Cash Credit

A Critical Analysis

Dhinal Shah Chartered Accountant

Scope

Section 68 of the Act Practical Issues Share Capital

Section 68

Section 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.

Scope of section 68

There should a credit entry in the books; AND

Assessee is unable to provide an explanation about the nature and source of the credit entry
OR

The explanation offered by the assessee is not to the satisfaction of the assessing officer;

Substantive Provision

Substantive provision

Section 2(24) gives inclusive definition of term income enlarges the scope for addition of certain things which would otherwise not be regarded as income therefore amount added u/s 68 constitutes income CIT vs. Ganpatrai Gajanand (108 ITR 403)(Ori) Section 68 itself is a charging section and consequently is a substantive provision Sikri & Co. Pvt. Ltd. vs. CIT (106 ITR 682)

Section 68 is a charging provision in so far as unexplained cash credits are concerned Bhogilal Virchand vs. CIT (127 ITR 591), CIT vs. Bihar Cotton Mills Ltd. (160 ITR 275)(Pat.)

Credit

Credit of sum in books

Where relevant amount is not credited in the assessees books, section 68 does not come into play Baladin Ram vs. CIT (71 ITR 427) (SC) & Laxmi Narain Gupta vs. CIT (124 ITR 94) (Pat.) Section 68 gets activated only when any sum is found credited in the books of the assessee Banshidher Agarwal Panna vs. CIT (148 ITR 523) (MP)

What if Only credit, No CASH??

Section 68 not to apply where entries are fictitious and are accommodating entries Addl. CIT vs K.A. Kuppuswami Chettiar (130 ITR 464) Section 68 not attracted where despite credit entries, there is no actual passing or receipt of cash and transactions are mere book entries resulting in acquisition of an asset in kind while simultaneously creating a liability Jatia Investment Co. vs CIT (206 ITR 718)

Books

What constitutes books

Section 2(12A) books or books of account means any book forming integral part of system of book keeping employed in any business would include ledger and books of original entry profit & loss account and balance sheet not books CIT vs. Taj Borewells (291 ITR 232)(Mad) Books of accounts to be of assessee himself, not any other assessee credit in books maintained by other assessees cant be brought to tax in assessees hands u/s 68 Smt. Shanta Devi vs. CIT (171 ITR 532)(P&H), Laxmi Narain Gupta vs. CIT (124 ITR 94)(Pat), Munshi Ram vs. CIT (126 ITR 663)(P&H), Yadu Hari Dalmia vs. CIT (126 ITR 48)(Del) Pass book issued by bank cannot be treated as books of assessee any credit appearing therein cannot be taxed u/s 68 CIT vs. Bhaichand H Gandhi (141 ITR 67)(Bom)

Burden of Proof

Burden of proof on assessee

Prima facie burden on assessee to prove the transaction resulting in cash credit by proving

Identity of the creditor;

Capacity of creditor to advance money;

Genuineness of the transaction

Mere establishment of creditors identity not enough

Dulichand Omprakash (113 ITR 476 (Cal) Shankar Industries vs. CIT (114 ITR 689)(Cal) Harichand Virender Paul vs. CIT (140 ITR 148)(P&H) CIT vs. S. Kamaraja Pandian (150 ITR 703)(Mad) Edayamal Constructions vs. CIT (183 ITR 671)(Ker)

In case of multiple creditors, burden of proof to be discharged in respect of each creditor CIT vs. R.S. Rathore (212 ITR 390)(Raj.)

When onus discharged..??

Confirmation of gift and source thereof by the donor Murlidhar Lahorimal vs. CIT (280 ITR 512)(Guj)

In light of positive evidence like existence of creditors, their IT file numbers, confirmation letters from creditors etc utilization of fictitious hundies would not make the assessee liable u/s 68 CIT vs. S.C. Ghosal (106 ITR 980)(Cal) Production of letters of confirmation by creditors, discharged hundies and particulars of creditors along with their IT file numbers is sufficient to discharge the burden of proof CIT vs. Orissa Corp. P. Ltd. (159 ITR 78)(SC)
Where the creditor is a not a man of means and barely able to sustain by himself, explanation regarding cash credits could not be accepted as genuine Gujarat Fertilisers vs CIT (210 ITR 594)

Onus in case of receipts of gifts

Section 68 applicable where explanation offered by assessee found to be unacceptable and gifts from NRIs not real even though the money may be routed through banking channel CIT vs. P. Mohanakala & Ors. (291 ITR 278)(SC) Assessee failed to prove relationship with donor working abroad as well as failed to state full name and other details of donor gift received cannot be treated as genuine Tirath Ram Gupta vs. CIT (304 ITR 145)(P&H); Subhash Chander Sekhri vs. Dy. CIT (290 ITR 300)(P&H) Failure to prove genuineness of gift, capacity of donor to make gift and source of gift Gift cannot be considered as genuine Yash Pal Goel vs. CIT (310 ITR 75)(P&H); CIT vs. Anil Kumar (292 ITR 552)(Del); CIT vs. R.S. Sibal (269 ITR 429)(Del) Where identity of donor, relationship with assessee, genuineness of transaction is proved, section 68 cannot be invoked CIT vs. Dr. R.S. Gupta (165 ITR 36)(SC); Sonia Bhatia vs. State of UP (AIR 1981 SC 1274); CIT vs. Kulwant Industries (214 CTR 223)(P&H)

Shifting of onus on to department

Once source of credit, genuineness of remittance and identity of remitter established, onus shifts on department to counter the same Bedi & Co. Pvt. Ltd. vs. CIT (144 ITR 352)(Kar), Roop Chand Manoj Kumar vs. CIT (235 ITR 461)(Gau) Mere absence of explanation not enough decision to made after applying the tests laid down by Supreme Court in CIT vs. P.K. Noorjahan (155 CTR 509) Mitesh Rolling Mills (P) Ltd. (258 ITR 278)(Guj) Burden of assessee is to prove genuineness of the transactions and creditworthiness of the creditor he is not required to show the source of his creditor or prove creditworthiness of his creditors creditor Nemi Chand Kothari vs CIT & Anr (264 ITR 254)(Gau) When assessee discharges his onus and proves genuineness of transaction, he cannot be further required to prove source of the source of money out of which loan was given S Hastimal vs CIT & Anr (49 ITR 273)(Mad.)

