UNEXPLAINED CASH CREDIT – IN DEPTH ANALYSIS OF SECTION 68

UNEXPLAINED CASH CREDIT – IN DEPTH ANALYSIS OF SECTION 68

Section 68 of Income Tax Act is one of the debated section which brings huge numbers of litigation and judgements, especially in case of Demonetisation, we have seen a numbers of assessment order have been passed by the assessing officer invoking section 68 and consequently applying section 115BBE.

We are going to get in depth insights of each important word used in the section and its meaning according to different judgements, as this will be helpful for tax professionals to understand it for the purpose of filing the appeal before Commissioner of Income Tax (Appeal) and taking the valid and effective grounds of appeal.

also read IMPORTANT INCOME TAX (DIRECT TAX) AMENDMENTS (SINCE 2019)

also read Practical Issues in Implementation of Section 50C of the Income Tax Act 1961

LET’S GET STARTED

SCOPE OF SECTION 68

✔️ Where any sum found credited
✔️ In the books of the 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 satisfactory in the opinion of A.O.,
✔️ then the sum so credited may be charged to tax as the income
of that previous year

  1. Credited: –
    Credit always results as an increase in liability in the Balance
    Sheet. Therefore, the realisations from the sundry debtors
    cannot be treated as cash credits. Realisation from the sundry
    debtors would reduce the sundry debtors appearing on the
    “assets” side of the balance sheet. Supporting Judgement
    favouring the above is Delhi ITAT – Racmann Springs (P.) Ltd vs
    DCIT [1995] 55 ITD 159 (DELHI)
    ..

2. Books of the Accounts
Definition of Books as per section 2(12A): –
“Books or Books of accounts” 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.
✔️ So, the precedent condition for invoking the provision of
Section 68 is the existence of Books of account. {Guwahati
HC – Anand Ram Raitani vs CIT [1997] 223 ITR 544
(Guwahati)}

✔️ Assessee can file an appeal with a valid ground that he is not
liable to maintain books and A.O. has made addition by
invoking provisions of Section 68.
Now,
A) Can Bank Pass Book be considered as books of account?
✔️ Pass Book supplied by the bank to their accountholders is only
a copy of transaction with respective bank maintained by the
Bank.

✔️ It neither can be said books is maintained by the bank as an
agent of accountholder nor can it be maintained by the bank
under the instruction of bank.
✔️ Hence, it is justified to say that bank passbook could not be
regarded as books of assessee. {CIT v Bhaichand N. Gandhi
[1983] 141 ITR 67 (Bom.)}

B) What if assessee is liable to maintain Books, but not
maintained by him?

✔️ Here, assessee can’t take advantage of his own wrong.
✔️ If he is liable to maintain books as prescribed u/s 44AA and he
has not maintained the same, then onus lies on the assessee to
prove the source of amount received and nature thereof.
{Bombay HC – Arunkumar J. Muchhala vs CIT [2017]
85 taxmann.com 306 (Bombay)}


C) What if A.O. has rejected the books and still making addition
u/s 68?

✔️ A.O. can’t take two ways to apply best judgement by applying a
flat rate as well as relying on books for the purpose of adding
unexplained cash credits. Supporting judgement in favour is
Maddi Sudarsanam Oil Mills Co. v. CIT v Bhaichand N. Gandhi
[1959] 37 ITR 369 (AP).

  1. Previous year: –
    ✔️ Section 3 of the Act defines that previous year means the
    financial year immediately preceding the assessment year.
    ✔️ Now suppose A.O. is making addition where assessee has
    deposited cash in his bank account from opening balance of
    cash-in-hand which doesn’t pertain to previous year for which
    such addition is made by A.O.
    ✔️ It is a finding of fact that if credit balance appearing in books
    of assessee doesn’t pertain to impugned year, then A.O. is not
    justified in making addition u/s 68 of the Act.
    ✔️
    Supportive judgement {Delhi HC – CIT vs Usha Stud
    Agricultural Farms Ltd. [2009] 183 Taxman 277 (Delhi)}
  1. No explanations about the nature and source
    ✔️ It is very impractical for a small businessman who deals in cash
    can maintain the name, address, PAN of purchaser to prove the
    genuineness of transaction.
    ✔️ In case of cash sales transaction, seller hardly needs to record
    the name and address except in few transactions mentioned in
    Rule 114B.
    ✔️ The failure to maintain the identity, prove the credit worthiness
    of customers or genuineness of transactions of cash customer
    can’t be regarded as circumstances giving rise to suspicion as
    there is no requirement for the assessee to maintain identity
    of cash customer.

    ✔️ This can be relies based on the judgement of Bombay High
    Court – R.B. Jessaram Fatehchand (Sugar Dept.) v. CIT [1970]
    75 ITR 33 (Bombay HC) and Kishore Jeram Bhai Khaniya, Vs
    Income Tax Officer (ITAT Delhi) (ITA No. 1220/Del/2011)
  1. Assessee has deposited cash in bank on account of cash sale.
    Can such sale be added u/s 68?

    ✔️ If A.O. has doubted the cash sales and accordingly made
    addition u/s 68 and assessee has already disclosed such sale in
    P&L A/c and offered for taxation.
    ✔️ Now A.O. can’t treat such sale as undisclosed income and no
    addition u/s 68 can be made once again in respect of that sale
    as it has already been offered for taxation. It tantamount to
    double taxation of same Delhi High Court – CIT vs KAILASH
    JEWELLERY HOUSE (ITA 613/2010)
  1. Cash deposit was on account of cash sale but no disclosed in
    P&L A/c by the assessee.

    ✔️ Here if A.O. finds that cash deposit was on account of cash
    sales, then only margin of profit should be added on such cash
    deposit. Delhi ITAT – ITO Vs. Shri Pankaj Aggarwal [ITA No.
    7091/Del/2014]
  1. Why unrecorded sale to be added u/s 68 and not u/h PGBP?
    ✔️ Even if profit element is added in total income of the assessee
    towards unaccounted sales, it can only be assessed u/h PGBP
    and not u/s 68 just to apply section 115BBE if all other
    conditions of section 68 is fulfilled.
    ✔️ Delhi ITAT – Racmann Springs (P.) Ltd vs DCIT [1995] 55 ITD
    159 (DELHI)
  1. Following are the situations where it is very difficult for the
    A.O. to make addition u/s 68: –

    (a) If stock exists and it is not proved by backdating.
    (b) A.O. accepted the books as well gross profit maintained
    by the assessee.
    (c) Proper invoice was issued and GST or VAT returns has
    been properly filed by assessee.
  1. Cash Deposit out of cash withdrawals: –
    ✔️ Assessee is only liable to explain why he kept such cash in hand.
    If there is higher time between the withdrawal and deposit, it is
    very hard for the assessee to explain and prove the
    genuineness.
    ✔️ But merely time gap between withdrawal and deposit of cash,
    explanation offered by the assessee couldn’t be rejected unless
    A.O. has evidence that such amount has been used for any
    other purpose.
  1. Burden of Proof: –
    ✔️ Initial burden lies on the assessee to prove the authenticity for
    transaction.
    ✔️ Subsequent to discharge of initial burden by the assessee, onus
    shifted to department to prove that explanation offered by the
    assessee.

Thanks for reading “UNEXPLAINED CASH CREDIT – IN DEPTH ANALYSIS OF SECTION 68

This article will be helpful for those tax professionals especially who
are going to CIT(A) for demonetisation cases. It will clear all the
doubts related to section 68 and its implications on different cases.
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