CASH CREDIT, UNEXPLAINED INVESTMENTS, ETC.
AND PROVISIONS FOR SETTLEMENT OF CASES
C. V. Kothari Advocate
After discussing and explaining the powers of the
Settlement Commission, the author has explained how the issue of cash credits, etc. is
dealt with in settlement proceedings under Chapter XIXA.
Amongst assessees in general, and even amongst some of the
professionals, there are some wrong notions about the powers of the Settlement Commission,
while dealing with the cases, which they have to settle. Therefore, it may be advantageous
to notice the provision of Chapter XIX-A of the Income-Tax Act, 1961 (the Act), which
deals with the nature of the order of settlement, which the Settlement Commission has to
pass. Sub-section (4) of section 245D of the Act deals with the final order of settlement,
which the Settlement Commission has to pass. The said sub-section reads as under:-
"After examination of the records and the report of the Commissioner received under
sub-section (1), and the report, if any, of the Commissioner received under sub-section
(3), and after giving an opportunity to the applicant and to the Commissioner to be heard,
either in person or through a representative duly authorised in this behalf, and after
examining such further evidence as may be placed before it or obtained by it, the
Settlement Commissioner may, in accordance with the provisions of this Act, pass such
order as it thinks fit on the matters covered by the application, and any other matter
relating to the case not covered by the application, but referred to in the report of the
Commissioner under sub-section (1) or sub-section (3)."
Thus it would be seen that the Settlement Commission can pass an order "as it thinks
fit", but all the same such order has to be "in accordance with the provisions
of" the Act.
Now, let us notice the section in the Act dealing with "CASH
CREDITS". The relevant section is section 68 of the Act. The said section reads as
under:-
"Cash credits.
68. Where any sum is found credited in the books of an assessee
maintained for any provisions year, and the assessee offers no explanation about the
nature and source thereof or the explanation offered by him is not, in the opinion of the
Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the
income of the assessee of that previous year."
On a plain reading of the section, it would be seen that under this
section any sum found credited in the books of an assessee maintained for a previous year
may be charged to income tax as the income of the assessee of that previous year, if
……..
the assessee offers no explanation about the nature and source of
such sum, or
the explanation offered by him is, in the opinion of the Assessing
Officer (AO), not satisfactory (Today Mal vs. CIT, 106 ITR 619
– Punj).
The subject matter of addition as income of the assessee is a sum
found credited in the books of an assessee maintained for the previous year. The question
that, therefore, arises is a to what is meant by "books"? The Supreme Court in
the case of CBI vs. V. C. Shukla, (1998) 3 SCC 410 has
held that ‘Book’ ordinarily means a collection of sheets of paper or other
material, blank, written, or printed, fastened or bound together so as to form a material
whole. Loose sheets or scraps of paper cannot be termed as ‘book’ for they can
be easily detached and replaced. Thus, spiral note books and spiral pads can be regarded
‘Books’ within the meaning of section 34 of the Indian Evidence Act, but not the
loose sheets of papers contained in the files.
From the wording of section 68, it is also very apparent that the
‘books’ in question have to be of the assessee. Therefore, if there are some
credit entries in the account of the assessee in the books maintained by someone else, the
provisions of section 68 of the Act would not be applicable. Such a case may fall u/s 69
of the Act. In this connection, it may be noted that on an analysis of section 68 on the
one hand and sections 69, 69A, 69B and 69C on the other, it would be seen that so far as
section 68 is concerned the onus is wholly upon the assessee to explain the source of the
credit entry found in the books maintained by him, whereas, in cases falling under
sections 69, 69A, 69B and 69C the phraseology used goes to show that before any of these
sections can be invoked, the condition precedent as to the existence of investment,
expenditure etc. must be established by the revenue. If the revenue cannot, or fails to
prove, the subject cannot be taxed. The primary onus is thus, in all these cases, on the
revenue (J.S. Parkar vs. V.B. Palekar, 94, ITR 616, 644 –
Bom). It may be appropriate at this stage to note the facts of the case of CBI vs. V. C. Shukla (Supra) which briefly stated are as
under:–
The CBI searched the premises of one Shri S. K. Jain, pursuant to
which, among others, two diaries, two small note books, and two files containing details
of receipts of various amounts from different persons were seized. Investigations by CBI
revealed payments of Rs. 65.47 crores, out of which Rs. 53.05 crores had been illegally
transferred from abroad through Hawala channels to 115 persons, including politicians,
officials of government, and public sector undertakings etc.. Investigations further
revealed that Jain Bros. and J. L. Jain, who was their employee, had acted as middle men
in the award of certain big projects of the Government to different bidders; that they had
official dealings with politicians and public servants whose names were recorded in the
diaries and the files, and that some of them had accepted illegal gratification from Jains
as a reward for giving them various contracts. An account of receipts and disbursements of
monies was maintained by Shri J. K. Jain, in the diaries and files recovered from his
house and Jain Bros. authenticated the same. The diaries and files contained names of
various persons, including those of Shri V. C. Shukla and Shri L. K. Advani.
