WHETHER LOOSE SHEETS FOUND IN SEARCH WITH THIRD PARTY WILL CONSIDERED AS BOOKS OF ACCOUNTS.

Dear friends, we know that 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. [ Section 68 of the Income Tax Act,1961]

Please note that when provisions of Section 68 are made applicable, the assessee shall be liable for income tax be liable to a penalty for concealment of income under Section 271(1) (c), which shall not be less than and more than 300% of the tax sough to be evaded by not disclosing those income.

PROVISIONS OF SECTION 68;

Cash credits.

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:

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

CONDITIONS TO BE FULFILLED FOR APPLICATIO OF PROVISIONS OF SECTION 68;

Below mentioned two conditions must be satisfied;

1) The assessee maintains books of accounts; and

2) A credit entry occurs in such books

And assessee is not able to explain source of credits or explanations given by the assessee were not justifiable or satisfactory in view of Assessing Officer in this case the undisclosed or unexplained credits in the books of accounts of an assessee is considered as Undisclosed or Concealed Income and same shall be chargeable to tax and liable to penalty under provisions of Section 271(1) (c) of the Income Tax Act, 1961.

Notes:

1. There is no difference between commercial loans or non-commercial loans;

2. Whether amount credited in assessee own Capital Account or any third-party account both are considered if not explained properly;

3. The expression “Books of the assessee”, appearing in Section 68 refers to the assessee whose books show the credit entry;

4. A perusal of this section would show that in relation to the expression “Books”, the emphasis is given on the word “Assessee”. It means that the “Books”, to be considered here is the “Books of the Assessee”and not other books of accounts or documents found with any third party;

5. Where such credits occur, the section enacts that the assessee should explain to the AO satisfactorily the nature and source of the sum so credited and establish that the sum in question is not an income.

6. If assessee is not able to explain or his explanation give did not satisfy the AO, then credits occur in the books will be treated as income of the assessee for the previous year under consideration.

From above we have understood the concept of “Books of the Assessee”, it means that credit must occurs in the books maintained by the assessee and no other books and accounts, which may be maintained by the third parties.

SECTION 132 OF INCOME TAX ACT,1961 this Section confers upon the Income Tax Authorities wide powers of search and seizure and in enforcement of this provision the applicable provisions of Criminal Procedure Code will be applicable.

PROVISIONS IN THE INCOME-TAX ACT, 1961, WHERE A SPECIFIC REFERENCE IS MADE OF EVIDENCE ACT:

Section 131.Power regarding,discovery, production of evidence, etc

Section 132. Search and seizure.

Section 132(4A). Presumption – Books of account, documents etc.

Section132A. Power to requisition books of account,etc.

Section 132B. Application of seized or requisitioned assets.

Section 133A. Power of survey.

Section136. Proceedings before income-tax authorities to be judicial proceedings.

Section 142. Enquiry before assessment.

Section143(3). Assessment.

Section 250(4). CIT(A)- Rule 46A- Additional evidence.

Section 254(1): Appellate Tribunal- ITAT, R, 18, 29.

Section 278E. Presumption as to culpable mental state.

Section292C.Presumption as to assets, books of account, etc.

PROVISIONS OF EVIDENCE ACT 1872 – RELEVANCE TO INCOME-TAX PROCEEDINGS

Section3: Interpretation clause, Document, Evidence, Electronic records

Section4 May presume shall presume conclusive

Section5: Evidence may be given of facts in issue and relevant facts

Section17. Admission defined

Section21. Proof of admission against persons making them, and by or on their behalf.

Section 24: Confession caused by inducement, threat or promise, when irrelevant in criminal proceedings

Section34: Entries in books of accounts including those maintained in electronic form when relevant

Section 35: Relevancy of entry in public record or an electronic record made in performance of duty.

Section45. Opinions of experts

Section45-A. Opinion of Examiner of Electronic evidence.

Section61. Proof of contents of documents

Section62. Primary evidence

Section63. Secondary evidence

Section65-A. Special provisions as to evidence relating to electronic record.

Section65-B. Admissibility of electronic records.

Section74. Public documents

Section75. Private documents. – All other documents are private.

Section76. Certified copies of public documents

Section91. Evidence of terms of contracts, grants and other dispositions reduced to from documents.

