Section 68: Cash Credits, Tax Compliance, and Case Studies

[Poornima Gupta]

In the real world people do a lot of tax evasion , so to mitigate such illegal practices sections from section 68 to section 69D under Chapter: VI- Part A were introduced in Income Tax Act. Under these sections the undisclosed cash credit or investments or money is deemed to be the income of the financial year and tax is charged @ 60% on such income u/s 115BBE along with penalty u/s 271AAC.

In this article will be discussing section 68.

However the nature of transaction each section applies is mentioned below -

Section 68 - Cash credits

Section 69 - Unexplained investments

Section 69A - Unexplained money, etc.

Section 69B - Amount of investments, etc., not fully disclosed in books of account 

Section 69C - Unexplained expenditure, etc.

Section 69D - Amount borrowed or repaid on hundi 

(In some parts of this article , the Sections 68/69/69A/69B/69C/69D are referred to as-  specified sections)

Section 68 - Cash credits

Where any sum is found credited in the books of assessee, it shall be charged to income tax as the income of that PY , if –

• Assessee offers no explanation about the nature and source of such credit, or
• The explanation offered by him is unsatisfactory in the opinion of AO(Assessing Officer).

 1) Sum credited in the nature of loan or borrowing

   Where assessee claims such sum is in the nature of loan/borrowing, then -

• The lender must offer an explanation about the nature and source of such amount ; and
• Such explanation should be satisfactory in the opinion of AO,

otherwise, the explanation by assessee shall be deemed unsatisfactory and the amount shall be charged to tax.

2) Sum credited in the nature of share application money / share premium / share capital

Where the assessee is a company, (not being a company in which the public are substantially interested) and it claims the sum to be in the nature of share application money/ share premium / share capital, then –

• The person ( being a resident ) in whose name such credit is recorded , must offer an explanation about the nature and source of such amount ; and
• Such explanation should be satisfactory in the opinion of AO,

otherwise, the explanation by assessee shall be deemed unsatisfactory and the amount shall be charged to tax.

3) Exception - The above points – 1 & 2 shall not apply where the person in whose name the sum is credited is a venture capital fund or a venture capital company, (as defined in clause (23FB) of section 10).

Tax and Penalties on such income-

Tax u/s 115BBE-

• Where the total income of an assessee includes income u/s 68/69/69A/69B/69C/69D, the total income tax payable shall be aggregate of-
  • Income tax @ 60 % on income under the specified sections, and
  • Income tax payable by assessee had his total income being reduced by the amount of income under these specified sections.
• Earlier, the rate was @30% on such income of undisclosed nature. This rate was changed to @60% w.e.f 1/4/2017.) 
• No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing his income under the specified sections.

Surcharge - In respect of any income chargeable to tax under section 115BBE(1)(i) of the Income-tax Act, the amount of income-tax computed under this sub-section shall be increased by a surcharge, calculated at the rate of 25% of such income-tax.

Penalty u/s 271AAC-

• Where income  of assessee  includes income u/s 68/69/69A/69B/69C/69D , the following officers -
  • Assessing Officer ; or 
  • Joint Commissioner (Appeals) ; or 
  • Commissioner (Appeals) 
  • may (in addition to tax payable under section 115BBE) impose penalty, @10% of tax payable under Section 115BBE on such income.
• No penalty shall be levied if income under these specified sections is included in return of income u/s 139 and tax has been paid u/s 115BBE on or before the end of the relevant PY.
• If Penalty has been imposed under section 271AAC(1) then Section 270A penalty does not imposed again on the assessee.

 

Example – Lets suppose, undisclosed income is found to be Rs. 2,00,000 u/s 68.  

Tax to be paid on such part of income u/s 115BBE Effective Rate of Tax = [(Tax i.e. 60%  + Surcharge i.e. 25%)  Plus Health & Education i.e. 4% Cess	= @60% of 2,00,000/- i.e Rs. 1,20,000/- Plus 25% Surcharge i.e. 1,50,000/- = 1,50,000/- Plus 4% Health & Education Cess i.e. 1,56,000/-
Penalty to be paid u/s 271AAC	= @10% of 1,20,000/- i.e Rs.12,000/-

 

CASE LAWS- Some of the judgements highlighting the importance and applicability of Section 68 are discussed below.

Cases in favour of the Revenue-

1. Cash credit in the nature of gifts -  Commissioner of Income-Tax Versus Anil Kumar. - 2007 (3) TMI 223 - DELHI HIGH COURT

FACTS OF THE CASE-

• Assessee had received two gifts of Rs. 10 lakhs each from NRE accounts of two donors.
• Assessee submitted gifts deeds, affidavits of two donors, passports of donors as well as bank certificates relating to these gifts by means of account payee cheques from NRE accounts from these two donors.
• AO dissatisfied of financial capacity and credit wordiness of donors, hence added 20 lakhs to his income.
• Matter reached High Court.