CBI filed charge sheets (challans) against Jain Bros. and various
Government servants and politicians, including Shri V. C. Shukla and Shri L. K. Advani.
The Special Judge took cognizance upon the charge sheets and issued
processes against the respondents. He passed separate orders deciding to frame charges and
try the respondents.
Assailing the order of the Special Judge, the respondents moved the
High Court through petitions filed u/s 482 Cr. P. C. The High Court accepted the plea of
the accused and proceedings of the two cases were quashed and respondents were discharged.
CBI appealed against the order of the High Court before the Supreme
Court. The Supreme Court dismissed the appeals filed by CBI.
From the above, it would be seen that though Jain Bros. had
authenticated the receipts and disbursements of monies as contained in the diaries and
files recovered from the house of Shri Jain, the Delhi High Court and the Supreme Court
did not uphold the action of the Special Judge in charge-sheeting the accused and deciding
to frame charges against them to try them. In the opinion of the Delhi High Court and the
Supreme Court the evidence in the possession of CBI was not enough even to frame charges
against the accused and to try them. Reference, in this connection, may be made to the
decision of the Bombay High Court in the case of Addl. C.I.T. vs. Miss Lata Mangeshkar, 97
ITR 696 (Bom). In this case, the income-tax authorities sought to assess certain income as
income from undisclosed sources received by the assessee. The evidence on which the
income-tax authorities relied were statements by two persons that they had paid money in
"black" to the assessee and entries in books belonging to them regarding alleged
payments to the assessee. The Tribunal examined the statements made by the two persons and
found that the evidence tendered by them suffered from serious infirmities. It held that
mere entries in the accounts regarding payments to the assessee was not sufficient as
there was no guarantee that the entries were genuine. The Tribunal, therefore, held that
there was no proof that the amounts in question represented income from undisclosed
sources belonging to the assessee. The department sought a reference to the High Court.
The High Court held that the conclusion of the Tribunal had been reached by it on a proper
appreciation of evidence. Therefore, the reference application made by the department was
rejected by the High Court.
We have noticed in the foregoing paragraphs a couple of important
aspects of section 68 of the Act. However, it may be stated that it is by now well settled
that where an assessee fails to prove satisfactorily the source and nature of a credit
entry in the books maintained by him, the Assessing Officer is entitled to draw an
inference that the receipt (represented by the credit entry in the books maintained by the
assessee) is of an assessable nature. The evidence, which the assessee has to produce,
could be direct or circumstantial. It is for the Assessing Officer to consider the
explanation offered and come to a conclusion whether the same is satisfactory or not.
In this connection, it may be noted that though the onus of
satisfactorily proving the source and nature of a credit entry in the books maintained by
an assessee is on him, yet the burden shifts on to the Department in certain
circumstances. Reference in this connection may be made to the decision of the Supreme
Court in the case of CIT vs. Orissa Corporation, 159 ITR 78 (SC).
The facts of the said case, briefly stated are as noted below:
In respect of certain cash credits, the assessee company produced letters of confirmation
from creditors, and discharged hundies, and also gave full particulars of those assessees
who were borne on the records of the department. The assessee could not, however, produce
the parties before the ITO, and summons issued by the department to those parties were
returned unserved with the remark ‘left’. Without any further attempt to examine
the source of credits, the ITO added the credits as the assessee’s undisclosed
income, and also levied penalty for concealment of income. The Tribunal was of the view
that if the assessees could not produce these persons alleged to be the creditors, it did
not follow automatically that an adverse inference should be drawn that these amounts
represented undisclosed income of the assessee. On these facts the Supreme Court held that
the revenue apart from issuing notices under section 131 at the instance of the assessee,
did not pursue the matter further. The revenue did not examine the source of income of the
said alleged creditors to find out whether they were creditworthy or were such creditors
who could advance the alleged loans, in those circumstances, the assessee could not do
anything further. In the premises, if the Tribunal came to the conclusion that the
assessee had discharged the burden that lay on him, then it could not be said that such a
conclusion was unreasonable or perverse or based on no evidence. It could not, therefore,
be said that any question of law arose out of the Tribunal’s order.
