Explore the tax implications of receipts under section 68 of the Income Tax Act, 1961. Understand the background, elements, onus of proof, and government actions in dealing with undisclosed income and alleged transactions. Learn about the tax rates and penalties applicable under section 115BBE and 271AAC.
Background
Income Tax Act 1961, provides statutory powers to the parliament to levy and collect tax on the income of the persons. The act provides 5 different natures of income called as 5 heads of income under which an income is taxed. Apart from these 5 heads of income there is another category of income which is treated separately and tax accordingly and that is undisclosed income or the black money.
India is well known for its parallel economy and there is huge amount of black money rotating in the system. Many a time specific attempts are made by assesses to convert and legalize these unaccounted money and they may be in the form of accommodation entries through the complex chain of shell and bogus companies. In order to curb these black money and undisclosed income there are specific provisions [Section 68 to section 69D] under the income Tax Act that provides taxability of undisclosed income and thereby provides important weapon available to parliament to tax the untaxed income.
In this article, taxability of undisclosed cash credits u/s. is discussed at lengths.
Section 68
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:
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 or second 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.
Elements of Section 68
1. Sum credited in books of assessee
The first element of section 68 provides that any sum to be credited in the books of assessee. The credit may be in any form- it may be in the form of loans, share application money, gifts, consideration received on sale of shares or any other form by whatever name called. The scope of the word “Sum” is very wide and include all the transactions whether commercial or non-commercial. Punjab & Haryana High Court in case of G.R. Siri Ram v. CIT [(1975) 98 ITR 337] held that the “term ‘’sum’’ used in the section has a very wide connotation. It applies to all the credits by whatever the name called. “
The other condition is that sum should be credited in books of assessee. If the sum is credited in any other books, assesses cannot be taxed. For example, books of partnership firm cannot form basis for taxing the credits in partner’s hand. In this regards, reliance is placed upon Smt Shanta Devi v. CIT [(1998) 171 ITR 532 (P&H)], wherein it was held that on a perusal of section 68 would show that the expression books has been used with reference to the word assessee.
What happened if assessee does not record the transaction in his books of accounts and claim that sum is not taxable as the same is not credited in books of accounts. Here come the case law of Sudhir Kumar Sharma (HUF) v/s. CIT [(2014) 224 Taxmann 178] wherein it was held that it was the bounded duty of the assessee to explain the nature and source of cash deposits. It has been therefore rightly held that assessee cannot take any advantage of the transaction as he had not kept any books of accounts. Similar view was taken by Bombay High court in case of Shri Arunkumar J Muchhala vs CIT [363 of 2015].
2. Explanation about nature and source of money
The second element of section 68 is that assessee should offer an explanation about the nature and source of the credit entry. The credit entry will be treated as the income of assessee in following two cases.
a. Assessee fails to provide sufficient explanation.
b. Assessee provides the explanation but the same is not satisfactory in the opinion of the assessing officer.
In order to provide the explanations about nature and sources of the transaction, various forums held that assessee should produce necessary documents in support of below.
(i) identity of the investors/person in whose name credit entry appears;
(ii) their creditworthiness/investments; and
(iii) genuineness of the transaction
Further, Honourable Supreme Court in landmark judgement of PCIT vs NRA Iron and Steel Pvt. Ltd. [CIVIL APPEAL NO. _OF 2019] held that
“This Court in the land mark case of Kale Khan Mohammad Hanif v. CIT3 and, Roshan Di Hatti v. CIT4 laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68”. Honorable Court at para 9 has hold that “The Judgments cited hold that the Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries”.
The Apex court in the same case laid down some important principles for taxing the receipt u/s. 68. These are.
- The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus.
- The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders.
- If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established
3. Special provisions for Corporate Assessee.
First proviso to section 68 which talks about furnishing the explanations about nature and source of funds in the hands of person making share application was added in the year 2012 vide Finance Act 2012.
– Position before finance Act 2012
There was no such provision before the finance Act 2012 and the company assessee would not have any onus to provide any explanation of funds in the hands of investor. It would discharge its onus by furnishing the Name, Address and PAN of the investor.
Honorable Apex Court in case of CIT vs. Lovely Exports P. Ltd. – 216 CTR 195(SC), held that ‘if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law.’
Assessee would not have any further obligations in view of the above ruling.
– The Amendment proposed in Finance Act 2012
The amendment was proposed to discourage the practice of conversion of unaccounted money and provides the obligation on the assessee company being closely held company to provide explanation about nature and source of funds credited in the hands of the investor.
Note that this would be applicable only in case of resident investors and in case of closely held company.
4. Amendment by Finance Act 2022
Finance Act 2022 provides for the addition of below proviso to the erstwhile section 68.
“Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless-
(a) The person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and
(b) Such explanation in the opinion of the A.O. aforesaid has been found to be satisfactory:”
In the erstwhile provision onus to prove nature and source of funds in the hands of Source (Source of Source) was there only in case of share application money. Therefore, in case where the accommodation entry was in the nature of loans or borrowings, various courts have held that “identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor” and therefore rendering the provision ineffective.
Therefore, finance act 2022 proposes above amendment to provide onus on the borrower to provide explanations about the nature and source of funds in the hands of lender also.
