Section 68, 69, 69A, 69B and 69C of Income Tax Act, 1961

CA Priya Fulwani

In this article Author has discussed comparison  between Section 68, 69, 69A, 69B and 69C of Income Tax Act, 1961 and Important Case laws related to these sections.

Section 68 -Cash credits

Section  69-Unexplained investments

Section 69A–Unexplained money, etc

Section 69B -Amount of investments, etc., not fully disclosed in books of account

Section 69C– Unexplained expenditure, etc

Comparison between section 68, section 69, section 69A, section 69B and section 69C: –

 Burden of Proof: –

So far as section 68 is concerned, the onus is wholly upon the Assessee to explain the source of the entry. But in cases falling under section 69, 69A, 69B and 69C, the words used show that before any of these sections are invoked, the condition precedent as to existence of investment, expenditure, etc. must be conclusively established by material on record/ evidence.

Year of Taxability: –

The sum as determined under above mentioned sections would be taxable in the Financial Year in which it is credited (Section 68), invested (Section 69, 69A, 69B) or incurred (Section 69C).

Rate of Taxability: –

As per Section 115BBE, income tax shall be calculated at 60% where the total income of assessee includes following income:

1. a) Income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D and reflected in the return of income furnished under Section 139; or
2. b) Which is determined by the Assessing Officer and includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is not covered under clause (a).

Such tax rate of 60% will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess). Provided that such 6% penalty shall not be levied when the income under Section 68, 69, etc., has been included in return of income and tax has been paid on or before the end of relevant previous year.

No deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE.

Opportunity of being heard: –

The word “explanation” indicates that the assessee must be given an opportunity of being heard to prove the nature and source of cash credits, investments and expenses.

Power of AO: –

The use of word “may” and not “shall” indicates that the Assessing officer has discretion to treat the particular cash credit, investment or expenditure as income of the Assessee depending on the facts and circumstances.

Relevant Citations:-

Section 68:-

• Amount credited in business books can normally be presumed as business receipt – When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business, if the explanation given by the assessee as to how the amounts came to be received is rejected by all the income-tax authorities as untenable – Lakhmichand Baijnath v. CIT [1959] 35 ITR 416 (SC).

• Department need not locate source of receipt – Where the assessee has failed to prove satisfactorily the source and nature of a credit entry in his books, and it is held that the relevant amount is the income of the assesse, it is not necessary for the department to locate its exact source – CIT v. M.Ganapathi Mudaliar [1964] 53 ITR 623 (SC)/A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC).

• Onus is on assessee to discharge that cash creditor is a man of means – The onus is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit. There should be identification of the creditor and he should be a person of means. When the cash creditor is an income-tax assessee, it cannot be said that he is not a man of means – Kamal Motors v. CIT [2003] 131 Taxman 155 (Raj).

• Deposits from tenants – In regard to deposit from tenants, it is sufficient if the assessee proves the identity of the tenant and the genuineness of transaction under which the deposit is made. It will not be necessary for the assessee to prove the capacity of the tenant to make the deposit/advance – CIT v. Nevendram Ahuja [2005] 197 CTR (MP) 462.

• Gifts – In the case of cash gifts recorded in the books of the donee, mere identification of the donor and showing the movement of the amount through banking channels is not sufficient to prove the genuineness of the gift. The onus lies on the donee not only to establish the identity of the donor but also the donor’s capacity to make such a gift. Where there was nothing on record to show as to (i) what was the financial capacity of the donors, (ii) what was the creditworthiness of the donors, (iii) what was the kind of relationship the donors had with the donee-assessee, (iv) what are the source of funds gifted to the assessee, and (v) whether the donors had the capacity of giving large amount of gift to the assessee, the Tribunal would not be justified in deleting the additions made by the Assessing Officer, especially when the assessee did not appear in person before the Assessing Officer despite being asked to do so – CIT v. Anil Kumar [2008] 167 Taxman 143 (Delhi).
• Gifts made by a mother to a son do not require any occasion and mother can make a gift to her son at any time – CIT v. Suresh Kumar Kakar [2010] 324 ITR 231 (Delhi).
• Creditworthiness of lender can’t be proved merely on strength of Bank Statement – Siddharth Export Vs ACIT (Delhi High Court)
• Section 68 addition merely for deposit of business receipt of Spouse in joint bank account unsustainable – Shri Rajesh Jain Vs ITO (ITAT Indore)
• Accommodation entry Business- Entire deposits cannot be assessed as unexplained cash credits – PCIT Vs Alag Securities Pvt. Ltd. (Bombay High Court)
• Section 68: Sales declared as Income in books cannot be treated as cash credit – Bhagwant Merchants Private Limited Vs ITO (ITAT Kolkata)

Section 69:-

• In Mad HC in 241 ITR 363,158 Taxman 363, 236 ITR 340, J&K HC in 201 CTR 178, it was held that when there was inflated stock to avail higher credit facility from bank (only amount inflated but quantity remained same), the books of the Assessee were duly audited and no trading outside the books were detected, the addition of difference in stock value could not be made as undisclosed income.

