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    Cash Credits

    Introduction: - 

    Subject of cash credits has been a major area of litigation in taxation, Section 68 has been introduced to plug loopholes and to place certain situations beyond doubt. Before introduction of this section, the decisions were being taken by court (For eg. Even prior to introduction of sec. 68 there are a large no. of case laws present and were in favour of Assessing officer - AO). Hence section 68 was inserted in the finance act 2012 w.e.f 01.04.2013,to provide statutory recognition to a principle which had been clearly enumerated in judicial decisions. 

    Similarly, sections 69,69A etc. talks about unexplained investments. The precondition to apply this section is that there must be existence of investment, expenditure etc. must be conclusively established by material on record or proper evidence available if any. 

    Additions under section 68 & 69 can be made to income during the previous year in which cash credit and unexplained investment respectively happened.

     

    Section

    Description

    Sec. 68

    Cash credits

    Sec. 69

    Unexplained investment

    Sec. 69A

    Unexplained money

    Sec. 69B

    Investment not fully disclosed in books

    Sec. 69C

    Unexplained expenditure

     

    1. Analysis of Section 68 [Cash Credit]: - It says that; 
    • Where any sum is found credited in the books of the assessee,
    • maintained during the previous year,
    • for which assessee offered no explanation about the source or nature or,
    • the explanation offered by the assessee is not satisfactory, then 
    • the sum so credited in the books of accounts may be charged/considered as income during that previous year 

    In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless: 

    • the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and 
    • such explanation in the opinion of the Assessing Officer has been found to be satisfactory. 

    Conditions to apply section 68:- 

    In order to apply section 68 the following must exist:

    1. Books of accounts maintained by the assessee: - 

    Existence of Books of accounts is the pre-condition for applicability of this section, it simply enumerate that section can be applied to assesse who is required to maintain books of accounts. The concept can be applied to assesse say an individual who is not required to maintain the books, where the bank statement shows any unexplained credits will not form part of this section {CIT, Poona v. Bhaichand H. Gandhi 141 ITR 67 (Bom.)}. Therefore, if AO finds any unexplained transactions in the bank passbook of the assesse then same can be taxed as unexplained money under section 69A of the Act. 

    1. Credit entry in the books of the accounts: - 

    The intention of the section is to check bogus entries which are resorted by the assesse to raise corpus fund and the money which is being invested may not come from valid sources say,‘Black Money’. 

    • Absence of satisfactory explanation by the assesse about the nature and source of the credit: - The section requires that the assessing officer must be satisfied that the explanation offered by the assessee is genuine. It means that proper explanation alone is not sufficient, it is required to authenticate the genuineness of the transaction. 
    1. Unexplained cash credits “may” be charged to Income tax: - 

    This section clearly says that, assessing officer must be satisfied with explanation given by the assessee, provided that validity of genuineness has to be checked. It means the unsatisfactory explanation does not automatically result in deeming the amount credited in books result as income of the assesse. 

    Circumstances in which section 68 would apply: - 

    • 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. 
    • 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 
    • 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. 
    • The explanations offered are required to be supported by a documentary evidence. Failure to do so invited the deeming fiction created under this section. 
    • Books of accounts of partnership firm and partners are different, hence any credit entry found in the capital accounts of the partners and explanation offered by the firm is not satisfactory, the same may be charged as income in the hands of Firm and not in the Partners hand. 
    • Cash Sales appearing in the books of an assessee and, therefore, if the assessee offers no explanation about the nature and source of "cash sales" or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, cash sales may be deemed as unexplained incomes chargeable to tax under section 68 of the Act. 
    • Assessee claimed that certain amount earned from agriculture operations was exempt without giving proper basis of arriving such income the same is considered as undisclosed source.
    • The responsibility of proving the source of amount credited in books of assessed lies with assesse himself. Burden of proof and extent of onus lies with assesee. 

    The confirmation so filed must indicate complete details of transactions (like mode- cash or cheque, with number date of cheque with bank details). The AO have right to demand the copy of bank account of the lender evidencing such transactions and the same needs to be filed. In case transaction is in cash then AO must demand cash flow statement of the lender, preferably containing details of opening balance and its source thereof. 