Rejection of Proof

Explanation, when can be rejected?

Where explanation is prima facie reasonable, it cannot be rejected except on cogent grounds Lalchand Bhagat Ambica Ram vs. CIT (37 ITR 288)(SC) Initial onus discharged by assessee by submitting reasonable evidence before rejecting evidence, Department must point out inherent weakness in such explanation or rebut it by some other information - It cannot act unreasonably and convert good proof into no proof Sreelekha Banerjee vs. CIT (49 ITR 112)(SC), While judging reasonableness, Department to look into surrounding circumstances to know the facts matter to be considered by applying test of human probabilities Sumati Dayal vs. CIT (214 ITR 801)(SC)

Separate addition despite estimation of business income

Separate addition despite addition made on income estimated?

Separate addition may be made even where books are rejected and income is determined on an estimation basis Source of estimated income is business while there is no source for cash credit Kale Khan Mohammed Hanif vs. CIT (50 ITR 1)(SC) There is nothing in law to prevent an ITO to tax both unexplained cash credit and business income estimated by ITO after rejecting books of account as unreliable in case of unexplained cash credit, ITO can hold the same to be the income of assessee without further burden to prove its source it is for assessee to show that cash credit is from source which has already been taxed CIT vs. Devi Prasad Vishwanath Prasad (72 ITR 194)(SC)

Scope of unexplained cash credit

Unexplained cash credit, covers

Section 68 is not confined to cash entries in accounts fictitious liability created by bogus purchases can also be covered u/s 68 V.I.S.P. (P) Ltd. vs. CIT & Anr. (265 ITR 202)(MP) Operation of section 68 cannot be restricted to sums borrowed alone section 68 can be invoked in credit in assessees capital account Dharmavat Provision Stores vs. CIT (139 ITR 700)(Bom) Share Application, Increase in Share Capital, whether covered??

Cash Credit and Share Capital

Credit in share application whether covered?

The words any sum found credited in the books in section 68 has a wide scope and gives the assessing officer powers to inquire in nature and source of amount irrespective of nature given by the assessee; this would also cover share application money account Sophia Finance Ltd (205 ITR 98) (Del HC) Provisions of section 68 are applicable to share application money received by assessee company Dhar Ispat (P) Ltd. (180 CTR 491) (MP) Genuineness of share application money not established where shareholder companies were found non-existent - amounts paid by such companies received by them on same day - addition u/s 68 justified Rathi Finlease Ltd. (215 CTR 429) (MP)

Credit in share application addition not sustainable

Even if it be assumed that subscribers to share capital were not genuine, share capital cannot be regarded as undisclosed income Stellar Investment Ltd. (192 ITR 287) (Del. HC)

This decision was overruled by Delhi High Court in case of Sophia Finance Ltd. (205 ITR 98); However, the Supreme Court in affirmed the decision of the High Court in CIT vs. Stellar Investments (251 ITR 263) (SC)

Supreme Court decision of Stellar Investments followed by Madras High Court in Electro Polychem Ltd. (294 ITR 661)

Share application money received from alleged bogus shareholders, names given to the AO Department free to proceed against such shareholders and not as unexplained income in hands of company Lovely Exports (P) Ltd. (216 CTR 195) (SC)

Cash Credit and Past intangible additions

Set-off of cash credits against intangible additions?

If unexplained cash credits can be reasonably related to amount covered by intangible additions made in the past or in that year, necessary set-off may be given by authorities on that account Anantharam Veerasinghaiah & Co. vs. CIT (123 ITR 457)(SC) approving Lagadapati Subba Ramaiah vs. CIT (30 ITR 593)(AP) and S. Kuppuswami Mudaliar vs. CIT(51 ITR 757)(Mad) and followed by CIT vs. Nabadwip Chandra Dey (190 ITR 133)(Gau)

However, burden to establish the nexus of unexplained cash credit and past intangible additions is on the assessee automatic adjustment of unexplained cash credit against available past intangible additions is untenable CIT vs. Kulwant Kaur & Ors. (121 ITR 914) (Del)
Only if unexplained cash credit can be reasonably related to the amount covered by intangible addition, necessary set-off be allowed Late R. Dalmia through LR vs. CIT (172 CTR 180)(Del) relying on Supreme Courts decision in CIT vs. Manik Sons (74 ITR 1)

Cash Credit Income from business or IFOS

Income from business or other sources?

Section 68 does not provide that cash credits should necessarily be deemed to profits of business for which books are maintained cash credits may be assessed as business profits or income from other sources CIT vs. Orissa Corpn. P. Ltd. (159 ITR 78)(SC) and CIT vs. Anupam Udyog (142 ITR 133)(Pat.) There is no rule that amount credited in business account is to be taken as receipt from business classification would depend upon evidence and explanation of assessee Kalooram Tirasilal vs. ITO (59 ITR 308)(MP), Ratanchand Dipchand vs. CIT (38 ITR 188)(MP) Unless there are strong reasons for connecting unexplained cash credits with known source of income of assessee, it should be treated as income from other sources D.C. Auddy & Bros. vs. CIT (218 ITR 713)(Cal)

Thank You