DECISION-

• A mere identification of the donor and showing the movement of the gift amount through banking channels is not sufficient to prove the genuineness of the gift.
•  Since the claim of the gift is made by the assessee, the onus lies on him not only to establish the identity of the person making the gift but also his capacity to make such a gift.
• Assessee failed to prove financial capacity, creditworthiness , relationship between donor and assessee , sources of funds gifted to assessee. Hence genuineness of the transaction not proven and Rs. 20 lakhs added to the income on account of gift.

Decision in favor of revenue.

2.  Share application money received by the assessee company from bogus shareholders -  COMMISSIONER OF INCOME TAX, DELHI-V Versus M/s. NR. PORTFOLIO PVT. LTD. - 2012 (12) TMI 762 - DELHI HIGH COURT

FACTS OF THE CASE-

• Assessee claimed that it received ₹ 35 lakhs from seven share applicants.
• Summons issued u/s 131 to these 7 parties.
• The share applicants did not attend the proceedings despite summons; most of the notices were also received unserved.
• The assessee’s bank accounts showed large amounts of cash debits and credit entries.
• Assessee, which was a stock broker had not traded in any stocks but was receiving dividends.
• In such event, there was no necessity of raising such huge amount of share capital and year after year.

DECISION-

• Investors were entry providers and that the transactions entered by the assessee with them were bogus. These entities exist only for providing accommodation entries.
• Further, the assessee relied on the fact on the basis of previous judgments that if relevant details of the address / PAN identity of the subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc. it would constitute acceptable proof by assessee.

However it is a private company, and share applicants are known to it

• The concept of “shifting onus” does not mean that once certain facts are provided, the assessee’s duties are over. If on verification , AO cannot contact the share applicants, the onus shifts back to the assessee.
• In the present case, share applicants failed to respond to summons, assessee also lacked business activity

Decision in favour of revenue.

Cases in favour of the Assessee-

1. High Court rejected addition of income by AO u/s 68 based on non-traceability of creditors - The Commissioner of Income Tax Versus M/s. Orchid Industries Pvt. Ltd. - 2017 (7) TMI 613 - BOMBAY HIGH COURT

FACTS OF THE CASE –

• AO added ₹ 95 lakhs as income under Section 68 on following basis-
  •  The party from whom the Assessee had received the share amount didn’t appeared before the AO.
  • Summons could not be served on the addresses given as they were not traced.

• Matter reached Tribunal where Tribunal decided in favour of assessee on the basis-
  • Assessee discharged its onus by producing PAN of all the creditors, Bank Statement, share application form, allotment letter, share certificate and even balance sheet, P/L account, the books of account of these creditors were produced showing that they had sufficient funds for investing in the shares of the assessee.

[M/s Orchid Industries Pvt. Ltd. Versus DCIT, CC-22, Mumbai. - 2014 (2) TMI 1376 - ITAT MUMBAI]

DECISION-

• The high court upheld the decision of the Tribunal as the assessee has produced the entire record regarding issuance of shares. The balance sheet and profit and loss account of these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. 
• In view of these voluminous documentary evidence, only because those persons had not appeared before the AO would not negate the case of the assessee.
•  No substantial question of law arises.

Decision in favour of assessee.

2.  Addition by AO of cash deposits in bank u/s 68 as unexplained income post-demonetization rejected - Anantpur Kalpana Versus ITO, Ward – 1, Koppal. - 2021 (12) TMI 599 - ITAT BANGALORE

FACTS OF THE CASE -

• Several cash deposits in the two bank accounts of the assessee owing to demonetization of currency.
• Assessee claimed cash collection from the small and medium class traders in course of business.
• AO and CIT(A) made addition only on the basis that after demonetization, the demonetized notes could not have been accepted as valid tender. 
• AO and CIT(A) accepted the fact that the cash receipts are nothing but sale proceeds in the business.
• Assessee’s nature of business is predominantly cash oriented, he is maintaining books getting audited u/s 44AB, filing VAT Returns.

DECISION-

• Since the sale proceeds for which cash was received from the customers was already admitted as income and if the cash deposits are added u/s  68 of the Act , that will amount to double taxation.
• Reliance also placed on the decision- Asst. Commissioner of Income Tax, Central Circle-1 Visakhapatnam Versus M/s Hirapanna Jewellers And (Vice-Versa) - 2021 (5) TMI 447 - ITAT VISAKHAPATNAM, wherein held that -
  • The cash receipts represent the sales which the assessee has rightly offered for taxation.
  • Going through the trading account, there was sufficient stock to effect the sales and and no defect in stock as well as sales.
  • Since, the assessee has already admitted the sales as revenue receipt, there is no case for making the addition u/s 68 or tax the same u/s 115BBE again.

 Decision in favour of assessee.