Section92. Exclusion of evidence of oral agreement.

Section94. Exclusion of evidence against application of document to existing facts. –

Section 106. Burden of proving fact especially within knowledge.

Section114. Court may presume existence of certain facts.

Section126. Professional communications

Section 129.Confidential communications with legal advisers

Section131. Production of documents or electronic records which another person, having possession, could refuse to produce. –

Section132. Witness not excused from answering on ground that answer will criminate.

Section147.When witness to be compelled to answer.

CIRCUMTANCES IN WHICH SEARCH AND SEIZURE CAN BE CONDUCTED [SEC 132(1)]

The Director General or Director or Chief Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner, has in his position any information through which he has reason to believe that –

a) A person to whom a summon under Section 131(1) or notice u/s 142(1) has been served to produce books of account (or other documents) has failed (or omitted to produce or cause to be produced) the said Books of Account (or other documents) or;

b) A person to whom a summon under section 131(1) or notice u/s 142(1) has been (or might be) issued is not likely to produce (or cause to be produced) any Books of Account or other documents, which will be useful for (orrelevant) any proceedings under the act; or

c) A person is in possession of money, bullion,jewellery or other valuable article or thing and such property represents wholly or partly income or property, which has not been disclosed or shown or would not be disclosed.

NOTE: while going through above provisions we find that

1) The Authority must be concrete material in their possession that there will be undisclosed income or there would be concealment of income by the assessee,on which they have made their decision to allow Search and Seizure;

2) It is abundantly clear from various Judicial Decision, that there has to be specific information rather than vague one. The opinion should be formed on subjective basis on which a prudent person can rely on their acts;

3) The information should be in possession of Authorities in advance and authentic and capable of giving rise to interference that a person is in possession of money etc., which has not been (or would not be) disclosed for the purpose of the Act;

4) The formation of opinion will be in good faith and not on mere pretence. There must be a reference among the information or material and belief that there is undisclosed income on behalf of the assessee;

The Income Tax Authorities may conduct Search and Seize Books of Accounts and other relevant details in the various premises of the assessee and as well as his suppliers, vendors, relatives, members, creditors or some other related persons etc., where they believe that information related to undisclosed income will be found and undisclosed money etc., are in their possession.

Please note that the Books of Accounts or other documents seized from third parties that are creditors, vendors,members, relatives or associates of assessees etc., are not the Books of Accounts maintained by the assessee as we have learnt while reading applicability of provisions of Section 68 of the Income Tax Act, 1961. The provisions of Section 68 clearly provides that the “Books of Account maintained by the Assessee” should be considered. There are various Judicial Decisions which have been overruled above requirements.

LETS’CONSIDER WHETHER LOOSE SHEETS ARE BOOKS OR NOT;

Section 158B(b):  defines Undisclosed Income refers to not only assets found but also income based on entry in books of account or other documents or transactions representing income. Similarly, Section 158BB (1) provides for computation of Undisclosed Income refers to not only evidence in the form of Books of Account or documents but also” such other materials” or “information” as are available with the AO. Loose Papers may come in the category of “Such other materials”, following “Books of Account” and “Documents”.

But it is a fact, such loose slips, papers, diaries or documents have been a source of information for large additions and often become contentions issues in post-search assessment /block assessment as to extent of reliance to be placed and the evidently value of such loose papers or documents normally found during the course of the search.

Let’s consider definition of “Document”- This is defined in Section 32 of Indian Evidence Act to mean- any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of those means, intended to be used or which may be used for the purpose of recording that matter. The word “Document“has also defined in General Clauses Act.

Ramji Dayawala & Sons(P) Ltd. Vs. Invert Import AIR 1981 SC 2085    it was held by Supreme Court that mere proofof handwriting of a document not tantamount to a proof of all the contents or the facts stated in the documents, if the truth of the facts stated in a document is in issue, mere proof of the handwriting and execution of the document would not furnish evidence of the truth of the fact or contents of the document. The truth or otherwise of the fact or contents sostated would have to be proved by admissible evidence i.e., by the evidence of those persons who can vouchsafe for the truth of the fact in issue.”