• In Delhi ITAT Kanta Dua, a husband made investment in Units of Mutual fund from Joint Bank Account in the name of himself and wife (second holder), the AO based on AIR information, made assessment in the hands of wife as unexplained investment, which was held as invalid by higher Tax authorities.

• In Mad HC in N Swamy 241 ITR 363 relied by Chennai ITAT in Omega Estates and Chd ITAT in Dr. R.L.Narang, it was held that The burden of showing that the assessee had undisclosed income is on the revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and making that the sole foundation for a finding that the assessee had deliberately suppressed his income.

• In Mum ITAT in Rupee Finance 119 TTJ 643, it was held that merely because assessee purchased certain shares at value much less than market price, difference in purchase cost and market price cannot be added u/s 69.

• In ITO vs. Mrs. Deepali Sehgal (ITAT Delhi), ITA No. 5660/Del/2012, the AO noted that assessee had withdrawn huge cash from bank account and the same amount had been deposited to the same account after lapse of substantial time. The AO rejected the explanation and held that the assessee hadcash deposit of Rs.24,38,000/- as unexplained money and the assessee found to be the owner of the money as he had not offered any acceptable and cogent explanation. AO, in his remand report could not bring out any fact that the cash withdrawn from Saving Bank Account and partnership overdraft account was used for other purpose anywhere else then, merely because there was a time gap between withdrawal of cash and its further deposit to the bank account, the amount cannot be treated as income from undisclosed sources u/s 69 of the Act in the hands of the assessee. Hence, the addition made by AO without any legal and justified reason was rightly deleted by the CIT (A).

Section 69A:-

• In P&HHC in 294 ITR 78, the assessee was found to be in possession of loose slips and not any valuable article or things. Neither the possession nor the ownership of any jewelry mentioned in the slips was proved. Therefore, the Tribunal had rightly held that the provisions of section 69A of the Act were not applicable. The Tribunal also held that if the assessee failed to explain the contents of the slips, it was for the Revenue to prove on the basis of material on record that they represented transactions of sales or stock in trade before making any addition on this score. The assessee had duly explained that these were rough calculations and the assessee’s explanation had not been rebutted by any material evidence.

• Commissioner of Income-tax vs. Meghjibhai Popatbhai Virani – Where assessee in support of certain amount received from his family members on account of sale of property, produced family settlement agreement and sale agreement, there being no defect in said agreements, amount so received by assessee could not be added to his taxable income as unexplained money.

• Ownership is one of the Considerations – The material difference between Section 68 and 69A is that Section 68 does not require that the amount is to be owned by the Assessee. It only deals with any amount shown in the books of accounts of the assessee whereas Section 69A deals with money, etc., owned by the assessee and found in his possession. – Durga Kamal Rice Mills v. CIT [2003] 130 Taxman 553 (Cal.).

• Possession of cash is evidence of ownership – Where cash was found in possession of assessee-politician during search and his claim that it belonged to a political party was denied by President and Treasurer of said party, addition of such cash to assessee’s income was rightly sustained by tribunal – Sukh Ram v. Asstt. CIT [2006] 285 ITR 256 (Delhi).

• Date of possession of money, etc. will determine year of Assessment – The relevant would be the date on which the assessee is physically found to be in possession of the money, etc. and not the date on which the finding about ownership is recorded. – Patoa Bros. v. CIT [1982] 133 ITR 672 (Gau.).

• Where assessee was managing a firm which collected deposits from public, but there was no evidence regarding registration and genuineness of firm and assessee could not explain source of deposits, nor could assessee establish that such deposits did not belong to him, addition of such deposits as asseesee’s unexplained investments was justified – CIT v. K. Chinnathamban [2007] 162 Taxman 459/292 ITR 682 (SC).

