What is section 68 of the Income Tax Act 1961 and why presently is it considered a hot topic?
In simple words, section 68- Unexplained cash credits empower an assessing officer, in case not satisfied with the explanations provided by the assessee, to add any unexplained amount credited in the books of an assessee during any previous year in his income and levy tax accordingly.
Further, in the case of any unexplained sum deposited in the bank account of a company (not being a company in which the public are substantially interested) as share application money, share capital, share premium or any such amount by whatever name called, if not explained in the manner provided in the section and/or where assessing officer is not satisfied may be added to the returned income and taxed accordingly.
Let us examine two latest Judgements decided by The High Court of Judicature at Bombay dated 22nd January 2020 and 29th January 2020 involving facts where assessing officers invoked section 68 of the Income Tax Act 1961 while making additions to the returned income.
This section became a bone of contention between the assessee and the assessing officer. Due to differences in interpretation of section 68 and the process/manner of offering explanations by assessees and the way the information was verified and accepted by the assessing officers' additions were made in the returned income of n-number of assessees resulting in a dispute. To resolve such disputes among the assessees and the department, the aggrieved parties preferred appeals starting from Commissioner of Appeals and finally getting solution/relief from the Hon'ble Supreme court.
In the case of Mr. Gaurav Triyugi Singh (Appellant) Vs. The Income Tax officer Mumbai (Respondent), Income Tax Appeal no. 1750 of 2017, the Hon'ble High Court of Bombay decided the appeal in the favor of the assessee and against the department.
The brief facts of the case were, assessee (an individual) has received Rs 17 lakhs as a loan from his relatives which was added back to his income by the assessing officer under section 68 of the Income Tax Act 1961. During the assessment process, the assessing officer asked the assessee to submit loan confirmation as well as returns and bank statements of the loaner. The assessee submitted the required information but the assessing officer was not satisfied, and he took a view that genuineness of the loan was not established and further creditworthiness of the loaner was found to be suspect. The action of the assessing officer was completed by adding Rs 17 lakhs to the returned income of the previous year and taxed accordingly.
CIT (A) confirmed and upheld the order of the assessing officer. Aggrieved by the order the assessee filed an appeal before the ITAT. The tribunal after verifying the facts of the case and the explanations given by the assessee reduced the addition by Rs. 3 lakhs and allowed the addition of Rs 14 lakhs. The observations of the tribunal were that the said amount was full of doubts and explanation provided by the assessee could not be accepted.
Aggrieved appellant filed an appeal before the Hon'ble High Court. The observation made by the court, after considering the facts, was that under section 68 "it is necessary for an assessee to prove prima facie the transaction which results in cash credit in his books of account. Such proof would include proof of the identity of the creditor, capacity of such creditor to advance the money and lastly, genuineness of the transaction. Thus, to establish receipt of credit in cash, as per the requirement of section 68, the assessee has to explain or satisfy three conditions, namely:
- Identity of the creditor.
- Genuineness of the transaction
- Credit-worthiness of the Creditor"
In the case of Principal Commissioner of Income Tax Vs. Veedhata Towers Pvt. Ltd. (2018) 403 ITR 415 (Bom), the court held that the assessee is only required to explain the source of the credit. There is no requirement under the law to explain the source of the source. In the instant case, the assessee has discharged his duty by providing all the information required but the assessing officer doubted the source of source. To prove the genuineness of the source of the source is the duty of the revenue and in this case, revenue could not prove or bring in any material to impeach. Thus, the appeal was decided in favor of the assessee and against the revenue.
Similarly, in the case of Pr. Commissioner Vs Ami Industries (India) P Ltd, Income Tax Appeal No. 1231 of 2017, The Hon'ble High Court of Judicature at Bombay on January 29th, 2020 decided the case in favor of the assessee and against the revenue on the similar principles of law by saying:
"As per the provisions of Section 68 of the Act, for any cash credit appearing in the books of assessee, the assessee is required to prove the following-
(a) Identity of the creditor
(b) Genuineness of the transaction
(c) Credit-worthiness of the party
(i) In this case, the assessee has already proved the identity of the share applicant by furnishing their PAN, copy of IT return filed for asst. the year 2010-11.
(ii) Regarding the genuineness of the transaction, the assessee has already filed a copy of the bank account of these three share applicants from which the share application money was paid and the copy of the account of the assessee in which the said amount was deposited, which was received by RTGS.
(iii) Regarding the credit-worthiness of the party, it has been proved from the bank account of these three companies that they had the funds to make payment for share application money and copy of resolution passed in the meeting of their Board of Directors.
(iv) Regarding the source of the source, Assessing Officer has already made inquiries through the DDI (Investigation), Kolkata and collected all the materials required which proved the source of the source, though as per settled legal position on this issue, assessee need not prove the source of the source.
(v) Assessing Officer has not brought any cogent material or evidence on record to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represents the company's income from undisclosed sources.
Accordingly, no addition can be made u/s.68 of the Act. Because of the above reasoned factual finding of CIT(A) needs no interference from our side. We uphold the same."
From the above two judgments, it is now a settled law that the responsibility to prove the source of the source lies with the revenue authority and not of the assessee. The responsibility, under section 68 of the income tax 1961, of the assessee is to prove the identity of the creditor, genuineness of the transactions and credit-worthiness of the creditor.
The author is an income tax practitioner and can be reached at: dilip@rklegal.org
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