Section 68 of Income Tax Act, 1961 (An Overview Of Related Provisions And Tax Treatment Of Cash Credits /Undisclosed Income)

Introduction to Section 68 of Income Tax Act, 1961

The section has been introduced in the 1961 Act w.e.f 1.4.1962.In the 1922 Act, there was no provision corresponding to section 68. The principle in section 68 is a statutory recognition of what was always understood to be the law based upon the rules of evidence that it is for the taxpayer to prove the genuineness of the borrowings or other credits in his books, since the relevant facts are exclusively within his knowledge. Precedents indicate that the law was no different earlier to this provision.

Section 68 incorporates only a rule of evidence, placing the onus of proof on the assessee.

There have been hardly any amendments in this section since its introduction.

The major amendment was by the FA, 2012 which introduced the two provisos to this section.

Any sum found credited in the books of the taxpayer, for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the Explanation offered by the taxpayer, is termed as cash credit.

For example, if an assessee account is credited with Rs.100000 and the assessee did not give any explanation about the amount credited to the Assessing Officer then the Assessing Officer will credit Rs.100000 to the total income of the assessee and will be taxed accordingly.

TAX TREATMENT OBSERVATIONThe unexplained amount is added back to the total income of the assessee and tax will accordingly impose on the said sum.

It is to be noted that each entry must be separately explained by assessee to prove the genuineness of the transaction. While explaining the various credits and investments, it is possible that the assessee may be successful in explaining some of them, but that does not by itself mean that the entire investments has to be considered as explained. The Assessing Officer has to apply his mind in each and every individual entry when an explanation is offered by the assessee as observed by the Hon’ble Rajasthan High Court in the case of CIT v. R.S. Rathore [1995] 212 ITR 390 (Raj.).

The Hon’ble Delhi High Court in the case of Yadu Hari Dalmia vs. CIT (1980) 126 ITR 48 (DEL) observed as under:

The whole history of the introduction of ss. 68 to 69D and the judicial decisions bearing thereupon clearly establish the proposition that these sections are only clarificatory and that even otherwise an addition can be made towards income from undisclosed sources in respect, inter alia, of amounts of expenditure which the assessee is found to have actually incurred but not satisfactorily explained”.

Overview of Section 68, 69, 69A, 69B, 69C and 69D

Sr. No. Section Nature of addition What can be taxed? Year in which taxable
1. 68 Unexplained Cash credits a) Unexplained loans

b) Unexplained Gifts, local as well as non-resident

c) Share Capital including share application money, share premium, etc.

Previous year in which amount credited in books of account
2. 69 Unexplained investments Unexplained investments not recorded in books of account maintained Previous year in which amount invested
3. 69A Unexplained money, etc. Unexplained money, bullion, jewellery or valuable article Previous year in which assesse is found in possession of money, bullion, jewellery or valuable article
4. 69B Amount of investments, etc. not fully disclosed in books of account Investments, money, bullion, jewellery or other article not fully disclosed in books maintained Previous year in which investment made or bullion, jewellery or other article is found in possession
 

5.

69C Unexplained expenditure Expenditure incurred out of unknown sources The year in which expenditure is incurred
6. 69D Amount borrowed or repaid on hundi Amount borrowed or repaid otherwise than by an account payee cheque Amount borrowed or repaid otherwise than by an account payee cheque. If addition is made of amount borrowed, same amount cannot be added when repaid (Refer Board Circular No. 204 dated 24/7/1976)

Applicability Conditions of section 68

a) Any sum credited in books of assesse

b) Assesse offers no explanation or explanation offered is not, in the opinion of the AO, Satisfactory

c) The sum so credited may be charged to income-tax of the assesse of that previous Year

♠ Prior to the enactment of the Amendment Act, 2016 there could have been a question as to whether an assessee, on his own, could offer certain amounts for taxation under the provisions of sections 68, 69, 69A, 69B, 69C and 69D (“specified sections”).

♠ It is now clear that items which could have been taxed by the provisions of sections 68, 69, 69A, 69B, 69C and 69D (“specified sections”) can also be offered for taxation by the assessee in his return of income by paying tax, on or before the end of the previous year, at the rates mentioned in section 115BBE.

