Section 68 – Meaning of Satisfactory explanation with respect to unexplained income!

“Deaths, taxes and Childbirth! there’s never any convenient time for any of them” – Margaret Mitchell

This article aims at highlighting the meaning of “Satisfactory Explanation to Assessing Officers with respect to Section 68 of the Income Tax Act, 1961.”

Background- The objective of Section 68 of the Income Tax Act, 1961 was to curb the all-prevailing evil of generation and proliferation of black money. For better understanding current provisions of section 68 is reproduced below for the ready reference:

68. Cash credits.

Where any sum is found credited in the books of an assessee maintained for any previous year, and assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [1][Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

[2][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.]

Thus, Section 68 has following essential ingredients:

• Any sum is found to be credited in the books of the assessee.
• The assessee offers no explanation about the nature and source of such credit
• In case the assessee offers explanation which is not satisfactory in the opinion of assessing officer
• Then, such sum credited in the books of the assessee may be treated as its income in the previous year.

The initial onus is upon the assessee to establish above points necessary to obviate the mischief of Section 68.

Section 68 of the Income Tax Act, 1961 are only clarificatory and an addition can be made even otherwise in respect of income from undisclosed sources. The word ‘may’ has been used in this section thereby, giving the discretion to the assessing officer to treat a particular sum as income or not; therefore even if assessee does not provide an explanation or provides an unsatisfactory explanation, officer may invoke the provisions of section 68 of the Income Tax Act, 1961.

In most of the cases, the assessing officer is unsatisfied with the explanation and invokes the harsh provisions of section 68 of the Income Tax Act, 1961 and tax is levied on such income under section 115BBE of the Income Tax Act, 1961 at rigorous tax rate.

It is important to understand the meaning of “Satisfactory Explanation” with respect to section 68 to counter the order passed by the assessing officer, as in most of the cases the explanation of assessee is regarded as unsatisfied. Encroaching towards “Unsatisfactory Explanation”:

Before the assessing officer forms an opinion, he must consider the material explanation and evidence submitted by the assessee in lieu of the alleged income while giving an explanation. Then he must collect his own material corroborative evidence as an enquiry officer, weigh the explanation furnished by the assessee, is the authority form an opinion as to whether explanation furnished by the assessee is satisfactory or not. If the assessing officer does not apply his mind in examining the documents furnished by the assessee neither  find any substantive error in them nor made collection of any material evidence by exercising powers under Income-Tax Act, 1961. Then, how  the claim of the assessee can be straightway rejected, resulting in violation of principle of natural justice and provisions of section 68.

The expression ‘the assessee offers no explanation’ means where the assessee offers no proper, reasonable and acceptable explanation as regards the sum found credited in the books of account maintained by the assessee. The opinion of the assessing officer for not accepting the explanation offered by the assessee as not satisfactory must be based on proper appreciation of material and other surrounding circumstances available on record. The opinion of the assessing officer is to be based on appreciation of the material on record.

Section 68 nowhere empowers the assessing officer to reject each and every explanation of the assessee. The assessing officer is a quasi-judicial authority and he should form his opinion judiciously, not in an arbitrary manner. It appeared that in the instant case the revenue had just made the addition for the sake of making the addition under section 68.

Where the statute places the burden of proof in income tax cases on the taxpayer, it is to be understood that it is only the initial burden. Prima facie the burden is on the assessee when explanation is being given as soon as the assessee provided that the onus of proof automatically shifts to the other party. Where the prima facie inference on the facts is that the assessee’s explanation is probable, the onus will shift to the revenue.

That means the conclusion made by an assessing officer is based on some evidence on which conclusion could be arrived at, it could not be unreasonable or perverse or based on no evidence. Revenue must examine the evidence provided by the assessee to reach the conclusion, on the basis of that he can form an opinion (Satisfactory or Unsatisfactory)

In most of the cases the assessing officer formed an opinion without examining the material evidence provided by the assessee and form the unreasonable  opinion  which is against the principle of natural justice.

Conclusion: Therefore,  prior to form an opinion by the Assessing Officer, there must be proper consideration of facts and circumstances of the case to which the material evidences and documents are being submitted by the assessee,  while giving an explanation. Eventually, if the Assessing Officer later on under the purview of the powers given under Income Tax Act, 1961  baldly rejects the claim of the assessee, is the violation of principles of natural justice and provisions of section 68. Thus,not only  there is need to recognize the significance of the submission made by the assessee to the competent officer but also there must be a reasonably satisfactory explanation given by the assessing officer to the facts and circumstances of the case.

Disclaimer: The views expressed herein above are solely the author’s personal views/opinion. This is an informational article and should not be considered as a legal opinion. The possibility of any errors and omissions in the article cannot be ruled out.

AUTHORED BY-

1. CA Ankesh Patni is a practicing member of ICAI. (ankeshjp@gmail.com & +91 7828538851)

2. CA Bhavya Shah is a practicing member of ICAI with L.L.B. qualification. (cabhavyashah01@gmail.com & +91 9131511757)