Section 69B:-

• In Smt. Amar Kumari Surana v. CIT [1996] 89 Taxman 544 (Raj.), it was held that the burden is on the revenue to prove that real investment exceeded the investment shown in account books of the assessee. Merely on the basis of fair market value no addition can be made under section 69B, but if on the basis of sufficient material on record some reasonable inference can be drawn that the assessee has invested more amount in purchase of plot than that shown in account books, then only the addition under section 69B can be made.

• In In CIT v. Daya Chand Jain Vaidya, the Allahabad Court shifted the onus on to the department saying that if the assessee’s explanation that the investments were in fact held by his wife and sons is not sustainable, then the department has to prove with material evidences that the investments were owned only by the assessee himself. Having said this, it is noteworthy that sec.69B per se uses the phrases like “is found to be the owner of any bullion, jewelry or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewelry or other valuable article……” (as opposed to the word ‘reasons to believe’) which is very conclusive that there is no room for any taxation based on a mere suspicion.

• In case of doubt, Assessing Officer can make reference to Valuation Cell – If the assessee maintained books of accounts in the regular course of business and necessary entries relating to the expenditure towards cost of construction are entered in the books of accounts, which are open to verification, and its correctness is not doubted, it should be accepted. In case of doubt, Assessing Authority can refer the matter to the valuation cell for determination of cost of construction and rely upon such report as an evidence, but it is open to the assessee to challenge the correctness of such valuation report and in case if it establishes that such report is not correct and reliable, expenditure shown in the construction as per the books of accounts is liable to be accepted. – CIT v. Meerut Cement Co. Pvt. Ltd. [2006] 15-0 Taxman 7 (All.).
• Section 50C provisions cannot be applied for section 69B addition – Gayatri Enterprise Vs ITO (Gujarat High Court)
• Addition u/s 69B justified in respect of unaccounted money paid in cash to sellers of land – Vinay Gupta v. ACIT (ITAT Delhi)
• Section 69B cannot be invoked on mere assumption that there was understatement of investment – DCIT Vs M/s Riar Builders Pvt. Ltd. (ITAT Amritsar)
• Mere valuation report not sufficient to conclude unexplained investment by Assessee – ACIT Vs. Shri Jayantilal T. Jariwala (ITAT Ahmedabad)

Section 69C:-

• As per proviso to Section 69C, when expenditure is deemed to be the income of the assessee, no allowance of the same can be claimed as business expenditure.

• The Jaipur Bench of ITAT ruling in 31 DTR 456- Nisraj Real Estate held that unverified purchases made by assessee could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C proviso there under – as once sales were made by assessee, purchases were obviously made.

• Question of Addition depends on satisfactory explanation of source – Section 69C deals with unexplained source of expenditure. If from documents it appears that there was expenditure, unless its source is satisfactorily explained, the same would also be deemed to be the income of the assessee for such financial year. The question depends on the satisfactory explanation of the source. – CIT v. Bhagwati Developers Pvt. Ltd. [2003] 261 ITR 658 (Cal.).

• Estimation of household expenditure in a particular year cannot be made on the basis of income of subsequent years – Where the search discloses that any expenditure is found to be false, appropriate additions can be made but what is relevant is that the addition can be made only in regard to the income related to false claim of expenditure disclosed by material unearthed during the search. There is absolutely no basis for assuming that the expenditure incurred during a particular month/year should be the expenditure during the ten years also. The monthly household expenditure may depend on various circumstances, one factor being the income/earning. Estimating the household expenditure in a particular year with reference to the income of a future year (that too 5 to 10 years later) in absence of any other evidence would be arbitrary and illegal – CIT v. C.L. Khatri [2005] 147 Taxman 652 (MP).

• Invocation of Powers under Section 142A – For purpose of getting himself satisfied about purported unexplained expenditure under section 69C, powers under section 142A could not be invoked by Assessing Officer – CIT v. Aar Pee Apartments Pvt. Ltd. [2009] 319 ITR 276/[2010] 188 Taxman 39 (Delhi).
• Addition u/s 69C on basis of statement of third party without providing opportunity of cross-examination to assessee was invalid – Bhatia Diamonds Pvt. Ltd. Vs ITO (ITAT Delhi)
• Addition of bogus share capital u/s 68 and bogus purchases u/s 69 cannot be made in absence of incriminating material with AO – Agson Global Pvt. Ltd Vs ACIT (ITAT Delhi)
• Addition only for difference of GP on Normal & Bogus Purchase – Hemant M Mehta HUF Vs A.C.I.T. (ITAT Mumbai)
• For some bogus purchases Entire purchases can’t be added to income – Sonal Parekh Vs ITO (ITAT Ahmedabad)

(Republished with Amendments by Team Taxguru)