Section 68 Applies Only to Entries in Assessee’s Books, Not Bank Deposits

Mehul V. Vyas Vs ITO (ITAT Mumbai)

Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has set aside an addition of Rs. 10,53,000 made by the Income Tax Officer (ITO) under Section 68 of the Income-tax Act, 1961, against Mehul V. Vyas, who represented the deceased assessee. The Tribunal’s order, pronounced on April 7, 2017, hinged on the crucial legal point that Section 68 applies only to sums credited in the “books of an assessee” and not to mere cash deposits in a bank account.

The appeal was filed against the order of the CIT(A)-11, Mumbai, dated December 13, 2012, which had sustained the AO’s addition made in an assessment order dated December 30, 2010, for the Assessment Year 2006-07.

Background of the Case

The assessee, an aged lady (since deceased), had filed her return of income for A.Y. 2006-07, declaring an income of Rs. 1,23,610. The case was reopened under Section 147 after the AO received information from the CIT (Central Information Branch) indicating that the assessee had made a cash deposit of Rs. 10,53,000 in her Savings Bank account with Punjab and Maharashtra Cooperative Bank during the year under consideration.

During the assessment proceedings, the AO asked the assessee to explain the nature and source of the cash deposit. The assessee submitted that the funds originated from accumulated savings, including money left by her deceased husband, income from a ‘Grauh Udyog’ over many years, and received back interest-bearing loans. She explained that she had decided to advance these accumulated savings as a loan to her son, Mr. Mehul V. Vyas, and for that purpose, deposited the cash into her bank account.

The assessee provided a detailed breakdown of the source of the Rs. 10,53,000 deposit, which included an opening cash balance, income from Grauh Udyog, repayments of loans given, and gifts from family members. She submitted substantial documentary evidence, including summarized cash analysis, confirmations from her son, daughters, and daughter-in-law along with their income tax credentials (ITR copies, PANs) for gifts received, and details/confirmations from parties related to loan transactions.

However, the AO rejected the explanation, treating the entire Rs. 10,53,000 cash deposit as an “Unexplained cash credit” and adding it to the assessee’s income by invoking Section 68. The CIT(A) subsequently upheld this addition, dismissing the assessee’s appeal.

Additional Grounds and Reassessment Validity

Before the ITAT, the assessee also raised additional grounds challenging the validity of the reassessment proceedings initiated under Section 148 and the assessment order passed under Section 143(3) read with Section 147. The ITAT admitted these additional grounds, citing the Supreme Court’s judgment in National Thermal Power Company Limited Vs. CIT (1998) 229 ITR 383 (SC), which allows additional grounds of appeal if they involve purely a question of law based on facts already on record.

However, the ITAT found no infirmity in the initiation of reassessment proceedings. The Tribunal concluded that the AO had a bona fide “belief” that income had escaped assessment based on concrete “material” (information from CIT-CIB regarding the cash deposit). Therefore, the fundamental requirement for assuming jurisdiction under Section 147 was satisfied. These additional grounds were consequently rejected.

Legal Argument on Section 68 Applicability

The core of the assessee’s appeal rested on the argument that an addition under Section 68 could not be made for a cash deposit in a bank account unless the sum was credited in the “books of account” maintained by the assessee. The AR contended that the AO had exceeded the scope of Section 68 by making an addition based on a bank deposit.

The ITAT found substantial force in this argument. The Tribunal meticulously analyzed the wording of Section 68, which states: “Where any sum is found credited in the books of an assessee maintained for any previous year…” The ITAT emphasized that a “bare perusal” of this deeming section reveals that its application is predicated on a credit found in the assessee’s own books of account.

The Tribunal clarified that a bank account, while being the assessee’s account with the bank, cannot be considered the “books of the assessee.” It is, rather, the assessee’s account in the books of the bank. Adhering to the principle of strict literal interpretation of statutory provisions, the ITAT concluded that a cash deposit in a bank account, if not reflected as a credit in the assessee’s own books maintained for the previous year, cannot be brought to tax by invoking Section 68.