    Assessee is expected to establish: 

    • Identity of creditor
    • Capacity of creditor to advance money
    • Genuineness of transaction 

    Case laws: 

    Burden of proof in respect of cash credit is from “Hon. Gujarat High Court in the case of DCIT vs. Rohini Builders (2002) 256 ITR 360 (Guj).” 

    It was held in this case that mere identification of the source of the creditors even without evidence as to the nature of the income could justify acceptance, where the assessee has given PAN of the creditor and also shows that the amounts were received by account payee cheques. 

    In CIT vs. Bhan & Sons (2005) 273 ITR 206 (P & H)

    It does not necessarily mean that in each and every case the onus on the part of the assessee is discharged by merely providing the PAN of the creditor.

    CIT v. Nevendram Ahuja (2005) 197 CTR MP 462, 2007 290 ITR 453 MP 

    In relation to deposit from tenants, it is sufficient if the assessee proves the identity of the tenant and the genuineness of transaction under which the deposit is made. It will not be necessary for the assessee to prove the capacity of the tenant to make the deposit/advance. 

    1. Analysis of Section 69 [Unexplained Investment]: - 

    Where an assessee had made an investment but failed to record them in books of accounts if any, maintained by him for any source of income, the value of such investment is deemed to be income of the assessee if;

    • The assessee offered no explanation about the nature and source of investment
    • The explanation offered by assessee is not found satisfactory by AO

    Section 69 of the Income Tax Act is a tool in the hands of the department to trace the tax evasion in connection with investments made by the assessee which are not mentioned in their books of accounts. 

    Points to be noted:

    • The word Investment has not been defined in section 69, therefore it shall be understood in the general meaning. 
    • AO can ask for explanation only if investments are not recorded in books of accounts.
    • Maintenance of books of accounts is only an option. 
    • The sum so determined under section 69 shall be chargeable to income tax during the previous year in which the investment was made. 

    Case laws: 

    Splitting of Investment 

    It is possible to argue that the unexplained investment may be the deemed income of more than one financial years e.g. Bank FD of Rs.1,15,000/- is located. The assessee could say that the said FD is the result of the earlier FD of Rs.1,00,000/- (matured and renewed). 

    In CIT V’s N Swamy Mad HC in 241 ITR 363 

    when there was inflated stock to avail higher credit facility from bank (only amount inflated but quantity remained same), the books of the Assessee were duly audited and no trading outside the books were detected, the addition of difference in stock value could not be made as undisclosed income. 

    In Rupee Finance & Management (P.) Ltd. (2008) 15 DTR 466 (Mum.) (Trib.) / (2008) 119 TTJ 643 

    It was held that merely because assessee purchased certain shares at value much less than market price, difference in purchase cost and market price cannot be added u/s 69. 

    • Analysis of Section 69A [Unexplained Money]: - 
    • Where in any financial year the assessee is found to be the owner of money, bullion, jewellery or other valuable article and 
    • Such values is not recorded in the books of accounts, if any 
    • The assessee offers no explanation about the nature and source of acquisition of such valuable articles or explanation offered by him is not satisfactory in the opinion of AO
    • In such case the value of the articles be added to the income of the assessee during such financial year (year in which it is found).

    Mere possession of such assets: 

    • If assessee found to be in possession of such assets then presumption is that he is the owner of such assets
    • An opportunity to be given to prove with evidence that owner is third person
    • Else explanation to be given for establishing ownership of asset from disclosed sources.

    Case laws: 

    Sukh Ram v. Asst. CIT [2006] 285 ITR 256 (Delhi)

    Possession of cash is evidence of ownership – Where cash was found in possession of assessee-politician during search and his claim that it belonged to a political party was denied by President and Treasurer of said party, addition of such cash to assessee’s income was rightly sustained by tribunal. 

    Durga Kamal Rice Mills v. CIT[2003] 130 Taxman 553 (Cal.) 

    The material difference between Section 68 and 69A is that Section 68 does not require that the amount is to be owned by the Assessee. It only deals with any amount shown in the books of accounts of the assessee whereas Section 69A deals with money, etc., owned by the assessee and found in his possession. 

