ADDITIONS UNDER SECTION 68 OF INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Cash credits

Section 68 of the Income Tax Act, 1961 (‘Act’ for short) provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Where the assessee is a company, (not being a company in which the public are substantially interested) and 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 assessee-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 aforesaid has been found to be satisfactory:

Nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

Much litigation has arised due to addition of income by the Assessing Officers on the assessees.  The onus is on the part of the assessee to prove the genuiness of the amount added to his income.  Some case laws, which are decided in favor and against the assessee,  are given for the benefit of the readers.

Case laws

De novo

In ‘SHRI K.L. CHANNAKESHAVA VERSUS THE INCOME TAX OFFICER WARD 6 (2) (1) BANGALORE. - 2021 (2) TMI 470 - ITAT BANGALORE, the assessee is an individual. For the assessment year 2014-2015, the return of income was filed on 30.11.2014 declaring income of ₹ 18,84,750. The assessment was taken up for scrutiny by issuance of notice under section  143(2) of the Act.   The assessee was asked to explain the source of cash deposits amounting to ₹ 87,32,900 in his savings bank account with Canara Bank.  The assessee vide letter dated 01.11.2016 stated that cash withdrawals from various banks, i.e., Corporation Bank, OD accounts of Canara Bank, represent the cash deposits in Canara Bank SB account totaling to ₹ 87,32,000. The Assessing Officer, however, did not accept the submissions made by the assessee for the reason that the cash withdrawals made from various banks in April 2013 were deposited in June 2013 and some of the cash withdrawals made in July 2013 were only deposited in November 2013, December, 2013, January 2014 and March 2014. Accordingly, the A.O. was of the view that since cash deposits are made after 3 to 4 months from the date of withdrawals, it is nothing but an afterthought to avoid payment of tax.  However, the A.O. gave credit for a sum of ₹ 5,84,476 being amounts received from the customers of the assessee. The difference of deposit of ₹ 81,48,424 (87,32,000 – 5,84,476) was added to the total income as per the provisions of section 68 of the Act.

The assessee filed appeal against the order of Assessing Officer before Commissioner (Appeals).  The Commissioner (Appeals) upheld the order of Assessing Officer.  Therefore the assessee filed appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The assessee has filed a letter in which the complete details of cash withdrawals and deposits from various banks were furnished. The assessee has also submitted the details of proprietary concern Voltron Power Systems, where turnover for the concerned assessment year was about ₹ 1,45,00,000, which was deposited in different bank accounts and periodical withdrawals were partly used for deposit in the saving bank account maintained by the assessee with Canara Bank.  The same was not considered by Commissioner (Appeals).  The Tribunal directed de novo by the Assessing Officer.  The Tribunal restored the addition to the files of Assessing Officer.  The Tribunal directed the assessee to cooperate with the Department and furnish necessary details to prove the source of cash deposit.  The Tribunal also directed the Assessing Officer to afford a reasonable opportunity of hearing to the assessee and pass an order in accordance with law.

Bogus purchase of shares

In ‘NILESH AGARWAL HUF, DEEPAK KUMAR AGARWAL HUF, VERSUS THE INCOME TAX OFFICER, WARD 2 (3) , JAIPUR - 2021 (2) TMI 540 - ITAT JAIPUR, the AO has treated the transaction of sale of 66,500 shares as bogus being accommodation entry but has not doubted the holding of the shares by the assessee to the tune of 4,13,500 shares in the Demat account of the assessee and add the said income under section 68 of the Act.

The ITAT held that once the assessee has produced all the supporting evidences which include purchase bill, bank statement showing the payment of purchase consideration, Demat account, holding of shares in the Demat account, sale of the shares through Stock Exchange which are also reflected in the Demat account of the assessee and receipt of the sale consideration in the bank account of the assessee as it is evident from the bank account, statement of the assessee, then in the absence of any contrary material or evidence brought on record by the AO, the transaction of purchase and sale of the shares in question cannot be held as bogus merely on the basis of the investigation carried out by the Department in some other cases where some persons were found indulged in providing accommodation entry.

The ITAT further held that mere suspicion cannot be a ground for treating the transaction as bogus in the absence of any evidence or material on record when the assessee has produced all the relevant documentary evidences to establish the genuineness of the transaction and there is no contrary evidence to doubt the correctness of the evidences produced by the assessee then treating the transaction of purchase and sale as sham by the AO is not justified.

