2017 (5) TMI 1115 - HC - Income Tax

Addition u/s 68 - cheques received by assessee admittedly were not presented for collection in Bank - Held that - In the case at hand there is no dispute that the assessee had received cheques for a sum of 15, 00, 000/- and entries in this regard were made in his books of accounts having received the said amount by way of unsecured loans from various persons. The assessee has also offered an explanation regarding the above entries but the explanation was not found to be satisfactory by the Assessing Officer and it was held that the aforesaid entries were in the nature of accommodation entries so as to raise bogus liabilities. The submission is that the entry of credit in the books of accounts may be relevant only when there is a cash transaction and not where the payment is through the cheques unless the cheques are cleared and encashed. Section 68 of the Act is clear enough as it uses the term sum is found credited in the books of accounts of the assessee . It does not make any distinction between any cash or cheque transaction. The sum found credited in the books of accounts of the assessee includes within its fold the entry either by way of cash or by cheque irrespective of the encashment of the cheques. Thus both the essential conditions for applicability of Section 68 of the Act stands fulfilled. Despite non-encashment of the cheques by the assessee the entries of credit appearing in his books of accounts for which no plausible explanation to the satisfaction of the Assessing Officer was furnished would attract Section 68 of the Act and the sum so credited by the entries would be deemed to be income of the assessee chargeable to tax. - Decided against assessee.

Summary

Issues:
- Interpretation of Section 68 of the Income Tax Act regarding unsecured loans credited in books of accounts without encashment of cheques.

Analysis:
The judgment pertains to an appeal related to the Assessment Year 2003-04 where the assessee, a company engaged in manufacturing and trading, credited accounts of six persons with unsecured loans totaling ?15,00,000. The Assessing Officer treated this amount as income chargeable to tax under Section 68 of the Income Tax Act. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision. The main question of law revolved around whether the non-presentation of cheques for collection in the bank would affect the applicability of Section 68.

The crux of Section 68 is that if a sum is found credited in the books of an assessee without a satisfactory explanation, it may be charged to income tax. In this case, the assessee received cheques totaling ?15,00,000, credited them in the books as unsecured loans, and offered an explanation. However, the Assessing Officer found the explanation unsatisfactory, deeming the entries as accommodation entries for bogus liabilities.

The court emphasized that Section 68 does not differentiate between cash and cheque transactions. The critical factors for its applicability are the presence of a credited entry in the books and an unsatisfactory explanation by the assessee. The court cited precedents to clarify that income tax is levied on actual income, not hypothetical income, but legal fictions can create deemed income for taxation purposes.

The judgment rejected the assessee's argument that non-encashment of cheques should exempt the credited entries from taxation. It differentiated regular entries from entries leading to a presumption of deemed income under Section 68. Consequently, the court ruled in favor of the revenue, holding that despite non-encashment, the credited entries without a satisfactory explanation would attract Section 68, deeming the sum as income chargeable to tax. As a result, the appeal was dismissed.