    Commissioner of Income-tax vs. Meghjibhai Popatbhai Virani 2012-LL-0830-21 

    Where assessee in support of certain amount received from his family members on account of sale of property, produced family settlement agreement and sale agreement, there being no defect in said agreements, amount so received by assessee could not be added to his taxable income as unexplained money. 

    1. Analysis of Section 69B [Investments not fully disclosed in books]: - 
    • Where an assessee made an investment or is found to be the owner of any bullion, jewellery or other valuable articles. 
    • Where AO found that amount expended on making such investments or in acquiring such valuable articles, exceeding the amount recorded in the books of accounts maintained by assesses. 
    • Where Assessee offers no explanation about such excess amount, the excess amount be deemed to be the income of the assessee. 

    Points to note: 

    • Since the investment or assets are recorded in books of account, it is the revenue alleging that the same is not disclosed fully.
    • The onus is on the department to prove the real value of investment or of assets. 
    • Merely on fair value / market value, provision of s.69B cannot be invoked. However, if sufficient material on record to draw inference of investing more amount than disclosed. (AO may require the Valuation Officer to make an estimate of such value and report the same to him). 
    • This section could be invoked only in cases where the assessee is maintaining books of account and the value of investment or other assets disclosed in books of account is less than its amount invested. 

    Case laws: 

    Smt. Amar Kumari Surana v. CIT 1997 226 ITR 344 Raj 

    It was held that the burden is on the revenue to prove that real investment exceeded the investment shown in account books of the assessee. Merely on the basis of fair market value no addition can be made under section 69B, but if on the basis of sufficient material on record some reasonable inference can be drawn that the assessee has invested more amount in purchase of plot than that shown in account books, then only the addition under section 69B can be made. 

    CIT vs. Meerut Cement Co. Pvt. Ltd (2006) 202 CTR All 506 

    If AO raise any doubt on the value of property constructed and value appearing in books, AO can refer the matter to valuation officer to determine the cost of construction and rely upon such report as an evidence. 

    Analysis of Section 69C [Unexplained expenditure]: - 

    • Where an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure(expenditure in the nature of revenue) (or) 
    • Explanation offered is not in the opinion of the AO satisfactory 
    • Amount covered by such expenditure or part thereof, may be deemed to be the income of the assessee for such financial year 
    • Further, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. 

    Points to note: 

    • Common examples of additions in this category are that of marriage expenses; 
    • In search action, loose papers, documents, etc. are found depicting expenses incurred outside books of account – may be for business purposes or otherwise. 
    • Burden of proof lies on the Assessing Officer 

    o by evidence on record that certain expenditure has in fact been incurred by the assessee and not by any other person 

    o  expenditure MUST BE certain 

    o must find out the financial year with dates, in which such expenditure is incurred by the assessee whom he is assessing 

    Case laws: 

    The Jaipur Bench of ITAT ruling in 31 DTR 456- Nisraj Real Estate 

    Unverified purchases made by assessee could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C proviso there under – as once sales were made by assessee, purchases were obviously made. 

    CIT v. Bhagwati Developers Pvt. Ltd 2003 261 ITR 658 Cal 

    If from documents it appears that there was expenditure, unless its source is satisfactorily explained, the same would also be deemed to be the income of the assessee for such financial year. The question depends on the satisfactory explanation of the source.

     

     

    Comparison of section 68, 69, 69A, 69B& 69C: -

     

     

     

     

     

     

     

     

    Particulars

     

    Sec. 68

     

    Sec. 69

    Sec. 69A

    Sec. 69B

     

    Sec. 69C

     

     

     

     

     

     

     

     

     

     

     

     

    Chargeability

     

    U n e x p l a i n e d

    I n v e s t m e n t

    Assessee found

    Investments

    to

    E x p e n d i t u r e

     

     

    cash credits

    in

    made, source of

    to be owner of

    the extent they

    w h e r e  t h e

     

     

    books

     

    which  is  not

    money,  that

    is

    are undervalued

    source of

     

     

     

     

     

     

    explained

    not recorded in

    i n  b o o k s

    o f

     

     

     

     

     

     

     

