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The basic edifice of presumptive scheme u/s 44AD is assessee would not be called to maintain books under the Act and get them audited if profit shown by the assessee is otherwise in accordance with the prescription of section 44AD of the Act. However, maintaining books of account is sine qua non for making addition under section 68. Since section 44AD does not obligate the assessee to maintain books, provisions of section 68 could not be invoked where the assessee had filed a return of income under provisions of section 44AD without maintaining books of account.

Deposits in bank account maintained by the assessee

This is the case of a person who has filed his return of income under presumptive taxation .He has made certain deposits in his bank account. Now a question arises, whether these deposits in bank can be transformed as unexplained cash credit u/s 68 of the Act.

Before proceeding further to decide this issue it would be imperative to refer to the relevant provisions of section 68 of the Act. The same are reproduced herein under :-

'68. 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:'

The pre-requisites for invoking the provisions of section 68 are

(i) any sum is found credited in the books of an assessee.

(ii) the assessee offers no explanation about the nature and source thereof.

(iii) the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory.

Invocation of Section 68 if Assessee Is Opting For Presumptive Taxation

Maintenance of books of account is sine qua non for making addition under section 68

A bare perusal of section 68 of the Act makes explicitly clear that the addition can be made under the section if, any sum is found credited in the books maintained by the assessee. .The Hon'ble High Court of Gauhati in the case of Anand Ram Raitani v. CIT (1997) 223 ITR 544 (Gau) : 1997 TaxPub(DT) 0638 (Gau-HC) has held that existence of books of account is a condition precedent for invoking the provisions of section 68 by the assessing officer. The relevant extract of the judgment is as under :-

'We have gone through section 68 of the Act. The assessing officer before invoking the power under section 68 of the Act 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 and if the assessee fails to satisfy the assessing officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking of the power. Discharging of burden is a subsequent condition. If the first point is not fulfilled the question of burden of proof does not arise. The assessing officer made the assessment by making addition of the amount for which disallowance was claimed Mr. Bhuyan very candidly admits that addition was made in exercise of the power under-section 68 of the Act, therefore, the first condition necessary for invocation of the power is the existence of the books of account.

 

Meaning of Books of Accounts

The 'books or books of account' have been defined in section 2(12A) of the Act. The same reads as under :-

'2(12A) books or books of account' includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;'

The definition of books under the Act is inclusive. A perusal of the definition shows that the same does not include bank passbook or bank statement. A conjoint reading of above provisions would thus lead to the conclusion that the addition under section 68 can be made only where any amount is found credit in the books as defined under section 2(12A) of the Act maintained by the assessee.

a. Books of the assessee and not any other person

It is to be noted that the books in which credit appears should be of the assessee only. Thus, any credit in the books of one person cannot be assessed in the hands of other person u/s. 68 [Shanta Devi vs. CIT - 171 ITR 532 (P&H), Anand Ram Raitani vs. Raitani - 223 ITR 544 (Gau)].

b. Balance sheet and profit and loss accounts are not Books of account. They are just byproducts

The Hon'ble Madras High Court in case of CIT vs. TajBorewell (291 ITR 232) has held that the Profit and Loss Account and Balance Sheet cannot be said to be books of account of the assessee. On the facts of that case, the Court has given the finding that 'object of a P&L a/c is to ascertain the income of a business and by offsetting the expenses of earning that income, to ascertain the net increase (profit) or decrease (loss) in the traders' "net worth" for the period while Balance sheet lists the assets and liabilities and equity accounts of the company. It is prepared 'as on' a particular day and the accounts reflect the balances that existed at the close of business on that day.

 

c. Loose sheet or loose papers are not books of account

Going by the definition of the books as given by section 2(12A) of the Act, loose sheet found during search could not be treated as books for the purpose of section 68 and also any entry in such sheet cannot be treated a credit entry. The entries in loose papers/sheets are irrelevant and inadmissible as evidence. Such loose papers are not 'books of account' and the entries therein are not sufficient to charge a person with liability

  • Common Cause (A Registered Society) v. UOI (2017) 394 ITR 220
  • CB I. v. V. C. Shukla (1998)3 SCC 410

d. Objectives of books of account

In the case of Sheraton Apparels v. Asstt. CIT [2002] 256 ITR 20 (Bom HC) Bombay High Court laid down the following objectives of books of accounts:

Main objectives of the books of account are to maintain a record of business:

  • to calculate profit earned or loss suffered during the period of time;
  • to provide credible data and information to file the tax returns;
  • to depict the financial position of the business;
  • to portray the liquidity position;
  • to provide up to date information of assets and liabilities with a view to derive information so as to prepare a profit and loss account and draw a balance-sheet to determine income and source thereof;
  • It cannot be understood to mean compilation or collections of sheets in one volume;
  • Not diaries which are maintained merely as a man's private record;
  • Not the ones prepared by him as may be in accordance with his pleasure or convenience to secretly record secret, unaccounted clandestine transactions not meant for the purposes of the Act, but with specific intention or desire on the part of the assessee to hide or conceal income so as to avoid imposition of tax thereon.

e. Whether bank pass book is considered to be books of accounts?

