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Unexplained Cash Credits, Investments, Money etc.

CA. Nishant Jain , Last updated: 07 May 2014  
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Section 68: Cash Credits

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 is liable to income tax as the income of the assessee of that previous year.

It may be noted that if section 68 has been made applicable, the assessee shall beside liable for income tax be liable to a penalty for concealment on income under section 271(1)(c).

It is well settled that in order to discharge the onus, the assessee must prove the following:-

i. The identity of the creditor

ii. The capacity of the creditor to advance money

iii. The genuineness of the transaction

After the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to department.

Section 68 does not apply only to cash transaction but also to amount received by cheque or draft. In section 68, the words used are “any sum found credited in the books of assessee maintained for any previous year”. The mere fact that the head note to section 68 refers to cash credit is not sufficient to support the view canvassed on behalf of the assessee. Section 68 is unambiguous and the sum referred to in the section would include the sum of money by whatever mode received.

Therefore even if an assessee company represents that it had issued shares on receipt of share application money, the ITO would be entitled and would be indeed his duty to enquire whether the alleged shareholders do infact exist or not,. If the shareholders exist, then possibly no further enquiry needs to be made. If ITO finds that the alleged shareholders do not exist then the ITO shall have the jurisdiction to treat such a credit to be the income of the assessee [CIT V Sophia Finance Ltd. (1994) 205 ITR 98 (Del) (FB)].

Even where cash credit in name of a partner has been assessed as unexplained in hands of firm, such deposit can be assessed as unexplained investment in hands of partner also, if a partner’s explanation regarding source of such deposit is disbelieved. There is no question of double taxation because the partnership firm and partners are treated as separate assessee under the Income Tax Act [Jagmohan Ram Ram Chandra V CIT (2005) 274 ITR 405 (AII)]

Gifts are required to be proved as bona fide gifts to avoid the provisions of section 68. Though gifts are not liable to tax except under section 56 (2) (vi), (vii), (viia) and as such where such gifts are received, they are required to be proved under section 68 as bona fide gift. 

*Addition under section 68 cannot be made if no books of accounts are maintained. The Guwahati High Court in case of Anand Ram Raitani v CIT (1997) 223 ITR 544 (Gau)

*Passbook supplied by bank to the assessee cannot be considered as books of accounts

Credit in capital account of partner, being at the time of formation of partnership firm, the firm could not have any income at the time of formation and therefore no addition under section 68 could be made in hands of the firm.

Section 69: Unexplained Investments

Where in any financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of accounts, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of the investment or the explanation offered by him is not, in the opinion of the assessing officer, satisfactory, the value of the investment may be deemed to be the income of the assessee of such financial year.

The Supreme Court in the case of CIT v P.K. Noorjahan (1999) 237 ITR 570 (SC) held that even if the assessee’s explanation regarding the source of an investment is not found to be satisfactory, the assessing officer has discretion to treat or not to treat such investment as assessee’s income, as section 69 gives a discretionary power to the assessing officer.

Similarly, the Andhra Pradesh High Court in the case of CIT V Moghul Durbar (1995) 216 ITR 301 (AP) held that if the explanation of the assessee is rejected, Section 69 confers only a discretion to the assessing officer to deal with the investment as income of the assessee, because the words used is “may” and not “shall” in the said section.

Section 69A: Unexplained Money, etc.

Where in any financial year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or other valuable articles is not recorded in the books of accounts, if any maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or  other valuable articles, or the explanation offered by him is not in the opinion of the assessing officer, satisfactory, the money and the value of the bullion, jewellery or other valuable articles may be deemed to be the income of the assessee for such financial year. 

This section can be invoked where the assessee is found to be the owner of and not merely in possession of the articles specified in the section. But where a person is found to be in possession of anything, the onus of providing that he is not its owner is on that person.

Section 69B: Amount of Investment, not fully disclosed in books of accounts

Where in any financial year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable articles and the Assessing officer finds that the amount expended on making such investments or in acquiring such bullion jewellery or other valuable articles exceed the amount recorded in this behalf in books of account maintained by the assessee for any source of income and the assessee offers no explanation about such excess amount may be deemed to be the income of the assessee for such financial year.

This section empowers the assessing officer to treat the undisclosed investment as income if they are not properly explained by the assessee. The burden to prove that the real investment exceed the investment shown in the books of accounts of the assessee is on the department and no addition can be made under this section merely on the basis of the fair market value.  

Section 69C: Amount of Investment, not fully disclosed in books of accounts

Where in any financial year, an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in he opinion of the assessing officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of assessee, shall not be allowed as a deduction under any head of income.  

Section 69D: Amount borrowed or repaid on hundi

Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year, in which the amount was borrowed or repaid, as the case may be, provided that, if in any case any amount borrowed on a hundi has been deemed under the provision of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount.

By: CA Nishant Jain

Reach me at: nishantjainarticles@gmail.com


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CA. Nishant Jain
(Audit Executive)
Category Income Tax   Report

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