>>CASH CREDIT, UNEXPLAINED INVESTMENTS, ETC.

UNEXPLAINED INVESTMENT AND UNEXPLAINED MONEY ASSESSABLE AS PER PROVISIONS OF SECTIONS 69 & 69A OF THE IT ACT

R. R. Vora
Chartered Accountant

The article after discussing the conditions on satisfaction of which the provisions of sections 69 & 69A are applicable, discusses in detail various eventualities in which applicability of the said provisions have been considered in various judicial decisions.

1. Unexplained Investment (Sec. 69)

1. As per the provisions of sec. 69 wherein any financial year —

• Assessee has made any investment, which is not recorded in the books of account, if any, maintained by him for any source of income, and

• Assessee offers no explanation about the nature and source of investment or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer –

2. Sec. 68 vs. Sec. 69/69A
   
   While comparing the section 68 and sec. 69, it would be noticed that both the sections have different objective. Sec. 68 applies when the amount is found credited in the books of account for which no satisfactory explanation is offered. As against this, sec. 69 applies when the amount is found to be invested but not recorded in the books.

3. Constitutional validity
   
   The constitutional validity of the provisions was upheld by the Courts on the ground that the legal fiction created u/s. 69 is a provision to prevent evasion of tax and therefore, valid and constitutional (Smt. Ashok Saran 209 ITR 679).

4. Each investment/entry to be explained
   
   While explaining the various investments, it may be possible that the assessee may be able to explain some of the entries or some of the investments, that by itself does not mean that the entire investment has to be considered as unexplained. The Courts have held that if no explanation or no satisfactory explanation is offered in respect of a particular entry or investment, only such entry or investment could be treated as unexplained and brought in within the purview of sec. 68 or sec. 69. Refer: R.S. Rathod 212 ITR 390 (Raj). Similarly, if the assessee is able to satisfy the Assessing Officer (AO) only about the nature and source of only part of the investment, the other unexplained portion may be added as his income. Refer: Jatindra Nath Sarmah 113 ITR 898 (Gau) and Smt. Venkatama 119 ITR 298 (Karn).

5. Stock-in-trade and sec. 69
   
   The question had arisen before the Courts as to if the assessee is not satisfactorily able to explain the nature and source of investment in stock-in-trade of the business, whether the provisions of sec. 69 could be invoked. The Bombay High Court in the case of Ramanlal K. Tejmal 146 ITR 368 and several other Tribunals have taken a view that sec. 69 applies to investment in stock-in-trade also. The Gujarat High Court however, in the case of Addl. CIT vs. Dahyabhai Pitambardas & Co. (1974) Taxation 36(1) 25 has taken a different view.
   
   Many a times, in the course of actions u/s. 132 or u/s. 133A, the issue of treating the difference in the stocks as unexplained and applicability of sec. 69 arises. The difference in the stock could arise on account of the difference in quantity, difference in the rates and on account of basis of valuation adopted by the assessee and as adopted by the AO. The Courts and Tribunals have held that if the quantity of the stock tallies and found recorded in the books, such stock cannot be treated as unexplained merely because there is difference in the valuation or basis of valuation adopted by the Assessee is different than adopted by the AO. The Tribunals have held that while taking stock of retail traders or where there is large quantity of stocks of different quality and varieties, necessary reduction/discount has to be given in respect of old stocks or obsolete stocks which are lying for a very long time. Similarly, selling price minus the normal GP/average GP cannot be the basis for overall valuation of the stocks, if the assessee is able to pinpoint the different rates of profits or is able to substantiate/justify/prove the date of acquisition or the cost of acquisition, which is apparently much lower than the sale price which may have gone up on account of overall increase in the prices. Refer:

6. Stocks pledged/hypothecated to bank
   
   On the same grounds and reasonings, the Courts have held that merely because the value shown in the stock statement submitted to the bank with whom goods are pledged or hypothecated, is higher compared to what is shown in the books or in the returns cannot be treated as unexplained investment if the quantity tallies or the assessee furnishes reasonable explanation about the tentative basis of valuation to cover the loan amount and there is no other evidence found of unexplained investment. Ref.