     

     

    books

     

    accounts

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    B o o k s  o f

    Compulsory

     

    Not compulsory

    as the word ‘if

    Compulsory

     

    Not compulsory

    accounts

     

     

     

    any’ is used

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Explanation

    to

    AO can ask

    for

    AO Can ask for

    Expl. Only when

    Expl. Only when

    AO can ask

    for

    AO

     

    expl. only if sum

    expl. If

    money,  bullion,

    t h e

    a c t u a l

    s o u r c e

    o f

     

     

    is  credited

    in

    investments are

    etc not recorded

    i n v e s t m e n t

    e x p e n d i t u r e

     

     

    b o o k s

    o f

    not recorded in

    i n  b o o k s

    o f

    value

    is greater

    incurred

     

     

     

     

    accounts

     

    books of

    accounts

     

    than

    the  book

     

     

     

     

     

     

     

    accounts

     

     

    value.

     

     

     

     

     

     

     

     

     

     

     

     

     

    Burden of proof

    Responsibility

    It shows that before any of these sections are invoked, the condition

     

     

    of Assessee

    to

    precedent as to existence of investment, expenditure etc must be

     

     

    e x p l a i n  t h e

    conclusively established by material on record/evidence

     

     

     

     

    source

     

     

     

     

     

     

     

     

     

     

     

    Year of taxability

    During the year

    During the year

    During the year

    During the year

    During the year

     

     

    of cash credit

     

    i n  w h i c h

    in which assesse

    i n

    w h i c h

    of  expenditure

     

     

     

     

    i n v e s t m e n t

    found to be the

    i n v e s t m e n t

    incurred.

     

     

     

     

     

     

    made.

    owner of money

    happened.

     

     

     

     

     

     

     

     

     

     

    etc.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Rate of Tax

     

     

     

    -Separate disclosure given-

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Rate of income tax to be charged:-

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    S No.

     

    Particulars

    AY 18-19

     

    From AY 19-20

     

     

     

    onwards

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    1

    Income tax

     

     

     

     

    60.00%

     

    60.00%

     

     

     

     

     

     

     

     

     

     

    2

    Surcharge @ 25%

     

    15.00%

     

    15.00%

     

     

     

     

     

     

     

     

     

     

     

     

    3

    Edd. Cess @ 3%

     

     

     

     

     

     

     

     

     

    (applicable on Tax and surcharge)

     

    02.25%

     

    -

     

     

     

     

     

     

     

     

     

     

     

     

    4

    Health and Edd. Cess @ 4%

     

     

     

     

     

     

     

     

     

    (applicable on Tax and surcharge)

     

    -

     

     

    03.00%

     

     

     

     

     

     

     

     

     

     

     

     

    Effective rate of Tax

     

     

     

     

    77.25%

     

    78.00%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Note: - 

    • Section 115BBE specified the rate of tax to be charged on the income chargeable under section 68, 69, 69A, 69B, 69C & 69D. 
    • Declaration of undisclosed income or assets should have been chargeable to tax for any assessment year prior to the AY 2017-18 is at 30% subject to surcharge at 15% and cess @ 3% effective rate be 38.625% 

    Penalty [Sec 270A & 271AAC] 

    ?Section270A-Where under reporting of income is in consequence of any misreporting thereof by any person, the penalty would be 200% of amount of tax payable on under reported income. 

    ?Section271AAC-Where the income determined includes any income referred to in section 68, 69, 69A, 69B, 69C and 69D, the assessee is liable to pay penalty @ 10% on tax payable under section 115BBE.

     

    S No.

    Particulars

    AY 18-19

    From AY 19-20

     

    onwards

     

     

     

     

    1

    Effective rate of tax (as cal. above)

    77.25%

    78.00%

     

     

     

     

     

     

    2

    Penalty u/s 271AAC @ 10%

    06.00%

    06.00%

     

     

     

     

     

     

    3

    Total Tax + Interest

    83.25%

    84.00%

     

     

    Note: - 

    The applicable penalty on the income voluntarily disclosed as per note 2 give above would be at the rate of 25% of the tax as calculated in the Note 2 above. Hence the effective rate be 45%.

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