Rectification of mistake

In ‘SANGAM STRUCTURAL LIMITED VERSUS INCOME TAX OFFICER, RANGE-II (3) , ALLAHABAD, U.P. - 2021 (2) TMI 180 - ITAT ALLAHABAD, the Assessing Officer while passing assessment order u/s 143(3) of the 1961 Act, dated 14.03.2013 , inter-alia , made an additions to the tune of ₹ 37,60,601/- on account of credits from one M/s R R Steel Industries, primarily on the grounds that the address given in PAN was different from the address of R R Steel Industries as mentioned in the confirmatory letter etc. under section 68 of the Act.  The Commissioner of Income Tax (Appeals) observed that the discrepancy in the address was due to the fact that Mrs. Reema Mittal was proprietor of concern namely R R Steel Industries and PAN was allotted at the address of proprietor, Mrs. Reema Mittal which was at address at 706, Siddhartha Apartment, MP Enclave, Pitampura , New Delhi, while address of her proprietary concern was at 216, Agarwal Plaza, Netaji Subhash Place, Pitampura, New Delhi.  The Commissioner (Appeals) deleted the additions to the income as were made by the AO to the tune of ₹ 37,60,601/-.  The Revenue filed appeal before ITAT and ITAT reversed the order passed by Commissioner (Appeals). 

The assessee filed the present application seeking to correct mistake apparent from records in the appellate order dated 21.12.2017 passed by the tribunal.  The Tribunal observed that huge payments of ₹ 40 lacs being fresh cash credit were received by assessee during the previous year relevant to impugned assessment year, which is without any interest liability being incurred by assessee. The peak cash credit during the year (inclusive of opening balance) was to the tune of ₹ 90 lacs from said R R Steel Industries, which did not bear any interest and sale transaction made by assessee to said R R Steel Industries was merely ₹ 39,399/-.

The Tribunal was of the view based on material on record, that the tribunal has passed well reasoned order in which conscious decision is taken by tribunal in allowing Revenues appeal by holding that creditworthiness of the lender did not stood proved by the assessee and the order of the tribunal does not deserve the  interference within limited scope of provisions of Section 254(2) of the 1961 Act as in their  considered view, there is no mistake apparent from records in the appellate order passed by tribunal.

Bank Statements of the lenders

In ‘M/S. CARISSA INVESTMENT (P) LTD. VERSUS THE ACIT, CIRCLE – 3 (1) , NEW DELHI. - 2021 (1) TMI 918 - ITAT DELHI’   the assessee company has filed its return of income on 30.10.2007 declaring income of ₹ 27,78,790/- in the computation of income. The assessee-company is engaged in the business of Investment and Trading in Shares. The A.O. noted that assessee-company has taken loan from 11 parties in assessment year under appeal. The A.O. issued notices under section 133(6) of the Income Tax Act to all the parties requiring them to furnish copy of the bank statements, PAN etc.

The ITAT observed that the Ledger account of both the creditors there are loans given to the assessee-company as well as assessee paid back the amounts to them. The debit of financial charges to the profit and loss account is not a relevant criterion to consider under section 68.  The Bank statements are part of the record which also did not show if any cash have been deposited in the bank accounts of the creditors for giving loan to the assessee-company. Their bank accounts clearly show that both the creditors have sufficient funds in their bank account and all the transactions are carried-out through banking channel only. Thus, the initial burden upon the assessee-company to prove the creditworthiness of the creditors and genuineness of the transaction have been established in the matter and burden upon assessee-company have been discharged   Assessing Officer/Commissioner of Income Tax(Appeals) did not do anything on the documentary evidences produced on record and no further enquiry have been made into the matter. Since the A.O. accepted the creditworthiness and genuineness of the transaction with the same creditors in subsequent assessment year as well, its stand proved on record that there was no justification for the authorities below to make any addition against the assessee-company.

In view of the above the ITAT set aside the orders of the authorities below and delete the entire addition.