It is to be noted that a bank passbook is not considered as books of account due to following reasons:

  • The relationship between the banker and the customer is one of debtor and creditor and not a trustee and beneficiary.
  • It is only a copy of the constituent's account in the books maintained by the bank.
  • It is not as if the pass book is maintained by the bank as an agent of the constituent.
  • Nor can it be said that the pass book is maintained by the bank under the instructions of the constituent.

Following judicial pronouncements support this issue that a pass book is not a book of account

The Hon'ble Bombay High Court in the case of CIT v. Bhaichand N. Gandhi (supra) upholding the decision of Tribunal concluded that bank passbook does not constitute books as envisaged under section 68 of the Act. The relevant extract of the judgment reads as under:-

'.............. the passbook supplied by the bank to its constituent is only a copy of the constituent's account in the books maintained by the bank. It is not as if the passbook is maintained by the bank as the agent of the constituent, nor can it be said that the passbook is maintained by the bank under the instructions of the constituent. In view of this, the Tribunal was, with respect, justified in holding that the passbook supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions. In our view, the Tribunal was justified in the conclusions at which it arrived.'

We find that the aforesaid view of the Hon'ble Bombay High Court had thereafter been followed by an 'SMC' bench of the ITAT, Mumbai in the case of Smt. Manshi Mahendra Pi tkarVs. ITO 1(2), Thane (2016) 73 taxmann.com 68(Mumbai Trib.) wherein it was held as under: -

"I have carefully considered the rival submissions. In the present case the addition has been made by the Income Tax authorities by treating the cash deposits in the bankaccount as an unexplained cash credit within the meaning of section 68 of the Act. The legal point raised by the assessee is to the effect that the bank Passbook is not an account book maintained by the assessee so as to fall within the ambit of section 68 of the Act. Under section 68 of the Act, it is only when an amount is found credited in the account books of the assessee for any previous year that the deeming provisions of section 68 of the Act would apply in the circumstances mentioned therein. Notably, section 68 of the Act would come into play only in a situation Where any sum is found credited in the books of an assessee......... . . . . , The Hon'ble Bombay High Court in the case of ShriBhaichand Gandhi (supra) has approved the proposition that a bank Pass Book maintained by the bank cannot be regarded as a book of the assessee for the purposes of section 68 of the Act. Factually speaking, in the present case, assessee is not maintaining any books of account and section 68 of the Act has been invoked by the Assessing Officer only on the basis of the bank Pass Book. The invoking of section 68 of the Act has to fail because as per the judgment of the Hon'ble Bombay High Court in the case of ShriBhaichandN.Gandhi (supra), the bank Pass Book or bank statement cannot be construed to be a book maintained by the assessee for any previous year as understood for the purposes of section 68 of the Act. Therefore, on this account itself the impugned addition deserves to be deleted. I hold so. "We further find that a similar view had also been arrived a tin a ' third member ' decision of the Tribunal in the case of Smt .MadhuRaitani Vs. ACIT (2011) 10 taxmann.com206 (Gauhati ) (TM), as well as by the co-ordinate Benches of the Tribunal in the case of Mehul V. Vyas Vs .ITO (2017) 164 ITD 296 (Mum) and ITO, Barabanki Vs .Kamal Kumar Mishra (2013) 33 taxamann.com610 (Lucknow)

The Co-ordinate Bench of the Tribunal in the case of ShriKokarrePrabhakara v. ITO (supra), in a similar situation where the assessee had declared income under section 44AD of the Act without maintaining books and the assessing officer, had invoked the provisions of section 68 of the Act, the Tribunal deleted the addition by placing reliance of various decisions of the Tribunal holding that where the returns are filed on the basis of income declared under section 44AD of the Act, there cannot be any application of section 68 of the Act.

