2024 (5) TMI 1503 - HC - Income Tax

Addition u/s 68 - Assessee argued said entries cannot be said to be the income for the previous year as it was wrongfully entered and reversed immediately on the next day - HELD THAT - We cannot lose sight of the fact that once amount is credited in the books of accounts and the same returned on the next day, realising that too only on 31st March i.e. last day of the assessment year, would be including of the said amount as part of the income of that year. Returning back the same on the next day would not result in the income of the previous year being reduced. If we allow such entries, one cannot lose sight that the assessees may make fictitious entries and return the same on the next day for taking tax benefits. There may be cases where the entries in the books of accounts may not be reflected in the bank account as the entries may be made in cash or in cheque which may not be ultimately encashed. We, therefore, answer question no. 1 in favour of the revenue. Income tax is on real income ascertained as per the provisions of the Act and not on hypothetical income - It is now trite law that the income to be assessed and ascertained under the provisions of the Act is the accrued income and not the actual income which the assessee may have acquired in a financial year. Therefore, the actual income of the assessee which accrues to him during the financial year, if there is an entry of any amount in the books of accounts as on 31st March, the same would be included as income of the assessee, even if he/ she may not have encashed the cheque on that day. The answer to question no. 2 is, therefore, in favour of the revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment of the Punjab & Haryana High Court in this case revolves around the following core legal questions:

(i) Whether the authorities erred in law by applying the provisions of Section 68 of the Income Tax Act to the assessee in a mechanical manner without considering the factual findings in favor of the assessee.

(ii) Whether income tax should be levied on real income ascertained according to the provisions of the Act, rather than on hypothetical income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Application of Section 68 of the Income Tax Act

- Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with cash credits and provides that any sum found credited in the books of an assessee for any previous year, for which the assessee offers no satisfactory explanation about the nature and source, may be charged to income tax as the income of the assessee for that year.

- Court's Interpretation and Reasoning: The court interpreted Section 68 to mean that once an amount is credited in the books of accounts, it becomes part of the income for that year, even if reversed the next day. The court emphasized that allowing such entries without scrutiny could lead to potential misuse, where fictitious entries are made and reversed to gain tax benefits.

- Key Evidence and Findings: The court noted that the amount in question was credited on the last day of the assessment year and reversed the following day. This timing raised concerns about the genuineness of the transaction.

- Application of Law to Facts: The court applied Section 68, concluding that the entry made on March 31st should be considered part of the income for that year, as the reversal on April 1st does not negate its inclusion.

- Treatment of Competing Arguments: The appellant argued that the entry was erroneous and immediately corrected. However, the court dismissed this argument, emphasizing the potential for abuse if such practices were allowed without scrutiny.

- Conclusions: The court concluded that the authorities did not err in applying Section 68, as the entry's timing and reversal raised valid concerns about its legitimacy.

Issue (ii): Taxation on Real vs. Hypothetical Income

- Relevant Legal Framework and Precedents: The principle that income tax should be levied on real income, as per the provisions of the Income Tax Act, is well-established. The Act requires income to be assessed based on accrual rather than actual receipt.

- Court's Interpretation and Reasoning: The court reiterated that the income to be assessed is the accrued income, not necessarily the actual income received. An entry in the books as of March 31st is considered accrued income, regardless of whether the cheque was encashed.

- Key Evidence and Findings: The court found that the entry existed in the books at the end of the financial year, thus qualifying as accrued income.

- Application of Law to Facts: The court applied the principle of accrual, determining that the entry made on March 31st qualifies as income for that year, irrespective of its subsequent reversal.

- Treatment of Competing Arguments: The appellant's argument that the entry did not represent real income was dismissed, as the court emphasized the principle of accrual over actual receipt.

- Conclusions: The court concluded that the authorities correctly assessed the income based on its accrual, affirming that the entry constituted taxable income for that year.

3. SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "We cannot lose sight of the fact that once an amount is credited in the books of accounts and the same returned on the next day, realizing that too only on 31st March i.e., last day of the assessment year, would be including of the said amount as part of the income of that year."

- Core Principles Established: The judgment reinforces the principle that entries in the books of accounts at the end of the financial year are considered accrued income, regardless of subsequent reversals. It also underscores the importance of scrutinizing such transactions to prevent potential misuse.

- Final Determinations on Each Issue: The court answered both questions in favor of the revenue, affirming the application of Section 68 and the principle of taxing accrued income. The appeal was dismissed, and all pending applications were disposed of.