According to section 68 of Income Tax Act 1961, 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 of the same or the explanation offered by him is not satisfactory in the opinion of A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year. An attempt here is made to understand the provisions of section 68 of Income Tax Act, 1961 herebelow:
There must exist books of accounts before making addition u/s 68: The addition under u/s 68 can be made on the basis of unexplained cash credit found in the books of the asseessee, hence existence of books of an assessee is a condition precedent before an addition u/s 68 can be made.
Now the question is what may be termed as books of the assessee. As per section 2(12A) of Income Tax Act, books includes ledgers, day books, cash books, whether kept in the written form or as print outs of data stored in floppy, disc, tape or any other electro-magnetic data storage device.
In Central Bureau of Investigation v. V.C. Shukla  3 SCC 410, the Supreme Court has held that ‘Book” ordinarily means a collection of sheets of paper or other material, blank, written or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as book for they can be easily detached and replaced.
Books of accounts must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT  171 ITR 532 (P&H), it was held that a perusal of section 68 would show that the expression books has been used with reference to the word assessee. In other words, such books of account have to be books of the assessee himself and not of any other assessee. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income u/s 68 in the hands of the partners.
Bank Pass book is not books of account for the purpose of section 68. In CIT, Poona v. Bhaichand H. Gandhi 141 ITR 67 (Bom.) it was held that the pass book supplied by the bank to the assessee cannot be regarded as the book of the assessee, that is, a book maintained by the assessee or under his instructions. Therefore a cash credit for the previous year shown in the assessee’s bank pass book but not shown in the cash book maintained by the assessee for that year, does not fall within the ambit of section 68 of Income Tax Act, 1961, and as such the sum so credited is not chargeable to tax as the income of the assessee of that previous year.
What will be the position where books of accounts rejected and tax is levied on estimated basis, can there be any addition for cash credit made u/s 68. In Kale Khan Mohammad Hanif v. CIT 50 ITR 1 (SC), it was held that there is nothing in law which prevents the Assessing officer in an appropriate vase in taxing both the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account of the assessee as unreliable. In CIT v. Devi Prasad Vishwanath Prasad  72 ITR 194, 196 (SC) it was held that whether in a given case the Assessing officer may tax the cash credit entered in the books of account of the business, and at the same time estimate the profit must, however, depend upon the facts of each case.
It is not necessary that books of account must be rejected before making any addition u/s 68. In Devinder Singh v. ACIT  101 TTJ 505 (ITAT-Asr) it has been held that there is nothing in section 68 that books of account must be rejected before making an addition u/s 68. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt/credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the A.O.
Additions in the Partner’s capital account-whether firm is liable to explain and whether addition can be made to firm’s income in such case u/s 68? In CIT v. Metachem Industries  245 ITR 160(MP), it has been held that where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged.
Once it is established that the amount has been invested, by a particular person, be he a partner or an individual then the responsibility of the assessee firm is over. The assessee firm cannot ask the person who makes investment, whether the money invested is properly taxed or not. If that person owns the entry then the burden of the assessee firm is discharged. It is open to the A.O to undertake further investigation with regard to that individual who has deposited the amount.
In India Rice Mills v. CIT 218 ITR 508, 511 (All.) it was held that where the capital contributions are made by the partners prior to the commencement of the business by the assessee-firm, it is for the partners to explain the source of such capital contributions and if they fail to discharge such onus then such capital contributions, although entered in the books of accounts of the assessee-firm, cannot be regarded as income of the assessee-firm.
Proper enquiry must be made by A.O before making any addition u/s 68: The A.O must make proper enquiry before making any addition u/s 68. In Khandelwal Constructions v. CIT 227 ITR 900 (Gau.) it has been held that section 68 of Income Tax Act, 1961, empowers the Assessing officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained.
The assessee is also entitled to cross-examine any person whose statement has been recorded by the A.O and such statement is proposed to be used by the A.O.- CIT v Eastern Commercial Enterprises 210 ITR 103 (Cal.).
If some depositor or any other person with whose evidence cash credit in question can be proved, does not cooperate in the assessment proceedings with the assessee concerned then assessee can also take assistance of section 131 of the Act wherein ample powers have been given to the A.O for compelling the attendance of witnesses.
Onus of proof : Prima facie onus is always on the assessee to prove the cash credit entry found in the books of account of the assessee. In land mark cases like Kale Khan Mohammad Hanif v CIT 50 ITR 1 (SC), Roshan Di Hatti v CIT  107 ITR (SC) it has been held that the law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee, is on him. Where the nature and source thereof cannot be explained satisfactorily, it is open to the revenue to hold that it is the income of the assessee and no further burden is on the revenue to show that the income is from any particular source.
An assessee can discharge his onus of proof by proving three things: Identity of the creditor, capacity of the creditor and the genuineness of the transaction in question. Once the assessee proves all three things his onus is discharged. It is also to be noted that there are many case laws wherein it has been held that the assessee only needs to prove the source of an entry he need not to prove the source of the source or the creditor’s creditor.
In ITO v Suresh Kalmadi  32 TTJ (Pune) TM 300 it was held that where identity of creditor is established and entry shown to be not fictitious, the burden shifts on to the department to show as to why the entry still represented the suppressed income of the assessee. The assessee cannot be called upon to prove the worth of his creditor’s creditor. The fact that in the books of the creditors exactly the same amounts had been credited in the name of other parties and that immediately after repayment, the creditors withdrew the money could not lead to any adverse inference when this was their modus operandi and assessee’s case was not the solitary transaction.
Merely proving the identity of the creditor does not discharge the onus of the assessee if the capacity or creditworthiness of the creditors is not proved. The assessee also has to prove the capacity to give credit of the creditor. For example in Shankar Ghosh v ITO  23 TTJ (Cal.) 20 the assessee failed to prove the capacity of the person from whom he had allegedly taken loan. Further the assessee could not explain the need for the loan and the manner in which the loan amount was spent. The creditor issued two letters demanding repayment but did nothing on non compliance therewith.- such letters did not therefore carry any conviction about the explanation of the assessee. Loan amount was rightly held as assessee’s own undisclosed income.
Assessee also has to prove the genuineness of the transaction in question in addition to the identity and capacity of the creditors. In CIT v Sahibganj Electric cables (p) Ltd.  115 ITR 408 (Cal.) where the amounts of loan received by cheques and repayments also made by cheques through asessee’s bankers, the creditors gave confirmation letters mentioning therein their income tax file numbers. ITO without making any further enquiry, disbelieving the evidence of the assessee made addition. ITAT held the additions not justified as the assessee discharged the onus. High Court held that Tribunal is justified in deleting the addition.
Conclusion : Whether any additions u/s 68 can be made, depends upon the facts of every case. Hereinabove only an attempt has been made to explain section 68 by referring to some of the case laws.
AMIT BAJAJ ADVOCATE
Bajaj & Bajaj Advocates
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Milap Chowk, Jalandhar city, Punjab (India)