What can be taxed under Section 68

a) Loans taken

b) Gifts received (from residents as well as from non-residents)

c) Share application, share capital and share premium – Supreme Court held that share Capital received by a public limited company in public issue cannot be taxed u/s. 68 – CIT v. Lovely Exports Pvt. Ltd. (2008) 216 CTR 195 (SC)

Two provisos inserted from A.Y. 2013 -14:-

As per 1st Proviso, in the case of a company, other than a company in which the public are Substantially interested, is found to have credited any amount by:

a) Share application money

b) Share capital

c) Share premium

d) Or any such amount by whatever name called

Any explanation offered 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 offered an explanation about the nature and source of such sum so Credited; and

b) Such explanation in the opinion of the AO has been found satisfactory. As per 2nd proviso, the 1st proviso will not be applicable if the investment is by a venture Capital Company or a venture capital fund

General understanding of Section 68 of Income Tax Act, 1961

  • The section uses the word “May” which gives discretion to the AO. It is not necessary That in all cases for the amount to be treated as the assessees income CIT v.NoorjahanP. K. (1999) 237 ITR 570 (SC), affirming CIT v. Noorjehan 123 ITR 3 (s. 69); CIT v. Moghul Darbar 216 ITR 301 (s. 69); DCIT v. Rohini Builders 256 ITR 360 (s. 68); Mitesh Rolling v. CIT 258 ITR 278.
  • The word `may’ denotes the discretion of the AO that he can make an addition or cannot make an addition. – Umesh Electricals v. ACIT [2011] 131 ITD 127(Agra Trib)(TM).
  • If books of account not maintained, section 68 is not applicable. Bank pass book is not books of account of assesse –CIT v. Bhaichand H Gandhi (1983) 141 ITR 67 (Bom).
  • Further, while considering the explanation of the assessee, the assessing officer cannot act unreasonably, and his satisfaction that a particular transaction is not genuine must be based onrelevant factors and on a just and reasonable inquiry – Sumati Dayal v. CIT 214 ITR 801 (SC); Khandelwal Constructions v. CIT 227 ITR 900; Rajshree v. CIT 256 ITR 331.
  • The assessee is entitled to an opportunity of explaining the transaction before any amount isadded to his total income – Menon v. ITO 96 ITR 148; Unit Const v. JCIT 269 ITR 189 (s. 69).
  • The provisions of sections 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc, and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been satisfactorily explained. In these cases, the source not being known, such deemed income will not fall even under the head `Income from Other Sources’ and the deductions that are applicable to the incomes under any of the heads will not be attracted – Fakir Mohmed v. CIT 247 ITR 290; Manharlal v. CIT 215 ITR 634; CIT v. Ramkant 252 ITR 210; Bijjala v. CIT 253 Itr 105.
  • Further, the fiction created under sections 68, 69, 69A, 69 B and 69C cannot, by itself, be Extended to penalty proceedings to raise a presumption of concealment of income –CIT v.Baroda Tin 221 ITR 661

Detailed Analysis of Section 68 of Income Tax Act, 1961

Section description

For the purpose of easy understanding of the provision, let us divide the section 68 into 7 parts as under:

1) A sum is credited into the books of the assessee

2) Maintained for the previous year

3) Assessee does not give any explanation about the source of the sum

4) Assessee does not give any explanation about the nature of the sum

5) The answer by the Assessee does not satisfy the Income Tax Officer

6) The sum credited is chargeable to income tax

7) If the above conditions are satisfied, sum is credited to the income of the assessee in the previous year

The word “Sum” used here in the section is very exhaustive in nature. The sum credited into the account shall be of any from and nature. It applied to all the credits by whatever the name being called. This was laid down in the case of G.R. Siri Ram v. CIT [1975] 98 ITR 337 (P&H). The ultimate aim of the Court was to keep the intent of the legislature alive.

The word “Books” is defined under the Section 2 (12) of the Income Tax Act, 1961. The existence of the books is the foremost condition under this act. In V.C. Shukla v. CBI [1998] 3 SCC 410, the Supreme Court has given a wider connotation of the term “Book”. It has stated that those evidences that come under the ambit of the Section 34 of the Indian Evidence Act, 1872 can be considered as book. The entries must be authentic else would fix the liability on the assessee. The pass book of the bank is not regarded as a valid account books under the section 68. It was laid in CIT, Poona v. B.H. Gandhi 141 ITR 67 [Bom].

Maintenance of Book of Accounts

The said book of accounts must be maintained for the previous year clearly indicating the transactions relating to the previous year. It must not relate to any other accounts or accounts of the persons other than the assessee.

Explanation as to nature and source of transaction

In the case of the unsecured loans obtained by the assessee from the money lenders it is the duty of the assessee to prove the identity, capacity and the genuineness of the transaction done. It is also his duty to file confirmation with the PAN when the lender is assessed to tax. This was held in CIT v. Orissa Corporation Private Limited (159 ITR 78) (SC). The assessee may not prove the source for the source of income acquired. When the amount is obtained through the Gift it is the duty of the assessee to explain the source of income of the donor of the gift to make such gift. When the money is obtained through the will it is not the duty of the assessing officer to go through the legality of the will made and hence the assessee need not submit any proof.