Mohd. Yusuf (Sir) Vs. D [AIR 1968 Bom 112]; the apex court held that the contents contained in document is hearsay evidence unless the writer is examined before the court. The Hon’ble Court, thereof held that the attempt to prove the contents of the document by proving the signatures of the handwriting of the author thereof is to set at nought, the well-recognized rule that hearsay evidence cannot be admitted. If we consider the said piece of paper seized during the search in light of definition of the word “ Document” as given in the Indian Evidence Act and General Clauses Act  and truthfulness of the contents thereof in the light of the aforesaid decision of the Hon’ble SC , we find that said paper contains jottings of certain figures by the same dose not describe or express the substance of any transaction and even if the said paper has been seized from the possession of the assessee the contents thereof are not capable of describing the transactions the way AO has deciphered them without support of corroborative evidence of the parties attributed to alleged transaction. The said paper, therefor does not come within the compass of definition of “Document”, to be used as an evidence. The papers seized have no evidently value and hence same cannot be a basis to tax undisclosed income.

LET’S CONSIDER DEFINITION OF “BOOKS OF ACCOUNT”;

Black’s Law Dictionary- “Books of Account”-“A details statement, in the nature of debits and credits between persons; an account or record of debits and credits kept in a book; a book in which detailed history of business transaction is entered; a record of goods sold or services rendered; a statement in details of transaction between the parties;

Black’s Law Dictionary- “Book entry”- “anotation, generally in figures or numbers, made in accounting journals, consisting, in double entry book keeping, of debits and credits.

It was held by Hon’ble SC that: – Piece of papers seized in search has not been proved to be written by the assessee relating to various business transactions in the normal course of business and, therefore, said papers also does not fall within the definition of books of account having creditability of its acceptance without support of corroborative evidence which admittedly missing.

Patel (D.A.) Vs. DCIT (2000) 72 ITD 340(Mum): – it was concluded with reference to sheet of paper found during the search by AO that the word “R.S.” figuring with the sheet of belongs to the appellant, because he belonged to “Radhaswamy”, cult and hence it belongs to him, but such an inference was not found sustainable on the basis of such slender evidence, so that the addition based on the sheet of paper was deleted.

Chander Mohan Mehta Vs. ACIT (1999) 65 TTJ (Pune) 327: -, post search enquiries revealed that the assessee was engaged in money laundering activities admitted during the enquiry, so that these loose papers, which were otherwise dumb by themselves, cannot be disregarded, especially since some of entries therein also was corroborated. The Tribunal further held that confessional statement together with the papers have to be considered in their entirety, so that the borrowers, which reduced liability have also to be accepted.

Pankaj Dahyabhai Patel (HUF) Vs. ACIT (1999) 63 TTJ (Ahm) 790- where papers were not seized from house of the assessee not was in his handwriting, the inference of on-money receipt based on such paper was not justified. Additions based on loose papers without corroborative evidence, it was held, byTribunal, to be not sustainable.

PCIT Vs. Delco (India) Pvt. Ltd. (2016) 67 Taxmann.Com 357 (Del)-it was held that no addition could be made under Section 68 on the basis of loose papers found during search in this case indicating assessee’s transaction with a company ,when assessee not only denied having any dealing with the said company but also produced all necessary details for AO to make necessary inquiries and a letter from director of that company confirming that the said company did not have any transaction with assessee.

NOTE:1

It is duty of assessee to establish genuineness of sum found to be credited in his books of account;

The Assessee has to prove;

i) The identity of creditor;

ii) The capacity of creditor to advance money, and

iii) The genuineness of the transaction.

After the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to the department.

The Assessee has to establish genuineness of those transactions, mere submitting proof of payment, PAN number,ledger, bank statement etc., by assessee is not sufficient. The creditor creditability to advance money should also be proved. The AO may ask from the creditor their proof of income and return filed by them to substantiate the entries related to creditor. The confirmation letter submitted by assessee signed by creditor is not sufficient to satisfy the AO.

When an unexplained credit is found in books of account of an assessee initial burden is placed on assessee and once that onus is discharged, it is for revenue to prove that credit found in with respect of deposits found in books of account of assessee is undisclosed income of the assessee.

In some cases, AO may ask for source of source, when some undisclosed credit entries are found in the books of account of an assessee.