Judicial Precedents

The ITAT’s view was significantly bolstered by several judicial precedents:

• CIT Vs. Bhai Chand N. Gandhi (1983) 141 ITR 67 (Bombay): The Hon’ble Bombay High Court explicitly held that a passbook supplied by a bank to its constituent is merely a copy of the constituent’s account in the bank’s books. It cannot be regarded as a “book of the assessee” for the purposes of Section 68.
• Smt. Manshi Mahendra Pitkar Vs. ITO 1(2), Thane (2016) 73 taxmann.com 68 (Mumbai Trib.): This Single Member Bench of the ITAT Mumbai followed the Bhai Chand N. Gandhi judgment, ruling that if the assessee does not maintain books of account and Section 68 is invoked solely based on the bank passbook, the addition must fail.
• Smt. Madhu Raitani Vs. ACIT (2011) 10 taxmann.com 206 (Gauhati) (TM): A ‘third member’ decision of the Tribunal that also supported this view.
• ITO, Barabanki Vs. Kamal Kumar Mishra (2013) 33 taxmann.com 610 (Lucknow Trib.): Another coordinate bench decision aligning with the principle.

Conclusion

Based on the clear wording of Section 68 and the consistent judicial pronouncements, particularly that of the jurisdictional Bombay High Court in Bhai Chand N. Gandhi, the ITAT held that the addition of Rs. 10,53,000 made under Section 68 was legally unsustainable. The Tribunal reasoned that a bank passbook or statement cannot be considered “books maintained by the assessee” for the purpose of Section 68.

While the assessee had also provided detailed explanations and supporting documents for the source of the cash deposits, which the Tribunal noted were disbelieved by lower authorities without credible infirmity, the ITAT chose not to delve further into the merits of the explanation given its primary legal finding on Section 68’s non-applicability.

Consequently, the ITAT set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 10,53,000. The appeal of the assessee was therefore allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal is directed against the order passed by the CIT(A)-11, Mumbai, dated 13.12.2012, which in itself arises from the assessment order passed by the A.O under Sec. 143(3) r.w.s. 147 of the Income-tax Act,1961 (for short ‘Act’), dated 30.12.2010. The assessee has raised the following grounds of appeal before us:-

“1. The Learned Commissioner of Income-tax (Appeals-11 erred in confirming the addition of Rs.10,53,000/- under Section 68 of the I.T. Act.

2. The learned CIT(A) failed to appreciate that the necessary confirmations were filed by the appellant before the A.O thereby discharging her onus to prove the source of the said cash deposits in her bank account.

3. The learned CIT(A) also erred in not appreciating the fact that the old records maintained by the appellant till F.Y. 2005-06 were not available due to the deluge in Mumbai during July 2005 which fact was duly appreciated by the CBDT who had issued a circular directing not to insist on material in respect of the assessment year 2006-07.

4. The learned CIT(A) failed to appreciate that the additions made by the A.O was arbitrary, based on suspicion, surmise and conjectures.

The appellant craves leave to add, to alter, amend or delete any or all of the grounds of appeal at any time.”

That further during the course of the appellate proceedings the assessee had raised the following additional grounds of appeal: –

“1. On the facts and in the circumstances of the case & in law, the proceeding initiated by issuance of notice u/s 148 of the I.T. Act is invalid and bad in law.

2. On the facts and in the circumstances of the case & in law, the Assessment order passed U/s. 143(3) r.w.s. 147 of the I.T. Act is invalid and bad in law.

The appellant craves to add, to alter, to delete and/or to amend any of the above grounds of appeal at any time.”

The Ld. Departmental representative (for short ‘D.R’) had objected to the admission of the additional grounds of appeal filed by the assessee. We however find that as the additional grounds of appeal raised by the assessee involve purely a question of law based on the facts available on record, therefore going by the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Company Limited Vs. CIT (1998) 229 ITR 383 (SC), the same are admitted.