Onus of Proof
Section 68 is the deeming fiction and provides that sum credited in books of assesses will be treated as the income of assesses if he fails to provide satisfactory explanation about its nature and source. Therefore, prima facie the onus to prove that the alleged transaction is not in the nature of income lies on the assesse. Honorable Delhi High Court in case of CIT v. Kamdhenu Steel & Alloys Ltd. (2012) 361 ITR 220 (Delhi) [SLP dismissed by SC, SLP (Civil) CC 15640 of 2012] held that though initial burden is upon the assessee, once he proves the identity of credit/share applications by either furnishing permanent account numbers or copies of bank accounts and shows the genuineness of the transaction by showing money in the banks is by account payee cheques or by draft, etc., then the onus to would shift to the revenue. Similar ruling was also provided in below cases.
A. CIT vs. STL Extrusion (P) Ltd. [333 ITR 269]- Madhya Pradesh HC
B. CIT v/s Vrindavan Farms Pvt. Ltd. [Tax Appeal No. 71 of 2015]- Delhi High Court
C. CIT v/s Ujala Dyeing and Printing Mills (P) Ltd. [328 ITR 437]- Gujarat High Court
Modus Operandi u/s 68
There are various forms of alleged transaction u/s. 68 and the most common of them are – share application money at high premiums, bogus loans and penny stock. These transactions are commonly called as accommodation entries or the fictious transactions. These kinds of transactions are commonly routed through the chain of shell or the bogus companies. Usually, a person called as Operator creates the complex chain of Shell companies and thereafter undertakes the series of fictious transaction to avoid audit trail and gave them colour. The other party is called as beneficiary who convert his unaccounted money through the shell company. The operator charges commission in consideration of providing the accommodation entries.
1. Share Application money at Higher Premiums
Share application money is the most common form of accommodation entries to convert unaccounted money. Assessee being corporate person (a closely held company) would receive accommodation entry in nature of subscription to shares of the company. The share would be then issued to the subscribes at very high premium to avoid dilution of equity. For instances shares having face value of Rs. 10 would be issued at the premium as high as Rs 990 making it Rs.1000.
Government Action– Parliament in Finance Act 2016 amended the section 56(2)(viib) of the Act to provides that where any closely held company receive any consideration from resident person for issuance of share and the consideration is in excess of the fair value of the share, then such difference between fair value and consideration would be treated as the income of the assessee. This amendment was made specifically to discourage the issuance of shares at Higher premiums. Note that certain categories of Venture Capital Funds and other specified class of persons are exempted from this section.
2. Bogus Unsecured Loans
Bogus unsecured loans are accommodation entries on simar patterns of share application money. Unaccounted money received in the books of the beneficiary would be recorded as unsecured loan. The transaction would be structured in such a manner as it would appears genuine including payment of interest, TDS compliances as well. The Loan is later repaid and accommodation entry is reversed.
It may be noted that Honourable Gujarat High Court in case of CIT vs Ayachi Chandrashekar Narsanji [42 taxmann.com 251] wherein at para 6, “it was held that “It has also come on record that the said loan amount s been repaid by the assessee to Shri Ishwar Adwani in the immediate next financial year and the Department has accepted the repayment of loan without probing into it. In the aforesaid facts and circumstances of the case, when the ITAT has held that the matter is not required to be remanded as no other view would be possible, we see no reason to interfere with the impugned order passed by the ITAT. No question of law, much less substantial question of law arises in the present Tax Appeal. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed”.
Government Action- Parliament in Finance Act 2022 has amended the section 68 and provides that where the credit entry is in the form of unsecured loan, assessee would be also required to prove the source of the source of transaction. (This is discussed in details in Elements of S.68 part)
3. Penny stock.
Kolkata Investigation wing in year 2015 has came up with the report on the “Bogus LTCG/STCG through BSE listed penny stock” wherein they have identified bogus accommodation entries in form of LTCG/STCG amounting to Rs 38,000 Crores. Under these type of accommodation entries, beneficiary would convert their unaccounted money in the form of consideration for sale of penny stock and claim exemption for the same u/s. 10(38) of the Act. It was the normal practice wherein prices of these penny stock would be inflated systematically through transaction between the groups of entry operators and the beneficiary would gave colour of consideration from sale of listed equity shares to there unaccounted money and claims exemption u/s. 68.
Government Action – Finance Act 2017 has removed this exemption u/s. 10(38) available on capital gains arising on transfer of long team capital asset being listed equity shares and mutual funds subject to Securities Transaction Tax.
Tax Rates for income charged u/s 68
Section 115BBE(1) provides the taxability of the unaccounted income. It provides that any undisclosed or unaccounted income charged under section 68 to 69D will be taxable at 60%. Further 25% surcharge would be levied in addition to the tax making effective tax rate to 78% (including 4% cess).
Section 115BBE(2) further provides that assessee would not eligible to claim deduction of any expenses or allowances for set off any losses while computing the income as per above provisions.
Position before Demonetization
It may be noted that the tax rate under section 115BBE was revised after demonetization. Earlier the tax rate was 30% which was later increased to existing rate of 60% by the Taxation Laws (Second Amendment) Act, 2016.
Penalty u/s. 271AAC
Section 271AAC provides for the penalty where any income is determined u/s. 68 to 69D. The penalty would be 10% of the tax payable u/s. 115BBE(1) [i.e 10% of 60% of tax].
Note that the penalty would not be leviable to the extent income u/s. 68 to 69D has been included in the return of income furnished by the assesses and the tax has been paid thereon before the end of relevant previous year.
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