Article on Section 68 with recent development in Case Laws in Bombay High Court in case of Pr. CIT vs Alag Securities Pvt Ltd. vide ITA No. 1512 of 2017 dated June 12, 2020

UNXEPLAINED CASH CREDITS, INVESTMENT, MONEY UNDER PROVISIONS OF INCOME TAX ACT, 1961

CASH CREDIT [SECTION 68]  define as 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.

As per the provisions of section 68 amount credited in book and the assessee failed to explained the nature and source of fund and the explanation offered by assessee is not satisfactory in the opinion of the Assessing Officer. The amount so credited may charged to income-tax as income of the assessee of that previous year.

The recent development in case laws in Bombay High Court in case of Pr. CIT vs Alag Securities Pvt Ltd. vide ITA No. 1512 of 2017 dated June 12, 2020 the Hon’ble Bombay High Court held that “in case of an assessee engaged in providing ‘accommodation entries’, the entire deposits cannot be assessed as unexplained cash credits. Only the commission (0.15%) earned in providing the accommodation entries can be assessed as income(Favour of Assessee)”.

The extract of relevant para of  Pr. CIT vs Alag Securities Pvt Ltd. vide ITA No. 1512 of 2017 dated June 12, 2020 the Hon’ble Bombay High Court is reproduced as under:-

“8. Revenue challenged this order of CIT (A) before the Tribunal. Tribunal vide the order dated 18.11.2016 noted that the same issue arose in the case of M/s. Goldstar Finvest Pvt. Ltd. for the same assessment year i.e., assessment year 2003-04. In M/s. Goldstar Finvest Pvt. Ltd., Tribunal took the view that assessee was only concerned with the commission earned on providing accommodation entries. Commission in that case was assessed at 0.15%. Since assessee was part of the group of entities in respect of which the same view was taken, Tribunal upheld the order passed by the CIT(A) and dismissed the appeal of the Revenue.

…..

20. We are in agreement with the view taken by the Tribunal. In a case of this nature Section 68 of the Act would not be attracted. Section 68 would come into play when any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee is not in the opinion of the Assessing Officer satisfactory. In such a situation the sum so credited may be charged to income tax as the income of the assessee of the relevant previous year. But that is not the position here. It has been the consistent stand of the assessee which has been accepted by the First Appellate Authority and affirmed by the Tribunal that the business of the assessee centered around customers / beneficiaries making deposits in cash amounts and in lieu thereof taking cheques from the assessee for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the assessee. The cash amounts deposited by the customers i.e., the beneficiaries had been accounted for in the assessment orders of these beneficiaries. Therefore, question of adding such cash credits to the income of the assessee, more so when the assessee was only concerned with the commission earned on providing accommodation entries does not arise.”

The observation of Hon’ble Bombay High Court can be explained as under.

  • If Assessee is engaged in the business of providing accommodation entries to entry seekers.
  • The customers / beneficiaries making deposits in cash amounts and in lieu thereof taking cheques from the assessee for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the assessee.
  • The cash amounts deposited by the customers i.e., the beneficiaries had been accounted for in the assessment orders of these beneficiaries.
  • The question of adding such cash credits to the income of the assessee, more so when the assessee was only concerned with the commission earned on providing accommodation entries does not arise.

As per the ruling of  Hon’ble Bombay High Court if assessee is engaged in business of providing accommodation entry business, the customers / beneficiaries making deposits in cash amounts and in lieu thereof taking cheques from the assessee for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the assessee. The cash deposited by customers/beneficiaries will be treated as unexplained cash credit and addition of cash credit can not be added as income of the assessee.

Only commission earned on providing accommodation entries is to be charged as income of the assessee.

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