7. Investment in the real estates or cost of construction — basis of valuation
   
   The cost of construction can be ascertained on the basis of the actual figures available or the records, vouchers etc. maintained by the assessee. In absence thereof, proper estimate made by the approved valuer or registered valuer can be used for such ascertainment. As has been held by the Courts, determination of the fair market value of the property u/s. 16A of the WT Act cannot be used for estimating the cost of the construction of the house. Refer Roshanlal Seth 178 ITR 660 (Punj). If however, reference is made u/s. 55A of the IT Act, question arises whether such determination is binding on the IT authorities. There are conflicting decisions on this issue. Refer:

8. Value adopted for stamp duty purpose
   
   The issue arose before the authorities as to whether the difference between the value of the property as per the document and value adopted by the municipal authorities or stamp authorities could be treated as undisclosed investment. It has been held that merely because there is a difference in the value adopted by difference authorities, it cannot be treated as undisclosed investment, unless there is a positive evidence available with the tax authorities (Dinesh Kumar Mittal 193 ITR 770 (Allah).

9. Investment in jewellery, gold ornaments
   
   As regards seizure of jewellery during the course of action u/s. no. 132, CBDT vide circular no. 288/63/93 IT (Inv) dated 11/5/1994 has clarified that as per the common Indian customs, it is normal that the following quantity of jewellery is possessed by the assessees and therefore, cannot be treated as undisclosed investment etc. and thereby, it cannot be seized.

10. May be deemed as income of the assessee
    
    The Supreme Court in the case of Noorjahan (P.K.) (Smt.) 237 ITR 570 has put at rest the controversy as to whether the expression "may" in the provisions of secs. 68, 69, 69A is to be read as "shall". The Supreme Court has held that the unsatisfactory submission/explanation does not and need not automatically result in deeming the value of investment to be the undisclosed income of the assessee u/ss. 69, 69A etc. Therefore, it is still a matter within the discretion of the Officer and the Appellate Authorities to treat the source of investment as income of the assessee depending upon the explanation offered and keeping in mind the facts and circumstances of the particular case. In that case, assessee having small income purchased property investing large amounts by explaining the source as out of accumulated past savings. The Court held that looking to the facts and the circumstances and in the absence of complete resources of the assessee and her age, it cannot be assumed that she had earned income in the past and therefore, the addition was confirmed. Refer:

11. Previous year for taxation
    
    The unexplained investment may be deemed as income of the financial year wherein the assessee has made unexplained investment, for which satisfactory explanation cannot be given. If there is evidence to support that investment which is deemed as undisclosed, is made in the particular year, income can be taxed only in that year and not in the year in which the assessment is made or it is found during the course of search etc. The property registration record or the record of acquisition of assets like purchase bill of jewellery etc. or documents, date of payment or deposit in the bank etc., would be treated as conclusive proof, unless there is any concrete contrary evidence available. [Ref. Lakshman Swaroop Gupta & Bros. 100 ITR 222 (Raj)].

2. Unexplained Money (Sec. 69A)

1. Where in any financial year -

2. Possession vs. ownership
   
   There is prima facie presumption that one who is found to be in possession of article or thing, is owner thereof unless the presumption is rebutted by cogent evidence (refer Sarjumal Nagarmal 181 ITR 340 (Cal). In that case there was action u/s. 132 on the firm premises, which was used by the firm for carrying out business. Certain partners also resided there. Certain jewellery was found in the possession of wife and mother of the partner. It was held that the jewellery cannot be assessed in the hands of the assessee firm.
   
