Unexplained Cash Credit
- If any sum is credited in the books of accounts of the assessee during a financial year, and
- The assessee cannot explain the nature and source of such credit, or
- The explanation provided is not satisfactory to the Assessing Officer,
- Then the amount is treated as income of the assessee for that financial year.
Scope
- A variety of monetary credits like advances, deposits, gifts, and loans are included in the definition of cash credits.
- Monetary credits that are already covered by other provisions, such as Section 41 or Section 56(2), are not covered by this section.
Objectives of Section 68
- Serving as a tool to guarantee accountability and transparency
- Preventing Tax Evasion
- Ensuring Transparency
- Curbing Accommodation Entries
- Deterrence Against Money Laundering
- Upholding Revenue Collection
Conditions for Invocation for Section 68 to apply
- Credit Entry in Books
- Onus of Proof on the Assessee
- Assessing Officer must find the explanation unsatisfactory.
Challenges in Proving the Genuineness of Cash Credits
The assessee must explain:
i. Identity of the creditor.
ii. Creditworthiness of the creditor.
iii. Genuineness of the transaction.
Legal Consequences of Non-Compliance with Section 68 of the Income Tax Act
- Non-compliance can result in serious legal consequences. If the tax authorities find that the cash credit is not genuine and is an undisclosed income, they can impose tax on the cash credit at the maximum marginal rate of tax, which can be as high as 30%.
- Additionally, the penalty of up to 100% of the tax payable on the undisclosed income. This penalty can be levied if the tax authorities find that the taxpayer has deliberately concealed the cash credit from the tax authorities.
- It is, therefore, crucial for taxpayers to maintain proper books of accounts and provide documentary evidence to support any cash credits. Taxpayers must also ensure that they comply with all the provisions of the Income Tax Act to avoid any legal repercussions.
Landmark Judgements of Sec 68
CIT v. P. Mohankala (2007) 291 ITR 278 (SC)
Merely filing documents like affidavits or confirmations is insufficient if the substance of the transaction is not genuine.
Principle Established:
- The onus is on the assessee to prove the genuineness of the transaction, the identity of the creditor, and the creditworthiness.
- If the explanation is found to be unsatisfactory, the amount can be taxed as income. The decision of the Assessing Officer cannot be reversed unless it is perverse.
- Merely filing documents like affidavits or confirmations is insufficient if the substance of the transaction is not genuine.
CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC)
Initial onus lies on the assessee; the AO must have substantial evidence to counter it.
Principle Established:
Once the assessee proves the identity of the creditor, creditworthiness, and genuineness of the transaction, the onus shifts to the Department to prove otherwise. Mere non-response to summons issued to the creditor is insufficient to draw adverse conclusions.
CIT v. Lovely Exports (P) Ltd. (2008)216 CTR 195 (SC)
Share application money cannot be taxed as unexplained unless the Department proves that it is an assessee's income.
Principle Established:
In cases of share capital received by a company, if the assessee provides details of shareholders (identity and addresses), the onus shifts to the Department to prove the money belongs to the assessee.
CIT v. Durga Prasad More (1971) 82 ITR 540 (SC)
Substance over form is critical in evaluating unexplained credits.
Principle Established:
The AO is entitled to look beyond the form and assess the substance of a transaction. Surrounding circumstances and human probabilities can be used to determine whether the explanation is satisfactory.
Pr. CIT v. NRA Iron & Steel Pvt. Ltd. (2019) 412 ITR 161 (SC)
Assessee must establish the credibility of the transaction in substance.
Principle Established:
Even in the case of share application money, the identity, creditworthiness of investors, and genuineness of the transaction must be proved. Merely submitting documents like PAN and ITR is insufficient.
CIT v. Vijay Kumar Kesar (2019) 412 ITR 322 (All.)
The addition must be based on facts, not assumptions.
Principle Established:
Suspicion alone cannot justify an addition under Section 68. The Department must have tangible evidence to reject the assessee's explanation.
Latest Judicial Updates & Interpretations
ACIT v. Amal Corporation
ITAT MUMBAI BENCH 'A' Assessment Year: 2012-13|October 14, 2024
No sec. 68 additions on account of unsecured loans if assessee duly discharged onus by providing all details.
Facts:
- The assessee, engaged in investments and property development, had taken unsecured loans of ₹1.50 crores from two creditors, M and W.
- The Assessing Officer (AO) deemed these loans as unexplained cash credits under Section 68, based on an investigation report alleging accommodation entries by the BJ Group.
- AO disallowed interest payments of ₹28.90 lakhs on these loans, claiming lack of creditworthiness of the creditors.
- The Commissioner (Appeals) deleted the additions, leading to the revenue's appeal to the Tribunal.
Tribunal Findings:
- The assessee provided sufficient evidence to support the genuineness of the loans.
- Ledger accounts.
- Bank statements reflecting loan transactions.
- Income tax returns and audited financials of creditors.
- Confirmation of loan source from creditors' balance sheets.
- AO issued notices under Section 133(6) and received full responses from the creditors.
- Two creditors personally appeared before the AO, gave sworn statements, confirmed the loans, and explained their business operations and financials.
- The AO relied solely on the investigation report without any specific evidence linking the assessee to bogus accommodation entries.
Decision:
- The Tribunal upheld the deletion of ₹1.50 crores by the Commissioner (Appeals), noting that the assessee had discharged its onus of proving the genuineness of the loans and creditworthiness of the creditors.