3. Briefly stated, the facts of the case are that the assessee who was an aged lady (since deceased) had filed her return of income for A.Y 2006-07 declaring an income of Rs.1,23,610/- on 23.03.2009. That on the basis of information received from the CIT(CIB) that the assessee had during the year under consideration made a ‘Cash Deposit’ of Rs.10,53,000/- in her Saving Bank account with Punjab and Maharashtra Cooperative Bank, Branch :Bhandup, Mumbai, the case of the assessee was reopened under Section 147 and a notice under Sec.148, dated 17.06.2009, was issued and served on the assessee.

4. That during the course of the assessment proceedings the A.O called upon the assessee to put forth an explanation as regards the nature and source of the cash deposit of bRs.10,53,000/- in her aforesaid Saving Bank account. The assessee in compliance to the aforesaid query submitted before the A.O that with the money left by her deceased husband and the income generated by her from Grauh Udyog for the last many years, she had accumulated savings out of which she had advanced interest bearing loans to different persons. It was submitted by the assessee that knowing well that she was at the fag end of her life, she decided to give her accumulated savings as a loan to her son Mr. Mehul V. Vyas, and to facilitate the same had deposited the amount of Rs.10,53,000/- out of the accumulated cash available with her in the aforesaid Saving bank account. The assessee further furnished with the A.O the bifurcated details of the source of deposit of the amount of Rs. 10,53,000/- in her aforesaid bank account, as under:-

The assessee had during the course of the assessment proceedings placed on record substantial documentary evidence in form of summarized cash analysis to explain the genesis of the Opening cash balance, Confirmations from her son, daughters and daughter in law, along with their income tax credentials, viz. copies of income-tax returns, PAN Nos. etc, to support the factum of gifts received from them during the year under consideration and the preceding years, details alongwith confirmations of the parties from whom loans were received by the assessee in cash during the year under consideration, and the details of the persons from whom loans had been received back by her during the year under consideration. The A.O however not finding himself as being in agreement with the explanation of the assessee, therein rejected the same and held the cash deposit of Rs. 10,53,000/- (supra) as an ‘Unexplained cash credit’, and added the same to the returned income of the assessee by invoking the provisions of Section 68.

4. That the assessee being aggrieved with the assessment therein assailed the same before the CIT(A)-11, Mumbai. The CIT(A) after deliberating on the contentions of the assessee so raised before him, therein not being persuaded to subscribe to the same, thus sustained the additions made by the A.O and dismissed the appeal of the assessee.

5. That the assessee being aggrieved with the order of the CIT(A) had thus carried the matter in appeal before us. The assessee by raising the aforesaid additional grounds of appeal had therein assailed before us the initiation of the reassessment proceedings, as well as the framing of the assessment under Section 143(3) r.w.s 147. We have given a thoughtful consideration to the contentions of the Ld. A.R in context of the aforesaid additional grounds of appeal and are not impressed with the same. We find that the A.O on the basis of information received from the office of the CIT(CIB) that cash aggregating to Rs.10,53,000/-(supra) was deposited by the assessee in her bank account, thus, after deliberating on the ‘material’ available before him, formed a bonafide ‘belief’ that the income of the assessee chargeable to tax had escaped assessment. We are thus of the considered view that in light of the well established nexus between the ‘material’ available on record and the formation of the belief by the A.O that the income of the assessee had escaped assessment, the fundamental requirement for assumption of jurisdiction by the A.O u/s 147 stood duly satisfied, and thus no infirmity can be related to the initiation of the aforesaid proceedings by the A.O. We further find that it neither emerges from the body of the assessment order, nor any averment had been made by the Ld. A.R before us, which could persuade us to conclude that the assessment framed by the A.O u/s 143(3) r.w.s 147 of the ‘Act’ was not sustainable in the eyes of law. We thus in the backdrop of our aforesaid observations, finding no force in the additional grounds of appeal raised by the assessee before us, therefore reject the same. The additional Grounds of appeal Nos. 1 and 2 so raised by the assessee before us are thus rejected.