   The Courts have held that the possession is evidence of ownership and the strength of the presumption of ownership arising from the fact of possession depends on the nature of property involved. In case of cash or any other movable property, since the title is transferable by mere delivery, strong presumption is person who is in possession of such asset, is the owner. Refer Ashok Kumar 160 ITR 497 (MP), KTMS Mohamod 228 ITR 113 (Mad), Vimal Prakash Gupta 179 ITR 613 (Punj), K. I. Pavunny 232 ITR 837 (Ker). If prima facie presumption (i.e., ownership belongs to the person in whose possession the asset is found) is to be rebutted, onus lies on the assessee to disprove such prima facie evidence with cogent evidence and necessary documents etc.
   
   The point for consideration is, whether the presumption of ownership u/s. 132(4A) is applicable only in respect of search u/s. 132 and not in respect of regular assessments therefore, subject to the evidence produced, it can be rebutted that prima facie assumption u/s. 132(4A) is not conclusive for the purpose of regular assessment. Ref:

3. Previous year
   
   Generally, the year in which the money, bullion etc. is found, it will be presumed to be the year of acquisition of that asset for the purpose of sec. 69A and the market value of such asset will be presumed to be the unexplained income u/s. 69A unless the assessee with specific evidence proves that such asset was acquired in different year and at different value.

4. Deposits in banks etc./peak credit
   
   In respect of deposits in the bank or any other concern etc., it is the date of such deposit would be treated as the relevant year for sec. 69A. If however, there are accretions or additions to such deposits by way of interest etc., it will be the income of the respective years in which it is credited. Similarly, if there are numerous deposits and withdrawals in an undisclosed account, it has been held that it is only the "peak credit" should be considered as undisclosed or unexplained money for sec. 69/69A and not the aggregate of deposits. Ref.

5. Voluntary Disclosure of Income Scheme (VDIS)
   
   Many assessees had made disclosures under the VDIS Scheme of jewellery, silver articles etc. and in respect of year of acquisition of assets, affidavits/declarations given were accepted as the date of acquisition of such assets. However, it was noticed in many cases that these assets have been sold subsequently and capital gain, if any, has been offered for taxation. Recently, investigations were carried out in respect of certain sale of jewellery, investments etc. by the declarants of VDIS and on the basis of confessions made by the purchasers of such assets, the IT Dept. has treated the amount deposited in the bank accounts of the declarants, (realized on the sale of assets) as undisclosed money/cash credit by invoking the provisions of sec. 69/69A. It is felt that such an action is contrary to the specific assurances given by the Finance Ministry as well as Tax Authorities that the VDIS declarations would be kept confidential and full immunity would be granted to the declarant. This is a clear case of Government going back on its word. It is a fit case that the Court should be approached to direct the Tax Department that Principle of promissory estoppels should be applied.
   
   Recently the Bombay High Court in the case of Tribhuvandas Bhimji Zaveri’s case (163 CTR 508) had occasion to consider whether the jewellery introduced by the partners in the firm, which was disclosed under the Amnesty Scheme 1985 could be treated as undisclosed money or investment of the firm. The Court held that after accepting the declaration from the partners under the Amnesty Scheme in respect of jewellery etc., the Dept. cannot treat such asset which is introduced in the firm as unexplained or undisclosed money or investment of the firm.

3. Conclusion

As discussed above, the addition u/s. 69/69A can be made only if satisfactory explanation cannot be given. It is therefore, advisable to prepare books of account, prepare balance sheet/wealth tax statement including all assets (including personal assets) giving particulars of saving out of household expenses, gifts received etc., properties purchased, constructed and file with the income tax returns etc. whether liable to wealth tax or not. Similarly, the assessees should periodically file valuation report of jewellery from Approved Valuers with the tax returns. This will help in explaining the changes/remakings in jewellery etc. made. So also, if new properties are constructed, detailed accounts should be maintained including vouchers etc. and also obtain Approved Valuer’s Reports, confirming the cost of construction. Experience shows that if returns of all family members of income tax and wealth tax are filed regularly irrespective of the fact whether they are liable to tax or not, it helps in proving the source and existence of assets in case of subsequent enquiry in the assessment or on action u/s. 132 etc. In short, regular record or book-keeping will help in discharging the prima facie onus about the ownership of assets and its source.

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