Addition to the Total Income

The Assessee must explain the source and nature of the sum to the Assessing Officer. If the explanation provided by the assessee does not satisfy the Assessing Officer, then the Section 68 will be attracted.

When section 68 is attracted with respect to the entry found in the book then the sum credited is chargeable to income tax under the income of the previous year.

Requirements to avoid application of the Provision

In case of section 68, the assessee is under the obligation to prove to following to avoid application of the deeming provision which has been considered by the Hon’ble Calcutta High Court in CIT vs. Precision Finance Pvt. Ltd. (1994)208 ITR 465 (Cal) which laid down the following criteria:-

1. Identity of his creditors;

2. Capacity of creditors to advance money; and

3. Genuineness of transaction.

Also, it is primarily important to ascertain the genuinity of the transaction claimed by the assessee before going into the issue under section 68 of the Act. It is not the entries which speak about the activity of the assessee but the actual act done during the previous year has to be reflected in the books of the assessee. The Assessing Officer is duty bound to satisfy himself with the genuinity of the transaction and only after such satisfaction, the AO has to proceed on the merit of the issue.

The Hon’ble Rajasthan High court in the case of CIT Vs Kishorilal & Santhoshilal [1995] 216 ITR 9 (RAJ.) made the following criteria for consideration for the purpose of the section 68 of the Act:

“On the basis of the language used under section 68 and the various decisions of different High Courts and the apex court, the only conclusion which could be arrived at is:

(i) that there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party.

(ii) that the burden to prove the identity, capacity and genuineness has to be on the assessee.

(iii) if the cash credit is not satisfactorily explained the Income-tax Officer is justified to treat it as income from “undisclosed sources”

(iv) the firm has to establish that the amount was actually given by the lender.

(v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities.

(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction credited by section 68 can be invoked.”

Issues arising in Section 68, 69 & 69A

• In case of the partnership firm

I. Treatment of partners’ credits in the assessment of the firm

II. Onus on the firm in respect of credit in partner’s name

III. Is double assessment in both partner and the firm on the same income tenable

• Income from undisclosed source or undisclosed income from a disclosed source

• Is the addition mandatory or discretionary – significance of `may’

• Can addition be made if income is assessed on an estimated basis

• Can addition be made in cases where income is assessed on presumptive basis

• Is the proviso to s. 68 retrospective in operation

• Is the nature of burden different in case of public companies and in case of private companies

• If the shareholder is identified, can addition be made in the assessment of the company issuing

• share capital

• Is penalty inevitable in cases of additions under s. 68

• Can addition be made in respect of credits recorded in books which are rejected

• S. 68 versus S. 69

• S. 68 versus S. 271(1)(c)

• Can an assessee suo motto offer income under this section in the return of income filed by him

• Powers of appellate authorities to reappreciate evidence

INTRODUCTION OF SECTION 115BBE

The “White Paper on Black Money” presented in the Parliament on 16th May, 2012 was, inter alia, concerned with the laundering of unaccounted money by taking advantage of basic exemption limit.

The above stated position of taxing income of the nature referred to in the specified sections at the normal rate / applicable rate of income-tax applicable on total income of the assessee has been changed w.e.f. 1.4.2013 by the Finance Act, 2012 as a result of introduction of section

115BBE dealing with a special rate of tax applicable to income of the nature referred to in sections 68, 69, 69A, 69B, 69C and 69D.

The rationale behind new section 115BBE has been explained by the Explanatory

Memorandum to the Finance Bill, 2012 as under:-

“Under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basic exemption limit. Therefore, in these cases,

no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate.

AMENDMENTS IN SECTION 115BBE

Purpose of amendments

Thus, section 115BBE is designed to impose greater tax burden on the assessees who fail to explain the “nature and source” of their income, investments, expenses, etc. However, substantive law dealing with provisions of sections 68, 69, 69A , 69B, 69C and 69D is unchanged.

The section has since its introduction by the FA, 2012 w.e.f. AY 2013-14 been amended twice – once vide FA, 2016 w.e.f. 1.4.17 when sub-section (2) was amended to prohibit setting off of any loss against income of the nature referred to in specified sections and second time, very recently, by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. 1.4.2017. The amendments made by the Taxation Laws (Second Amendment) Act, 2016 are drastic and will have far reaching implications, going forward.