We may also refer to the provisions of section 132 of the Act, as
most of the cases, which go to the Settlement Commission are search cases. Sub-section
(4A) of section 132 provides that where any books of account, other documents, money,
bullion, jewellery or other valuable article or thing are or is found in the possession or
control of any person, in the course of a search, it may be presumed —
that such books of account, other, documents, money, bullion,
jewellery or other valuable article or thing belong or belongs to such person;
that the contents of such books of account and other documents are
true; and
that the signature and every part of such books of account and other
documents which purport to be in the handwriting of any particular person or which may
reasonably be assumed to have been signed by, or to be in the handwriting of, any
particular person, are in that person’s handwriting, and in the case of a document
stamped, executed or attested, that it was duly stamped and executed or attested by the
person by whom it purports to have been so executed or attested.
A question that arises for consideration is whether the above
presumptions are available only in regard to the proceedings for search and seizure and
the same are not available for the purposes of making an assessment? This issue came up
for consideration before the Allahabad High Court in the case of Pushkar
Narain Sarraf vs. CIT, 183 ITR 388. The Allahabad High Court held that the
presumptions under section 132 (4A) are relevant and limited only to the summary
adjudication contemplated under section 132(5) and that the presumptions arising under
section 132 (4A) do not override or exclude section 68, i.e., they do not obviate the
necessity to establish by independent evidence the genuineness of the cash credits under
section 68.
Broadly stated, the main features of the law governing credit entries
appearing in the books maintained by the assessee are as noted above. From the language of
section 245D(4), it would be seen that the Settlement Commission has to pass the order of
settlement "in accordance with the provisions of" the Act.
If that is the position in law, does that mean that the treatment
meted out to the credit entries appearing in the books maintained by the same, whether the
matter is before the normal assessment machinery or before the Settlement Commission? The
answer is both ‘YES’ and ‘NO’. Theoretically, the answer is
‘YES’ and, normally in practice, the answer is ‘NO’. The reason why,
normally, in practice, the answer is ‘NO’ is that an assessee approaches the
Settlement Commission making "a full and true disclosure of his income which has not
been disclosed before the Assessing Officer" (see sub-section (1) of section 245C of
the Act), and, therefore, his whole approach before the Settlement Commission is different
than what it is before the Assessing Officer and the appellate authorities. The assessee
having taken a position in the return, wants to justify his stand. Residing from the stand
taken by him is fraught with danger; he may be penalised and even prosecuted. Even a
sympathetic officer may find it difficult to help an assessee, should he, at a later stage
in the proceedings, concede an addition of cash credits. In a way, the Department and the
assessee become adversaries. The assessee, to save himself from the dire consequences,
which he would have to face, in case he concedes an addition of cash credits, is advised
to fight tooth and nail. Before the Settlement Commission, the position of the assessee
and Settlement Commission is not that of adversaries. The entire machinery and effort is
geared to finding out an amicable solution to a vexed problem. As per the provisions of
sub-section (1) of section 245H of the Act, the Settlement Commission is empowered to
grant immunity from prosecution for any offence under the Act or under the IPC or under
any other Central enactment, and also from the imposition of any penalty under the Act
with respect to the case covered by the settlement, if it is satisfied that an assessee
who has made an application for settlement has co-operated with the Settlement Commission
in the proceedings before it and has made a full and true disclosure of his income and the
manner in which such income has been derived. The assessees, who want to come out clean,
by making a full and true disclosure of income, which has not been disclosed before the
Assessing Officer, approach the Settlement Commission. Even during the course of
proceedings before the Settlement Commission, assessees agree to certain additions in a
spirit of settlement, and the immunity from prosecution and penalty u/s 245H(1) is not
denied because of such concessions made by the assessees. It is the atmosphere to trust
and conciliation in the Settlement Commission, which makes it easier for the assessees and
the Settlement Commission to put an end to vexatious problems quickly, which is
advantageous both to the assessees and the department.
In sum, though the law governing credit entries appearing in the
books of the assessee is the same, the approach adopted by the asseessees and the
department in the proceedings before the Assessing Officer and the appellate authorities
on the one hand, and the approach adopted by the assessees and the Settlement Commission
on the other, makes a world of difference in finding out a solution to the problem.