6. The ld. A.R had vide Ground of appeal no. 1 therein assailed the addition of Rs.10,53,000/- made by the A.O under Section 68 of the ‘Act’. During the course of hearing of the appeal it was vehemently averred by the ld. A.R that the A.O had traversed beyond the scope and gamut of the additions contemplated under Section 68 and made an addition of Rs.10,53,000/- in the hands of the assessee. It was submitted by the ld. A.R. that an addition under Section 68 could be made only where any sum is found credited in the ‘books of an assessee’ maintained for any previous year, and the assessee either fails to offer any explanation as regards the nature and source of such credit, or the explanation offered by him is not found in the opinion of the A.O to be satisfactory. The Ld. A.R submitted that the addition of Rs.10,53,000/- had been made by the A.O in context of the cash deposit made by the assessee in her Saving Bank account with Punjab and Maharashtra Cooperative Bank, Branch :Bhandup, Mumbai. The ld. A.R in the backdrop of the aforesaid facts therein averred that the A.O loosing sight of the fact that as the aforesaid sum of Rs.10,53,000/-was not found credited in the ‘books of account’ of the assessee for the year under consideration, therefore no addition in respect of the said amount could be made under Section 68. It was thus submitted by the ld. A.R that the addition of Rs.10,53,000/-made by the A.O under Section 68 of the Act was not sustainable in the eyes of law, and as such on the said count itself the same was liable to be vacated. The ld. A.R in order to drive home his aforesaid contention therein relied on a host of judicial pronouncements including that of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Bhai Chand N. Gandhi (1983) 141 ITR 67 (Bom). Thus in the backdrop of his aforesaid submissions it was averred by the ld. A.R that now when the addition of Rs.10,53,000/- made by the A.O under Sec. 68 did not fall within the four corners of the additions which could be made under the said statutory provision, therefore the same being absolutely devoid of any force of law, thus could not be sustained and was liable to be vacated.

7. Alternatively, the Ld. A.R adverting to the merits of the case there in submitted that though the complete details as regards the source of the cash deposit of Rs.10,53,000/- in the bank account of the assessee were furnished with the A.O along with supporting documentary evidence, however the latter had proceeded with most arbitrarily and without appreciating the explanation of the assessee in respect of the nature and source of the aforesaid cash deposit, which as claimed by the Ld. A.R stood duly substantiated on the basis of substantial material that was placed on his record, had made an addition of the said amount as an unexplained cash credit under Section 68 in the hands of the assessee. It was further submitted by the ld. A.R that the CIT(A) had in a mechanical manner upheld the assessment framed by the A.O. The Ld. A.R in order to fortify his contention that the complete details along with supporting documentary evidence in respect of the cash deposit of Rs.10,53,000/-(supra) was placed on record during the course of the assessment proceedings, therein took us to the relevant pages of his ‘Paper Book’ (APB), viz. ‘Summary of cash analysis’ explaining the genesis of the Opening cash balance of Rs.6,85,643/- (Page 15-19); Confirmations along with copies of the income tax returns of the relatives of the assessee, viz, Ms. Seema Narendra Bhatt (daughter), Ms. Priti Phadraya Jani (daughter), Mr. Mehul Vinitkumar Vyas (Son) and Mrs. Pooja Mehul Vyas(daughter in law) from whom the assessee was in receipt of gifts since the financial year 2002-03 (Page 20-52); and details of the persons from whom loans were received by the assessee during the year along with their respective confirmations (Page 53-69). It was further submitted by the ld. A.R that as the A.O had not raised any query in respect of the old loans which were advanced by the assessee in F.Y. 2001-02 and were received back during the year under consideration, therefore, there was no occasion for the assessee to furnish the details as regards the same during the course of assessment proceedings. The ld. A.R however in order to remove any scope of doubt as regards the veracity of his claim in context of the old loans which were received back during the year under consideration, thus furnished the complete details of the persons who had repaid the said old loans during the year under consideration, along with his duly deposed ‘Affidavit’, dated 16.01.2017, furnished before us during the course of hearing of the appeal. It was thus submitted by the ld. A.R that despite the fact that complete details as regards the nature and source of the cash deposit of Rs.10,53,000/- along with the supporting documents were furnished with the A.O, the latter however had most arbitrarily scrapped the same and had proceeded with in a whimsical manner and drawn adverse inferences in the hands of the assessee. Per contra, the ld. D.R strongly relied on the orders of the lower authorities and therein submitted that in the absence of any plausible explanation forthcoming on the part of the assessee in respect of the nature and source of the amount of Rs.10,53,000/- as stood deposited in her bank account, the A.O being left with no other alternative, had thus rightly made the addition of the same in the hands of the assessee, which thereafter had been sustained by the CIT(A). It was submitted by the ld. D.R that the appeal of the assessee was devoid of any force and was liable to be dismissed.