Share application received from group companies

In ‘Income Tax Officer Ward – 4(1), Kolkata v. RKB Services Private Limited’- 2021 (1) TMI 1070 – ITAT, Kolkata, the ITAT observed that the Commissioner of Income Tax (Appeals) that the records finding of facts that there are common directors and common shareholders and hence these are group companies which have invested.  The Assessing Officer has not considered any of these documents and that there is no adverse material with the Assessing Officer, to controvert the information or document filed by the assessee. Under such circumstances, the Commissioner of Income Tax (Appeals) held that money received from the shareholder companies cannot be considered as unexplained income.  Most important finding of the Commissioner of Income Tax (Appeals) is that scrutiny assessment order was passed u/s 143(3) of the Act, in respect of all the three share allottee companies. The Copies of these assessment orders were filed before the Assessing Officer. The ITAT held that no addition can be sustained u/s 68 of the Act where the assessment of the share allottee companies is completed u/s 143(3).    In this case huge additions were made in the hands of the share allottee companies in their scrutiny assessment u/s 143(3) of the Act. Again making the addition in the case of the assessee company would tantamount to double addition.

In ‘DCIT CENTRAL CIRCLE-03 NEW DELHI VERSUS RAJU INVESTMENTS (P) LTD. 2021 (2) TMI 66 - ITAT DELHI, the assessee is a non-banking finance company and had been engaged in the business of providing loans as investment in shares and securities of other companies. The return of income u/s 139(1) declaring an income of ₹ 88,919/- was filed on 31.03.2010. The Assessing Officer computed the total income of the assessee at ₹ 2,34,04,919/- thereby making addition related to unexplained cash credit under section 68. 

Being aggrieved by the assessment order, the assessee filed appeal before the Commissioner of Income Tax (Appeals).   The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee.  Against the order of Commissioner of Income Tax (Appeals), the Department filed appeal before the ITAT.

The Revenue submitted that the Commissioner of Income Tax (Appeals) was not correct in admitting additional evidence under Rule 46A without giving proper justification and has not given adequate opportunity and totally ignored the remand report given at the appellate proceedings by the Assessing Officer.

The ITAT held that the Inspector Report has clearly stated the wrong address and therefore, the same will not prove the case of the Department that the share applicant parties were not properly examined. The Commissioner of Income Tax (Appeals) has taken into account all the evidences and has confronted the same to the Assessing Officer for which remand report was filed by the Assessing Officer.   The Assessing Officer chose not to consider the evidences on merit and simply stated that these parties were not found.  Thus, the assessee in the opinion of ITAT has proved the genuineness, identity and creditworthiness of these parties.   Thus, the parties mentioned in present assessee’s case were held genuine, creditworthiness and its identity.   The ITAT held that the order of the Commissioner of Income Tax (Appeals) does not require any interference and appeal of the Revenue is dismissed.

Bogus LTCG

In ‘Income Tax Officer – 4(3)(3) v. Shri Sajjan Kumar Bajoria and another’ – 2021 (1) TMI 839 –ITAT, Mumabi, an assessment has been framed against assessee for the year under consideration under section  143(3) on 22.03.2016  wherein the assessee has been saddled with certain addition under section  68 in view of the fact that Long-Term Capital Gain (LTCG) earned on sale of certain shares of an entity namely Quest Financial Services Limited was declared as bogus and the same was added to the income of the assessee as unexplained cash credit under section 68.  The assessee filed an appeal before the Commissioner of Income Tax (Appeals) which deleted the additions made by the Assessing Officer.  Against this order the Revenue filed appeal before ITAT. 

The ITAT held that onus casted upon Assessing Officer to corroborate the impugned additions by controverting the documentary evidences furnished by the assessee and by bringing on record, any cogent material to sustain those additions, could not be discharged. The whole basis of making additions is third party statement and no opportunity of cross-examination has been provided to the assessee to confront the said parties. As against this, the assessee’s position that that the transactions were genuine and duly supported by various documentary evidences, could not be disturbed by the revenue.

The ITAT was of the considered opinion that the additions thus made by Assessing Officer had no legs to stand and therefore, the same has rightly been deleted by Commissioner of Income Tax (Appeals). The ITAT found no reason to interfere in the impugned order, we dismiss the appeal.

Deposits during demonetization period

In ‘Nurul Islam v. Income Tax Officer, Ward – 2, Nagon’ – 2021 (1) TMI 837 – ITAT, Gauhati’, the assessee has not filed his income tax return for AY 2017-18. The Assessing Officer issued notice under section 142(1) of the Income Tax Act, 1961 on 15.03.2018 and directed the assessee to submit his return of income. According to Assessing Officer, the assessee finally filed his return of income showing income of ₹ 2,86,934/-. The Assessing Officer noted that the assessee had deposited cash to the tune of ₹ 17,01,000/- after 8/9th November, 2016 wherein the currency notes of the denomination of ₹ 500 and ₹ 1,000 was declared no longer a legal tender (demonetized).   The Assessing Officer made an addition of ₹ 8,75,500/-.   The assessee filed an appeal before Commissioner of Income Tax (Appeals) who dismissed the appeal.