OBJECT AND REASON OF AMENDMENTS

Statement of Objects & Reasons appended to the Taxation Laws (Second Amendment) Bill, 2016, inter alia states the object and purpose of introducing PMGKY as under –

1. Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programs. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of denomination of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) issued by the Reserve Bank of India have been ceased to be legal tender with effect from 9th November, 2016.

2. Concerns have been raised that some of the existing provisions of the Income tax Act, 1961 could possibly be used for concealing black money. It is, therefore, important that the Government amends the Act to plug these loopholes as early as possible so as to prevent misuse of the provisions. The Taxation Laws (Second Amendment) Bill, 2016, proposes to make some changes in the Act to ensure that) p p g defaulting assessees are subjected to tax at a higher rate and stringent penalty provision.

Overview of the Amendment Act

Compared to various other provisions of Chapter XII, the provisions of section 115BBE are different from them in the following respects:

(a) Whereas various other provisions of Chapter XII apply to income determined at an estimated percentage of gross receipts, section 115BBE, read with section 68 applies to “sum credited”. The expression “sum credited” is a wider term which includes receipts of all kinds, e.g., capital, creditors, loans and revenue receipts. Similarly, section 155BBE, read with other sections e.g., sections 69, 69A, 69B and 69C apply to the entire amount of unexplained money, bullion, jewellery or other valuable article or expenses. Section 69D applies to amounts borrowed and repaid on hundi loans otherwise than by an account-payee cheque or a bank draft.

(b) Prior to insertion of section 115BBE, an assessee was entitled to basic exemption, deductions and allowances under the provisions of the Act in respect of additions made under the above circumstances. But after the insertion of section 115BBE, no such basic exemption, deductions and allowances would be allowed for calculating tax at a flat rate of 30% (plus surcharge and cess) upto AY 2016-17 and for AY 2017-18 at a flat rate of 60% (plus surcharge@ 25% and cess) on income added under any of the groups of section 68, etc. The tax liability of the assessee would be higher under the new regime.

Impact of amendment in 115BBE

When assessee has incurred unexplained expenses When an addition to a returned income made by the Assessing Officer under any of the groups of section 68, etc., consists of such income, investments, money, bullion, jewellery or other valuable articles as are not recorded in the books of account by an assessee and/or has incurred unexplained expenses or repaid hundi loans in a manner other than that prescribed.

When assessee’s income is recorded in books but has not been offered for taxation

When an addition to a returned income made by the Assessing Officer in respect of income of the nature referred to in specified sections, i.e. the income consists of investments, money, bullion, jewellery or other valuable articles as are recorded in the books of account as part of capital, loans, sundry creditors or such other credits which are not offered for taxation by the assessee voluntarily and the assessee fails to prove the nature and source thereof satisfactorily.

When assessee is found to be in possession of unexplained investments – When an assessee is not required to maintain the books of account but is found to be in possession of unexplained investments, money, bullion, jewellery or other valuable articles; and/or having incurred unexplained expenditure.

When an assessee voluntarily returns income but is unable to prove source thereof –

When an assessee voluntarily returns income for taxation but is unable to prove the nature and source thereof, to the satisfaction of the Assessing Officer, such income though voluntarily declared could be held to be liable for taxation under specified sections.

PENALTY U/S 271AAC

Amendment Act has w.e.f. 1.4.2017 introduced section 271AAC in the Act.

Penalty under section 271AAC is leviable if the following conditions are satisfied – the total income determined includes any income referred to in the specified sections; and the income referred to in the specified sections has not been included in the return of income furnished under section 139; or

tax on income referred to in specified sections, in accordance with provisions of section 115BBE(1)(i) has not been paid on or before the end of the relevant previous year.

If the above conditions are satisfied then the AO may direct that the assessee shall pay a penalty in addition to tax payable under section 115BBE.

The quantum of penalty will be ten percent of the tax payable under clause (i) of sub-section (1) of section 115BBE.

PENALTY U/S 271AAB

Amendment Act has amended the provisions of section 271AAB of the Act which deal with levy of penalty, in cases where search has been initiated, in respect of undisclosed income of specified previous year.

The terms “specified date”; “specified previous year” and “undisclosed income” are defined in an Explanation to this section.

Presently, section 271AAB provides for penalty @10% of undisclosed income if the case falls under clause (a) of sub-section (1) of section 271AAB

20% of undisclosed income if the case falls under clause (b) of sub-section (1) of section 271AAB; 30% to 90% of undisclosed income if the case falls under clause (c) of sub-section (1) of section 271AAB

For standard procedure refer notification 246/151/2017-A&PAC-1 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Dated:10.01.2018

(Author Pawan kumar singh can be reached at Pawan.singh693@gmail.com / +91 8103015729)

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