Cash credits and its treatment under income tax act, 1961

CASH CREDITS UNDER INCOME TAX ACT, 1961

Section 68 of the Income Tax Act, 1961 provides that there has to be credit of amounts in the books maintained by the assessee, that such credit has to be of a sum during the previous year, and that the assessee offers no explanation about the nature and source of such credit found in the books or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory. It means that the assessee offers no explanation regarding the accounting of the sum found in his books of accounts or his answer given is not satisfactory, tenable or acceptable.

The Assessee has to satisfy the Assessing Officer through his arguments, documents, proofs that the sum credited the books maintained by the assessee if true and reasonable. The assessee has to offer proper, reasonable and acceptable explanation regarding sum credited in the books. 

CIT v P. Mohanakala [2007] 161Taxmann(SC): The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opening.

CIT v Baijnath [1959] 35 ITR 129(cal.): when an amount is credited in business books, it is  not an unreasonable inference to draw that it is a receipt from the business, if the explanation given by the assessee as to how the amounts came to be received is rejected by all income tax authorities as untenable.

CIT v C. Kant & Co.[1980] 126ITR63(cal.): Section 68 does not make any distinction between commercial and non-commercial loans.

CIT v Abdul Haseeb, Pro MSJB Silk[2014]51:  Explanation "any sum is found credited in books of assessee" in section 68 not only means all entries on credit side but also entries on debit side in books of account."

CIT v Gymani ram Siri Ram[1945]98ITR 337(Pun & Har):  The language of Section 68 shows that it is general in nature and applies to all credit entries in whomsoever name it may stand , that is, whether in the name of assessee or third party.

Smt. Shanta Devi v. CIT[1988]171ITR532(Pun & Har.): The Assessing Officer before invoking the power under Section 68 must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account. The existence of books of account is a condition precedent for invoking of the power.

Burden of Proof is on Assessee:

The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. where the nature and source of a receipt, whether it to be of money or their property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source.

Aravali Trading Co. v ITO [2008] 220CTR (Raj.) 622: Neither under provisions of Section 68 nor on general principal , it can be said that once existence of persons in whose name credits are found in books of assessee is proved, and such persons own such credits with assessee, still assessee is to prove source from which creditors could have acquired money to be deposited with him.

Note: if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing officer, not satisfactory, there is prime facie evidence against the assessee, viz the receipt of money, and if he fails to rebut the same, the said evidence being unrebutted can be used against him by holding that it is a receipt of an income nature.

CIT v Smt. Prem Lata sethi[2013]492: Transactions through bank account is not enough to explain money and creditworthiness of the creditors and genuineness of transaction is to be examined.

CIT v C. Kant & Co.[1980]126ITR63 (cal.): In cash of Cash Credit entry it is necessary for the assessee to prove not only the identity of the creditors but also to prove the capacity of the creditors to advance the money and the genuineness of the transactions. On who the onus has been discharged in a case is a question of fact.

Note: The Assessee is not supposed to know the capacity of the money lender or cash creditor. It is within the exclusive domain of creditor. It is for that specific purpose that Section 131 of the Act has been introduced so that in case of any suspicion, the ITO  or the authorities concerned may exercise the power of a Civil court under that provision and call upon the creditor concerned to prove his capacity to pay and genuineness of the transactions. Once Assessing Authority is satisfied that the assessed is not telling truth, the onus is on the creditor to prove his creditworthiness and genuineness of the transactions with the assessee. The Income Tax Authorities has power under provisions of section 131 of the Act, to summon the creditor to prove the genuineness of the transaction.