8. We have heard the ld. Authorized representatives of both the parties, perused the orders of the lower authorities as well as the material produced before us. We will first deal with the objection raised by the ld. A.R as regards the addition of Rs.10,53,000/-which was made by the A.O under Section 68 of the ‘Act’, in respect of the cash deposit in the bank account of the assessee. We find substantial force in the contention of the ld. A.R that an addition under Section 68 can only be made where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee either offers no explanation about the nature and source as regards the same, or the explanation offered by him in the opinion of the assessing officer is not found to be satisfactory. That before adverting further, we herein reproduce the relevant extract of the aforesaid statutory provision, viz. Section 68, which reads as under: –

“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 ”

That a bare perusal of the aforesaid deeming section therein reveals that an addition under the said statutory provision can only be made where any sum is found credited in the books of an  assessee maintained for any previous year. Thus, the very sine qua non for making of an addition under Section 68 presupposes a credit of the aforesaid amount in the ‘books of an assessee’ maintained for the previous year. We not being oblivious of the settled position of law that a statutory provision has to be strictly construed and interpreted as per its plain literal interpretation, and no word howsoever meaningful it may so appear can be allowed to be read into a statutory provision in the garb of giving effect to the underlying intent of the legislature, thus confining ourselves within the realm of our jurisdiction, therein construe the scope and gamut of the aforesaid statutory provision by according a plain meaning to the language used in Sec. 68. We are of the considered view that a credit in the ‘bank account’ of an assessee cannot be construed as a credit in the ‘books of the  assessee’, for the very reason that the bank account cannot be held to be the ‘books’ of the assessee. Though it remains as a matter of fact that the ‘bank account’ of an assessee is the account of the assessee with the bank, or in other words the account of the assessee in the books of the bank, but the same in no way can be held to be the ‘books’ of the assessee. We have given a thoughtful consideration to the scope and gamut of the aforesaid statutory provision, viz. Sec. 68, and are of the considered view that an addition made in respect of a cash deposit in the ‘bank account’ of an assessee, in the absence of the same found credited in the ‘books of the assessee’ maintained for the previous year, cannot be brought to tax by invoking the provisions of Section 68. That our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Bhaichand N. Gandhi (1983) 141 ITR 67 (Bombay) wherein the Hon’ble High Court has held as under: –

“As the Tribunal has pointed out, it is fairly well settled that when moneys are deposited in a bank, the relationship that is constituted between the banker and the customer is one of debtor and creditor and not of trustee and beneficiary. Applying this principle, the pass book supplied by the bank to its constituent is only a copy of the constituent’s account in the books maintained by the bank. It is not as if the pass book is maintained by the bank as the agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. In view of this, the Tribunal was, with respect, justified in holding that the pass book supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions. In our view, the Tribunal was justified in the conclusions at which it arrived.”