In the case of VishanSwaroop Gupta [TS-109-ITAT-2021(JPR)]Jaipur ITAT deletes addition u/s 68 for AY 2015-16, made by Revenue based on unexplained cash deposited in assessee's (retired doctor) bank account, holds credit in bank account not equivalent to credit books of accounts; The addition was partly upheld by CIT(A) to the tune of Rs.4.03 lakhs; ITAT finds force in assessee's contention that provisions of Sec. 68 which requires any sum to be credited in the ‘books of accounts' of assessee (with no/ unsatisfactory explanation of source) to attract an addition, should be construed strictly; Accepts assessee's contention that as per section 44AA, assessee is not required to maintain books of account and the pre-requisite condition for invoking Sec. 68 is the credit entries in the books of account of the assessee; Relies on Bombay HC ruling in Bhaichand N. Gandhi, and Mumbai ITAT ruling in ManshiMahendraPitkar, holds,'a bank pass book or bank statement cannot be considered to be a 'book' maintained by the assessee for any previous year for the purpose of Section 68'.:

In the case of DineshkumarVerma [TS-703-ITAT-2020(Mum)]Mumbai ITAT deletes Sec.68 made for assessee-individual during AY 2014-15, holds that Sec.68 cannot be invoked where the assessee has filed return of income u/s 44AD without maintaining books of account; Revenue had made additions u/s 68 w.r.t assessee's cash deposit into his bank account treating as unexplained cash; Perusing Sec.68, ITAT states that the section 'makes explicitly clear that the addition can be made under the section if, any sum is found credited in the books maintained by the assessee.'; Relies on Gauhati HC ruling in Anand Ram Raitani to hold that maintenance of books by the assessee is sine qua non for making addition u/s 68; Rejects Revenue's contention that passbook of assessee's bank account constitutes books of account; Opines that 'Since section 44AD does not obligates the assessee to maintain books, the provisions of section 68 cannot be invoked where the assessee has filed return of income under the provisions of section 44AD....' :

In the case of Smt. Babbal Bhatia [TS-306-ITAT-2018(DEL)]Delhi ITAT deletes addition u/s 68 [dealing with unexplained cash credits] in respect of cash deposited in the bank accounts of assessee-individual during AYs 2010-11 to 2012-13, despite assessee being unable to explain the sources of cash deposits; Holds that Sec. 68 is applicable only when the credits are found in the books of account of assessee, relies on jurisdictional HC ruling in Ms. Mayawati; Clarifies that a credit in the bank account of an assessee cannot be construed as a 'credit' in the books of the assessee, remarks that The account of the assessee in the books of the bank is different from the books of the assessee.'; Noting that assessee had made it very clear in the returns of income that she is not maintaining books of account, ITAT deletes addition; Relies on Bombay HC ruling in Bhaichand N Gandhi, distinguishes Revenue's reliance on Delhi ITAT Special Bench ruling in ManojAggarwal noting that it was delivered before jurisdictional HC ruling in Mayawati, also distinguishes Revenue's reliance on Bombay HC ruling in Arun Kumar J. Muchhala on facts.

Sri Girish Vs. Yalakkishettar vs.The Income Tax officer (ITA No. 354/ Bang/ 2019) (Dtd. 27.01.2020) (SMC) (Bangalore)

In the present case, the Assessing Officer found certain deposits as unexplained in the bank account of the assessee with ICICI Bank, Dharwad branch at Rs.36.26 lakh. In my opinion, when moneys are deposited in the bank account, the relationship that is constituted between the banker and the customer is one of the debtor and creditor and not of trustee and beneficiary. Applying this principle, the bank statement supplied by the bank to its constituent is only a copy of the constituent's account in the books maintained by the bank. It is not as if the bank statements are maintained by the bank as the agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. Therefore, the bank statements supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, nor a book maintained by the assessee or under his instructions. As such, addition u/s 68 of the Act of the amount entered only in the bank statements was not justified.

My view is fortified by the judgment of the Hon'ble Bombay High Court in the case of CIT v. Bhaichand H. Gandhi [141 ITR 67 (Bom.)] and also the judgment of the Hon'ble Allahabad High Court in the case of Smt.Sarika Jain v. CIT (407 ITR 254). The Hon'ble Allahabad High Court held that the Tribunal is not competent to sustain the addition u/s 69A of the Act after deleting the said addition made by the A.O. and confirmed by the CIT(A) u/s 68 of the Act, the entire order of the Tribunal stands vitiated in law. Being so, the amount found credited in the bank account of the assessee cannot be made an addition u/s 68 of the Act. Accordingly, I am inclined to delete the addition made u/s 68 of The Income Tax Act, 1961.

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