- Disallowance of interest was also deleted, as the loans were established as genuine and no evidence of fictitious transactions was provided.
- The revenue's appeal was dismissed.
Conclusion:
- The Tribunal ruled in favor of the assessee, confirming that: the onus of proving the loans was duly discharged.
- Relying solely on investigation reports without corroborative evidence against the assessee is insufficient for additions under Section 68.
Specimen-1 Reply to Notice of the A.O. for treating the amount found credited in the Books of account as cash credit and charging the same to tax u/s 68:
Dated
To,
The NFAC/Assessing Officer,
Circle/Ward..
Sir,
H.A In
Name of assessee
PAN.
Asst. Year ----
Sub: Reply to Notice for treating the amount found credited in the Books of account as cash credits and charging the same to tax u/s 68
Dear Sir/Madam,
Kindly refer to your Notice dated to my above-named client regarding treating the amount found credited in the books of account as cash credit and charging the said amount to tax u/s 68.
As instructed by my client, I would like to make the following explanation about the nature and source for the amount found credited in the books of account of my client for your kind consideration: .......in the books of account
1. Nature and Source of Credit: At the outset, we would like to clarify that the amount in question, amounting to ₹[insert amount], represents [specify nature of credit, e.g., share application money, loan received, sale proceeds, etc.]. The nature and source of this credit have been fully explained and substantiated with appropriate documentary evidence, as outlined below:
- [Specify details, e.g., loan agreement, confirmation letters, share application forms, sale invoices, etc.]
- [Provide details of the parties involved, e.g., name, address, PAN, etc.]
2. Genuineness of the Transaction: The genuineness of the transaction has been established through the following:
- [Mention mode of transaction, e.g., banking channels, RTGS, NEFT, cheque, etc.]
- Copies of bank statements reflecting the said transaction.
- Relevant correspondence and supporting documents to substantiate the bonafide nature of the transaction.
3. Creditworthiness of the Parties: The creditworthiness of the parties involved has been adequately demonstrated by submitting the following documents:
- Income tax returns and computation of income for the relevant assessment year.
- Financial statements, including balance sheet and profit & loss account.
- Any other supporting evidence to verify the financial standing of the parties.
4. Compliance with Judicial Precedents: We would like to draw your attention to various judicial precedents that emphasize the necessity of the Assessing Officer to:
- Establish that the credit is unexplained despite the taxpayer's explanation.
- Accept evidence provided unless there is substantial ground to discredit it.
Relevant judgments include:
CIT v. Lovely Exports (P) Ltd. [(2008) 216 CTR (SC) 195]: The Hon'ble Supreme Court held that where identity, genuineness, and creditworthiness are established, no addition can be made under Section 68.
CIT v. Orissa Corporation Pvt. Ltd. [(1986) 159 ITR 78 (SC)]: If the assessee provides details of the creditors, the onus shifts to the Assessing Officer to conduct further inquiries.
5. Additional Information and Cooperation: We have already submitted the necessary details and documents in response to the notice dated [insert date]. However, if your office requires any additional information or clarification, we remain committed to fully cooperating and providing the same at the earliest.
6. Conclusion: In light of the above, we respectfully submit that the addition under Section 68 is unwarranted in the present case as we have adequately discharged our onus to explain the nature, source, and genuineness of the credit. We request your good office to kindly consider our submission and drop the proposed addition.
We look forward to your favorable consideration of our reply.
Thanking you.
Yours faithfully,
[Chartered Accountant/ Advocate/Authorized Signatory]
[Contact Information] [Date]
Specimen-2 Reply to Notice of the A.O. for treating the amount found credited in the Books of account as cash credit and charging to tax u/s 68:
To,
The Assessing Officer,
Circle/Ward..........…
Sir,
Name of assessee
PAN
Asst. Year
Sub: Reply to Notice for treating the amount found credit in the Books of account as cash credits and charging the same to tax u/s 68
Kindly refer to your Notice dated........ to my above-named regarding treating the amount found credited in the books of account credit and charging the said amount to tax u/s 68.
As instructed by my client, I would like to make the following explanation about the nature and source for the amount found credited in the books of account of my client for your kind consideration :
The said amount was received by------(Bank)Cheque No.-----dated----drawn on------from M/s-----against sale made by my client to them.
I am enclosing the following :-
1. A copy of the ledger account with the said party for the relevant financial year, which also reflects that my client has regular transactions with the said party.
2. Copy of Sale Bill against which the said payment was received.
3. A confirmation of the transaction of sale and the relevant payment from the said party, mentioning their Income Tax PAN.
4. The Books of account, Bank Statement and Copy of Sale Bills are enclosed for your kind perusal.
As the nature and source of the said amount has already been explained as above, my client has complied with the requirements of section 68.
Under the facts and circumstances, the said amount cannot be considered as a cash credit and thus the proposed addition of the amount in the hands of my client u/s 68 is totally uncalled for.
Your honour is prayed to drop the proposed action of treating the credited amount as income under section 68 in the hands of my client as the same is not warranted in the facts and circumstances of the instant case.
Should your honour require any further clarification, my client would furnish the same.
Thanking You,
Yours faithfully,
(Advocate/Chartered Accountant/A.R.)
Encl:
1. Vakalatnama / Power of Attorney
2. Explanation of the Loan creditor regarding source of amount
CC: to Client for information.
CA Leena Theraja
(Start-up Advisory & Direct Tax Expert )
CAclubindia
