. The Department, however, objected that the question did not arise out
of Tribunal’s order.
Held –
That the Assessing Officer before making any order under section 68,
as to the application of section 68 must be satisfied that there are books of account, and
that the assessee has failed to satisfy the Assessing Officer. Only then, the sum so
credited be charged to Income tax as income of the assessee for relevant previous year.
The existence of books of account is a condition precedent for invoking the power under
section 68. Discharging the burden (by the assessee) is a subsequent condition. In order
to justify the addition it was the duty of the Tribunal to look to section 68, which
required that maintenance of books of accounts was necessary. The Tribunal has no
jurisdiction to affirm the order passed by the Assessing Officer without first considering
whether the conditions necessary to invoke section 68 were fulfilled or not. The question
thus, arose out of the Tribunal’s order.
That the partnership firm is an assessable assessee entity, distinct
from its individual partners. The books of account of a partnership firm cannot be treated
as books of account of the individual partners. Reference, in this case has been made to
the books of account of the partnership-firm, saying that cash credits had been found, and
those were added by the Assessing Officer under section 68, rejecting the assessee’s
submission that cash credits were genuine. These books of accounts were not books of
contemplated under section 68. Section 68 was, held, not applicable to the facts of the
case.
8) Jalan Timbers vs. CIT (1997) 223 ITR 11 (Gauhati)
– on the point of – cogent reasons for rejection of evidence
The assessee must prove three important conditions namely:–
- Identity of persons-creditors;
- Genuineness of transaction; and
- Capability of the persons giving cash credit.
Section 68 makes it clear that in respect of a cash credit entry the
explanation offered by the assessee can be rejected by the Income Tax Officer only on
cogent grounds, that is, only if such grounds are not based upon any evidence.
In this case, the assessee carried on business and in the assessment
year 1981-82, he received loan of Rs.1,50,000/- from H- a partnership firm, Rs. 35,000/-
from M, and Rs. 30,000/- from R. The Income Tax Officer disbelieved the assessee and
directed the assessee to produce evidence to prove genuineness of the transaction. The
assessee produced confirmation letters. The Income Tax Officer accepted the returns in
respect of the said three creditors but added Rs. 2,15,000/- in the hands of the
assessee-firm.
The Commissioner of Income Tax held that the assessee has discharged
his onus.
The Tribunal, however, confirmed the Income Tax Officer’s order of
addition.
The High Court held that the Tribunal did not make any endeavour to give any cogent
reason why returns filed by the creditors and accepted by the ITO should be ignored. The
credits were prima-facie genuine. The Tribunal was not justified in upholding the addition
of Rs. 2,15,000/- to the income of the assessee and in disallowing the interest on the
amount.
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