2018 (8) TMI 860 - HC - Income Tax

Additions u/s 68 - majority of the deposits received from the public and the agents - onus to prove source of funds - Held that - Merely because there was a permission granted under the Companies Act to accept deposits from the public, it does not necessarily follow that the deposits shown are really those received from the members of the public or from the agents. Section 68 is a provision which seeks to ensure that the income received by an assessee is not fully disclosed, by a ruse employed of showing it as credits from depositors which are not genuine and the identity of such depositors are not verifiable. The Tribunal has erred insofar as the finding that the fundamental fact of the assessee having collected deposits from the public stands proved with respect to the entire cash credits so recovered. It can be said to have been proved, only with respect to the verifiable materials produced before the AO and on which the AO had entered a satisfaction. There could hence be no rule of probability applied as against the specific provision under Section 68 of the Act. We are of the opinion that the Tribunal acted erroneously and in a perverse manner insofar as directing deletion of the addition not proved before the AO; applying the rule of probability, which is alien to the Act. Matter remanded back to AO for verification - Decided in favor of revenue.

Summary

Issues:
1. Application of rule of probability in deleting additions under Section 68 of the Income Tax Act, 1961.
2. Proof of the source of deposits collected from the public and agents.

Issue 1: Application of Rule of Probability

The case involved appeals regarding assessment years 1999-2000 and 2001-2002 where the Tribunal applied a rule of probability to delete additions made under Section 68 of the Income Tax Act, finding that since most deposits were proven by the assessee, the unproven ones were also considered sourced from the public or agents. The Tribunal's decision was challenged based on the argument that the rule of probability is not aligned with the specific provision under Section 68. The High Court noted that the Tribunal erred in applying the rule of probability and directing deletion of unproven additions. It emphasized that the fundamental fact of the assessee collecting deposits from the public was only proven for deposits with verifiable evidence before the Assessing Officer (AO). The Court directed a limited remand for the AO to consider the proof presented by the assessee regarding specific depositors and agents, while upholding that the assessee must satisfy the tax due for other unproven additions.

Issue 2: Proof of Source of Deposits

The assessee, a printing and publishing Company, accepted deposits from the public and agents as permitted under the Companies Act, 1956. The Assessing Officer treated some deposits as unexplained cash credits under Section 68 due to lack of sufficient evidence. The first appellate authority did not consider additional materials presented by the assessee, leading to the Tribunal's examination of whether the sources of deposits were properly proved. The Tribunal highlighted the importance of verifying the sources of deposits and rejected the notion that permission under the Companies Act automatically validated the source of deposits. It emphasized that Section 68 aims to prevent undisclosed income by ensuring the genuineness and verifiability of credits from depositors. The Court found that while some evidence was presented before the first appellate authority, further verification was necessary by the AO. The judgment allowed the appeals in favor of the Revenue, directing a remand for the AO to assess the veracity of specific proof provided by the assessee while maintaining the tax liability for unproven additions.

This detailed analysis of the judgment from the Kerala High Court provides insights into the application of the rule of probability in tax assessments and the importance of proving the source of deposits to prevent tax evasion.