The assessee filed appeal before the ITAT.  The appellant contended that a perusal of bank statement would reveal that there were regular bank deposits of cash and payment to the creditors (tea vendors).  The ITAT observed that the deposit of ₹ 8,75,000/- [₹ 2,00,000/-accepted by AO] cannot be said to be as result of non-genuine business receipt or a case of black money and therefore, in the peculiar facts narrated above, including the past history taken note of and the pattern of money deposited pre-demonetization and post that event as discussed, addition was not warranted and it is directed to be deleted; and further, profit embedded in ₹ 8,75,500/- need to be taxed @ 8% and it is ordered accordingly. Appeal of the assessee is partly allowed.

Opening balance brought forward

In ‘UNISON HOUSING COMPANY LTD. VERSUS INCOME TAX OFFICER, WARD–II (3) , ALLAHABAD - 2021 (1) TMI 531 - ITAT ALLAHABAD, the assessee company was engaged in the business of Civil Contract and filed its return of income on 31.03.2011declaring total income of ₹ 21,810/-. During the course of assessment proceedings, the Assessing Officer noted that in the balance sheet as on 31.03.2010, the assessee has shown the earnest money of ₹ 3,79,00,000/-, which was ₹ 1,22,00,000/- as on 31.03.2009. The Assessing Officer asked the assessee to explain as to why, the earnest money of ₹ 2,57,00,000/- should not be considered as unexplained cash credit, for the year under consideration and added to the income of the assessee under section 68 of the Act. The Assessing Officer has noted that the assessee has offered no explanation about the nature and source thereof and accordingly, made the addition of ₹ 2,57,00,000/- under section 68 of the Act as unproved cash credit. The assessee challenged the action of the Assessing Officer before the Commissioner of Income Tax (Appeals) but could not succeed.

The assessee has contended that the amount was received through banking channel and under the contract as security deposit for the contract work to be carried out by the contractor however, the contract work was not carried by the contractor and the amount was refunded by the assessee in the subsequent year.  The ITAT held that when the amount was claimed to have been received by the assessee through banking channel and under the agreement, which was claimed to be repaid by the assessee in subsequent year then the relevant documentary evidence is required to be verified before deciding the issue of unexplained cash credit. Hence, this issue is set aside to the record of the Assessing Officer to properly verify, examination and consider the evidence produced by the assessee.

Interpretation of section 68

In ‘Nemi Chand Kothari v. Commissioner of Income Tax and another’ – 2003 (9) TMI 62 – Gauhati High Court, the High Court has thrown light on touching the issue of onus on assessee under section 68, by holding that the same should be decided by taking into consideration the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are in his knowledge.

While interpreting the meaning and scope of section 68, one has to bear in mind that normally, interpretation of a statute shall be general, in nature, subject only to such exceptions as may be logically permitted by the statute itself or by some other law connected therewith or relevant thereto. Keeping in view these fundamentals of interpretation of statutes, when reading carefully the provisions of section 68, it may be  noticed nothing in section 68 to show that the scope of the inquiry under section 68 by the Revenue Department shall remain confined to the transactions, which have taken place between the assessee and the creditor nor does the wording of section 68 indicate that section 68 does not authorize the Revenue Department to make inquiry into the source(s) of the credit and/or sub-creditor. The language employed by section 68 cannot be read to impose such limitations on the powers of the Assessing Officer. The logical conclusion, therefore, has to be, and the High Court held that an inquiry under section 68 need not necessarily be kept confined by the Assessing Officer within the transactions, which took place between the assessee and his creditor, but that the same may be extended to the transactions, which have taken place between the creditor and his sub-creditor. Thus, while the Assessing Officer is under section 68, free to look into the source(s) of the creditor and/or of the sub-creditor, the burden on the assessee under section 68 is definitely limited.

Burden of proving fact especially within knowledge.- When any fact is especially within the knowledge of any person, the burden) of proving that fact is upon him.

If section 106 and section 68 are to stand together, which they must, then, the interpretation of section 68 are to stand together, which they must, then the interpretation of section 68 has to be in such a way that it does not make section 106 redundant. Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income- tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been. eventually, received by the assessee. It, therefore, further logically follows that the creditor's creditworthiness has to be Judged vis-a-vis the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, for, these aspects may not be within the special knowledge of the assessee.