There is no embargo in making the genuine investments out of the explainable source of funds. But many times investments are being made out of unaccounted funds and black moneys are being settled in such investments. Section 69 is the weapon in the armoury of the revenue department to detect the tax evasion in respect of clandestine investments made by the assessee & naturally which are not recorded in the books of accounts, if any, maintained by him. Section 69 also gives power to AO to treat the value of investments as the income of the assessee if the assessee does not offer any explanation or the explanation offered by him is not satisfactory. This is a very wide power given to Assessing Officer.
Section 69 does not provide any guideline about the extent and length of the discretionary power given to AO in the matter of treating the investment as income which is unexplained or unsatisfactorily explained by the investor-assessee. Therefore, Assessing Officer is expected to appreciate the reasonable explanation offered to him, the evidences produced before him about the nature and source of investment and he can not make the addition merely on surmises, conjectures as well as without any supporting evidences. (Ashok Kumar Rastogi V CIT (1991) 100 CTR 204.)
For, sake of convenience, Section 69 has been reproduced below:-
“Where in the financial year immediately preceding the assessment year the assessee has made investments WHICH ARE NOT RECORDED IN THE BOOKS OF ACCOUNT, if any, maintained by him for any source of income, AND the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”
The above section indicates that in order to be an income, there must be fulfillment of two conditions since the word “and” has been used in the section. The investments made in the current year must not be recorded in the books of accounts AND the explanation not offered or not satisfactorily offered. In addition to the same, it may be noted that this is a deeming provision which means that even though the assessee has no real income it may be deemed to be his income. The provision which is deeming is always rebuttable. The use of the words ‘if any’ in the section indicates that it is not compulsory that the assessee must have maintained the books of accounts. He can prove the genuineness of the investments by some other evidence which proves investment out of disclosed source.
The word ‘explanation’ indicates that the opportunity of being heard must be given to the assessee to prove the nature and source of investments. The use of word ‘may’ and absence of the word ‘shall’ in the section indicates that the Assessing Officer has discretion to treat the particular investment as the income of the investor-assessee depending of the facts and circumstances of each case at a particular situation of time.
It may be noted that the AO is under obligation to give reasons for not accepting the explanations offered by the assessee. It is also to be noted that the revenue can not rely on assessee’s statements to third parties. It is worth noting that the word “Investment” has not been defined in Section 69 itself. Therefore, Investment should be construed in general meaning. It is just possible that on the day of search the Investment may not be physically available but the said Investment might be in existence in earlier Financial Year e.g. Search has taken place on 08/03/06 where the Fixed Deposit of 14/05/02 having the date of maturity as 13/05/05 is located. Section 69 would be applicable.
Situation Where the Books of Accounts Not Produced Before AO:- It may happen that even though the assessee has recorded the investment in the books of accounts, submitted the Balance Sheet, P & L A/c etc. with the Return of Income but he fails to produce the books of accounts before AO during the course of assessment proceedings and AO makes the addition under section 69 with the contention that such addition has been made since the investment made, recorded in the books of accounts could not be verified with the books of accounts due to failure of assessee to produce before him during the course of assessment proceedings. In such a situation it may be argued that Balance Sheet and Profit and Loss Accounts are the abstract of books of accounts maintained by the assessee. In case of Tax Audit Cases, the Tax Audit Report is the strong evidence of adequate maintenance of books of accounts duly audited by the auditor and all the additions made in the investments are duly verified by the auditor during the course of audit process and duly certified by the auditor through audited Balance Sheet and Tax Audit report.
Distinction Between Section 68 & 69
Point of Distinction
Record in Books of Account
Amount should be credited in the Books of Accounts, if not credited, then Section 68 is not applicable.
The investment should not be recorded in the Books of Accounts, if recorded, Section 69 is not applicable.
Maintenance of Books of Accounts
Optional since the words ‘if any’ used in the Section itself.
Explanation to AO
AO can ask for explanation only in case any sum is credited in the books of accounts.
AO can ask for explanation only if investment is not recorded in the books of accounts. Meaning thereby such investment should be outside the books of accounts, if any, maintained by the assessee.
If the sum credited is not explained or not explained satisfactorily, AO may treat the sum credited as income but evenif the sum credited is satisfactorily explained, then also on Violation of provisions of Section 269SS &/or Section 269T may be applicable & penalty u/s 271D may be initiated which is equal to the amount of default.
After making the addition , the AO may initiate the penalty under section 271(1)(c) either for concealment of particulars of income or for furnishing inaccurate particulars of income depending on the nature of addition made by him.
Burden of Proof :- The initial burden lies on the assessee to offer the explanation in respect of the concerned investment. Therefore, it is the duty of the assessee to offer the relevant explanation (with suitable proof) as regards the investment in question. It is the right of the Assessing Officer to frame the opinion whether the explanation offered by the assessee is acceptable or otherwise.
Opportunity of Being Heard – The Imperative Condition Before Making Addition :- Since the words used in the Section 69 are “assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory” conspicuously indicates that there must be an opportunity of being heard to the assessee.
“For, applying Section 69, the Assessing Officer must first come to a finding that the assessee made investments which are not recorded in the books of account and thereafter call for an explanation from the assessee about the nature and source of the investments and if he finds that no such explanation was furnished by the assessee-firm or the explanation offered by the assessee was not satisfactory, he could treat the value of the investments to be the income of the assessee-firm of the financial year in which it has made the investments. The Assessing Officer had come to the conclusion that the assessee-firm had made investments during the financial year previous to the assessment year only on an analysis of different figures of assets and liabilities taken from the balance-sheet and the party ledgers and not on the basis of any material or information that the appellant had in fact made investments in some form or the other such as immovable and movable assets which were not recorded in the books of the assessee-firm, the source and nature of which the appellant had failed to explain to the satisfaction of the Assessing Officer. Therefore, section 69 could not be applied to treat the said sum as income
Year of Taxability
The phase incorporated in Section 69 “Such Financial Year “ is very significant. The question is how to determine “Such Financial Year”. The amount of unexplained investment will be deemed to be the income of the investor-assessee of the financial year in which said investment is made by him. Say Bank Fixed Deposit issued in favour of assessee on 07/08/02 is located on 07/05/04. It may be deemed income for the financial year 2002/03 which is the year in which the assessee had made the deposits.
Splitting of Investment
It is possible to argue that the unexplained investment may be the deemed income of more than one financial years e.g. Bank FD dated 03/05/2004 of Rs.1,15,000/- is located. The assessee could say that the said FD is the result of the earlier FD dated 04/05/2002 of Rs.1,00,000/-.
Existence of Investment
It is not necessary that on the day of detection of investment, the same must be in existence.
Addition to the Extent of that Part for Which Explanation offered is not Satisfactory
Accordingly, No Addition Can Be Made U/s 69.
AO Can Ask for Explanation U/s 69
AO Can Not Ask for Explanation U/s 69