We find that the aforesaid view of the Hon’ble jurisdictional High Court had thereafter been followed by a ‘SMC’ of the ITAT Mumbai bench in the case of Smt. Manshi Mahendra Pitkar Vs. ITO 1(2), Thane (2016) 73 taxmann.com 68 (Mumbai Trib.) wherein it was held as under: –

“I have carefully considered the rival submissions. In the present case the addition has been made by the income tax authorities by treating the cash deposits in the bank account as an unexplained cash credit within the meaning of section 68 of the Act. The legal point raised by the assessee is to the effect that the bank Pass book is not an account book maintained by the assessee so as to fall within the ambit of section 68 of the Act. Under section 68 of the Act, it is only when an amount is found credited in the account books of the assessee for any previous year that the deeming provisions of section 68 of the Act would apply in the circumstances mentioned therein. Notably, section 68 of the Act would come into play only in a situation “Where any sum is found credited in the books of an assessee ”. The Hon’ble Bombay High Court in the case of Shri Bhaichand Gandhi (supra) has approved the proposition that a bank Pass Book maintained by the bank cannot be regarded as a book of the assessee for the purposes of section 68 of the Act. Factually speaking, in the present case, assessee is not maintaining any books of account and section 68 of the Act has been invoked by the Assessing Officer only on the basis of the bank Pass Book. The invoking of section 68 of the Act has to fail because as per the judgment of the Hon’ble Bombay High Court in the case of Shri Bhaichand N. Gandhi (supra), the bank Pass Book or bank statement cannot be construed to be a book maintained by the assessee for any previous year as understood for the purposes of section 68 of the Act. Therefore, on this account itself the impugned addition deserves to be deleted. I hold so.”

We further find that a similar view had also been arrived at in a ‘third member’ decision of the Tribunal in the case of Smt. Madhu Raitani Vs. ACIT (2011) 10 taxmann.com 206 (Gauhati) (TM), as well as by a coordinate bench of the Tribunal in the case of ITO, Barabanki Vs. Kamal Kumar Mishra (2013) 33 taxamann.com 610 (Lucknow Trib.). Thus in the backdrop of the aforesaid facts of the case read in light of the settled position of law, we are of the considered view that the addition made by the A.O in respect of the cash deposit of Rs.10,53,000/-(supra) in the bank account of the assessee by invoking Section 68 has to fail for the very reason that as per the judgment of the Hon’ble Bombay High Court in the case of Shri Bhaichand N. Gandhi (supra), a bank pass book or bank statement cannot be considered to be a ‘book’ maintained by the assessee for any previous year, as understood for the purpose of Section 68 of the Act. Therefore, on this count itself the impugned addition Rs.10,53,000/- deserves to be deleted.

9. Even otherwise, we find that the explanation rendered by the assessee in respect of the nature and source of the cash deposit of Rs.10,53,000/-(supra) in her bank account has been disbelieved by the lower authorities without establishing any credible infirmity or fallacy in the substantial material which was made available on record by the assessee. We are of the considered view that the assessee had not only put forth an explanation in respect of the nature and source of the cash deposit of Rs.10,53,000/-(supra) in her bank account, but rather it remains as a matter of fact that substantial material was placed on record by the assessee to fortify the genuineness and veracity of his aforesaid explanation. We find that the explanation of the assessee had been dislodged by the A.O merely on the basis of doubts, surmises and conjectures, which we are afraid cannot form a basis for making an addition in the hands of the assessee. Be that as it may, since we have already held that the addition is unsustainable following the ratio of the judgment of the Hon’ble Jurisdictional High Court in the case of Shri Bhaichand N. Gandhi (supra), therefore we do not deal with instant aspect any further. That as a result of our aforesaid observations, the order of the CIT(A) is set aside and the A.O is directed to delete the addition of Rs.10,53,000/- made under Section 68 in the hands of the assessee.

10. Resultantly, the appeal of the assessee is allowed. Order pronounced in the open court on 07.04.2017