NOTE: 2

i) The Assessee must prove identity of creditor, genuineness of transaction and creditworthiness of creditor. Assessee need not prove source of funds of creditor. In all cases in which receipt to be taxed as income, the burden lies on the revenue to prove that it is within the taxing provisions, but once that burden is discharged, the burden of proving that it is not taxable because it falls within the exemption provisions of the Act, lies on the assessee.

ii) The Assessee may request to AO to issue summons u/s. 131 to call the creditor to prove genuineness of documents and details submitted and entries in the books of account of assessee. The AO has duty to call the creditor by issuing summons u/s. 131 of the Income Tax Act, 1961.

iii) Evidence which is used against the assessee must be provided to the assessee and also an opportunity to confront the same should be given permitting cross- examination (Kishan Chand chellaram v CIT (1980) 125 ITR 713 (SC) (720))

iv) if some document is relied on against the assessee to assessee him to a high rate of tax, the documents shall be disclosed to him. It cannot be withheld (Capricorn Shopping complex v. ITO (1996) 218 ITR 721 ( Ker) (HC) (723))

v) Any oral statement made by third party during the inquiry post-search, should be made available to the assessee and if assessee wants to cross -examine the third party, then it is duty of AO to summon third party and produce them before assessee for cross -examination.

vi) Failure to give the assessee the right of cross- examine witness whose statements are relied up results breach of principles of natural justice. It is a serious flaw which renders the order a nullity. (Andaman Timber Industries v CCE (2015) 127 DTR 241/ 281 CTR 241 (SC))

NOTE: 3

i) Suspicion and doubt may be starting point of an investigation but cannot, at the final stage of assessment, take the place of relevant facts, particularly where a deeming provision is sought to be invoked. The principal that governs a deeming provision is that the initial onus lies upon the revenue to raise a prima facie doubt on the basis of credible material. The onus thereafter shifts to assessee to prove that transaction is genuine and if the assessee is unable to offer a credible explanation, the AO may legitimately raise an inference against the assessee.

ii) If assessee furnishes all relevant facts within his knowledge and offers credible explanation, the onus shifts on the revenue to prove that those facts revealed by the assessee are not correct.

iii) The revenue cannot draw an inference based upon suspicion or doubt or perception of culpability or the quantum of the amount, involved.

iv) The transaction cannot be treated as bogus until and unless a finding is given that the shares were acquired by the assessee from the person other than the broker claimed by the assessee. The enquiry conducted by the Investigation Indore is not a conclusive finding of fact in view of the fact that the shares were duly materialized & held in the d-mat account. Merely supplying of statement to the assessee at the far end of the assessment proceedings is not sufficient to meet the requirement of giving an opportunity to cross examine. The AO cannot proceed on suspicion without any material evidence to controvert or disprove the evidence produced by the assessee. (Pramod Kumar Lodha v. ITO (Jaipur)(Trib), www.itatonline.org)

CONCLUSION; it is duty of every citizen to pay their taxes as levied according to the provisions of applicable laws. We should emphasise on tax planning rather than tax evasion. The revenue has right to ask for explanation and do search and seize books of account and other relevant documents to check evasion of tax. They have power to ask for explanation for any entries, whether debit or credit in books of account of an assessee. If any credit entry found in books of account and assessee is not able to explain satisfactory the genuineness of entry, then AO has power to tax those entries as Undisclosed Income. It is duty of an assessee to submit substantial evidences with the AO to prove genuineness of those transactions. In case of doubt and suspicion revenue authorities may issue order for search of premises of an assessee and seize books of account and other documents. The search and seizure may be carried on in the premises of relatives, associates, suppliers etc., of the assessee. It may be possible that at the premises of third party, the revenue seized some loose papers, where some entries are made related to business of the assessee. In this case the revenue has to substantiate their findings with proper proof and corroborative evidences. They have to prove relations of those entries with the business of the assessee. Mere doubt/suspicion related to those entries do not help the revenue to tax them as income of the assessee.

DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.

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A Qualified Company Secretary, LLB from Purvanchal University UP and a Science Graducate , Alumni of Banaras Hindu University (Bsc.), having more than 19 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & Finance and recently working as a M View Full Profile

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